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TMI Blog2023 (3) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... tners (representing their respective firms) as an AOP . Thus, in terms of aforesaid observations set-aside the order of the CIT(Appeals) and direct the A.O. to assess the assessee firm in the status as that of a firm as therein claimed. Thus, the Ground of appeal No. 1 raised by the assessee is allowed in terms of my aforesaid observations. Disallowance u/s 14A - HELD THAT:- When both interest free funds and interest-bearing funds are available, then, it can safely be presumed that the interest free advances or investments in exempt income yielding assets were made out of the interest free funds is supported by the judgment of Pr. CIT Vs. Sintex Industries Ltd [ 2017 (6) TMI 601 - GUJARAT HIGH COURT] - Also, a similar view had been taken in the case of HDFC Bank Ltd.[ 2016 (3) TMI 755 - BOMBAY HIGH COURT] Thus, in terms of my aforesaid observation that the assessee had sufficient interest free funds available with it to source the investments in exempt income yielding mutual funds, thus, vacate the disallowance made/sustained by the lower authorities u/s. 14A of the Act. Thus, the Ground of appeal No. 2 raised by the assessee is allowed in terms of my aforesaid observation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal. 2. Succinctly stated, the business premises of the assessee firm which is engaged in construction business was visited by the department u/s. 133A of the Act on 09.04.2013. The assessee firm, thereafter, filed its return of income for A.Y. 2014-15 on 15.10.2014, declaring an income of Rs. 69,310/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s. 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O. that the assessee firm was constituted vide a partnership deed dated 05.03.2009 comprising of four partners who represented their respective firms, as under: a. Shri Suresh Chandra Dayabhai Manik (Representative of a firm namely Manik Brothers Raipur) b. Shri Hemendra Kumar Dayabhai Manik (Representative of a firm namely M/s. Thackers H.P. Co., Raipur) c. Shri Paresh Kumar Dayabhai Manik (Representative of a firm namely M/s. Everest Leaves Co. Raipur) d. Shri Yogesh Kumar Dayabhai Manik (Representative of a firm namely M/s. Manik Co.) On a perusal of the records, it was observed by the A.O. that each of the aforesaid partners was having 25% share in their representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance u/s. 14A of the Act. On a perusal of the record, it was observed by the A.O. that the assessee had raised a claim for deduction of interest expenditure of Rs. 60,91,354/- in its profit loss account on interest bearing borrowed funds, which, he was of the view could safely be related to its exempt income yielding investments in mutual funds. The A.O. on the basis of his aforesaid observations worked out the disallowance u/s. 14A at Rs. 13,19,518/-, viz., (i) U/rule. 8D(2)(ii): Rs. 12,50,745/-; and (ii) U/rule 8D(2)(iii) : Rs. 68,773/-. The A.O. further disallowed the assessee's claim for deduction of donation of Rs. 28,600/-. Accordingly, the A.O. vide his order passed u/s. 143(3) of the Act dated 29.12.2016 assessed the income of the assessee firm in the status of an AOP at Rs. 14,17,430/-. 5. Aggrieved, the assessee carried the matter in appeal before the CIT(Appeals) but without any success. 6. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before me. 7. I have heard the Ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led position of law as had been laid down by the Hon'ble Apex Court, principally in agreement with the observation of the A.O. that a partnership firm cannot become a partner in another partnership firm. 10. It is in the background of the aforesaid position of law that I shall now look into the sustainability of the view taken by the A.O. that the assessee was liable to be assessed as an AOP . Although, it is observed by the A.O. that the assessee firm was comprising of the aforesaid four partnership firms as partners, but the said observation had been rebutted by the Ld. Authorized Representative (for short 'AR'), on the ground that those were the respective individuals, viz. (i) Shri Suresh Chandra Dayabhai Manik; (ii) Shri Hemendra Kumar Dayabhai Manik; (iii) Shri Paresh Kumar Dayabhai Manik; and (iv) Shri Yogesh Kumar Dayabhai Manik who had associated in their individual capacities, though, representing their respective firms, to constitute the assessee firm, viz. M/s. D.M. Builders. It was averred by the Ld. AR that there was no restriction on nominating a person to become a partner in a firm in his individual capacity. The Ld. AR in support of his aforesaid co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inability of the disallowance u/s. 14A made by the A.O., and find substance in the claim of the Ld. AR. Now when the interest free funds available with the assessee firm were in excess of the investment made in the exempt income yielding mutual funds, therefore, no disallowance of any part of the interest expenditure could have been made in its hands. My aforesaid view that when both interest free funds and interest-bearing funds are available, then, it can safely be presumed that the interest free advances or investments in exempt income yielding assets were made out of the interest free funds is supported by the judgment of the Hon'ble High Court of Gujarat in the case of Pr. CIT Vs. Sintex Industries Ltd. (2018) 403 ITR 418 (Guj.). Also, a similar view had been taken by the Hon'ble High Court of Bombay in the case of HDFC Bank Ltd. Vs. DCIT, (2016) 383 ITR 529 (Bom). I, thus, in terms of my aforesaid observation that the assessee had sufficient interest free funds available with it to source the investments in exempt income yielding mutual funds, thus, vacate the disallowance of Rs. 13,19,518/- made/sustained by the lower authorities u/s. 14A of the Act. Thus, the Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership firms had been taken as partners in the assessee firm is found to be absolutely misconceived and misplaced. 17. I shall in the backdrop of the aforesaid factual position deal with the issue in hand. As observed by me hereinabove, the assessee firm was comprised of four individual partners who were representing their respective firms. It is, thus, in the backdrop of the aforesaid factual matrix that I shall herein deal with the proposition that as to whether or not such an arrangement is as per the mandate of law. It would be apposite to refer to the judgment of the Hon'ble Apex Court in the case of Ram Laxman Sugar Mills Vs. CIT (1967) 66 ITR 613 (SC). The Hon'ble Apex Court in the aforesaid case, had observed, that the mere fact that the manager of a HUF describing himself as a representative of the family had entered into an agreement of partnership with other persons could not form a basis to infer that an agreement of partnership was intended contrary to law between the HUF and other partners. For the sake of clarity, the relevant observations of the Hon'ble Apex Court are culled out as under: 7. In ascertaining the legal effect of a transaction the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the aforesaid case, the Hon'ble Apex Court reiterating its earlier judgment in the case of Dulichand Laxminarayan Vs. Commissioner of Income Tax (1956) 29 ITR 535 (SC), had observed, that as a firm is a compendious way of describing the individuals constituting the firm, therefore, neither HUF nor a firm can become a partner of a firm because a firm is an association of individuals. Carrying its observation further, it was held by the Hon'ble Apex Court that even if a person nominated by the HUF joins a partnership, then the partnership will be between the nominated person and the other partners of the firm. It was further observed by the Hon'ble Court that where the Karta of an HUF enters into a partnership agreement with a stranger, the Karta alone in the eyes of law is the partner. For the sake of clarity the relevant observations of the Hon'ble Apex Court, are culled out, as under: 8. An HUF cannot be in a better position than a firm in the scheme of the Partnership Act. The reasons that led this Court to hold that a firm cannot join a partnership with another individual will apply with equal force to an HUF. In law, an HUF can never be a partner of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived from the firm to another person or another firm or an association of persons or an HUF. But that will not alter the fact that commission was paid by the firm to one of its partners. On the basis of the facts involved in the aforesaid respective cases before the Hon'ble Supreme Court and the first principle therein laid down, it can safely; or in fact inescapably, be concluded, that there is no bar on an individual to join a partnership firm in his representative capacity of a firm being represented by him. 19. On the basis of the facts involved in the case before me read with settled position of law, I am of the considered view that there was no justification on the part of the lower authorities to have recharacterized the assessee firm i.e. a firm comprising of individual partners (representing their respective firms) as an AOP . I, thus, in terms of my aforesaid observations set-aside the order of the CIT(Appeals) and direct the A.O. to assess the assessee firm in the status as that of a firm as therein claimed. Thus, the Ground of appeal No. 1 raised by the assessee is allowed in terms of my aforesaid observations. 20. I shall now deal with the grievance o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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