2017 (10) TMI 1666 - AT - Income Tax

Claim of expenses against the salary income and the other incomes earned under the provisions of Section 28(v) - AO had allowed 25% of the expenses relating to the car representing the car loan interest, depreciation, petrol expenses and vehicle repair expenses and disallowed the balance of 75% along with all other expenses claimed - AO had disallowed the same by holding that the expenditure claimed by the assessee is on account of earning of income from different entity, whose accounts are already audited and that the assessee had failed to establish the genuineness by producing the evidence in the form of bills and vouchers except a few vouchers on vehicle repairs - HELD THAT - The provisions of Sec 28(v) was reads any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm shall be chargeable to income tax under the head profit and gains business or profession . Once the said income is chargeable to income tax under the head profits and gains business or profession then the assessee is entitled to claim any expenses which he has incurred for the purpose of earning such income. AO has taken a stand that the expenses were not for the purpose of earning income. AO has held certain expenses in respect of Ladies Club to be personal in nature. In the course of the assessment, the assessee himself has volunteered for disallowance of 25% of the expenses to be disallowed. Considering the fact that the assessee is a Chartered Accountant and professional, the requirement of his having to entertain clients at clubs and travel for his business requirements. We are of the view that it cannot be held that all the club expenses are personal in nature. The bank charges admittedly are for the purpose of assessee s business. The assessee would have to attend various meetings consequently boarding and lodging. To keep upto-date books and periodicals have to be purchased and expenses incurred. So also telephone charges, travelling expenses and other subscriptions, keeping an employee to look after his works would also incur salary expenses. A perusal of the income expenditure account of the assessee clearly shows that the assessee has not claimed any specific personal expenses in the said income expenditure account and the expenses are clearly allowable expenses while computing the income under the head profits and gains business or profession. Assessee has agreed to a disallowance of 25% before the AO, as also considering the fact that the AO has allowed 25% of the vehicle expenses as allowable expenses, the AO is directed to restrict the disallowance to 25% of the expenses as claimed by the assessee, in the interest of natural justice, the balance 75% of the expenses are directed to be allowed. Appeal filed by the assessee is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the expenses claimed by the assessee against his salary and other incomes are allowable under the provisions of Section 28(v) of the Income Tax Act.
• Whether the disallowance of 75% of the expenses by the Assessing Officer (AO) was justified.
• Whether the assessee's expenses were genuine and incurred for the purpose of earning income.
• Whether the provisions of Section 28(v) constitute a deeming provision as argued by the Revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of Expenses under Section 28(v)

• Relevant Legal Framework and Precedents: Section 28(v) of the Income Tax Act provides that any interest, salary, bonus, commission, or remuneration received by a partner from a firm is chargeable to income tax under the head profits and gains of business or profession.
• Court's Interpretation and Reasoning: The court interpreted that once the income is chargeable under the head profits and gains of business or profession, the assessee is entitled to claim any expenses incurred for the purpose of earning such income.
• Key Evidence and Findings: The assessee provided evidence of expenses, including payments made by cheque, debit cards, and credit cards, which were not disputed by the Revenue.
• Application of Law to Facts: The court found that the expenses claimed were related to the assessee's professional activities and were not personal in nature.
• Treatment of Competing Arguments: The court dismissed the Revenue's argument that Section 28(v) is a deeming provision, noting that the section does not mention any deeming provision.
• Conclusions: The court concluded that the assessee is entitled to claim the expenses as they are incurred for the purpose of earning income under the head profits and gains of business or profession.

Issue 2: Justification of 75% Disallowance

• Relevant Legal Framework and Precedents: The AO disallowed 75% of the expenses, arguing they were not incurred for earning income from the firm.
• Court's Interpretation and Reasoning: The court reasoned that the expenses are allowable as they are related to the assessee's professional activities.
• Key Evidence and Findings: The evidence provided by the assessee showed that the expenses were genuine and incurred for professional purposes.
• Application of Law to Facts: The court applied the law by allowing the expenses as they were related to the assessee's business activities.
• Treatment of Competing Arguments: The court noted that the AO's reasoning for disallowance did not hold as the expenses were not claimed by the firm and were substantiated by evidence.
• Conclusions: The court directed the AO to restrict the disallowance to 25% of the expenses, allowing the balance 75%.

Issue 3: Genuineness of Expenses

• Relevant Legal Framework and Precedents: The AO questioned the genuineness of the expenses due to lack of evidence.
• Court's Interpretation and Reasoning: The court found that the expenses were genuine as they were supported by documentary evidence.
• Key Evidence and Findings: The assessee provided sufficient evidence, including bank statements and vouchers, to support the genuineness of the expenses.
• Application of Law to Facts: The court applied the law by accepting the evidence provided and allowing the expenses.
• Treatment of Competing Arguments: The court dismissed the AO's argument regarding the genuineness of expenses as the evidence provided was substantial.
• Conclusions: The court concluded that the expenses were genuine and allowable.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Once the said income is chargeable to income tax under the head profits and gains business or profession then the assessee is entitled to claim any expenses which he has incurred for the purpose of earning such income."
• Core Principles Established: Expenses incurred for the purpose of earning income chargeable under profits and gains of business or profession are allowable, provided they are substantiated by evidence.
• Final Determinations on Each Issue: The court allowed the appeal in part, directing the AO to restrict the disallowance to 25% of the expenses, thereby allowing 75% of the expenses claimed by the assessee.

The judgment emphasizes the importance of substantiating expenses with evidence and clarifies the interpretation of Section 28(v) regarding the allowability of expenses related to income from a partnership firm.