S.57 do not provide for deduction of any expenditure from salary income of an MLA

IN THE ITAT BANGALORE BENCH ‘B’

B. Nanjamari, Ex-MLA v. ACIT

IT APPEAL NO. 505 (BANG.) OF 2011

[ASSESSMENT YEAR 2007-08]

MAY 11, 2012

ORDER

Jason P. Boaz, Accountant Member

This appeal by the assessee for Assessment Year 2007-08 is directed against the order of the Commissioner of Income Tax (Appeals)-II, Bangalore dated 27.12.2010.

2. The facts of the case, in brief, are as under :

2.1 The assessee, an individual, filed his return of income for Assessment Year 2007-08 declaring income of Rs. 1,28,330 on 9.3.2009. The return was processed under section 143(1) on 19.3.2009 and the case was taken up for scrutiny by issue of notice under section 143(2) and 142(1) of the Income-tax Act, 1961 (hereinafter referred as ‘the Act’). The Assessing Officer noted that during the relevant period, the assessee was an MLA drawing pension, salary and other allowances from the Govt. of Karnataka. The assessee had claimed exemption of expenses to the extent of Rs.4,37,881. The Assessing Officer after examination of the assessee’s claims, noted that daily allowance was fully exempt under section 10(17)(i) and constituency allowance was fully exempt under section 10(17)(iii) of the Act and allowed the eligible exemption amounting to Rs. 1,61,400, disallowing the balance amount of this claim of Rs. 2,76,481 (viz. Rs. 4,37,881 less Rs. 1,61,400). Besides this, a gift of Rs. 15 lakhs allegedly made by the assessee to his son Sri B.N. Vijay Kumar was treated as an unexplained cash credits under section 68 of the Act and brought to tax in his hands. The Assessing Officer accordingly completed the assessment by an order under section 143(3) of the Act on 26.12.2009 determining the total income of the assessee at Rs. 19,04,811.

2.2 Aggrieved, the assessee went in appeal before the CIT(A). The CIT(A) after considering the claims of the assessee, dismissed the assessee’s appeals on both issues of dispute (i) being the claim for exemption of expenditure under section 10(14) and 10(17) and exemption under section 57 of the Act and (ii) unexplained gift of Rs. 15 lakhs by order dt.27.12.2010.

3. The assessee is now in appeal before us challenging the order of the CIT(A).

4. The grounds raised by the assessee in this appeal are as under :

5.1 The grounds raised at S. Nos. l, 7 & 8 are general in nature and no adjudication is called for thereon.

5.2 In the grounds of appeal raised at S.Nos.2 to 5, the assessee has challenged the learned CIT(A)’s finding in not allowing exemption of expenditure for other allowances as was allowed for constituency allowance under section 10(17)(iii) or under section 10(14) of the Act and also deduction under section 57 considering that the assessee’s income was assessable under section 56 as ‘Income from other sources.’

5.3 The learned counsel for the assessee submitted that the assessee being an MLA during the relevant period, the salary and other allowances received in such status is to be taxed under the head ‘Income from other sources. ‘Consequently it is submitted that, apart form being allowed exemption under section 10(14) and 10(17) of the Act, the assessee ;should be allowed deduction under section 57 of the Act also. However, he submitted that, the Assessing Officer and learned CIT(A) while considering his claim did not allow the entire claim for deduction of other allowances of expenditure like constituency allowance under section 10(17)(iii) or under section 10(14) of the Act following the decision of the Visakhapatnam Bench of the ITAT in the case of M. Venkata Subbaiah v. ITO [2010] 127 ITD 399. In support of the proposition that these expenditure claimed are allowable as a deduction under section 57(iii) of the Act, the learned counsel for the assessee placed reliance on the decision of the Indore Bench of the Tribunal in the case of Jaswant Singh v. ITO [2005] 96 TTJ 660. The learned Authorised Representative finally pleaded that the claims of the assessee be allowed.

5.4 The learned Departmental Representative, on the contrary, strongly supported the findings of the lower authorities that the assessee’s claim for exemption under section 10(17) and 10(14)have been considered both by the Assessing Officer and the learned CIT(A) and that the learned CIT(A) had correctly relied on the decision in the case of M. Venkata Subbaiah (supra) in upholding the Assessing Officer’s finding which was in accordance with the provisions of section 10(14) r w Rule 2BB(i) and section 10(17) of the Act. The learned D.R. pointed out that the learned CIT(A) had noted that conveyance allowance and clerical allowance, are entitled to exemption subject to documentary proof being filed for grant of such allowances and expenses thereof. It was also contended that the assessee’s claim for deduction of expenditure under section 57 was incorrect and he was not eligible for deduction under section 57(iii) as claimed by him. In this regard the learned Departmental Representative pointed out that the finding in the case of Jaswant Singh (supra) relied only the learned Authorised Representative is covered against the assessee, as the Hon’ble Tribunal in that case upheld the finding of the learned CIT(A) that the provisions of section 57 of the Act do not provide for deduction from the salary income and other allowances of an MLA received by him in such office even though that income is to be assessed not under the head ‘salaries’ but as ‘Income from other sources.’ In these circumstances, the learned Departmental Representative submitted that the assessee’s grounds raised at S. Nos. 2 to 5 need to be rejected and prayed that the order of the lower authorities be upheld.

5.5 We have heard both parties, carefully perused the orders of the authorities below, the material on record and judicial decisions referred to. There is no dispute with regard to the fact that ‘salary’ and other allowances received by an MLA, arising out of such position, are to be assessed to tax under the head ‘Income from other sources’ as held in the case of CIT v. Shiv Charan Mathur [2008] 306 ITR 126 (Raj). As per the provisions of section 10(17)(i) and 10(17)(iii), the Assessing Officer allowed the assessee’s claim for exemption of daily allowance of Rs. 1,19,400 under section 10(17)(i) and constituency allowance of Rs. 42,000 under section 10(17)(iii) out of a total claim of Rs. 4,37,881. The learned CIT(A) upheld the findings and action of the Assessing Officer in application of the provisions of section 10(124) read with Rule 2BB(1) of Income-tax Rules, 1962 and section 10(17) of the Act, following the decision of the Visakhapatnam Bench in the case of M. Venkata Subbaiah (supra) and with which we are in agreement. In para 21 of the order the Tribunal held that:

“21 From a careful study of the amendments brought time to time in section 10(17) of the Act, we are of the view that Legislature has been quite conscious about the allowances granted to the MLAs or the MPs and time to time they are bringing enactments to grant exemption of particular type of allowances from the total income of the MLAs or MPs. Had it been a case that for all allowances section 10(14) can be invoked subject to proof of the expenditure to be incurred in respect of that purpose to which the allowances are given, there would be no need to make a necessary amendment from time to time in section 10(17). We are, therefore, of the view that while dealing with the issue of special allowances granted to the MLAs or MPs has to keep in mind both the provisions of sections 10(17) and 10(14) of the Act and only those allowances are to be exempted from the total income of the assesses which are specified in these sections or rule 2BB of IT Rules. Under section 10(17), the Legislature has prescribed a particular limit up to which the allowances are to be exempted from the total income of the assessees but section 10(14) is to be read with rule 2BB of the IT Rules and only those allowances are to be allowed to be exempted from the total income of the assessees which are specifically mentioned in rule 2BB subject to proof of its being spent for the purpose to which it is received or granted. We, therefore, set aside the order of the CIT(A) and restore the matter to the file of Assessing Officer with a direction to re-examine the issue and grant an exemption of the conveyance allowance and the clerical allowance after making necessary verification of the expenditure incurred for the said purpose. Rest of the allowances i.e. telephone allowance, consultancy allowance and contingency allowance do not fall either in the purview of section 10(14) or 10(17) and they cannot be allowed to be exempted from the total income of the assessees. So far as medical allowances are concerned, the Assessing Officer should verify the nature of these allowances. If it is a reimbursement of the medical expenses incurred by the MLA, it may be allowed in the light of the judgment of the Rajasthan High Court in the case of Shiv Charan Mathur (supra). Otherwise, no exemption can be allowed as it does not fall either in the purview of section 10(14) and 10(17) of the Income Tax Act.”

Following the decision of the Visakhapatnam Tribunal in the case of M. Venkata Subbaiah, we have no hesitation in upholding the finding of the learned CIT(A) that the exemption under section 10(17) and 10(14) of the Act allowed by the Assessing Officer to the assessee from out of his salary and other allowances received as an MLA is in order and accordingly dismiss the ground raised by the assessee in this regard.

5.6 The assessee has also raised a ground that he be allowed deduction of various items of expenditure claimed by him under section 57(iii) of the Act from out of the salary and other allowances received by him in his status as an MLA since such income is assessable to tax under section 56 as ‘income from other sources.’ After careful consideration of this claim, we are unable to agree with the assessee’s contention. Our view is in keeping with the view expressed and finding rendered by the Indore Bench of the Tribunal in the case of Jaswant Singh (supra). The Indore Bench of ITAT in the case of Jaswant Singh (supra) had an occasion to examine the same issue of whether deduction of expenditure is to be allowed under section 57 of the Act from out of the salary income and other allowances granted to an MLA, which is to be assessed to tax under the head ‘income from other sources.’ The Bench after examination of this issue came to the following finding which portion is reproduced hereunder :

“The learned Commissioner (Appeals) also discussed the provision laid down under section 57 of the Act and was of the view that the same does not provide for any deduction for such income. The learned Commissioner (Appeals) accordingly, came to the conclusion that in the scheme of taxing the income from other sources, the Income-tax Act, 1961, did not provide for any deduction under section 57 from the fixed salary and allowances received by the assessee by virtue of his election to the State legislative and the assessee could not have been allowed his estimated claim of deduction of Rs. 79,016. The same has been questioned by the assessee before us. We after carefully considering the arguments advanced by the parties and the orders of the lower authorities find force in the first appellate order but with this modification therein on our part to this extent that the assessee was very much entitled to the claimed allowances only for the amount allowed in the certificate dated 25.9.2002, issued by the by. Secretary, Madhya Pradesh Legislative Assembly for the year relevant for the assessment year under consideration for the members of Madhya Pradesh Legislative Assembly, mentioned in para No. 16 of the first appellate order. After reimbursement of the entitled allowances from the claim, the remaining amount is directed to be taxed as income of the assessee from other sources under section 56 of the Income-tax Act, 1961.”

This finding of the Tribunal, in our considered opinion, clearly upholds the view that the provisions of section 57 of the Act do not provide for any deduction of expenditure from such salary income, etc of an MLA. Only those exemptions as laid out as per the provisions of section 10(14) read with Rule 2BB(1) and section 10(17) of the Act are allowable from an MLA’s salary and other allowances granted in such capacity as held in the case of M. Venkata Subbaiah (supra). Applying the same ratio to the instant case, we uphold the learned CIT(A)’s action in rejecting the assessee’s claim for allowing deduction of expenditure under section 57 of the Act and accordingly dismiss the assessee’s grounds raised at S. Nos. 2 to 5.

6.1 In the ground raised at S No. 6, the assessee has challenged the action of the CIT(A) in not accepting his explanation regarding the source of gift of Rs. 15 lakhs given by him to his son and in upholding the action of the Assessing Officer in treating it as an unexplained gift and consequent addition made by assessee as an unexplained cash credits under section 68. In the hearings before us, the learned Authorised Representative reiterated the claim that, sources of the gift of Rs. 15 lakhs given by assessee to his son Sri B.N. Vijay Kumar was out of loan obtained from Canara Bank, withdrawals from partnership firm and agricultural income of HUF claiming that since all explanations have been furnished to the Assessing Officer and CIT(A) ought to have accepted the gift as genuine rather than treating the gift of Rs. 15 lakhs as unexplained gift and addition in the assessee’s hand as unexplained cash credits under section 68 of the Act. In the course of hearing, the learned Authorised Representative was asked to produce the sanction letter from Canara Bank for the grant of loan of Rs. 15 lakhs to him in order to explain the source of gift. The learned Authorised Representative failed to do so in spite of being provided opportunity for providing this crucial and clinching evidence.

6.2 The learned Departmental Representative, on her part supported the finding of the lower authorities that the source of the alleged gift of Rs. 15 lakhs given to the son of the assessee was unexplained and has been rightly treated as an unexplained cash credits under section 68 and brought to tax in the assessee’s hands. The learned Departmental Representative submitted that the Assessing Officer noted from the capital account of Sri Siddarameswara Traders, where the assessee’s son Sri B.N. Vijay Kumar was proprietor, that the assessee had given his son gifts of Rs. 15 lakhs. On being asked to furnish sources thereof, the assessee vide letter dt. 17.12.2009 stated that the source for the same is from loan obtained from Canara Bank of Rs. 15 lakhs, withdrawal from partnership firm and also from HUF source ( agricultural income). The Assessing Officer noted that apart from this letter, no documentary evidence was furnished to substantiate the claim like loan sanction order from Canara Bank, or any proof of the withdrawal from HUF or firm. The Assessing Officer on examination of the assessee’s Canara Bank S.B. Ale. No. 23151 statement, found that the assessee had made two cash deposits therein of Rs. 8 lakhs and Rs. 7 lakhs on 17.7.2006 and these cash deposits were given as gift to his son on the same day itself. In these circumstances, the learned Departmental Representative submitted that the Assessing Officer treated the cash deposits of Rs. 15 lakhs, made by the assessee on 17.7.2006 in his savings bank account, as unexplained cash credits under section 68 and brought the same to tax in the assessee’s hands as his income from other sources. The learned Departmental Representative submitted that the learned CIT(A) too had examined this matter at length in his order at pages 8 to 14 (para 4 to 4.10) thereof. It was further submitted that the learned CIT(A) after examining this matter noted in para 4.6 of his order that the assessee could not furnish copy of the sanction letter for loan of Rs. 15 lakhs from Canara Bank, the bank statement wherein the sanctioned loan was deposited, nature of loan, etc, could not furnish even the name of the firm capital account, etc from which withdrawals were claimed to have been made. It was also pointed out by the learned Departmental Representative that the learned CIT(A) in para 4.9 of his order noted that the existence of the HUF of the assessee was not borne by any document and that returns of income of the HUF were filed only on 5.10.2010 beyond the permissible time under section 139(4) and almost a year after the relevant assessment of the assessee for Assessment Year 2007-08 was completed on 24.12.2009. In these circumstances, the learned CIT(A) rejected the assessee’s claims and upheld the finding of the Assessing Officer that the source of the alleged gift of Rs. 15 lakhs stood unexplained and was rightly brought to tax in the hands of the assessee as unexplained cash credits under section 68 of the Act. The learned Departmental Representative prayed that the assessee’s ground be rejected and the findings of the lower authorities be upheld.

6.3 We have heard the arguments put forth by both parties, carefully examined the material on record and perused the orders of the authorities below. We find from the record that the Assessing Officer, in proceedings before him, found that the assessee had given a gift of Rs. 15 lakhs to his son Sri B. N. Vijay Kumar as reflected in the son’s capital account in his proprietorship concern Sri Siddarameswara Traders. It is a matter of record that when questioned about the source of Rs. 15 lakhs gifted to his son, the assessee merely furnished an explanation in letter dt.17.12.2009 without any corroborative evidence or documentary proof to substantiate the claim and therefore the. Assessing Officer, finding that two cash deposits of Rs. 8 lakhs and Rs. 7 lakhs in the assessee’s Canara Bank account on 17.7.2006 preceeded the gift of Rs. 15 lakhs given on the same day, held that the source of the gifts was unexplained and brought these cash credits to tax in his hands as unexplained cash deposits under section 68 of the Act. Before the learned CIT(A) too the assessee put forward similar explanations in an attempt to explain the source of the gifted amount of Rs. 15 lakhs, but failed to furnish and corroborative documentary evidence. While dismissing the assessee’s claim, the learned CIT(A) recorded in paras 4.6 to 4.9 of his order that the assessee could not furnish a copy of sanction letter for loan of Rs. 15 lakhs claimed to have been taken from Canara Bank, bank statement wherein the sanctioned loan was deposited, purpose of loan, name and capital account of the firm from which the withdrawals were allegedly made, proof of withdrawals from HUF out of sources from agricultural income and consequently dismissed the assessee’s appeal. All these details, on record, in our view, go to establish that all the claims made by the assessee about the source of the gift of Rs. 15 lakhs, are bereft of any documentary evidence to substantiate them. Even before us similar submissions were made as were made before the lower authorities. The learned Authorised Representative who specifically asked by this bench to produce a copy of the sanction order of the loan of Rs. 15 lakhs from Canara Bank and inspite of being given are opportunity failed to produce the sanction order for the said loan of Rs. 15 lakhs. No. evidence was also filed in respect of the gift being made out of withdrawals from firm or HUF as claimed. In this view of the matter, we have no hesitation in upholding the finding of the authorities below that the source of the alleged gift of Rs. 15 lakhs is unexplained and their action in bringing the unexplained cash credit amounting to Rs. 15 lakhs to tax in the assessee’s hands under section 68 as income from other sources. The assessee’s ground is accordingly dismissed.

7. In the result, the assessee’s appeal is dismissed.