2016 (8) TMI 1037 - AT - Income Tax

Revision u/s 263 - allowably of expenditure - Held that - The assessee has stated that he was partner in various partnership firms. In respect of the expenses, the assessee also stated in that reply about the expenditures incurred and deduction claimed. The AO after considering the submissions allowed the claim of the assessee in respect of deduction/expenditure. Now the question arises is whether the AO erred in allowing the expenditure. The ld. Counsel for the assessee has placed reliance on the judgment of the Hon ble Jurisdictional High Court rendered in the case of CIT vs. Jabarmal Dugar (1971 (7) TMI 17 - RAJASTHAN High Court ). We find that the Hon ble High Court has held that the expenditure was allowable. The Hon ble Calcutta High Court in the case of CIT vs. S.B. Ghose (1980 (6) TMI 27 - CALCUTTA High Court ), after considering various judgments held that When the income of a partnership is allocated t the different partners of a firm, the partners are entitled to have their income assessed in accordance with law, that is to say, under section 28 of the I.T. Act, 1961. In making that assessment, a partner of the firm, being an assessee, is entitled to all the deductions allowable under the Act. In order to earn the income as a partner of a firm, a partner of a firm has to do some work and he has to incur certain expenses, e.g., holding consultation for the work of the firm at one s residence or acts done in order to facilitate or earn the income as a partner of the firm. Such expenditure was allowable. In view of these judgments, the act of the AO cannot be termed as erroneous. Therefore, on this ground invoking of provisions of section 263, in our considered view was not justified. Excessive claim of deduction under section 80C allowed - Held that - From the details filed in the paper book, it transpired that the assessee has claimed deduction on gross amount paid to the school. However, out of this gross amount, the assessee was entitled for deduction to the extent of tuition fee alone. Therefore, the AO erred in allowing the deduction on gross amount. But looking to the amount involved, in our considered view, the ld. CIT should have given direction to the AO as he is empowered to do so to restrict the claim to the extent of allowable deduction instead of setting aside the assessment order. As per section 263, the ld. CIT is empowered to modify the assessment. Thus the direction issued by the ld. CIT is modified. The AO is directed to restrict the deduction to the extent of ₹ 56,749/- claimed under section 80-C.

Summary

Issues Involved:
1. Validity of order passed under section 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax, Kota.
2. Allowability of expenditure claimed by the assessee against business income.
3. Excessive claim of deduction under section 80C and the AO's decision on the same.

Issue 1: Validity of order under section 263:
The appeal challenged the order of the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, 1961, for being erroneous and prejudicial to the revenue's interests. The CIT revised the assessment order of the Assessing Officer (AO) based on claimed expenditure and excessive deduction under section 80C. The assessee contended that the AO's order was not erroneous, as proper enquiry and verification were conducted during assessment proceedings. The CIT's decision was based on the belief that the AO did not apply his mind adequately, leading to the order being set aside for a denovo assessment.

Issue 2: Allowability of claimed expenditure:
The assessee argued that the expenses incurred in managing partnership firms were allowable deductions, citing relevant legal precedents. The AO had accepted the expenditure claimed by the assessee after considering the submissions. The Tribunal noted that the expenditure was justified based on the nature of partnership income and the expenses incurred to earn it. Legal judgments were referenced to support the allowance of such expenses, indicating that the AO's decision was not erroneous in this regard.

Issue 3: Excessive claim of deduction under section 80C:
The CIT contended that the AO allowed an excessive deduction under section 80C without proper enquiry. The assessee maintained that all necessary details were provided to the AO, and the deduction was based on the gross amount paid to the school. The Tribunal found that while the AO erred in allowing the deduction on the gross amount instead of the tuition fee alone, the CIT's decision to set aside the assessment was not in line with the law. The Tribunal directed the AO to restrict the deduction to the allowable amount under section 80C, emphasizing the CIT's power to modify the assessment rather than setting it aside entirely.

In conclusion, the Tribunal partly allowed the assessee's appeal, setting aside the CIT's order on the first ground and modifying the direction on the second ground. The decision highlighted the importance of proper enquiry and application of legal principles in assessing claimed expenditures and deductions under the Income Tax Act.