2012 (9) TMI 1205 - AT - Income Tax

Summary

Issues involved: Appeal against order of CIT(A) confirming disallowance of depreciation, interest on car loan, and car-related expenses u/s 10(2A) and section 14A of the Income Tax Act, 1961 for assessment year 2006-07.

Details of Judgment:

1. The appellant, an individual and partner in a firm, contested the disallowance of depreciation, interest on car loan, and car expenses totaling &8377;1,38,820 by the Assessing Officer (A.O.). The CIT(A) confirmed 76% of the disallowance based on section 14A of the IT Act, amounting to &8377;1,25,005. The matter was referred to a Special Bench regarding the application of section 14A on exempt income from the firm. The Special Bench held that share income from the firm is excluded from the partner's total income, justifying the disallowance under section 14A. The Special Bench clarified that depreciation is a statutory allowance, not an expenditure under section 14A.

2. Following the Special Bench decision, the disallowance on account of depreciation was deleted. However, the remaining additions were upheld by the Tribunal as the appellant's arguments were not deemed convincing. The appeal was partly allowed based on this decision.

3. The judgment emphasized that the firm and partners are separately assessable entities, and the share income from the firm is excluded from the partner's total income. Therefore, section 14A applies to disallow expenditures incurred in earning the share income. The decision clarified the distinction between statutory allowances and expenditures under section 14A.

4. The Tribunal's decision aligned with the Special Bench's ruling, highlighting that depreciation is not to be considered for disallowance under section 14A. The judgment upheld the CIT(A)'s order to the extent of confirming the disallowance of expenses other than depreciation.

5. In conclusion, the Tribunal partly allowed the appellant's appeal, deleting the disallowance of depreciation but confirming the disallowance of other expenses based on the application of section 14A.