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Income Tax Appellate Tribunal, ‘’SMC’’ BENCH, AHMEDABAD
Before: SHRI KUL BHARAT & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-10, Ahmedabad dated 27/02/2017 (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dt.29/01/2016 relevant to the Assessment Year 2013-2014.
The assessee has raised the following grounds of appeal. 1 . The learned Commissioner of Income Tax(Appeals) has erred in facts and law by considering expenditure incurred of Rs.5,66,925/- for the purpose of earning business income from the seven partnership firms as considering such as totally personal expenditure and confirmed the addition of the aforesaid amount.
The solitary issue raised by the assessee is that the Ld. CIT (A) erred in confirming the disallowance of the expenditure of Rs. 5,66,925/- claimed against the business income received from the partnership firms.
The facts in brief are that the assessee in the present case is an individual and is a partner in 7 partnership firms. The assessee from such partnership firms is earning income by way of share of profit, remuneration and interest on the capital invested by him in the firms. The assessee during the assessment proceedings claimed that he has incurred an expense of Rs. 5,66,925/- against the income received from the partnership firm. As per the assessee, he has employed two persons, one is looking after managerial work and the other one is doing petty work in the capacity of the peon. Accordingly the assessee claimed that he is eligible for claiming the deduction of such expenses against the income received from the partnership firms.
2.1 However, the AO was of the view that such expenses as claimed by the assessee are incurred to meet his personal requirement. Therefore the same cannot be allowed as deduction against such income. Thus the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal before the Ld.CIT (A) who confirmed the order of the AO by observing as under:
8.3 During the course of appeal proceedings, the appellant has filed the details of expense claimed by the appellant. For clarity sake, the same is reproduced as under:- Chandra Nanakram Jethwani- 10-12 ‘matruchhaya’ Nr. Jain Temple, Jain Nagar, Kabir Chowk, Sabarmati Ahmedabad PAN No. ABCPJ7113L Indirect Expenses Group Summary 1 April 2012 to 31 Mar 2013 Particulars Closing Balance Accounting Fees 12,000 Bank Charges 158.00 Car Insurance (Honda City) 17,262.00 Depreciat 1,35,932.00 Electric Exp. 13,450.00 Int. on 36,793.11 Pagi Salary A/c 60,000.00 Petrol Exp. 20,580.00 Rent Exp. 96,000.00 Salary Paid 1,14,000.00 Tea & Coffee 14,550.00 Telephone 13,793.00 Vakil Fee 5,000.00 Vehicle Maintainance Exp. 27,407.00 Grand 5,66,925.11 8.3.1 First of all, during the course of assessment proceedings, the appellant argued that the expenses have been incurred for keeping one management person and one peon. However, while going through the actual expenses debited in the personal accounts of the appellant, it is found that these expenses are not only for the salaries but are also for car expenses, accounting fees, electricity expenses, petrol expenses, rent expenses, tea-coffee expenses, telephone expenses, vakil fees which are all general expenditure of the appellant. The appellant has not given any reasons as to why these expenses should be allowed under the head 'Profit 85 Gains of business'. The onus is on the appellant to prove that these expenses have been incurred wholly and exclusively for the purpose of business. The Hon'ble Gujarat High Court in the case of Matubhai Chunilal Patel Vs CIT (the case which has been relied upon by the appellant) has clearly held that the burden to prove that the expenses have been expended/incurred for the purpose of ! business is on the appellant. The relevant portion of Hon'ble Gujarat High Court's j order is reproduced as under:- "With reference to this contention, it must be borne in mind that before the Income-tax Officer as also before the Appellate Assistant Commissioner and the Tribunal it was nowhere contended on behalf of the department that the burden of showing that the amount was expensed wholly and exclusively for the purpose of the business had not been discharged by the assessee. On the contrary, the order of the Tribunal goes to show that it has found as a fact that the amount actually represented the expenses incurred for the business of the firm". On verification of records, it is observed that the appellant has not made any submissions even before the A.O or before the undersigned as to how the expenses incurred by the appellant and claimed under the head 'profits and gains of business or profession' have been expended for earning business income. The appellant has completely failed in discharging the burden casts on his by the statute.
In order to verify the claim of the appellant whether it has received remuneration/salary from the partnership firm, the computation of income filed by the appellant was perused. On going through the computation of income, it is noticed that the appellant has received salary income of Rs. 1,01,670/- from M/s. Dev Corporation and Rs. 44,737/- from Shri Siddhi Vinayak Enterprises, totaling to Rs. 1,46,407/- during the whole year. All other receipts are either of interest on capital or share in the partnership firm. 9.1 Even on verification of the sources of income being shown by the appellant, it is clear that the expenses claimed by the appellant have not been expended for earning business income. In fact, these expenses are the personal expenses of the appellant which has been incurred for maintaining his personal books of accounts. All these persons are only doing the work of his personal accounts including maintaining the books of account of the appellant in his personal capacity, which has nothing to do with the earning of business income as claimed by the appellant. This is also demonstrated by the fact that the salary of the appellant from the partnership firm is only Rs. 1,46,407/-. The judgement relied upon by the appellant of Hon'ble Gujarat High Court is also not applicable to the facts of the case. In that judgement, the appellant claimed expenses relating to motor car on the ground that the car was being used for the purpose of business. Accordingly, their Lordship have held that since the Tribunal has given a clear cut finding that the car was indeed used for the purpose of business and there is no finding of either the Assessing Officer or the appellate Commissioner or the Tribunal that the expenses have not been incurred for the purpose of business, the Gujarat High Court decided the issue in favour of the appellant. However, in this case, the appellant has not discharged the onus/burden cast on him by the statute and has not produced any evidences to show that these expenses have actually been incurred for the purpose of business. A perusal of the expenses claimed by the appellant shows that these are the general expenses which have been incurred by the appellant in his personal capacity which has rightly been held by the A.O as 'application of income'. It is also seen that the appellant has not filed the capital account of the relevant Assessment Year. Therefore, it is not clear as to how much drawings have been shown by the appellant and whether the appellant has also incurred these expenses in his personal capacity or not. This also proves that these are nothing but the personal expenses of the appellant which have been debited in the books of account with the sole intention of reducing the income of the appellant from business and profession. 9.2 In view of the aforesaid discussion, it is held that there is no force in the argument of the appellant and therefore, the ground of appeal taken by the appellant is dismissed and the order of the A.O is confirmed.
Being aggrieved by the order of the Ld.CIT (A) the assessee is in appeal before us.
The Ld. AR before us filed a paper book running from page 1 to 40 and submitted that the reasonable disallowance can be made for the expenses incurred by the assessee.
On the other hand the Ld. DR supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. In the instant case, the AO has disallowed the expenses claimed by the assessee against the income earned by him from the partnership firms on the ground that such expenses are personal in nature. The Ld.CIT (A) subsequently confirmed the view of the AO.
6.1 Indeed, the amount received by the assessee in the capacity of the partner from the partnership firm in the form of interest on the fund invested, remuneration for working in partnership firm and share of profit constitute income chargeable to tax under the head profit and gains of business or profession. This fact has been specifically provided under the provisions of section 28(v) of the Act read as under:
“Profits and gains of business or profession. (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 :
6.2 But the question arises whether there emerges any business activity merely on becoming a partner in the partnership firm. A business is an organization where people work together to make and sell products or services. A business can earn a profit for the products and services it offers and it works on regular basis.
6.3 We also note that a partnership firm is a form of business in which a group of people, also known as partners, come together. They set up their firm and provide services and products through it. However, a partnership firm is not considered to be a separate legal entity. Partners share all the profit and losses amongst each other. Thus the business has been carried out by the partnership firm and the profit of the same has been determined in its hands for the purpose of the tax. Accordingly, we hold that the assessee on becoming a partner in the firm does not mean that he is carrying out any business activity.
6.4 We also feel to refer the definition of the business or profession as provided under section 2(13) and 2(36) of the Act which reads as under: 1) "business" 40 includes trade 40, any commerce or manufacture or any adventure 40 or concern in the nature of trade 40, commerce or manufacture 2) "profession" includes vocation
In view of the above, we are of the opinion that the assessee as such is not carrying out any business activity and therefore the question of claiming the expenses against the income received from the firm does not arise.
6.5 We also draw support and guidance from the judgment of Hon’ble Supreme Court in the case of N. khadevali Saheb V. N. guddu sahib reported in 261 ITR 1 wherein it was held as under: A partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm. So long as the partnership continues, each partner is interested in all the assets of the partnership firm as each partner is owner of the assets to the extent of his share in the partnership. On dissolution of the partnership firm, accounts are settled amongst the partners and the assets of the partnership are distributed amongst the partners as per their respective shares in the partnership firm.
From the above judgment it is clear that the partners are not separate from the partnership firms. Therefore the income of the partner from the firm is treated as business income.
6.6 Without prejudice to the above, we also note that the assessee can claim the expenses against the impugned income if it has been incurred to generate such income. For example, if the assessee has invested money in the partnership firm out of the borrowed fund, then the interest cost incurred by the assessee against interest income from the firm is eligible for deduction. However in the case before us, there is no issue regarding the interest income viz a viz interest cost.
6.7 Similarly, the share of profit received by the assessee from the firm is exempted under section 10(A) of the Act, therefore there is no occasion to claim any expense against such exempted income.
Now turn to the next income received by the assessee from the partnership firm i.e. remuneration from the firm, in this regard we note that such income is taxable in the hands of the partner. Now the question arises, whether the assessee has incurred an expense against the earning of such income. The assessee as partner in the firm is acting in the representative capacity meaning thereby whatever expenses are incurred by the partner in connection with the business of the firm, then the firm is entitled for the deduction of such expenses subject to the provisions of the Act. Thus in our considered view, if the assessee has incurred any expense on behalf of the partnership firm then the right course of action is to claim the reimbursement from the partnership firm and such firm will claim the deduction under the relevant provisions of the Act on account of such reimbursement of expenses. As such the assessee cannot claim any expense against the income from the firm, save as provided above.
7.1 We further note that the assessee has shown aggregate incomes from all the partnership firms as detailed under: S.No. Particulars Amount 1. Interest Income 13,50,197/- 2. Remuneration 1,46,407/- 3. Share of profit 6,90,761/- 7.2 As we have noted that, there is no dispute regarding the interest income viz a viz interest expenses.
From the above, it is transpired that the assessee has claimed an expense of Rs. 5,66,925/- against the remuneration and share of profit as discussed above. However the assessee has claimed that expenses against the remuneration income. As such the assessee has not allocated any expense which has been incurred against the share of profit. Thus, the action of the assessee is not acceptable.
7.3 Coming to the judgment of the Hon’ble Gujarat High Court in the case of Matubhai Chunnilal Patel Vs. CIT reported in 66 ITR 408, we note that the tribunal in its order has given very clear-cut finding that the expenses were incurred by the partner of the firm on behalf of the firm, therefore the Hon’ble Gujarat High Court after taking the note of this finding of the tribunal has decided the issue in favour of the assessee.
7.4 However in the case on hand, there is no mention/plea from the side of the assessee that he has incurred the expenses on behalf of the firm. Therefore, we are of the view that the assessee cannot get the benefit of the Hon’ble Gujarat High Court judgment as discussed above.
7.5 We are also conscious to the fact that the assessee has claimed the deduction against such income in the earlier years as evident from the income tax returns available on record. But the question arises whether the principle of consistency will be applied in the given facts and circumstances as held by the Hon’ble Supreme Court in the case of Radhasoami Satsang Vs CIT reported in 60 taxman 248 wherein it was held as under: We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assess ment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier
proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12.
7.6 The principles of consistency can be applied where the facts remain the same. Thus it is transpired that the principles of consistency are based on the facts. For example if the salary has been paid to the staff for a particular amount in a year then in our considered view the same cannot be disturbed in the subsequent year until and unless the facts warrant otherwise. Thus in our considered view in such a situation, the principles of consistency will be applied.
7.7 However, in a case where there is a violation of the law in 1 year then the question arises whether, the same can be allowed to be applied in the subsequent year. For example, the assessee is entitled to claim the depreciation at a particular rate say 10% but the assessee has claimed depreciation at the rate of 25%. Thus the question arises whether the assessee can claim depreciation at the rate of 25% in the subsequent year keeping the principle of consistency. To our mind, the answers stands negative.
7.8 Now, coming to the present facts of the case, we are of the view that the issue involved is legal in nature whether the assessee by becoming a partner in the firm can be said that the partner has started any business and commercial activity.
7.9 It is undisputed fact that there was no scrutiny assessment under section 143(3) of the Act in the earlier years. But in our considered opinion the principles of consistency cannot be applied in the given facts of the case.
In view of the above we do not find any infirmity in the order of the authorities below. Accordingly we uphold the same. Hence the ground of appeal of the assessee is dismissed.
In the result the appeal of the assessee is dismissed.
Order pronounced in the Court on 01/10/2019 at Ahmedabad.