2014 (9) TMI 1266 - AT - Income Tax

Tribunal decision on Income Tax Act disallowance upheld, interest on partner's debit balance ruled in favor.

The Tribunal upheld the disallowance under section 14A of the Income Tax Act with rule 8D, directing the Assessing Officer to determine the disallowance ... Disallowance u/s 14A read with rule 8D - disallowance made by the assessee suo-motto - HELD THAT:- The assessee claims that only net interest should be taken into account, while computing the disallowance u/s 8D(ii) of the IT Act. In the interest of justice and in view of the facts of the case, we restore this issue back to the file of AO for the limited purpose of determining the disallowance u/s 14A read with Rule 8D of the IT Rules and the computation would be worked out after verifying the claim of the assessee of netting of interest expenditure. Disallowance under Rule 8D(iii) of the IT Rules needs to be verified and we restore this issue also to the AO. Appeal are allowed for statistical purposes. Disallowance of interest on debit balance in the account of one of the partners - disallowance of interest being attributable to the negative balance of the partner, where cumulative balance of the other partners alongwith the partner having debit balance were to be considered in order to compute the disallowance under section 36(1)(iii) - HELD THAT:- The facts of the present case are identical to the facts before in Tex Designers [2014 (6) TMI 1067 - ITAT CHANDIGARH] and following the parity of reasoning, we hold that where the cumulative balance of the partner at the close of the year were on the credit side, there is no merit in any disallowance on account of interest being attributable to the debit balance of one of the partner - we direct the AO to delete the disallowance. - Decided in favour of assessee. Issues:1. Disallowance under section 14A of the Income Tax Act read with rule 8D of IT Rules.2. Disallowance of interest on debit balance in the account of one of the partners.Analysis:1. The appeal concerned the disallowance made under section 14A of the Income Tax Act read with rule 8D of IT Rules amounting to Rs. 1,11,549. The assessee argued that no new investments were made during the year, and all old investments were from own funds. The Assessing Officer disallowed the amount based on indirect expenditure like interest not attributable to any particular income. The Tribunal found that the provisions of section 14A were applicable as the assessee had made investments with exempt income. The Tribunal restored the issue to the Assessing Officer to determine the disallowance considering net interest and verified disallowance under Rule 8D(iii) for accurate computation.2. The second issue was the disallowance of interest on a debit balance in a partner's account. The Assessing Officer disallowed Rs. 39,262 under section 36(1)(iii) of the Act. The assessee argued that the cumulative balance of partners was in credit, so no disallowance was warranted. The Tribunal referred to a similar case and held that if the cumulative balance of partners was on the credit side, no disallowance on interest attributable to a debit balance was justified. The Tribunal directed the Assessing Officer to delete the disallowance. The appeal was partly allowed, and the order was pronounced on 15th September 2014.