Case Law Details
Depreciation is admittedly in the nature of allowance and, therefore, it cannot be subject matter of dis allowance under section 14A, which must remain confined to expenditure incurred by the assessee. Similarly, as far as deduction under section 80D is concerned, it cannot be subject matter of dis allowance under section 14A either. The deduction under section 80D is not admissible because it is an expenditure for the purpose of earning an income but because, by virtue of specific provision under section 80D, payment of premium of health insurance, which is inherently personal expenses of the assessee, is admissible as deduction. This deduction cannot, therefore, be subject matter of dis allowance under section 14A, which, as we have noted earlier, is confined to expenditure incurred for the purpose of an income which is not includible in total income of the assessee.
Details of the Case Law:-
Hoshang D Nanavati Vs. ACIT (ITAT Mumbai)
ITA No. 3567/Mu m/07
Assessment year: 2003- 04
O R D E R
Per Pramod Kumar :
1. The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in upholding dis allowance of Rs 1,01,265, under section 14 A of the Income Tax Act, 1961, for the assessment year 2003-04.
2. The issue in appeal lies in a narrow compass of material facts. The assessee, an advocate and solicitor by profession, is a partner in a law firm by the name of Mulla & Mulla Craigie Blunt and Caroe. During the relevant previous year, the assessee received Rs 14,43,000, towards remuneration as a working partner, and Rs 46,17,600, towards share of profit in the partnership, from the said law firm. There is no dispute that the remuneration so received from partnership firm is taxable as ‘profits and gains from business and profession’, the assessee is, therefore, entitled to normal admissible deduction from the said income. However, when assessee claimed deductions aggregating to Rs 1,32,911, from remuneration so received from the law firm, the Assessing Officer did not allow the same in entirety. He invoked section 14 A, which provides for dis allowance of expenditure incurred in relation to income exempt from tax, and held that since profit share received by the assessee from the partnership firm is not exempt from tax in the hands of the assessee, expenses incurred by the assessee in relation to such income are to be disallowed under section 14 A. The Assessing Officer further held that in the absence of specific details of expenses incurred to earn such income, the total expenses to be disallowed in the same ratio which profit share in the firm bears to the total receipts from the firm i.e. on account of profit share as also remuneration. The dis allowance thus worked out to Rs 1,01,265. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.
3. Learned counsel submits that in the case of the partnership firm, unlike in the case of a corporate entity, taxes on profits of the partnership firm are borne by the partner’s inasmuch these taxes directly affect the profits credited to the partners’ accounts, and the existence of firm is not independent of its partners. It is submitted that it is thus wrong to proceed on the basis that profit share from a partnership firm is not a taxable income, and Section 10 (2A) is no more than clarificatory in nature. Even without Section 10(2A), learned counsel contends, profit share from partnership firm cannot be taxed in the hands of the assessee, as it would amount to double taxation of an income. Learned counsel, however, submits that since there is a cleavage of opinion by coordinate benches on this issue, and looking to the smallness of amount, he does not wish to carry this matter to a Special Bench which will be inevitable in view of the conflicting views expressed by the coordinate benches. It is for this reason, according to learned counsel, that he does not press this grievance before us, even though he firmly believes that the assessee deserves to succeed on this preliminary issue itself. He, however, hastens to add that even as he does not press this grievance, it should not be construed as his having conceding the appeal on this issue.
4. Learned counsel then submits that depreciation, which has been included in dis allowance under section 14A, is not an expenditure but an ‘allowance’, and, for this reason, dis allowance under section 14A cannot be invoked in respect of depreciation. He invites our attention to Hon ‘ble Supreme Court’s judgment in the case of Nectar Beverages P. Ltd. v. Deputy Commissioner of Income-tax (314 ITR 314), wherein, Their Lordships have, inter alia, observed that “depreciation is neither a loss nor an expenditure nor a trading liability….”. It is then pointed out in terms of the provisions of section 14A, what can be disallowed is only “an expenditure incurred by the assessee in relation to an income which does not form part of the total income under this Act”. It is thus pleaded that since depreciation is not an expenditure and since the disallowance under section 14A is confined to expenditure alone, no dis allowance can be made in respect of depreciation. It is then pointed out that the assessee has claimed deduction of Rs 6,471 under section 80D of the Act which is in respect of health insurance premium paid by the assessee and that this deduction also cannot be hit by dis allowance under section 1 4A as it is not an expenditure for earning any income but a permissible deduction from gross total income under Chapter VIA. It is then pointed out that the assessee has paid Rs 9000 to Rotary Club in respect of which deduction is claimed but then the said expenditure is incurred on a service club which is primarily a contribution for expenditure on the public good and the expenditure for so incurred cannot be, according to learned counsel, said to be for the purpose of earning any income. It is thus urged that this expenditure should also be kept out of expenditure which can be considered for disallowance under section 14A. As regards the remaining expenses i.e. Rs 9,594 in respect of books and reading material, Rs 16,168 in respect of insurance to car, Rs 14,766 in respect of repairs to car and Rs 4,800 in respect of computer expenses, learned counsel invites our attention to Section 16(1), as it is stood at the relevant point of time, which permitted a standard deduction of Rs 20,000 in respect of salary earning for more than Rs 3 lakhs. He submits that expenditure of Rs 20,000 which was allowed standard deduction at the relevant point of time, was considered reasonable expenditure incurred to earn salary income and, accordingly, the same should be treated as attributable to having earning salary income. As for the amount left out after the said deduction, learned counsel submits that on principle of proportionate allocation, in the same ratio as adopted by the Assessing Officer, the expenditure can be attributed for earning remuneration form firm and for earning profit share form the firm. He once again emphasized that even though he is having a strong case on merits on the sort ground that no part of this expenditure can be said to be attributable to earning profit share, he is not pressing the said point because of the practical difficulty before the Division Bench in the sense that the matter will have to be referred to Special Bench and considering the smallness of the amount, such an exercise is not perhaps warranted. On the strength of these arguments, learned counsel urges us to modify the impugned dis allowance under section 14 A of the Act. Learned Departmental Representative submits that there is no dispute that these are distinct stream of receipts, i.e. receipt on remuneration and the profit receipt from partnership firm, and that some allocation has to be done for the expenses incurred to earn these incomes. He also points out that details were not furnished before the Assessing Officer as is evident from the observations made by the Assessing Officer in paragraph 4.3 of the assessment order. Learned Departmental Representative takes us through the orders of the authorities below to justify and support the same. It is his contention that only practical method of apportioning of common expenses, between expenses incurred to earn profit share form the firm and the remuneration from the firm, is to apportion the expenses incurred by the assessee is in the ratio of earning of the assessee from these distinct source and once the exercise is carried out, it would not be appropriate to exclude some items of expenditure. Learned Departmental Representative submits that there is no dispute that car is used for the purpose of earning the profit share as also remuneration from firm, and, it is, therefore, only fair that all expenses incurred on car and related deductions i.e. depreciation, repairs and insurance should be reasonably allocated between to these streams of income, i.e. profit share and the remuneration. It is also submitted that in the absence of any other specific basic allowance of expenditure, the Assessing Officer had no option but to allocate the expense in the ratio of earnings. Our attention is also invited to the decision of the a co-ordinate bench of this Tribunal in the case of ACIT v. Citicorp Finance India Pvt Ltd (108 ITD 457), wherein, the principle of proportionate dis allowance under section 1 4A has been applied. We are thus urged to uphold the dis allowance made by the Assessing Officer, which has been confirmed by the CIT(A) as well. In his brief rejoinder, learned counsel submits that it is incorrect to say that requisite details were not furnished at the assessment stage. He further points out that as a reference to the observation made by the Assessing Officer in paragraph 4.3, the reference for details of expenditure attributable to the share of profit and not the details of expenditure per se. It is pointed out that since no expenditure was incurred for the purpose of earning profit share, the assessee could not furnish any details of the same. However, the assessee had furnished all the necessary details not only during assessment proceedings but also by way of appropriate disclosure in the income tax return itself – by way of note attached to the return. Our attention is invited to note to the return of income, dated 20.10.2003, a copy of which was filed before us and in which all the relevant details were set out. Learned counsel once again reiterated his submissions and urges us to delete the impugned dis allowance, or modify the same.
5. Having considered the rival contentions and having perused the material on record, we are of the considered view that the dis allowance under section 1 4A cannot indeed cover depreciation inasmuch as what can be disallowed under section 14A is only expenditure incurred by the assessee and not allowance admissible to him. Hon’ble Supreme Court in the case of Nectar Beverages P. Ltd (supra) have clearly noted the distinction between an expenditure and allowance and the same principle and held that the expression ‘expenditure’ will not include allowances such as depreciation allowance. This principle, which was applied by Their Lordships in respect of taxability under section 41(1), applies to the facts situation before us as well. Depreciation is admittedly in the nature of allowance and, therefore, it cannot be subject matter of dis allowance under section 14A, which must remain confined to expenditure incurred by the assessee. Similarly, as far as deduction under section 80D is concerned, it cannot be subject matter of dis allowance under section 14A either. The deduction under section 80D is not admissible because it is an expenditure for the purpose of earning an income but because, by virtue of specific provision under section 80D, payment of premium of health insurance, which is inherently personal expenses of the assessee, is admissible as deduction. This deduction cannot, therefore, be subject matter of dis allowance under section 1 4A, which, as we have noted earlier, is confined to expenditure incurred for the purpose of an income which is not includible in total income of the assessee. As far as question of payment of Rs 9,000 to Rotary Club is concerned, we find that deduction has been claimed under section 37(1) of the Act and, therefore, one has to proceed on the basis that these expenses are in the nature of business expenditure. The plea that expenses are in the nature of cost incurred on social cause is not supported by any material on record, and we are, therefore, unable to accept the contention of the assessee so far as inclusion of Rotary Club membership from dis allowance under section 14A is concerned. Coming to the question as to the basis on which remaining expenses are to be apportioned between the expenditure incurred for the purpose of profit share and expenditure incurred for the purpose of earning remuneration from partnership firm, we are unable to see much guidance from section 16(1) as it is stood at the relevant point of time. In our considered view the purpose of standard deduction under section 16(1) was to grant deduction in respect of incidental expenditure incurred in connection with earning the salary income, which involved attending office or place of employment. However, in the present case, since the assessee earns remuneration income as also profit share from the same activity of attending office, it would not be fair to treat all such incidental expenditure only for the purpose of earning remuneration income. In our considered view and particularly having regard to the smallness of the amount involved it would be justified to allocate these expenses in the same ratio in which these expenses were allocated by the Assessing Officer. As we do so, we make it clear that we have adopted this method on the peculiar facts of this case and having regard to the smallness of the amount involved and the same criteria should not be construed on universal application in the cases where the assessee has earned income from profit share as also from remuneration from the same firm. In effect, thus, while amounts of Rs 78,733, being depreciation on car, and Rs 6,471, being admissible deduction under section 80 D in respect of health insurance premium, are excluded from amounts which can be considered for dis allowance under section 14 A, out of the remaining amount claimed as deduction i.e. Rs 47,707 ( Rs 1,32,911 – Rs 78,733- Rs 6,471) 76.19% ( i.e. 46,17,600X100/ 46,17,600+ 14,43,000) are to be disallowed under section 14 A of the Act.
6. With these observation, we restrict the dis allowance under section 1 4A is restricted to Rs 36,348. The assessee gets the relief accordingly. We once again emphasize that this decision is rendered on the peculiar facts of this case and having regard to the smallness of amounts involved, and, therefore, it cannot be construed as laying down propositions of law of general applications. The broad legal issues urged by the learned counsel remain open for adjudication in an appropriate case.
7. In the result, appeal is partly allowed in the terms indicated above.
Pronounced in the open court on 18th March, 2011.
Mumbai; 18th day of March, 2011.
