2014 (7) TMI 3 - AT - Income Tax

Profits and taxable income received from firm Disallowance u/s 14A of the Act Held that - The AO made disallowance taking into account the entire expenses debited to Profit & Loss A/c - the Assessee has received income from profession and also received remuneration from partnership firm M/s. Amarchand Mangaldas & Suresh A. Shroff & Co. - the Assessee has not incurred any expenses towards becoming partner in the firm and as such no expenses were incurred against the remuneration received/ share of profit received from the firm - Whatever expenditure is incurred is for carrying out his professional consultancy in his personal name for which Assessee was receiving a fee of Rs.1.55 crores - against the income assessee claimed expenses only of Rs.51.80 lacs which is 33.5% of professional income - assessee made capital investment of Rs.16.00 lacs by way of fixed capital in the partnership firm and has not paid any interest on borrowings for the purpose of making investment in the partnership firm - investment was made out of own funds/non-interest bearing funds which is evident from Profit & Loss A/c - interest expenditure debited to Profit & Loss A/c was in respect of car loan - thus no disallowance is warranted u/s 14A - no expenditure was claimed in Profit & Loss A/c which can be directly or indirectly attributed to earning of share of profit from the firm thus, there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961 for the assessment year 2009-10.

Analysis:
The Revenue filed an appeal against the order of CIT(A) regarding the disallowance made under section 14A of the Act. The Revenue contended that the disallowance of Rs.10,59,174/- was correctly made by the Assessing Officer (AO) in relation to the profit received from a partnership firm. The AO observed that partners and firms are separate taxable entities, and thus, the treatment of income in one's hands does not affect its nature in the other's hands. The AO made the disallowance based on this reasoning.

The CIT(A), however, deleted the disallowance after considering that the appellant had not incurred any expenditure in relation to earning the share of profit and partner's remuneration from the firm. The CIT(A) noted that the appellant's investment in the firm was made out of own funds/non-interest bearing funds, and the expenses debited were against the professional income, not the exempt income. The CIT(A) referred to relevant case laws to support the deletion of the disallowance under section 14A.

Upon reviewing the contentions and records, the Appellate Tribunal found that the Assessee had not incurred any expenses related to the share of profit and remuneration received from the partnership firm. The Assessee's business expenses were claimed against the professional income, not the exempt income. The Tribunal noted that the Assessee's capital investment in the firm was made from own funds without interest-bearing borrowings. As no expenses were directly or indirectly attributed to earning the share of profit from the firm, the Tribunal held that no disallowance was warranted under section 14A.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance, emphasizing that the expenses were not incurred in relation to exempt income. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.

In conclusion, the Appellate Tribunal upheld the deletion of the disallowance under section 14A, emphasizing that the expenses were not related to earning exempt income from the partnership firm. The decision was based on a thorough analysis of the appellant's investments, expenses, and income sources, supported by relevant legal precedents.