2014 (11) TMI 473 - AT - Income Tax

Claim of deduction on business expenses incurred for earning remuneration from the firm - assessee a qualified Chartered Accountant was a partner in two firms - Whether authorities were justified in disallowing the claimed deduction on account of business expenses on running, maintaining and on account of depreciation on motor car for earning the income from profession Held that - Following the decision in Commissioner of Income-Tax, Bihar Versus Ramniklal Kothari 1969 (3) TMI 1 - SUPREME Court - the assessee has claimed that the expenditure on maintenance and running of car was incurred by him for the purpose of discharging his professional duties as a partner of the firm - the expenditure on running and maintenance of the car was incurred by the assessee for the purpose of earning share income and remuneration from the firm - the assessee has received remuneration in addition to the share of profit from the firms, the expenditure incurred by the assessee for running and maintenance of motor car is to be allocated between the share of profit from the firms and remuneration from the firm - This allocation has to be made on the proportionate basis i.e. the expenditure on running and maintenance of motor car, depreciation etc. is to be allocated in proportion of share of profit from the firms and the remuneration received from the firms thus, the AO is directed to allow the proportionate deduction in respect of running and maintenance of motor car and depreciation against the remuneration received from the firm Decided partly in favour of assessee. Unexplained cash deposits - Whether the authorities below are justified in making and sustaining the addition for unexplained cash deposits out of cash earlier withdrawn Held that - There was cash deposits in the bank account aggregating to ₹ 52,60,000/- which are clearly covered by earlier withdrawals of ₹ 54,65,000 - there is no reason to doubt the explanation of the assessee that the deposits were from the earlier withdrawals - The period of paring the money withdrawn ranging from 123 days to 8 days is also not so long to doubt the explanation of the assessee that the money was kept for the purchase of land for which dealing was going on but ultimately could not be materialized - There is a need to verify the claim of the assessee that these withdrawals from the bank were kept intact and were not used for house hold expenditure as the entries accounted for in the cash book maintained in this regard furnished by the assessee were exclusive of house hold withdrawals thus, the matter is remitted to AO for verification Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claimed deduction of Rs. 11,59,309 on account of business expenses for running, maintenance, and depreciation on a motor car.
2. Addition of Rs. 52,60,000 for alleged unexplained cash deposits out of cash earlier withdrawn.

Issue No. 1: Disallowance of Claimed Deduction of Rs. 11,59,309

The assessee, a Chartered Accountant and partner in two firms, claimed business expenses of Rs. 11,59,309 for running, maintaining, and depreciating a motor car used for professional purposes. The Assessing Officer (AO) disallowed this claim, stating that the expenses and depreciation pertained to the partnership firm, not the individual. The CIT(A) upheld this disallowance.

In support of his claim, the assessee argued that he used his own vehicle for firm-related work, as the firm did not provide a vehicle. He incurred expenses of Rs. 11,59,309, including car running and maintenance, driver's salary, depreciation on the car, computer, and cell phone, and car insurance. The remuneration from the firm was taxable under "income from business or profession" per Section 28 of the Act, and the expenses were allowable as business expenses.

The Tribunal reviewed precedents, including the Supreme Court's decision in Ramniklal Kothari, which allowed deduction of expenses incurred by a partner for earning income from the firm. The Tribunal agreed that the expenses were incurred for earning share income and remuneration from the firm. However, it noted that the assessee allocated the entire expenditure against remuneration, ignoring the share income, which was exempt under Section 10(2A). The Tribunal directed the AO to allow proportionate deduction of the expenses against remuneration based on the ratio of share income and remuneration.

Issue No. 2: Addition of Rs. 52,60,000 for Alleged Unexplained Cash Deposits

The AO added Rs. 52,60,000 to the assessee's income based on AIR information from HDFC Bank regarding cash deposits in the assessee's account. The AO was not satisfied with the assessee's explanation that the deposits were from earlier cash withdrawals intended for purchasing agricultural land, which did not materialize.

The assessee argued that he withdrew Rs. 54,65,000 in cash for land deals, which failed, leading to the re-deposit of Rs. 52,60,000. The assessee provided an affidavit and a cash book showing the withdrawals and deposits, exclusive of household expenses. The CIT(A) and AO rejected this explanation, doubting the parking of cash and the lack of evidence for land deals.

The Tribunal found the explanation plausible, noting that the deposits were covered by earlier withdrawals and the period of parking the money (ranging from 123 to 8 days) was reasonable. The Tribunal emphasized that the assessee's prerogative to keep cash or deposit it in the bank should not be questioned if the source is explained. However, the Tribunal directed the AO to verify the claim that household withdrawals were separately maintained. If verified, the AO should accept the explanation and delete the addition.

Conclusion:

The appeal was partly allowed. The Tribunal directed the AO to allow proportionate deduction of car expenses and verify the claim regarding household withdrawals for the cash deposits. The order was pronounced on January 31, 2014.