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Income Tax Appellate Tribunal, ‘’ SMC’’ BENCH, AHMEDABAD
Before: 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)-3, Ahmedabad, dated 29/06/2018 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") relevant to the Assessment Year 2013-14.
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The assessee has raised the following grounds of appeal:
That the learned CIT(A) has erred in laws and facts by confirming disallowance of Rs.10,39,806/- of various expenses to earn income and therefore, the ld.AO should be directed to allow the said expense while computing the total income. 2. That the learned CIT(A) has erred in laws and facts by confirming addition of Rs.42,750/- while computing capital gains and therefore the ld.AO should be directed to allow the said expenses while computing the total income. 3. That your appellant craves a leave to add, alter or amend any grounds at the time of hearing.
2.1 At the outset, the ld. AR before us submitted that he has been instructed by the assessee not to press ground No.2 filed in the memo of appeal. Therefore, we dismiss the same as not pressed.
The only effective issue raised by the assessee is that the learned CIT(A) erred in confirming the order of the AO by sustaining the disallowance of ₹ 10,39,806.00 representing the expenses incurred by the partner of the firm against the remuneration and the interest income received from the firm.
The facts in brief are that the assessee in the present case is an individual and a partner in 3 partnership firms. The assessee from the partnership firms is drawing remuneration, interest on capital and share of profit. The assessee against such income has claimed certain expenses as detailed under: On verification of the records it is noticed that have debited following expenses out of income from share interest Remuneration received from Khushi Enterprise. 1. CAR INSURANCE 15433 2. CAR REPAIRING 36457 3. DRIVER SALARY 80000 4. LOAN PROCESSING EXP 18117 5. PETROL EXP 128790 6. CAR LOAN INTEREST 252050 7. DEPRECIATION 508959
4.1 As per the assessee, all the above expenses were incurred for commuting from the place of residence to the different places where the business activities of
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the partnership firms were carried out. Thus considering the commercial expediency, the impugned expenses are to be allowed.
4.2 However the, AO found that the assessee was the owner of 4 vehicles and claimed for using the same in the business. As such the use of 4 vehicles by a single person was something abnormal. Furthermore, the assessee was not carrying out any business activity in his individual capacity. As such, it was the partnership firm which was carrying on the business activity. Thus the AO concluded that such expenses cannot be allowed against the income of the assessee as discussed above. Accordingly, the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A.
The assessee before the learned CIT-A submitted that he has incurred total expenses of ₹ 13,40,491.00 and out of which approximately 25% of such expenses were disallowed considering personal in nature. The assessee also submitted that genuineness of the expenses has nowhere been doubted by the AO. According to the AO, these expenses were incurred for the business carried on by the partnership firm and therefore the same should have been claimed by such partnership firm. However, the rate of tax in the case of a partnership firm is flat rate whereas in the case of an individual there is a basic exemption provided to him and thereafter the tax is charged on a slab rate basis. Thus, there was no loss to the revenue if the expenses has been claimed by the assessee.
The learned CIT after considering the submission of the assessee confirmed the order of the AO by observing as under: From the above arguments, it is concluded that the appellant feels that the genuine expenditure incurred on behalf of firm should be allowed as the same has been incurred for firms' businesses. However, that is not the scheme of the Act. Different assesses are taxed differently and the individuals have been given certain taxation advantages by providing deductions under Chapter-VI of the IT Act. 1961. The genuine expenditure are required to be claimed in P & L Account of the firm and taxes paid on resultant taxable income, Similarly,
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the partners in individual capacity have to earn remuneration/interest etc. from the firm(s) and pay the taxes as per law. The partners are separate assessees than the firms in which they are partners. It is my humble understanding that the expenditure claimed by the assessee is appropriation 01 income rather than expenditure incurred to earn the income. It is not on record as to how many cars are owned in individual capacity by the partners and their other family members. After-all, there is personal life of not only partners but also of family members. The family members can use personal cars to go to schools or clubs or picnic or to social functions. The expenditure on such cars has to be claimed in individual files by the family members. That kind of analysis and the facts are not on record either filed during assessment proceedings or appellate proceedings. What is to be considered is the true nature of income as held in the case of Kedarnath Jute Manufacturing Co. Ltd. - 82 ITR 363 (SC) and in my opinion, expenditure claimed by individual partner in his personal file on behalf of genuine expenditure incurred for business of the firm(s) if allowed would create anomalous situation in IT tax regime. The shifting of tax burden from one partner to another or from firm to partner is not allowable as per provisions of the Act. I am reminded of a cardinal principle of interpretation of statue which says that literal theory is applied when statute is unambiguous and clear and intent theory is applied in case otherwise and provisions are very clear on this issue. There is no point in discussing about the] gain or loss to the revenue in the decision. Therefore, the two case laws relied by .the appellant from ITAT, Ahmedabad are distinguished as one case law is on section 264 and another on statutory allowability of depreciation. The income has to be taxed correctly in respective hands by the AO and to my mind the AO has taken correct decision in this case. The AO has rightly disallowed expenditure which are to be claimed in another income tax file. Ground No. 1 is dismissed.
Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
The learned AR before us submitted that the assessee is entitled for the expenses incurred by him against the remuneration and interest income received from the partnership firm.
9.1 The learned AR also argued that there is no loss to the revenue if the expenses are claim by the assessee in his individual capacity instead of partnership firm in which he is the partner. It is for the reason that in case of partnership firm there is flat rate of tax whereas in the case of individual there is a slab rate of tax besides the basic exemption.
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On the other hand the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The genuineness of the expenses claimed by the assessee has nowhere been doubted by the authorities below. Likewise, the AO in his order has categorically observed that these expenses should have been claimed by the partnership firm instead of the partner in his individual capacity. The relevant observation of the AO reads as under: The partner contributes capital the firm as per the profit sharing ration and as per the partnership deed from the details mentioned above, when you are a partner in three partnership firms, it is not clear how you have bifurcated the expesnses for Car insurance Car repairing , driver Salary, Loan Processing Exp. Petrol Exp. Car loan interest and Depreciation Exp. To one particular firm. The firms are entitled to claim deduction for such expenses. In view of the above facts the expenses claimed by the you for earning share/interest/remuneration from firm are not an allowable deduction and therefore an amount of Rs.10,39,806/- proposed to be disallowed and added to the total income.
11.1 From the above, we note that there is no loss to the revenue. It is for the reason that the rate of tax applicable to the individual is slab rate whereas in the case of partnership firm there is flat rate of tax. Furthermore the firm and the partner are very closely connected. Therefore, the expenses cannot be allowed merely on the reasoning that the expenses has been claimed by the partner of the firm instead of the partnership firm.
11.2 We also note that the Tribunal in the case of Nitin B. Karve Vs. ACIT in 3089/Mum/2008 dated 19-1-2010 involving identical facts and circumstances, allowed the expenses in the hands of the partner. The relevant finding of the order reads as under: 5. After hearing rival submissions, we find that this Bench of the Tribunal in the case of Sudhir D. Patil vs. DCIT reported in 2 SOT 678, J-Bench, Mumbai had considered the question of allowing expenditure, while computing income from a partner, against salary received by the partner from the firm. The Tribunal had taken the view that the salary from the firm in which the assessee is a partner, is in the nature of business income u/s 28(v) and, therefore, interest paid by the partner on money borrowed for contributing capital has to be allowed as a deduction in the hands of the assessee. In respect of the nature of the share in the profits of the firm, in the hands of the partner, the Supreme Court has
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considered the issue in the case of CIT, Madras v.s.R.M. Chidambaram Pillai 106 ITR 292 and held that salary paid to a partner is business income. Applying those case laws to a partner of a Chartered Accountant Firm, the C-Bench of the Trihunal in the case of Shri Sudhir Kapadia vs. ITO, order dated 26th Feb., 2007, decided the issue in favour of the assessee. Similar view was taken by the J-Bench of the Tribunal in the case of Mr. Anand J. Vashi vs. ITO in ITA No. 3 269/M urn/2006, order dated 23rd January, 2009. Respectfully applying the ratios laid down in these decisions to the facts of this case, we direct the AO to allow the claim of expenses made by the assessee against his professional income. 6. In the result, the appeal of the assessee is allowed.
11.3 In view of the above and after considering the facts in totality, we are of the view that the expenses claimed by the assessee cannot be disallowed on the reasoning as discussed above. Hence we reverse the order of the authorities below and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 30/03/2022 at Ahmedabad.
Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER
(True Copy) Ahmedabad; Dated 30/03/2022 Manish