TaxTMI 
TaxTMI 
2019 (11) TMI 926
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....essee had received the interest of Rs. 22,98,853/- on capital contribution from the partnership firm. From the said interest income, the assessee claimed the deduction of Rs. 16,41,509/- representing the interest payment on loans and admitted the balance amount of Rs. 6,57,344/- as income from business. The AO found that the assessee was not maintaining the books of accounts and apart from the contribution to capital in the partnership firm the assessee also made the investments in a company M/s Tirumala Steel Rolling Mills Pvt. Ltd. and given loans and advances to various persons, thus, held that there is no clear nexus between earning of interest and the interest payment, hence, disallowed the entire interest of Rs. 16,41,509/- and added back to the total income. 3. Against the order of the AO, the assessee went on appeal before the CIT(A) and submitted that there was a miscommunication with regard to maintenance of books of accounts. The assessee submitted before the Ld.CIT(A) that by mistake, the accountant of the assessee stated that the assessee was not maintaining books of accounts, though she has maintained the books of accounts regularly. She filed the details of loans ....
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....argued that the assessee has invested the entire unsecured loans towards the capital contribution and she has received the interest as well as share of profit from the firm. Since the entire share of profit cannot be attributed to only investment, the Ld.AR argued that it is unjustified to attribute the entire profit to the capital contribution and make the disallowance of interest proportionately, since other activities were also involved in carrying on business such as marketing, distribution, sales etc, he argued that the reasonable disallowance may be made u/s 14A instead of making the proportionate disallowance on the basis of the income received by the assessee. 5. On the other hand, the Ld.DR submitted that the Ld.CIT(A) has rightly invoked the provisions of section 14A of the Act and restricted the disallowance proportionately on the basis of income earnings on 2 streams of income earned by the assessee i.e. interest receipt which is taxable and share of profit which is exempt from taxation. The assessee is free to draw the remuneration from the partnership firm as provided u/s 40(b) of the Act for other services rendered by her and the share of profit as well as the rem....
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....nsidered by the appellate authority. 7.12. Be that as it may, I have perused the additional evidence filed by the assessee which is nothing but the details of funds / loans in respect of which the assessee has paid interest and utilisation of such funds/loans for the purpose of making investment in capital of the firm M/s Sree Tirumala Enterprises. Further, the assessee has furnished the statement of Union Bank of India highlighting the utilisation of funds towards making investment in capital account. 7.13. After having examined the same, it is observed that, prima facie, there is a nexus between loans borrowed from banks and outside parties and investment made in the capital of the firm. However, it is -important to note that during the FY 2011-12 relevant to the impugned AY 2012-13, the assessee has actually received two streams of income from the partnership firm M/s Sree Tirumala Enterprises, as given below: (1) Interest on capital Rs. 22,98,S3/- (2) Share of profit from firm Rs. 78,94,246/- Total Rs. 1,01,93,099/- 7.14. As seen from the above, it is quite clear that the assessee has received an aggregate am....
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....s not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does uniform part of the total income under this Act; Provided that nothing contained in this-section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee wider Section 154, for any assessment year beginning on or before the 1st day of April, 2001". (Emphasis supplied) Rule 8D: Method for determining amount of expenditure in relation to Income not includible in total income. 8D (I) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not sat isfied with - (a) the correctness of claim of expenditure made by the assesses; or (b) the claim made by the assessee that no expenditure has been ....
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....m the partnership firm : 22.55% 4) Proportionate interest expenditure attributable to taxable income i.e. interest on capital : 16,41,509 x 22.55% = Rs. 3,70,160/- As such, the assessee is eligible to claim only Rs. 3,70,160/- as allowable interest expenditure against interest on capital received from the firm in place of Rs. 16,41,5091 - claimed by the assessee. Thus, the excess amount of interest claimed of Rs. 12,71,348/-, which is actually attributable to tax exempt income i.e., share of profit, is not allowable as deduction while computing the total income of the assessee. 7.19. In this regard, reliance is placed on following case laws wherein it has been held that provisions of section 14A of the Act are applicable in respect of share income of a partner from a partnership firm which is exempt from tax u/s 10(2A) of the Act, and, therefore, proportionate expenditure incurred in earning the share of profit from the firm should be disallowed: 1) Vishnu Anant Mahajan Vs ACIT [2012] 22 taxmann.com 88 (Ahmadabad Tribunal- Special Bench ): In this case; Special Bench of Hon'ble ITAT has held that - Share income of a partner from part....
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....2A) of the Act in the hands of the partner, disallowance under section 14A of the Act is attracted in respect of such income. The relevant portion of the judgement is reproduced below for ready reference: "8. The ground No. 3 raised by the assessee in appeal is with respect to disallowance of deduction u/s. 14A r. w: Rule 8D in respect of share of profit received by the assessee from partnership .firm. The assessee has received tax free income of Rs. 49,79,071/- from M/s. Tirupati Pooja Construction where the assessee has holding 60% share. The contention of the assessee Is that the income of the partnership firm is not tax free. Before distribution of profits, tax is paid on the income of partnership firm, therefore, no disallowance u/s. 14A should be made on the share of profit received from partnership firm. The Ld. Counsel has placed reliance on the Circular No. 8/2014 to support his contentions that once the tax has been paid by the firm the same is not liable to be taxed in the hands of the partners of the assessee. Therefore, no disallowance should be made in the hands of the assessee. We do not find merit in the submissions of the Ld.Counsel for t....
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....ncerned" A perusal of circular would show that the interpretation drawn by Ld.Counsel for excluding share of partnership firm from scope of section 14A is not sustainable. We do not find any infirmity in the order of the Commissioner of Income Tax (Appeals) in upholding the disallowance made by the Assessing Officer. Accordingly, the ground No.3 raised by the assessee in its appeal is dismissed 3) ACIT Vs. Vinay Sehgal [2012] 27 taxmann.com 136 (Chandigarh Tribunal) : In this case, It has been held by the Hon'ble ITAT that - Where the assessee had invested 'borrowed funds in partnership firm from which he received share of profit not taxable in his hands, interest relatable to borrowed funds utilized in firm was to be disallowed under section 14A of the Act. 4) Hoshang D.Nanavati Vs. ACIT [2012 16 ITR(T) 614 (Mumbai - Trib): In this case, it has been held by the Hon'ble ITAT that - Where the assessee has earned income from profit share as also from remuneration from same firm expenses incurred by assessee in ratio which profit share in firm bore to total receipts from firm, i.e., on account of profit share as also remuneration, were t....