2020 (10) TMI 1237 - AT - Income Tax

Disallowance of expenditure not exclusively for business - remuneration received from partnership firm - HELD THAT - We find that there is no reason that the expenditure cannot be allowed to a partner whose income is taxed on account of remuneration and interest received from the firm u/s 28(v) of the Act as business income. The only criteria for allowance of the expenditure are that expenditure should have been incurred by the assessee wholly and exclusively for the purpose of the business. In the present case the assessee has given details of expenditure such as salary expenditure of driver, communication expenditure, insurance and depreciation on the vehicle. Out of the above expenditure the assessee himself has disallowed part of personal expenditure and disallowance u/s 14A of the Act. The lower authorities could not say that in all these expenditure has not been incurred by the assessee wholly and exclusively for the purpose of his business. The allegation of the ld AO was that the expenses incurred by the assessee does not have any nexus with remuneration earned does not have any legal backing. He does not say that these expenditure are not incurred by the assessee for the purpose of the business. Naturally when the income is taxed as remuneration from firm as business income, any expenditure incurred to earn that income is an allowable business expenditure, if it satisfy the relevant criteria. It is not the case of the lower authorities that whole of the expenses incurred by the assessee were not incurred wholly and exclusively for the purposes of the business i.e. to earn remuneration from partnership firm. Therefore, disallowance made by the ld AO and confirmed by the ld CIT(A) cannot be sustained. In view of the fact that the assessee himself has disallowed personal expenditure and u/s 14 A - we direct the ld AO to delete the disallowance of expenditure - Decided in favour of assessee.

Summary

Issues:
Appeal against disallowance of expenses claimed by the assessee against remuneration received from partnership firm and the classification of partner's remuneration as business income.

Analysis:
1. The appeal was filed by the assessee against the order of the ld CIT(A) confirming the disallowance of expenses amounting to ?871316 claimed against remuneration received from a partnership firm for the Assessment Year 2014-15. The ld CIT(A) held that partner's remuneration cannot be considered as business income.

2. The assessee contended that the expenses were wholly and exclusively incurred for business purposes and cited a similar case to support their argument. The assessee, an individual advocate, received income from various sources and claimed expenditure against remuneration received from a law firm as a partner. The ld AO disallowed the expenses, primarily related to car expenses, stating lack of segregation between personal and official use. The net disallowance was ?871316, resulting in an assessment of ?32553950 under section 143(3) of the Act.

3. The assessee's appeal before the ld CIT(A) was unsuccessful, leading to the current appeal. During the proceedings, the ld AR argued that the expenses were allowable as business expenditure under section 28(v) of the Act and were incurred wholly and exclusively for business purposes. The ld DR supported the orders of the ld CIT(A).

4. The Tribunal analyzed the facts and expenditure details, noting that the assessee received remuneration and profit share from the firm. The total expenditure claimed was ?2257453, out of which ?1386137 was self-disallowed by the assessee. The Tribunal found that the expenditure, including salary, communication, insurance, and depreciation on the car, was related to the business. It emphasized that as the income was taxed as business income, any expenditure incurred to earn that income should be allowable if meeting the criteria of being wholly and exclusively for business purposes.

5. The Tribunal concluded that the disallowance made by the ld AO and confirmed by the ld CIT(A) was not justified. Since the assessee had already disallowed personal expenses and expenses under section 14A, the disallowance of ?871316 was directed to be deleted. Consequently, both grounds of appeal were allowed, and the appeal of the assessee was allowed.

In summary, the Tribunal allowed the appeal, directing the deletion of the disallowance of expenses claimed against remuneration received from the partnership firm, emphasizing that the expenditure was incurred wholly and exclusively for business purposes, and thus, should be considered allowable.