2018 (3) TMI 1313 - AT - Income Tax

Addition on account of legal expenses - as per AO expenses were not incurred for the purpose of business and moreover, TDS deducted there-from was not deposited within the stipulated time limit - Held that - As assessee pleaded for admission of additional evidences in support of the claim on this account. Keeping in view the principle of natural justice, the issue stands remitted back to the file of Ld. AO with a direction to assessee to substantiate his claim and demonstrate that these expenses were incurred for the purpose of assessee s business and further the provisions of TDS has duly been complied with against the same. Ground Nos. 1 & 2 stands allowed for statistical purposes. Adhoc disallowance against telephone expenses, motor expenses & depreciation and sundry expenses debited to the profit & Loss Account - Held that - Keeping in view, the reasonable disallowance rate of 10% & 20%, the same do not require any interference on our part and hence, dismissed. Allowance of brought forward losses of AY 2007-08 - Held that - As it is noted that loss of ₹ 5,55,990/- incurred by the assessee in the capacity of proprietor for AY 2007-08 has completely been set-off in AY 2008-09 and the same is, undisputedly, in order. Loos set-off to the partner in individual capacity - Held that - The assessee was admitted as partner of the firm since 22/10/1968 and continued as partner up-to 22/09/2006 when the other partner of the firm (assessee s brother) died and the firm was continued as proprietorship concern of the assessee. Therefore, we do not find any strength in the argument that it is a case of succession by inheritance since nothing has been inherited by the assessee rather he was already a partner in the firm since inception stage of the firm. Hence, on factual matrix, we find that the assessee s share in the losses of the erstwhile firm belonged to that firm only and could not be set-off by assessee in individual capacity.

Issues Involved:
1. Addition of ?7,33,565/- on account of legal expenses.
2. Adhoc disallowance against telephone expenses, motor expenses & depreciation, and sundry expenses.
3. Allowance of brought forward losses of AY 2007-08.
4. Additional additions of ?14,12,500/- for AY framed u/s 143(3) read with Section 148 of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of ?7,33,565/- on Account of Legal Expenses:
The first issue under appeal is the addition of ?7,33,565/- on account of legal expenses. The Ld. AO opined that these expenses were not incurred for the purpose of business and the TDS deducted was not deposited within the stipulated time. The Ld. AR pleaded for the admission of additional evidences to support the claim. In the interest of natural justice, the issue was remitted back to the file of Ld. AO with directions for the assessee to substantiate the claim and demonstrate compliance with TDS provisions. Ground Nos. 1 & 2 were allowed for statistical purposes.

2. Adhoc Disallowance Against Telephone Expenses, Motor Expenses & Depreciation, and Sundry Expenses:
Ground Nos. 3 & 4 contested the adhoc disallowance against telephone expenses, motor expenses, depreciation, and sundry expenses debited to the Profit & Loss Account. The tribunal found the disallowance rates of 10% & 20% reasonable and did not interfere with the same, hence these grounds were dismissed.

3. Allowance of Brought Forward Losses of AY 2007-08:
Ground Numbers 5 & 6 pleaded for the allowance of brought forward losses of AY 2007-08. The assessee claimed a brought forward business loss of ?42,72,212/- but failed to furnish sufficient documentary evidence, leading to the denial of the claim. The Ld. CIT(A) noted the correct figure of brought forward losses as ?26,93,383/-. The tribunal found that the losses incurred by the firm could not be set-off by the assessee in an individual capacity, as the firm and individual are separate legal entities. The tribunal relied on the judgment of the Hon’ble Delhi High Court in Pramod Mittal Vs. CIT, which clarified that losses of a dissolved firm could not be set-off by an individual partner. Consequently, this ground of the assessee’s appeal was dismissed.

4. Additional Additions of ?14,12,500/- for AY framed u/s 143(3) read with Section 148:
The assessee contested the order of Ld. CIT(A) confirming additional additions of ?14,12,500/- for the AY framed u/s 143(3) read with Section 148. The Ld. AR pointed out that the assessee did not have professional representation before the Ld. CIT(A) and thus deserved another opportunity. Despite repeated non-compliance and frequent adjournments by the assessee, the tribunal, considering the principle of natural justice, remitted the matter back to the file of Ld. CIT(A) for re-adjudication. The assessee was directed to substantiate the case, failing which Ld. CIT(A) could dispose of the matter based on available records. This appeal was allowed for statistical purposes.

Conclusion:
Both appeals were partly allowed in terms of the above order. The tribunal provided opportunities for re-adjudication in the interest of natural justice while maintaining certain disallowances and dismissing claims based on legal precedents. The order was pronounced in the open court on 23rd March, 2018.

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