TMI Blog2020 (10) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... lea 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. - ITA No.415/CTK/2018, ITA No.237/CTK/2019 - - - Dated:- 21-10-2020 - Shri Chandra Mohan Garg, Judicial Member And Laxmi Prasad Sahu, Accountant Member For the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Rule 8D of the Rules at ₹ 14,00,616/- being proportionate amount of expenditure towards interest in relation to income which does not form part of the total income and disallowed the same, which was upheld in the firm appeal. 5. Ld Authorised Representative of the assessee placing reliance on the decision of Hon ble Gujarat High Court in the case of Pr. CIT vs CIMS Hospital Pvt Ltd., (2020) 4 NYPCTR 244 (Guj) submitted that the Assessing Officer can apply Rule 8D of the I.T.Rules if the having regard to the accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income. Further placing reliance on the decision of Hon ble Bombay High Court in the case of PCIT vs BSE Ltd., (2019) 3 NYPCTR 874 (Bom), ld A.R. submitted that non-satisfaction as recorded by the AO for rejecting the sou moto disallowances claimed by the assessee is not done as required under section 14A(2) of the Act. He further explained that the AO must first record a conclusion that having regard to the accounts of the assessee, he is not satisfied with the disallowances offered by the assessee in terms of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arises for our consideration is whether payment of interest to the partners by the partnership firm toward use of partner s capital is in the nature of expenditure or not for the purposes of section 14A of the Act and consequently, whether interest on partners capital is amenable to section 14A or not in the hands of partnership firm. 11. In order to adjudicate this legal issue, we need to appreciate the nuances of the scheme of the taxation. We note that prior to amendment of taxation laws from AY 1993-94, the interest charged on partners capital was not allowed in the hands of partnership firm while it was simultaneously taxable in the hands of respective partners. An amendment was inter alia brought in by the Finance Act 1992 in section 40(b) to enable the firm to claim deduction of interest outgo payable to partners on their respective capital subject to some upper limits. Hence, as per the present scheme of taxation, the interest payment on partners capital in essence is not treated as allowable business expenditure except for the deduction available under S. 40(b) of the Act. 11.1. Ostensibly, with effect from assessment year 1993-94, partnership firms complying with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm. Held accordingly, the salary paid to a partner by a firm which grows and sells tea, is exempt from tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60 per cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent. Supreme Court has also held in the case of CIT vs. Ramniklal Kothari (1969) 74 ITR 57 (SC) that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. Thus, the partnership firm and partners have been collectively seen and the distinction between the two was blurred in the judicial precedents even for taxation purposes. 11.4 Section 4 of the Indian Partnership Act 1932 defines the terms partnership, partner, firm and firm name as under : Partnership is the relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not lead to any loss in revenue by this action of the assessee. In view of the inherent mutuality, when the partnership firm and its partners are seen holistically and in a combined manner with costs towards interest eliminated in contra, the investment in mutual funds generating tax free income bears the characteristic of and attributable to its own capital where no disallowance under S. 14A read with Rule 8D is warranted. Consequently, the plea of the assessee is merited in so far as interest attributable to partners. However, the interest payable to parties other than partners, in our view, would be subjected to provisions of Rule 8D(2)(ii) of the Rules. Similarly, in the absence of any specific plea from assessee towards disallowance under Rule 8D(3), we hold it sustainable in view of express mandate of law. The matter is accordingly remanded back to the file of the Assessing Officer for re-computation of disallowance under Rule 8D r.w.s. 14A of the Act in terms of our opinion expressed hereinabove. 9. Respectfully following the decision of ITAT Pune in the case of Quality Industries (supra), we hold that payment of interest to the partners towards the use of the partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 2013-2014, wherein the Tribunal relying its earlier order dated 27.04.2018, passed in ITA No.352/CTK/2016 for the assessment year 2010-2011 along with other connected appeals has observed as under :- 22. From the above judicial decisions, we find that the Tribunal has restored the disputed issue to the file of AO for re-examination and reverification and apply the provisions of Section 14A r.w.rule 8D and in the instant case, the issue being similar, we find that the AO has not complied with the mandatory requirement of Section 14A (2) of the Act read with Rule 8D (1) (a) of the Rules and we respectfully follow the above judicial decision of the Tribunal and remit the disputed issue to the file of AO for re-examination and verification and to decide the issue on merits after complying the mandatory requirement of the provisions of Section 14A of the Act and this ground of appeal is allowed for statistical purposes. 14. From the orders both the authorities below, we observe that the assessee is earning income under different heads, as mentioned above. During the year, the assessee has received dividend of ₹ 110,068,076/- and claimed such income as ..... 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