Tribunal directs reassessment under Section 14A, excludes partner interest.

The Tribunal partly allowed the appeals for both assessment years, directing the Assessing Officer to re-compute the disallowance under Section 14A read with Rule 8D. The Tribunal held that interest paid to partners on their capital cannot be considered for disallowance under Section 14A. It also ruled that only investments yielding exempt income during the year should be considered for disallowance, limiting the disallowance to the lower of the exempt income or the computed amount under Rule 8D. The Tribunal's decision for one assessment year was applied to the other as well.

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Issues Involved:
1. Legality and validity of the CIT(A)'s order.
2. Disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Rules.
3. Principles of natural justice.

Issue-Wise Detailed Analysis:

1. Legality and Validity of the CIT(A)'s Order:
The assessee contended that the order of the CIT(A) is "bad in law and contrary to the facts of the case." This claim was raised as a general ground of appeal without specific details provided in the judgment.

2. Disallowance of Expenses under Section 14A read with Rule 8D:
The primary issue raised by the assessee was the disallowance of expenses amounting to Rs. 38,06,300/- for AY 2012-13 and Rs. 48,49,645/- for AY 2013-14 under Section 14A read with Rule 8D of the Income Tax Rules.

- Assessee's Argument:
- The assessee argued that the disallowance under Section 14A cannot exceed the exempted income, which was Rs. 29,05,561/- for AY 2012-13.
- It was contended that only those investments yielding exempted income during the year should be considered while computing disallowances under Rule 8D(2)(iii).
- The assessee also argued that the interest paid to partners should not be considered for disallowance under Section 14A, as it is an attribution of profit rather than an expense.

- Revenue's Argument:
- The Revenue supported the orders of the AO and CIT(A), which disallowed expenses based on the application of Rule 8D.

- Tribunal's Findings:
- Interest on Partner's Capital: The Tribunal referred to the ITAT Pune Bench decision in Qualities Industries Vs. JCIT, where it was held that interest paid to partners is not an expenditure for the purposes of Section 14A. The Tribunal agreed with this view and concluded that interest paid to partners on their capital cannot be considered for disallowance under Section 14A.
- Investments Yielding Exempt Income: The Tribunal cited the ITAT Special Bench of Delhi in Asstt. CIT v. Vireet Investment (P.) Ltd., which held that only those investments yielding exempt income during the year should be considered for disallowance under Rule 8D(2)(iii). The Tribunal directed the AO to re-compute the disallowance accordingly.
- Disallowance Exceeding Exempt Income: The Tribunal referred to the Delhi High Court judgment in P.CIT vs. Craft Builders & Construction (P.) Ltd., which held that disallowance under Section 14A cannot exceed the exempt income. The Tribunal directed the AO to limit the disallowance to the lower of the exempt income or the disallowance computed under Rule 8D.

3. Principles of Natural Justice:
The assessee claimed that the order of the CIT(A) was "illegal, unjustified and against the principles of natural justice." However, the Tribunal's judgment did not provide specific details on this issue, and it appears to have been raised as a general ground.

Conclusion:
The appeals for both AY 2012-13 and AY 2013-14 were partly allowed. The Tribunal directed the AO to re-compute the disallowance under Section 14A read with Rule 8D by considering only those investments yielding exempt income and limiting the disallowance to the amount of exempt income. The interest paid to partners on their capital was excluded from the disallowance computation. The Tribunal's findings for AY 2012-13 were applied to AY 2013-14 as well.

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