Vishnu Anant Mahajan v. Asstt. CIT

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The Tax Publishers2012 TaxPub(DT) 2246 (Ahd-Trib) : (2012) 047 (II) ITCL 0073 : (2012) 147 TTJ 0142 : (2012) 072 DTR 0217 : (2012) 016 ITR (Trib) 0621 INCOME TAX ACT, 1961 --Depreciation--Disallowance under section 14AApplicability of provision--The assessee was an individual and derives income by way of share of profit from the firm of M/s. M, capital gains, interest, dividend and house property. The findings of the assessing officer are that the assessee is a separate and distinct legal entity from the partnership firm. Although, the assessee is the legal owner of the motor car, but that does mean that the expenditure so incurred is for earning the business income. The earning of other incomes apart from share in the partnership firm does not advance the case of the assessee regarding the claim of the expenditure. The assessee has also disallowed suo motu 1/10th of depreciation allowance which indicates that the asset has been used for personal purpose. The Commissioner (Appeal) disallowed 76 per cent as depreciation and 24 per cent expenses under section 14A. :Held: Depreciation could not be disallowed under section 14A as it was not an expenditure but a statutory allowance. A firm can validly enter into an agreement with a partner regarding purchase and sale of assets etc. (Kaluram Puranmal; Chase Trading Co.) Further, it has been held that whenever the field is occupied by the tax law, the provision contained therein will become applicable, but where the field is left vacant, one will have to take assistance from the provisions contained in the Partnership Act for filling the vacuum under the tax law. (K. Kulakutty). In so far as the issue is concerned, a firm and its partners are assessable separately on their total income in their names, notwithstanding the position of law under the Partnership Act that a firm is a compendium or the collective name of the partners. Thus, in so far as the taxation is concerned, the firm is not a pass-through vehicle. It is a translucent vehicle, as only the salary and interest paid to the partners are taxable under section 28(v) as business income. It has been so provided because there cannot be really be a relationship of employer and employee or debtor or creditor between the firm on one hand and the partners on the other hand. Even earlier, the salary and interest allocated to the partners were taxable as business income. The real change in the scheme of taxation is that the firm is taxed at a flat rate of income after deduction of interest and salary paid to the partners, and interest and salary are taxed in the hands of the partners as business income. Thus, it is clear that the amount taxed in the hands of the firm is not taxed again in the hands of the partners. This change has led to avoidance of double taxation because the firm does not have to pay tax on salary and interest income paid to the partners and the partners do not have to pay tax on share income allocated to them. This is achieved by insertion of section 10(2A) and 28(v). In so far as share income is concerned, the field is occupied by the tax law, as it is enacted that the share income shall not form part of total income of the partners. Therefore, in view of this specific provision and the fact that the firm and partners are separately assessable entities, it will be difficult to hold that the share income is not excluded from the total income of the partner because the firm has already been taxed thereon. When section 10(2A) speaks of its exclusion from the total income, it means, the total income of the person whose case is under consideration. The instant case is that of the partner and therefore what is to be examined is whether the share income is excluded from his total income. The answer is obviously in the affirmative. In such a situation, provision contained in section 14A will come into operation and any expenditure incurred in earning the share income will have to be disallowed. Thus, Tribunal agrees with the Commissioner (Appeal) that the provision contained in section 14A is applicable to the facts of the case. Further, it has been held in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 TaxPub(DT) 2182 (Bom-HC) : (2010) 328 ITR 81 (Bom), that all facts may be taken into consideration for determining the quantum of disallowance to be made. This portion of the judgment is applicable only in respect of determination of quantum of disallowance. The Commissioner (Appeal) has disallowed the expenditure in the ratio of income not included in the total income and the income received from the firm. In the absence of any argument regarding any error in this part of the decision, it is held that he was right in doing so. (Para 7) Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshang D. Nanavati (supra) that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Bebverages Pvt. Ltd. v. DCIT 2009 TaxPub(DT) 1871 (SC) : (2009) 314 ITR 314. The CIT (DR) has not been able to displace the ratio of these cases. Thus, on consideration, section 14A uses the words 'expenditure incurred by the assessee in relation to income'. A statutory allowance under section 32 is not an expenditure. Therefore, Tribunal is in agreement with the decision of the Division Bench in the case of Hoshang D. Nanavati. (Para 8) SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2246 (Ahd-Trib) : (2012) 047 (II) ITCL 0073 : (2012) 147 TTJ 0142 : (2012) 072 DTR 0217 : (2012) 016 ITR (Trib) 0621

INCOME TAX ACT, 1961

--Depreciation--Disallowance under section 14AApplicability of provision--The assessee was an individual and derives income by way of share of profit from the firm of M/s. M, capital gains, interest, dividend and house property. The findings of the assessing officer are that the assessee is a separate and distinct legal entity from the partnership firm. Although, the assessee is the legal owner of the motor car, but that does mean that the expenditure so incurred is for earning the business income. The earning of other incomes apart from share in the partnership firm does not advance the case of the assessee regarding the claim of the expenditure. The assessee has also disallowed suo motu 1/10th of depreciation allowance which indicates that the asset has been used for personal purpose. The Commissioner (Appeal) disallowed 76 per cent as depreciation and 24 per cent expenses under section 14A. :Held: Depreciation could not be disallowed under section 14A as it was not an expenditure but a statutory allowance.

A firm can validly enter into an agreement with a partner regarding purchase and sale of assets etc. (Kaluram Puranmal; Chase Trading Co.) Further, it has been held that whenever the field is occupied by the tax law, the provision contained therein will become applicable, but where the field is left vacant, one will have to take assistance from the provisions contained in the Partnership Act for filling the vacuum under the tax law. (K. Kulakutty). In so far as the issue is concerned, a firm and its partners are assessable separately on their total income in their names, notwithstanding the position of law under the Partnership Act that a firm is a compendium or the collective name of the partners. Thus, in so far as the taxation is concerned, the firm is not a pass-through vehicle. It is a translucent vehicle, as only the salary and interest paid to the partners are taxable under section 28(v) as business income. It has been so provided because there cannot be really be a relationship of employer and employee or debtor or creditor between the firm on one hand and the partners on the other hand. Even earlier, the salary and interest allocated to the partners were taxable as business income. The real change in the scheme of taxation is that the firm is taxed at a flat rate of income after deduction of interest and salary paid to the partners, and interest and salary are taxed in the hands of the partners as business income. Thus, it is clear that the amount taxed in the hands of the firm is not taxed again in the hands of the partners. This change has led to avoidance of double taxation because the firm does not have to pay tax on salary and interest income paid to the partners and the partners do not have to pay tax on share income allocated to them. This is achieved by insertion of section 10(2A) and 28(v). In so far as share income is concerned, the field is occupied by the tax law, as it is enacted that the share income shall not form part of total income of the partners. Therefore, in view of this specific provision and the fact that the firm and partners are separately assessable entities, it will be difficult to hold that the share income is not excluded from the total income of the partner because the firm has already been taxed thereon. When section 10(2A) speaks of its exclusion from the total income, it means, the total income of the person whose case is under consideration. The instant case is that of the partner and therefore what is to be examined is whether the share income is excluded from his total income. The answer is obviously in the affirmative. In such a situation, provision contained in section 14A will come into operation and any expenditure incurred in earning the share income will have to be disallowed. Thus, Tribunal agrees with the Commissioner (Appeal) that the provision contained in section 14A is applicable to the facts of the case. Further, it has been held in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 TaxPub(DT) 2182 (Bom-HC) : (2010) 328 ITR 81 (Bom), that all facts may be taken into consideration for determining the quantum of disallowance to be made. This portion of the judgment is applicable only in respect of determination of quantum of disallowance. The Commissioner (Appeal) has disallowed the expenditure in the ratio of income not included in the total income and the income received from the firm. In the absence of any argument regarding any error in this part of the decision, it is held that he was right in doing so. (Para 7) Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshang D. Nanavati (supra) that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Bebverages Pvt. Ltd. v. DCIT 2009 TaxPub(DT) 1871 (SC) : (2009) 314 ITR 314. The CIT (DR) has not been able to displace the ratio of these cases. Thus, on consideration, section 14A uses the words 'expenditure incurred by the assessee in relation to income'. A statutory allowance under section 32 is not an expenditure. Therefore, Tribunal is in agreement with the decision of the Division Bench in the case of Hoshang D. Nanavati. (Para 8)