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2020 (10) TMI 938 - AT - Income TaxDisallowance u/s. 14A r.w.r. 8D - interest on partners’ capital treated as exempt for the purpose of making disallowance or not? - assessee is claiming that there are no borrowed funds and no expenditure can be directly attributed to earn the exempt income and the AO has not recorded his satisfaction for not accepting the assessee’s claim - HELD THAT:- Respectfully following the decision of ITAT Pune in the case of Quality Industries [2016 (10) TMI 56 - ITAT PUNE] we hold that payment of interest to the partners towards the use of the partner’s capital as per the provisions of partnership deed is held not subject to disallowance under section 14A read with Rule 8D(ii). Interest is simultaneously be subjected to tax in the hands of its partners is merely in the nature of contract items in the hands of the firms-partners. Therefore, the investment in Mutual funds by the assessee generating tax free income bears the characteristic of and is attributable to its capital where, no disallowance u/s.14A r.w Rule 8D(ii) is warranted. Disallowance u/r 8D(iii) - no specific ground or plea has been taken by the ld A.R. on behalf of the assessee, therefore, we hold it sustainable in view of express mandate of law - Keeping in view the facts related to the remaining issue of mandatory disallowance u/s.14A r.w. Rule 8D(2)(iii), we are consistently following the view expressed in the case of NALCO [2019 (10) TMI 124 - ITAT CUTTACK] wherein as held average of only such investments have to be taken into account, which yielded the income not forming part of the total income. AO was required to work out the average of such investment, the income from which did not form part of the total income instead of total value of investment. For this view, our stand is fortified by the decision of Special Bench in the case of ACIT vs. Vireet Investment (P) Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. We, therefore, restore the issue to the file of the AO for limited purpose i.e. for calculation of the disallowance u/s.14A r.w. Rule 8D(2)(iii) of the Rules, in the light of our conclusions recorded hereinabove.
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