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TMI Blog2023 (1) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taken into consideration while computing disallowance u/s 14A - HELD THAT:- During the course of hearing the Ld. Authorised Representative for the Appellant had placed on record computation sheet showing disallowance computed as per the order passed by CIT(A) and had submitted that substantial relief would be granted in case the directions issued by the CIT(A) to include only income yielding investments is implemented. Accordingly, the Assessing Officer is directed to re-compute disallowance under Section 14A of the Act read with Rule 8D(2)(ii)/(iii) of the Rules by taking into account only the investments which yielded exempt income during the previous year relevant to the Assessment Year 2014-15. Accordingly, Ground raised by the Appellant are disposed off with the aforesaid directions. Disallowance of interest Expenses - According to AO interest pertained to non-business activity and was, therefore, not allowable as deduction u/s 37 - since interest amount was already disallowed under Section 14A read with Rule 8D(2)(ii) of the Rules, the Assessing Officer disallowed the balance - HELD THAT:- CIT(A) has returned the findings that the Appellant has not placed any evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT(A) erred in confirming the action of AO in making disallowance u/s 14A r.w. Rule 8D of the I.T./Rules without recording his dissatisfaction with respect to books of accounts of the Appellant. The Appellant submits that it has not incurred any expenses exceeding Rs. 3,31,283/-; hence, the further disallowance made by the AO shall be deleted. (b) The CIT(A) erred in confirming the action of AO in considering the interest paid to partners for the purposes of disallowance as per Rule 8D(2)(ii) of the I.T. Rules. The Appellant submits that the balances in the partners capital accounts constitute own fund of the Appellant; hence, interest allowable u/s 40(b) of the Act shall not be considered for the purposes of disallowance u/s 14A r.w. Rule 8D(2)(ii) of the I.T. Rules. 3. The CIT(A) erred in confirming the disallowance of interest expense to the extent of Rs. 37,80,959/- u/s 37 of the Act, made by the AO, out of total interest paid to the partners alleging that the funds have not been utilized for business purposes. The Appellant submits that in the facts and circumstances of the case and provision of law, the interest paid to partners cannot be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by the CIT(A) on this issue. The relevant extract of the decision of the Tribunal in the case of the assessee for the Assessment Year 2010-11 [ITA No. 3881 of 2016, dated 31.01.2018] read as under: 12. In ground no.3, assessee has challenged ad hoc disallowance of ₹ 1,04,564 being 5% of various expenses aggregating to ₹ 20,91,282. 13. While completing assessment, the Assessing Officer made ad hoc disallowance of 5% on various expenditure claimed by the assessee for want of supporting details and vouchers. Though the assessee challenged the disallowance before the learned Commissioner (Appeals), he also confirmed the disallowance. 14. Learned Counsel for both the parties agreed that the issue in dispute is decided against the assessee by the Tribunal in order passed for assessment year 2008 09. On a perusal of the order of the Tribunal referred to above, it is noticed that while deciding the issue of ad hoc disallowance of 5% out of various expenses, the Tribunal did not interfere in the matter and upheld the disallowance. Following the order of the Tribunal, we uphold the disallowance by dismissing the ground raised by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is implemented. Accordingly, the Assessing Officer is directed to re-compute disallowance under Section 14A of the Act read with Rule 8D(2)(ii)/(iii) of the Rules by taking into account only the investments which yielded exempt income during the previous year relevant to the Assessment Year 2014-15. Accordingly, Ground No. 2(a) and 2(b) raised by the Appellant are disposed off with the aforesaid directions. Ground No. 3 10. Ground No. 3 pertains to disallowance of interest. During the assessment proceedings, the Assessing Officer noted that the Appellant has claimed deduction of interest expenses of INR 1,63,75,280/-. According to the Assessing Officer, an amount of INR 92.69 Crores was utilized for earning exempt income whereas loans and advances of INR 38.56 Crores given by the Appellant were not related to the business activity of the Appellant. According to the Assessing Officer interest amounting to INR 1,16,49,614/- pertained to non-business activity and was, therefore, not allowable as deduction under Section 37 of the Act. However, since interest amounting to INR 78,68,655/- was already disallowed under Section 14A read with Rule 8D(2)(ii) of the Rules, the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as computed interest attributable to non-business activities at Rs. 1,16,49,614/-. However, as the disallowance of Rs. 78,68,655/- was already made by him u/s 14A, only balance amount of Rs. 37,80,959/- was disallowed u/s 37. Obviously, the balance disallowance to be made here will be outcome of total disallowance re-computed minus re-computed disallowance u/r 8D(2)(ii) and will increase/decrease accordingly. Therefore, if the balance disallowance increases, the same should not be a case of enhancement because it is the outcome of findings in the assessment order and the same is a variable figure. 38.1 In the decision of [2016] 66 taxmann.com 30 (Mumbai - Trib.): ACIT v. Pahilajrai Jaikishin, it was held that Interest paid by the assessee firm to the partners on capital contribution is covered as an 'expenditure' as envisaged u/s 36(1)(ii) of the Act and the assessee firm has to firstly establish its claim of deduction of interest on capital by satisfying the provisions of Section 36(1)(ii) of the Act and then, Section 40(b) of the Act puts limitation on allowability of interest once it passes the requirements of provisions of Section 36(1)(iii) of the Act and thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed while computing disallowance under Section 36(1)(iii) of the Act. The onus was on the Appellant to account for interest expenses separately instead of clubbing the same in one head. Referring to paragraph 8.2 of the assessment order, she submitted that the during the assessment proceedings the Appellant had taken a stand that it was normal business practice to invest surplus funds to earn interest income, and was not adopting a different stand in the appellate proceedings. 15. We have considered the rival submission and perused the material on record. We are not inclined to accept the contention raised on behalf of the Appellant that in case interest expenses have been considered for the purpose of computing disallowance under Section 14A read with Rule 8D of the Rules, the entire amount of such interest expenses shall be excluded while considering/computing disallowance under Section 36(1)(iii) or 37 of the Act. The interest expenses computed and disallowed under Section 14A of the Act are those which pertain to earning exempt income. Thus, the scope and purpose of disallowance under Section 14A differs from Section 37/36(1)(iii) of the Act. However, we do agree that that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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