Tribunal directs re-computation of disallowance under Section 14A for assessment years 2015-16 and 2016-17

The Tribunal partly allowed the appeals for statistical purposes, directing the Assessing Officer to re-compute the disallowance under Section 14A read with Rule 8D(2)(iii) for the assessment years 2015-16 and 2016-17. The Tribunal held that interest paid to partners by the partnership firm is not subject to disallowance under Section 14A, but upheld the disallowance under Rule 8D(iii) due to lack of specific plea from the assessee. The issue was restored to the AO for re-computation of the disallowance under Rule 8D r.w.s. 14A.

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Issues Involved:
1. Whether the interest on partners’ capital can be treated as exempt for the purpose of making disallowance under Section 14A of the Income Tax Act, 1961 by invoking Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961

Facts and Background:
- The appeals pertain to the assessment years 2015-16 and 2016-17.
- The Assessing Officer (AO) noticed that the assessee firm had shown significant income from production of TV programs and other sources, and had claimed interest expenses on partners’ capital.
- The AO observed that the major portion of the partner’s capital was invested in mutual funds and other share transactions, which generated exempt income.
- Consequently, the AO disallowed a proportionate amount of expenditure towards interest in relation to the exempt income under Section 14A read with Rule 8D.

Assessee’s Arguments:
- The assessee, relying on various judicial precedents, argued that the AO can only apply Rule 8D if they are not satisfied with the correctness of the claim made by the assessee.
- It was contended that the AO did not record the required satisfaction for rejecting the self-assessed disallowances.
- The assessee also argued that there were sufficient own funds available, and no capital was introduced for investment purposes, thus no disallowance should be made.

Revenue’s Arguments:
- The Revenue supported the orders of the lower authorities, maintaining that the disallowance was justified.

Tribunal’s Observations and Decision:
- The Tribunal examined the rival submissions and the relevant materials.
- It was noted that the interest paid to partners by the partnership firm as per the provisions of the partnership deed is not an expenditure subject to disallowance under Section 14A.
- The Tribunal referred to the decision of ITAT Pune in the case of Quality Industries, which held that payment of interest to partners is not subject to disallowance under Section 14A read with Rule 8D(ii).
- The Tribunal also observed that the interest paid to partners is simultaneously subjected to tax in the hands of the partners, thus no revenue loss occurs due to the investment in mutual funds generating tax-free income.
- However, for disallowance under Rule 8D(iii), the Tribunal found no specific plea from the assessee and thus upheld it in view of the express mandate of law.
- The Tribunal restored the issue to the AO for re-computation of disallowance under Rule 8D r.w.s. 14A, specifically for calculating the disallowance under Rule 8D(2)(iii) afresh.

Conclusion:
- The Tribunal partly allowed the appeals for statistical purposes, directing the AO to re-compute the disallowance under Section 14A read with Rule 8D(2)(iii) in light of the Tribunal’s observations.
- The decision for the assessment year 2015-16 was applied mutatis mutandis to the assessment year 2016-17.

Final Order:
- The appeals of the assessee were partly allowed for statistical purposes.

Pronouncement:
- Order pronounced on 21/10/2020.

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