COMMISSIONER OF INCOME TAX vs. KARSANDAS BECHARDAS AND SONS

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ITR/190/1995HC GujaratGJHC24022513199526 July 2006Author: HONOURABLE MR. JUSTICE M.R. SHAH,HONOURABLE MR. JUSTICE R.S.GARG5 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Tribunal was right in deleting the motor car allowance paid by the firm to its partners, which had been disallowed by the Assessing Officer under Section 40(b) of the Income Tax Act. The Court reasoned that Section 40(b) specifically disallows deductions for payments of interest, salary, bonus, commission, or remuneration made by a firm to its partners. However, it does not restrict the deduction of actual expenditure incurred for business purposes, even if it is provided to partners in the form of an allowance or reimbursement. The Court found that the motor car allowance, as presented, was essentially a reimbursement of petrol expenses for business use. Therefore, Section 40(b) was not applicable to this expenditure, and the CIT(A) and Tribunal were justified in allowing the deduction. The reference was answered against the Revenue and in favour of the assessee.

What were the facts?

The assessee, Karsandas Bechardas and Sons, a firm engaged in manufacturing textile machineries, paid a motor car allowance of Rs. 1000 per month to each of its two partners during the calendar year 1984 (Assessment Year 1985-86). The firm contended that this allowance was a reimbursement of petrol expenses incurred for business purposes, with a ceiling of Rs. 1000 per partner per month. The Assessing Officer disallowed this allowance under Section 40(b) of the Income Tax Act. The Commissioner of Income Tax (Appeals) deleted the addition, holding Section 40(b) inapplicable. The Income Tax Appellate Tribunal upheld the CIT(A)'s decision. The Revenue has filed a reference to the High Court.

What were the issues?

1. Whether, the Appellate Tribunal is right in law and on facts in deleting the motor car allowance paid by the firm to its partners, which was disallowed by the Assessing Officer under Section 40(b) of the Income Tax Act? Assessee's Contention: The judgment does not record any specific contentions made by the assessee before the High Court. However, the CIT(A) and Tribunal held that Section 40(b) prohibits deductions on payments like salary, interest, bonus, commission, or remuneration to partners, but not on reimbursement of actual expenditure incurred for business purposes. They relied on the distinction between 'allowance' and 'reimbursement of expenditure'. Revenue's Contention: The Revenue contended that both the CIT(A) and the Tribunal erred in holding Section 40(b) inapplicable to the motor car allowance paid to the partners, and that such an allowance is not allowable.

Which sections of the Income-tax Act were involved?

Section 40(b)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITR/190/1995 1/5 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 190 of 1995 For Approval and Signature:  HONOURABLE MR.JUSTICE R.S.GARG  HONOURABLE MR.JUSTICE M.R. SHAH  =========================================================  1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? =========================================================  COMMISSIONER OF INCOME TAX - Applicant(s) Versus KARSANDAS BECHARDAS AND SONS - Respondent(s) =========================================================  Appearance : MR MANISH R BHATT for Applicant(s) : 1, SERVED BY RPAD - (N) for Respondent(s) : 1, ========================================================= CORAM :  HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 26/07/2006

ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE M.R. SHAH)

ITR/190/1995 2/5 The following question is referred by the Income Tax Appellate Tribunal, at the instance of the Revenue, for our opinion; “Whether, the Appellate Tribunal is right in law and on facts in deleting the motor car allowance paid by the firm to its partners disallowed by the Assesssing Officer u/s. 40(b) of the I.T. Act ?”

2.

Heard Shri B.B. Naik, learned counsel appearing on behalf of the Revenue. Though served, nobody appears on behalf of respondent assessee.

3.

The assessee was a firm engaged in manufacture of textile machineries. During calendar year 1984, i.e., Assessment Year 1985-86, the assessee firm paid motor car allowance of Rs. 1000 per month to its two partners. Before the Income Tax Officer, it was submitted that instead of incurring expenditure on running and maintenance of motor cars

ITR/190/1995 3/5 in regard to the said partners it was thought it fit to allow monthly allowance to the partners. It was also submitted before the Income Tax Officer that the allowance was actually in the form of reimbursement of petrol expenses etc., incurred for the purpose of business with the ceiling of Rs. 1,000/- per partner per month. The Income Tax Officer disallowed the motor car allowance paid to the partners considering the provisions of Section 40(b) of the Income Tax Act by holding that the same is not allowable. On appeal, at the instance of the assessee, the Commissioner of Income Tax (Appeals) held that the provisions of Section 40(b) were not applicable as they prohibit any deduction on any payment of interest, salary, bonus, commission or remuneration made by a firm to any partner of a firm and that it does not restrict such allowance from actual expenditure being paid to a partner, and accordingly he deleted the addition of Rs. 24,000/-. On further appeal, the Income Tax Appellate Tribunal, concurred with the view of the C.I.T. (Appeals) by reiterating and holding that the provisions of Section 40(b) of ITR/190/1995 4/5 the Income Tax Act are not applicable and the finding given by the C.I.T. (Appeals) is correct.

4.

Shri B.B. Naik, learned counsel appearing on behalf of the Revenue, has submitted that both the C.I.T. (Appeals) and the Tribunal have materially erred in holding that Section 40(b) of the I.T. Act is not applicable in the facts of the case, i.e., to say that the amount paid to the partners towards motor car allowance is not allowable.

5.

Section 40(b) of the Act, refers to any payment of interest, salary, bonus, commission or remuneration made by a firm to any partner of a firm and only those payment shall not be deducted in computing the income chargeable under Section 40. If any facility of providing a motor car is given to the partners of a firm, then the expenditure could be deducted. However, the contention that motor car allowance being paid to the partners will not be allowable, cannot be accepted. On facts and considering the provisions of Section 40 sub-clause

ITR/190/1995 5/5 (b), both the C.I.T. (Appeals) and the Tribunal were justified in holding that Section 40(b) would not be applicable and they have rightly held so in allowing the deduction. We hold that the Tribunal was right in deleting the motor car allowance paid by the firm to its partners disallowed by the Assessing Officer under Section 40(b) of the Income Tax Act. We answer the Reference accordingly against the interest of the Revenue and in favour of the assessee. The Reference stands disposed of accordingly. No costs. [ R.S. Garg, J. ] [ M.R. Shah, J. ] RMR.

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