TMI Blog2011 (6) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... HD.) OF 2008 - - - Dated:- 9-6-2011 - T.K. SHARMA, A.K. GARODIA, JJ. S.N. Soparkar and Jaimin Gandhi for the Appellant. K. Madhusudan for the Respondent. ORDER T.K. Sharma, Judicial Member. This appeal is filed by the assessee against the order of ld. CIT(A)-XX, Ahmedabad dated 9-10-2007 for the assessment year 2004-05. 2. Briefly stated, the facts are that the assessee is a firm carrying on business of manufacturing of chemicals, particularly Sodium/bisulphate for which raw material Soda Ash and Sulphar is being used. For the assessment year under appeal, it filed the return of income on 21-10-2004 declaring total income at Rs. 17,83,800. In this return of income, the assessee claimed an exempt income of Rs. 43,47,990. The Assessing Officer framed the assessment under section 143(3) wherein he disallowed Rs. 17,04,535 under section 14A of the Income-tax Act. For making this disallowance, in the assessment order, the Assessing Officer observed from the balance-sheet that the assessee 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1993-94, interest paid to partners was not allowable as a deduction in computation of total income. Vide Finance Act, 1992 the taxation of the firms has been restructured and interest paid to partners become allowable deduction provided such interest payment does not exceed specified percentage and it is authorised by the partnership deed. The copy of the memorandum explaining provisions in Finance Act, 1992 is enclosed for your reference. Vide para 48 of the Circular No. 636 dated 31-8-2001 the CBDT has explained the provisions of the Finance Act, 1992 regarding the assessment of the firm. In the said circular, in para-48.2, it is stated that the share of the partner in the firm will not be included in computing his total income [section 19(2A)]. However, interest, salary, bonus, commission or any other remuneration allowed by the firm to partner will be liable to be tax as business income in the partner's hand [Section 2(24)(ve) and section 28(v)]. An explanation has been added to the newly inserted clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to adjusting the income of the partner to the extent of the amount not so deductible; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the financial year in which the final order was passed in the case of the firm, the Assessing Officer stated that it is apparent that the partners' assessments are to be revised to deduct the remuneration added, if any, and there was no mention regarding deduction of the interest taxed in the hands of the partners. The Assessing Officer also found that by referring the Board Circular, etc. the appellant made an attempt to go through the legislative history of the insertion of section 40(b) of the Income-tax Act and the amendment of the related provisions of the registration of the firm. This reference is not considered by the Assessing Officer as he felt that the insertion of provisions of section 14A are altogether separate piece of legislation for the distinct 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act, 1961. (3) The learned Commissioner (Appeals) erred in holding that the provision of section 40(b) is not applicable as the funds are utilised for the purpose of investment rather than investment as stated in partnership deed. (4) Alternatively, without prejudice to the above ground No. 2, the learned Commissioner (Appeals) erred in confirming the working of the disallowance of interest in proportion to the amount of investment and total funds applied instead of in proportion to taxable and non-taxable income earned for payment of interest." 5. At the time of hearing before us, on behalf of the assessee, Shri S.N. Soparkar along with Shri Jaimin Gandhi appeared and filed a paper book containing 8 pages which, inter alia, include (1) submissions before CIT(A) - 1 to 4 pages, (2) Comparative tax working at page No. 5, (3) Balance-sheet Profit Loss A/c. at page Nos. 6 and 7 and (4) Alternative calculation of interest disallowance under section 14A at page No. 8. 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. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest is paid are taxable at the maximum rate. He further submitted that amendment in the assessment of a firm has been made to avoid double taxation of the income. Interest paid to partners is distribution of profit allocated to the partners in the form of interest. Interest to partners can be taxed once either in the hands of the firm or in the partner's hand. It cannot be taxed in both places. Since, the partners have paid tax on interest received from the firm and all the conditions laid down in the provisions of section have been fulfilled, no portion of interest paid to partners can be disallowed. If it is disallowed, it will amount to double taxation. 6. We have heard both the sides on various pleas but we are not satisfied. We decide each and every contention raised by the ld. Counsel of the assessee. The first contention raised by him has already been rejected by us in para No. 5 above. Regarding the second contention raised by him that any disallowance of interest under section 14A 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of concerned partners. In this regard, he drew our attention to the provisions of section 28(v), which reads as under : "28. (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm : Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted." 6.3 From the above proviso to section 28(v), it is seen that if there is any disallowance of interest in the hands of the firm due to clause (b) of section 40, income in the hands of the partner has to be adjusted to the extent of the amount not so allowed to be deducted in the hands of the firm. Hence, it is seen that the operation of the proviso to section 28(v) will come into play only if there is some disallowance in the hands 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also his contention that since the partners have paid tax on interest received by them from the firm, no portion of interest paid to partners can be disallowed and if it is disallowed, it will amount to double taxation. This contention of the ld. Counsel is also devoid of any merit because interest to partners by the firm is not distribution of profit by the firm because interest is payable to the partners, if it is so prescribed in the partnership deed, even if there is no profit in the hands of the firm. If the firm pays interest to the partners and the firm is having loss, loss of the firm will increase to that extent and it will be allowed to carry forward in the hands of the firm and therefore, payment of interest by the firm to its partners is not distribution of profits by the firm to the partners. We have also observed somewhere in above paragraphs that there is no disallowance as such of interest in the hands of the firm and only the manner of allowing deduction on account of interest or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure has been incurred for earning exempt income, the same has to be disallowed even if there is no actual earning of any exempt income. If interest-bearing borrowed funds are utilised for the purpose of investment in shares and there is no receipt of dividend income or if there is only meagre amount of dividend income, even then, the whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. In the earlier period, when dividend income was not exempt, interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses, even if, there was no actual receipt of dividend or insufficient/meagre amount of dividend income. The logic was that the entire expenditure has been incurred for earning taxable dividend income and hence, it is allowable, even if there is nil or small amount of dividend income. This aspect has been approved by various courts and hence, the same judgment supports this view also that even in case of 'nil' or small amount of dividend income, the en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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