2024 (5) TMI 1299 - AT - Income Tax

Allowable expenditure u/s 37(1) - Deduction from the remuneration and interest received by the assessee as partner of the firm - expenses claimed by the assessee towards interest on car loan, depreciation on the car, fuel expenses and salary of the driver of the car - specific provisions of chargeability to tax are mentioned u/s 28(ii) to 28(iii) - DR submitted that the assessee was earning profit from the firm which was exempted under section 10(2A) HELD THAT - There is no dispute regarding the fact that assessee has received interest and remuneration from the firm in which he is a partner. This is over and above share profit of the firm received by the assessee, which is not included in total income of the assessee in view of provisions u/s 10(2A) of the Act. Hence, the interest on capital and remuneration is liable to be taxed under the specific provisions of chargeability to tax u/s 28(v) under the head profits and gains of business as provisions . The assessee would be, accordingly, eligible to claim deduction mentioned u/s 30 to 43D of the Act. The assessee has claimed the impugned expenditure u/s 37 of the Act, which is a residual section and deals with general deduction. For any expenditure to be eligible for deduction under sub-section (1) of the Section 37, all the following conditions should be satisfied (i) the expenditure should not be covered by sections 30 to 36 of the Act, (ii) expenditure should not be capital in nature, (iii) it should not be personal expenditure of the assessee, (iv) it should be incurred wholly and exclusively for the purpose of business or profession, (v) it should be incurred during the year and (vi) it should not be incurred for any purpose which is an offence or which is prohibited by law. As seen from the details on record that the expenses pertained to the car owned by the assessee. The assessee claimed that it was used by him for business purposes and no expenditure was claimed by the firm. This has not been disputed by Revenue. However, no evidence has been given by the assessee to support his claim that it was used only for the purpose of business and it was not at all used for any personal purpose. In absence of requisite details, we deem it proper to allow 50% of the expenditure for business purposes and the other 50% of it towards personal use of the car. Thus, disallowance made by Assessing Officer is restricted to Rs. 2,71,322/- instead of Rs. 54,26,44/- in the assessment order. Accordingly, the ground raised by the assessee is partly allowed.

Issues Involved:
1. Disallowance of claim u/s 37 of the Income-tax Act, 1961.
2. Deduction of expenses against income from business and profession.
3. Allegation of double deduction.

Summary:

Issue 1: Disallowance of claim u/s 37 of the Income-tax Act, 1961

The appellant contested the disallowance of Rs. 542,644/- claimed u/s 37 of the Act. The Assessing Officer (AO) and the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] disallowed the claim, stating that the expenses were not substantiated with evidence and were personal in nature. The appellant argued that the expenses were incurred for business purposes, specifically for car loan interest, depreciation, diesel expenses, and driver salary, and should be deductible.

Issue 2: Deduction of expenses against income from business and profession

The appellant, a partner in two firms, declared income from remuneration and interest on capital amounting to Rs. 27,81,952/-. He claimed expenses of Rs. 3,07,700/- and depreciation of Rs. 2,34,944/- from this income. The AO disallowed these expenses, arguing that the partnership firms had already claimed expenses on income earned to make payments to partners. The Ld. CIT(A) upheld this disallowance, stating that the appellant failed to provide evidence that the expenses were incurred for business purposes and not personal use.

Issue 3: Allegation of double deduction

The appellant argued that the expenses were not claimed by the partnership firms, hence there was no question of double deduction. The Ld. CIT(A) found that the expenses should be deductible in the hands of the partnership firm, not the appellant. The appellant relied on various case laws to support his claim, but the Ld. CIT(A) and AO found no evidence to substantiate that the expenses were solely for business purposes.

Tribunal's Decision:

The Tribunal examined whether the expenses claimed for car loan interest, depreciation, fuel, and driver salary could be deducted from the remuneration and interest received by the appellant as a partner. It was noted that the appellant received exempted share profits and taxable remuneration and interest. The Tribunal acknowledged that while the expenses were claimed for business purposes, no evidence was provided to prove they were not used for personal purposes. Consequently, the Tribunal allowed 50% of the claimed expenses for business purposes and disallowed the remaining 50% as personal expenses, reducing the disallowance to Rs. 2,71,322/-.

Conclusion:

The appeal was partly allowed, with the Tribunal restricting the disallowance to Rs. 2,71,322/- instead of Rs. 5,42,644/-. The decision was pronounced on 27/05/2024.

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