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TMI Blog2024 (5) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeded with and determined the amount of such other/administrative expenditure incurred in relation to the income which did not form part of its total income. We however find that in the case of the present assessee company the AO had carried out the disallowance of the other/administrative expenditure u/s 14A in a mechanical manner as per the methodology provided in Rule 8D(2)(ii). The general observations of the AO can by no means partake the color and character as that of a satisfaction, which as per the mandate of law is required to be arrived at by him with regard to the correctness of the claim of the assessee in respect of the administrative/other expenses claimed to have been incurred in respect of income which did not form part of the total income of the assessee company, having regard to the accounts of the assessee, as were placed before him. Thus, being of the considered view that as the A.O had summarily carried out the disallowance of the administrative/other expenses u/s 14A, as per the methodology provided in Rule 8D(2)(ii), without satisfying the statutory requirement of first arriving at a satisfaction as required by the mandate of law, having regard to the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid as without having valid jurisdiction for making assessment u/s. 143(3), is liable to be quashed." Additional Gr.No.3: "On the facts and circumstances of the case and in law, notice issued u/s. 143(2) by ACIT-2(1), Raipur who was not having pecuniary jurisdiction as per sec. 124(1) rws. 120(2) & 120(3) to make assessment for AY17-18 as returned loss was Rs. 71,537, as CBDT Instruction No.1/ 2011 dt. 31-1-11 & No. 6/2011 dt. 8-4-11 is binding on the IT authorities u/s. 119; in absence of a valid notice issued u/s. 143(2) by ITO-2(1), Raipur as per sec. 124(1), 120(2) & 120(3); assessment made u/s. 143(3) would be invalid and is liable to be quashed; relied on Hotel Blue Moon (2010) (SC)." Additional Gr.No.4: "On the facts and circumstances of the case and in law, there is violation of Sec. 143(2) as notice u/s. 143(2) can only be issued by 'the Assessing Officer' as mentioned in the sec. 143(2) itself as "the Assessing Officer shall serve on the assessee a notice"; in absence of a valid notice issued by 'the Assessing Officer' u/s. 143(2) as mandated by law u/s. 143(2) itself, Sec. 124(3)(a) does not come into play; assessment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 28,26,982/-. 4. Aggrieved the assessee company carried the matter in appeal before the CIT(Appeals) but without success. On a perusal of the order of the CIT(Appeals), I find that he had merely referred to the observations of the A.O and without giving any independent reasoning upheld the same. For the sake of clarity, the relevant observations of the CIT(Appeals) are culled out as under: "4. Adjudication : During the appellate proceedings in response to notice issued u/s. 250 of the Act, the appellant has uploaded submission which is being considered for adjudicating the appeal. It is contended that the appellant company is a partner of M/s. Shri Rani Sati Steel Traders and has made capital contribution in above named partnership firm. It is argued that the above investment in partnership firm has been made out of share capital and reserve & surplus as under : Particulars A.Y. 2017-18 Share capital 1,85,92,100.00 Reserve & surplus 2,50,32,537.98 Total 4,36,24,627.98 Investment in partnership Firm 1,69,54,736.70 4.1 I have carefully perused the facts of the case. The submissions made are not found tenable in view of the following observations made by the AO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip law would be the guiding factor for adjudication of that issue. The current judicial thought is leaning towards the concept of a separate legal entity of partnership firm than that of its partners for the purposes of IT Act, 1961. There was a judicial opinion that on distribution or division or allotment of assets to partners by the firm on dissolution or otherwise there resulted no gain eligible to tax, however, by incorporating s. 45(2), 45(3) &id 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of income-tax on the transactions entered into between them. Similarly, from asst. yr. 1993-94 partnership firms have been given a corporate personality in a limited sense by making necessary amendments in the provisions of ss. 10(2A), 28(v),40(b) and relevant procedural sections which conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specific provisions mentioned hereinabove read with Circular No. 636, dt. 31st Aug., 1992 go to show that a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A r.w.r. 8D on the basis of his multi-facet contentions: (i) that as the assessee company had sufficient interest free self-owned funds of Rs. 4.36 crore (approx.) which were sufficient to source the investment made in the partnership firm, therefore, no disallowance of any part of the interest expenditure u/s. 14A r.w.r 8D(2)(i) was called for in its hand; (ii) that in absence of recording any dissatisfaction by the A.O as to why the claim of the assessee that no part of the expenditure claimed as deduction could be attributed to earning of exempt profit income, there was no justification for assuming jurisdiction for working out the disallowance u/s. 14A of the Act; AND (iii) that alternatively disallowance u/s. 14A r.w.r. 8D in the case of the assessee company could not have exceeded the amount of exempt income of the assessee of Rs. 1,79,601/-. The Ld. AR in support of his aforesaid contentions had relied on the following judicial pronouncements: (i) Pr. CIT Vs. Binani Industries Ltd. (2022) 145 taxmann.com 431 (Cal.) (ii) DCIT Vs. Jite Shipyard Ltd. (2023) 157 taxmann.com 733 (Delhi) (iii) Pr. CIT Vs. Devata Tradelink Ltd. (2023) 157 taxmann.com 269 (Delhi) (iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (2021) 438 ITR 1 (SC), wherein the Hon'ble Apex Court had held that if investment in exempt income yielding shares is made out of common funds and the assessee had available non-interest bearing funds larger than the investments made in tax-free securities then in such cases, no disallowance u/s. 14A would be called for. Although, I am principally in agreement with the aforesaid contention of the Ld. AR but the said factual position, in all fairness, would be required to be verified. Accordingly, I restore the matter to the file of the A.O with a direction to verify the aforesaid factual position. In case, if the aforesaid claim of the assessee as regards the availability of the sufficient self-owned funds is found to be in order, then, no disallowance of any part of the interest expenditure u/s. 14A r.w.r. 8D would be warranted in its case. Accordingly, this part of the ground is allowed for statistical purposes to the extent relevant in terms of my aforesaid observations. 11. Apropos the disallowance of administrative/other expenses u/s. 14A r.w.r. 8D(2)(ii), I finds substance in the claim of the Ld. AR that as the A.O had failed to record his dissatisfaction as regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar footing would be a case where the assessee had not attributed any part of the expenditure for earning of exempt dividend income and, the A.O is not satisfied with the said claim. Apart from that we find that the Hon'ble Jurisdictional High Court in the case of CIT Vs. Sociedade De Fomento Industrial (P). Ltd (supra) had observed, that the A.O before rejecting the disallowance offered by the assessee remains under a statutory obligation to give a clear finding with reference to the accounts of the assessee that the other expenditure which were being claimed qua the non-exempt income were in fact related to its exempt income. Also, as stated by the Ld. AR, and rightly so, a similar view had been taken by the Hon'ble High Court of Delhi in the case of H.T Media Ltd. Vs. Pr. CIT (2017) 399 ITR 576 ( Delhi). Now, in the case before us, we find that the A.O had though deliberated at length on the scheme of section 14A of the Act, but had failed to give any reason as to why the claim of the assessee that no part of the expenditure could be attributed towards earning of exempt income was not to be accepted. Although, the CIT(Appeals) in his order had tried to improve upon the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .05.2017) (SC), dealing with the statutory requirement of satisfaction on the part of the A.O as regards not accepting the correctness of the claim of the assessee in respect of the expenses claimed by him to have been incurred in relation to income which does not form part of the total income of the assessee, had held as under:- "Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best ju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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