AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (6) TMI 331
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.... had made investment in various assets, which are debentures and bonds, mutual funds and shares purchased, etc. and income derived from which is not forming part of total income. The value of such investment was shown as on 31-3-2004 at Rs. 1,92,89,640 and the total dividend income derived was of Rs. 43,47,992, which was not included in the computation of taxable income. The Assessing Officer also noted that though this income was claimed as exempt, the various expenses which were incurred for the earning of this income were debited to Profit & Loss Account. On being asked to show cause as to why the proportionate interest expenditure of Rs. 23,23,206, claimed to have been incurred for the earning of the above exempted dividend income should not be disallowed and added back to the total income, the assessee contended as under : "The assessee has not incurred any expenditure in relation to exempt dividend income. The assessee has paid interest to its depositors for whom the deposits were obtained in earlier years where there were no investments by the assessee. Therefore, the interest paid to depositors is not in relation to dividend income. The assessee firm has paid interest on....
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....se (2A) of section 10 to make it clear that the remuneration or interest which is disallowed in the hands of the firm will not suffer taxation in the hands of the partner. Thus, if the interest is disallowed in case of the firm than it will not be taxed in the case of partner. It may be noted that in the case of the assessee firm the partners to whom interest is paid are taxable at the maximum rate. The copy of the relevant portion of the CBDT circular is enclosed. The amendment in the assessments of the firm has been made to avoid the double taxation of income. The interest paid to partners is distribution of the profit allocated to the partners in the form of interest. As per the provisions of the Income-tax Act, the interest to partners can be taxed once either in the hands of the firm or partners. It cannot be taxed in the both places. Since, the partners have paid taxes on the interest received from the firm and all the conditions laid down in the provisions of section 40(b)(v) has been fulfilled, no portion of the interest to partners can be disallowed. If it is disallowed, it will amount to double taxation..." 2.1 On the basis of above, the assessee contended before the As....
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....ct purpose as mentioned above. Considering all the above facts, he disallowed an amount of Rs. 17,04,535 out of the total interest expenses of Rs. 23,23,206 and added to the total income of the assessee. 3. On appeal before the ld. CIT(A), the assessee reiterated the submissions made before the Assessing Officer. In the impugned order, the ld. CIT(A) upheld the disallowance of interest under section 14A for the detailed reasons given in para 2.3 which is extracted below : "2.3 The facts of the case and the submissions of the Authorised Representative have been carefully considered. As rightly observed by the Assessing Officer that the source of investment in mutual funds, shares and debentures & bonds is made from no other source but capital employed by the partners (which includes accumulated profits earned in previous years) taking into account the total borrowings of the assessee at Rs. 15,57,624 and the total investments made of Rs. 1,92,89,640. The Assessing Officer has rightly disallowed proportionate part of interest, which amounts to Rs. 17,04,535 under section14A as the capital was employed for the purpose of investment in mutual funds, shares and debentures & bonds and ....
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....The first contention raised by the assessee is that no nexus is established. Therefore, following the decision of Hon'ble Gujarat High Court in the case of CIT v. Gujarat Power Corporation Ltd. [Tax Appeal No. 1587 of 2009, dated 28-3-2011] (unreported), the disallowance of Rs. 17,04,535 made under section 14A be deleted. As against this, the ld. D.R. pointed out that no interest-free funds were available to the assessee. Therefore, disallowance has rightly been made. It is pertinent to note that no interest-free funds were available. The investments were made from capital of the partners on which interest at the rate of 10.5 per cent per annum is paid. Therefore, this plea of the assessee's counsel is hereby rejected. 5.1 The second plea raised by the ld. Counsel of the assessee is that as per clause (v) of section 28 of the Income-tax Act, 1961, interest paid to partner of a firm is chargeable to tax. Therefore, disallowance of interest under section 14A will amount to double disallowance. To buttress this contention, the ld. Counsel of the assessee submitted that firm and partners are not different entity. On the other hand, the ld. D.R. pointed out that firm in question is a r....
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....4A will amount to double disallowance, we would like to point out that this contention is also devoid of any merit. For the purpose of deciding this aspect, we first reproduce the provisions of sub-section (1) of section 14A, which is as under : "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." 6.1 As per the provisions contained in section 14A(1) as reproduced above, we find that the expenditure incurred for earning exempt income shall not be considered for computing total income under Chapter IV. It implies that such expenditures are to be allowed as deduction, while working out exempt income under Chapter III. Hence under section 14A, only some specific treatment is to be given to those expenditure, which are incurred for earning exempt income. This treatment is this that those expenses should be disregarded for computing total income under Chapter IV and should be reduced from exempt income under Chapter III. Hence, there is no double addition or double disallowance. Partners have share ....
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....s of the firm under clause (b) of section 40 but in the present case, the disallowance is under section 14A and not under section 40(b) and therefore, the proviso to section 28(v) is not applicable and the partner of the assessee firm did not deserve any relief on this account. Moreover, before us is the assessee firm only and not the partners and hence, we do not give any direction on this aspect. 6.4 The ld. Counsel of the assessee also drew our attention to the provisions of sub-section (2A) of section 10 and its explanation and it has been contended that as per the provisions of this Explanation to section 10(2A), remuneration or interest, which is disallowed in the hands of the firm, will not suffer taxation in the hands of the partner. This contention of the ld. Counsel of the assessee is also devoid of any merit. We reproduce the relevant provision, which is as under : "10. (2A) In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.-For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything containe....
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....other expenses incurred for earning exempt income is specified in section 14A, as per which, deduction on account of expenses incurred for earning exempt income cannot be allowed for computing total income under Chapter IV and hence, impliedly, the same has to be deducted from the exempt income to be computed under Chapter III. This contention of ld. Counsel of the assessee is also rejected. 6.7 One more contention has been raised by him that section 14A talks of disallowing expenditure incurred by the assessee in relation to exempt income and interest paid to partners is not an expenditure at all and it is a special deduction allowed to the firm under section 40(b). This contention of the ld. Counsel of the assessee is also devoid of any merit because there is no deduction allowed under section 40(b). In fact, section 40(b) is a restricting section for various deductions allowable under sections 30 to 38. As per clause (ii) of section 40(b), interest paid to any partner is not allowable, if it is not authorised by or not in accordance with the terms of the partnership deed. As per clause (iv) of section 40(b), it has been specified that even if payment of interest to partner is a....