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TMI Blog2024 (5) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... s before or at the time of hearing." Also, the assessee company has raised additional grounds of appeal which reads as under: "Additional Gr.No.1: "On the facts and circumstances of the case and in law, when assessee had sufficient interest-free own funds of Rs. 4,36,24,627 which is more than the average investment of Rs. 2,22,96,301 in the partnership firm wherefrom exempt income of Rs. 1,79,601 has been earned; no disallowance u/s. 14A rwr.8D would be permissible in the eyes of law; relied on Godrej & Boyce Mfg Co Ltd (2023) (Bom); Binani Industries Ltd (2022) (Cal HC); South Indian Bank Ltd (2021) (SC); HDFC Bank Ltd (2016) (Bom)." Additional Gr.No.2: "On the facts and circumstances of the case and in law, notice issued u/s. 143(2) dt.9-8- 18 by ACIT-2(1), Raipur; assessment made u/s. 143(3) dt.16-12-19 by ITO-2(1), Raipur; there is violation of Sec. 127(1) & 127(3); there is no mention of order u/s. 127 by PCIT for transferring the case from ACIT-2(1) to ITO-2(1) for assuming valid jurisdiction by ITO-2(1); in absence of order u/s. 127 by PCIT for transferring the case to ITO-2(1); assessment made u/s. 143(3) by ITO-2(1) would be invalid as without having valid jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat though the assessee company had made investment towards its capital contribution as a partner in a partnership firm, viz. Shri Rani Sati Steel Traders of Rs. 1,69,54,737/-, profit from which was exempted u/s. 10(2A) of the Act but had not made any suo-motto disallowance of the corresponding interest expenditure u/s. 14A of the Act. Accordingly, the A.O called upon the assessee company to put forth an explanation as to why disallowance u/s. 14A r.w.r 8D may not be made in its case. As the reply filed by the assessee did not find favour with the A.O, therefore, he worked out disallowance u/s. 14A r.w.r. 8D of Rs. 28,89,519/-, as under: Sl. No. Particulars Amount (Rs.) Note No. 1. Amount of expenditure directly relating to income which does not form part of total income 26,75,556/- 1 2. Amount equal to 1% of the annual average of the monthly averages of the opening and closing balance of the value of investment (2,22,96,301 x 1%) 2,22,963/- 3. Total disallowance 28,98,519/- Accordingly, the A.O vide his order passed u/s. 143(3) dated 16.12.2019 assessed income of the assessee company at Rs. 28,26,982/-. 4. Aggrieved the assessee company carried the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is clear that the assessee has incurred expenses in the form of interest cost for the purposes of earning exempt income in the form of share of profit from the Partnership Firm and therefore the disallowance u/s 14A is attracted.' 4.2 It is further seen that the contentions raised were rejected holding that since the assessee and partnership firm are separate legal entities for income tax purposes, hence, disallowance u/s14A is applicable in respect of share of profit from the partnership firm, reliance is placed on the decision of DHARMASINGH M. POPAT vs. ASSISTANT COMMISSIONER OF INCOME TAX reported in (2010) 2 ITR 0586, it was held that "Though the partnership firm is not a separate entity as per general law, for a specific purpose it may be treated as independent of its partners under the provisions of IT Act, 1961. To put it differently, the concept of partnership firm, being a compendium of its partners is subject to the tax law modifying such concept of partnership law which means that if there exists no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of IT Act is a separate assessable entity and therefore partners vis-a-vis partnership firm would stand on the same footing of shareholders vis-a-vis company. Accordingly, income charged in the hands of partnership firm cannot be treated as being a non-exempt income in the hands of a partner of such firm and, therefore, provisions of s. 14A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm. 4.3. In view of the above, the action of the AO is upheld and the appeal is treated as dismissed." 5. The assessee company being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal. 6. I have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and material available on record as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions. 7. Shri Sunil Kumar Agrawal, Ld. Authorized Representative (for short 'AR') for the assessee company has assailed the disallowance made by the A.O u/s. 14A r.w.r. 8D on the basis of his multi-facet contentions: (i) that as the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the assessee company had self-owned funds of Rs. 4.36 crore (approx.) which were sufficient to source the investment of Rs. 1.69 crore (approx.) towards capital contribution with the partnership firm, therefore, no part of the interest expenditure was liable to be disallowed u/s. 14A r.w.r. 8D(2)(ii) of the Act. 10. I have thoughtfully considered the aforesaid contention of the Ld. AR and principally concurred with him that in case if the assessee has sufficient self-own funds, the presumption would be that the investment in the exempt income yielding investment was sourced out of the same. My aforesaid conviction is fortified by the judgment of the Hon'ble High Court of Bombay in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The Hon'ble High court had observed that where the assessee has more interest free funds than the tax-free investments, then a presumption would arise that tax free investments would be out of the interest-free funds. In fact, the aforesaid view is further supported by the judgment of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. Vs. CIT (2021) 438 ITR 1 (SC), wherein the Hon'ble Apex Court had held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exempt income, he had wrongly assumed jurisdiction u/s. 14A as a result whereof disallowance determined by him by triggering the mechanism contemplated in Rule 8D(2)(iii) could not be sustained and was liable to be vacated. For the sake of clarity, the relevant observations of the Tribunal are culled out as under: "13. After giving a thoughtful consideration to the issue in hand in the backdrop of the aforesaid contentions advanced by the Ld. Authorized Representatives of both the parties, we find substantial force in the claim of the Ld. AR. Admittedly, pursuant to the judgment of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi (2018) 91 taxmann.com 154(SC), the A.O prior to dislodging the disallowance, if any, offered by the assessee u/s. 14A of the Act remains under a statutory obligation to record his dissatisfaction as regards the correctness of the said claim of the assessee in reference to its accounts and therein, categorically record the reasons as to why the claim of the assessee qua the disallowance so offered by him is not being accepted. On a similar footing would be a case where the assessee had not attributed any part of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained and is liable to be vacated. As we have vacated the disallowance made by the A.O u/s. 14A(2)(iii) for want of valid jurisdiction on his part, therefore, we refrain from adverting to the other contentions that have been advanced by the Ld. AR qua sustainability of the said disallowance on merits which are left open. Thus, the Ground of appeal No.2 raised by the assessee is allowed in terms of our aforesaid observations. 13. Also, I find that the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) has held that that if the A.O was not satisfied with the disallowance that was offered by the assessee, then, he remained under a statutory obligation to record his dissatisfaction to the said effect, as it was only thereafter that he could assume jurisdiction and take recourse to and work out the disallowance as per sub- section (2) and (3) of Sec. 14A of the Act. 14. I further find that the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Limited Vs. Dy. Commissioner Of Income- Tax & Anr (Civil Appeal No. 7020 of 2011; dated. 08.05.2017) (SC), dealing with the statutory requirement of satisfaction on the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utory obligation as stood cast upon him, could have validly proceeded with and determined the amount of such other/administrative expenditure incurred in relation to the income which did not form part of its total income. I however find that in the case of the present assessee company the A.O had carried out the disallowance of the other/administrative expenditure under Sec. 14A in a mechanical manner as per the methodology provided in Rule 8D(2)(ii). I am of the considered view that the general observations of the A.O can by no means partake the color and character as that of a satisfaction, which as per the mandate of law is required to be arrived at by him with regard to the correctness of the claim of the assessee in respect of the administrative/other expenses claimed to have been incurred in respect of income which did not form part of the total income of the assessee company, having regard to the accounts of the assessee, as were placed before him. I, thus, being of the considered view that as the A.O had summarily carried out the disallowance of the administrative/other expenses under Sec. 14A, as per the methodology provided in Rule 8D(2)(ii), without satisfying the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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