2010 (11) TMI 111 - HC - Income Tax

Depreciation claimed on the factory building - Deduction of the insurance charges - The depreciation is allowable under Section 32 of the Income-tax Act in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of business or profession - Held that factory building was not used by the assessee company but by the partnership firm for the purpose of its business - The use of building was not by the assessee for the purpose of its business, we do not find any infirmity in the orders of lower authorities for declining the claim of depreciation in the hands of the assessee company in respect of factory building which was not put to use by the assessee but by the partnership firm to whom same was contributed as per the terms of partnership deed The computation of income under the head profit and gains of business or profession is made in accordance with the provisions of Section 29. Section 29 provides that deduction eligible u/s 30 to 43D is to be allowed while computing the business profits - The claim of depreciation on the building contributed by the assessee for the purpose of its business is to be considered u/s 32 - The assessee company has earned either in the form of share of profit or interest which is a business income of the assessee has to be computed after allowing deduction of expenditure permissible u/s 30 to 43D Section 14A stipulates for disallowance of expenditure against the exempt income - Assessee s claim for insurance premium in respect of this building cannot also be allowed against interest income - Only interest expenditure incurred on the amount borrowed for the purpose of contributing funds in the form of capital in partnership firm can be allowed against the interest income received from partnership firm on the credit balance of capital - Appeal is dismissed in favour of Revenue

Issues Involved:
1. Rejection of depreciation claim on factory building owned by the assessee but used by the partnership firm.
2. Rejection of deduction claim for insurance charges paid by the assessee for the factory building used by the partnership firm.

Detailed Analysis:

1. Rejection of Depreciation Claim:
The core issue is whether the depreciation claimed on the factory building owned by the assessee but used in the business of the partnership firm was rightly rejected by the Tribunal. The appellant argued that a partnership firm does not have a separate legal entity and is synonymous with its partners. Therefore, the assets used by the firm should be considered as used by the partners themselves, fulfilling the conditions under Section 32 of the Income Tax Act. The appellant cited several judgments to support this argument, including:

- Commissioner of Income Tax Vs. Ramnik Lal Kothari [74 ITR 57]: The Supreme Court held that the share in the profits of a partnership received by a partner is "profits and gains of business" carried on by him.
- Commissioner of Income Tax, Madras-II Vs. K.G. Sadagopan [104 ITR 412]: The Madras High Court allowed depreciation on assets owned by a partner and used for the profession of the firm.
- Commissioner of Income Tax Vs. P. Janki Bai [87 ITR 645]: The Andhra Pradesh High Court allowed depreciation on a building used for the firm's business, of which the assessee was a partner.

However, the Tribunal dismissed the appeal, stating that the factory building was not used by the assessee for its own business but by the partnership firm. The Tribunal and CIT (A) both opined that post-amendment of Section 10 by introducing sub-section (2A), the partner's share of profits is exempt from tax. Therefore, the depreciation claim does not arise as the asset was not used for the assessee's business but for the partnership firm's business. The Tribunal emphasized that the depreciation could only be claimed if the asset was used for the business of the assessee, which was not the case here.

2. Rejection of Deduction for Insurance Charges:
The second issue concerns whether the insurance charges paid by the assessee against fire risk of the factory building used by the partnership firm were rightly rejected. The appellant contended that under Section 37 of the Act, expenses incurred in the course of business are deductible. Since the business of the firm was carried out by the assessee as its partner, the insurance amount paid for the factory premises should be considered a business expense.

The Tribunal, however, rejected this claim, aligning with the CIT (A)'s view that no expenditure is allowable against exempt income under Section 14A of the Act. The CIT (A) highlighted that the insurance charges were not incurred for earning the interest income from the partnership firm. Instead, the interest income was derived from the capital contribution, not from the insured factory building. Therefore, the insurance premium paid could not be allowed as a deduction against the interest income.

Conclusion:
The High Court upheld the decisions of the lower authorities, agreeing that the legal position has changed post the amendment of Section 10 by introducing sub-section (2A). The judgments cited by the appellant were deemed inapplicable as they pertained to the period before the amendment. The Court concluded that the depreciation claim on the factory building and the deduction for insurance charges were rightly rejected, as the factory building was not used for the assessee's business but for the partnership firm's business. The appeal was dismissed, and the questions were answered in the affirmative and against the assessee.

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