2017 (9) TMI 1412 - HC - Income Tax

Validity of Orders passed by the Commissioner u/s 264 - expenditure wholly and exclusively incurred for the purpose of business of the firm and by or on behalf of the firm - Held that - Commissioner is bound to apply his mind to the question whether the assessee was taxable on a particular income. Section 264 uses the expression any order . It would imply that the section does not limit the power to correct errors committed by the subordinate authorities but could even be exercised where errors are committed by the assessee. There is nothing in section 264 which places any restriction on the Commissioner s revisional power to give relief to the assessee in a case where the assessee detects mistakes after the assessment is completed because of which he is over-assessed. First objection of the Commissioner was therefore not valid. Second objection of the Commissioner that there was no evidence to prove that the expenses claimed by the partner in the return were incurred wholly for earning business income of the firm - Merely because the claim of the expenditure being incurred wholly for the purpose of the partnership business was not verified, cannot be the ground for rejecting the claim. The occasion arose before both the Assessing Officers, that of the partner as well as of the firm to examine the veracity of the expenditure and the claim of the petitioners that it was expended wholly for the purpose of the business of the firm. In case of the partner the claim was rejected not on the ground that the expenditure was not wholly for the purpose of business of the firm but on entirely different ground. In case of the firm the claim was not even examined, despite which, if the Commissioner desired to examine it or have it examined, it was always open for him to call for a remand report or place the issue back before the Assessing Officer for passing an appropriate order. Last objection of the Commissioner was that the expenditure was not shown in the account of the firm and therefore allowing the expenditure would run counter to the accountancy principle. The Act proceeds on the fundamental principle of taxing real income. The accounts cannot change taxability or non-taxability of a certain receipt which depends on the nature of the receipt and the legal principles applicable. In case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. Commissioner of Income Tax 1997 (7) TMI 4 - SUPREME Court observed that income tax is attracted at the point when the income is earned. Thus setting aside the impugned orders passed by the Commissioner under section 264 of the Act. It is held that the expenditure in question, if found to be wholly and exclusively incurred for the purpose of business of the firm and by or on behalf of the firm, the same would be allowed in the hands of the firm. To verify this aspect, the proceedings are placed before the Commissioner who shall pass a fresh order on the revision petitions of the firm,

Summary

Issues Involved:
1. Disallowance of expenses claimed by a partner under Section 14A of the Income Tax Act.
2. Whether the expenses claimed by the partner can be allowed in the hands of the partnership firm.
3. The validity of the Commissioner’s objections to the firm’s claim for expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Claimed by a Partner:
The petitioner, a partner of M/s. Hitech Analytical Services, claimed expenses of ?10.70 lacs for the assessment year 2012-13. The Assessing Officer (AO) disallowed these expenses under Section 14A of the Income Tax Act, stating that the partner’s share of profit from the firm was exempt from tax, and thus the expenses were for earning exempt income. The petitioner’s response to the show-cause notice and subsequent communication did not change the AO’s decision, leading to the disallowance of the expenses in the assessment order dated 13.01.2015.

2. Whether the Expenses Claimed by the Partner Can Be Allowed in the Hands of the Partnership Firm:
The firm, whose assessment was pending, filed a revised computation of income on 27.02.2015, claiming the same expenses of ?10.38 lacs. The AO completed the firm’s assessment on 26.03.2015 without addressing this claim. Both the partner and the firm filed revision petitions under Section 264, arguing that the expenses should be allowed either in the partner’s hands or the firm’s. The Commissioner rejected both claims, stating that the expenses were related to earning exempt income for the partner, and for the firm, the claim was invalid due to non-filing of a revised return, lack of evidence, and inconsistency with accounting principles.

3. The Validity of the Commissioner’s Objections to the Firm’s Claim for Expenses:
The Court found no error in the Commissioner’s view regarding the partner’s claim. However, it disagreed with the rejection of the firm’s claim based on the following points:
- Non-filing of Revised Return: The Court held that the non-filing of a revised return should not have been a ground for rejection. The Commissioner had the power to examine the issue and conduct further inquiries if necessary.
- Lack of Evidence: The Court noted that the claim was not verified by the AO of either the partner or the firm. The Commissioner could have called for a remand report or referred the issue back to the AO for verification.
- Accounting Principles: The Court emphasized that taxability depends on the nature of the receipt and legal principles, not merely on accounting entries. The Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd vs. Commissioner of Income Tax stated that income tax is attracted when income is earned.

Conclusion:
The Court dismissed the petitions of the partner (Special Civil Application Nos. 12765 of 2017 and 12768 of 2017) and allowed the petitions of the firm (Special Civil Application Nos. 12764 of 2017 and 12766 of 2017). The Commissioner’s orders under Section 264 were set aside, and it was held that the expenses, if found to be wholly and exclusively incurred for the business of the firm, should be allowed in the firm’s hands. The proceedings were remanded to the Commissioner for a fresh order, with a preference for completion within four months.