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2019 (11) TMI 1174 - AT - Income TaxDisallowance of expenditure against the business income received from the partnership firms - whether there emerges any business activity merely on becoming a partner in the partnership firm - HELD THAT - A business can earn a profit for the products and services it offers and it works on regular basis. We also note that a partnership firm is a form of business in which a group of people, also known as partners, come together. They set up their firm and provide services and products through it. However, a partnership firm is not considered to be a separate legal entity. Partners share all the profit and losses amongst each other. Thus the business has been carried out by the partnership firm and the profit of the same has been determined in its hands for the purpose of the tax. Accordingly, we hold that the assessee on becoming a partner in the firm does not mean that he is carrying out any business activity. We are of the opinion that the assessee as such is not carrying out any business activity and therefore the question of claiming the expenses against the income received from the firm does not arise. As relying on N. KHADERVALI SAHEB AND ANOTHER 2003 (2) TMI 63 - SUPREME COURT it is clear that the partners are not separate from the partnership firms. Therefore the income of the partner from the firm is treated as business income. Income received by the assessee from the partnership firm i.e. remuneration from the firm, in this regard we note that such income is taxable in the hands of the partner. Now the question arises, whether the assessee has incurred an expense against the earning of such income. The assessee as partner in the firm is acting in the representative capacity meaning thereby whatever expenses are incurred by the partner in connection with the business of the firm, then the firm is entitled for the deduction of such expenses subject to the provisions of the Act. If the assessee has incurred any expense on behalf of the partnership firm then the right course of action is to claim the reimbursement from the partnership firm and such firm will claim the deduction under the relevant provisions of the Act on account of such reimbursement of expenses. As such the assessee cannot claim any expense against the income from the firm, save as provided above. As we have noted that, there is no dispute regarding the interest income viz a viz interest expenses. From the above, it is transpired that the assessee has claimed an expense against the remuneration and share of profit as discussed above. However the assessee has claimed that expenses against the remuneration income. As such the assessee has not allocated any expense which has been incurred against the share of profit. Thus, the action of the assessee is not acceptable. Principles of consistency can be applied where the facts remain the same. Thus it is transpired that the principles of consistency are based on the facts. For example if the salary has been paid to the staff for a particular amount in a year then in our considered view the same cannot be disturbed in the subsequent year until and unless the facts warrant otherwise. Thus in our considered view in such a situation, the principles of consistency will be applied. In a case where there is a violation of the law in 1 year then the question arises whether, the same can be allowed to be applied in the subsequent year. For example, the assessee is entitled to claim the depreciation at a particular rate say 10% but the assessee has claimed depreciation at the rate of 25%. Thus the question arises whether the assessee can claim depreciation at the rate of 25% in the subsequent year keeping the principle of consistency. To our mind, the answers stands negative. Now, coming to the present facts of the case, we are of the view that the issue involved is legal in nature whether the assessee by becoming a partner in the firm can be said that the partner has started any business and commercial activity. It is undisputed fact that there was no scrutiny assessment under section 143(3) of the Act in the earlier years. But in our considered opinion the principles of consistency cannot be applied in the given facts of the case. - Decided against assessee.
Issues Involved:
1. Disallowance of expenditure claimed by the assessee against business income from partnership firms. Issue-Wise Detailed Analysis: 1. Disallowance of Expenditure Claimed Against Business Income: The primary issue in this case revolves around whether the expenditure of ?5,66,925/- claimed by the assessee against the business income received from seven partnership firms should be allowed as a deduction. Facts of the Case: - The assessee is a partner in seven partnership firms and earns income through profit share, remuneration, and interest on capital invested. - The assessee claimed an expense of ?5,66,925/- incurred for employing two persons (a managerial worker and a peon) against the income received from these firms. - The Assessing Officer (AO) disallowed the claimed expenses, considering them personal in nature and not incurred for business purposes. Arguments and Observations: - The assessee argued that the expenses were incurred for business purposes, but the AO found them to be personal expenses, including car insurance, accounting fees, electricity, petrol, rent, and other general expenditures. - The CIT(A) upheld the AO’s decision, emphasizing that the burden of proof lies on the assessee to demonstrate that the expenses were incurred wholly and exclusively for business purposes. The assessee failed to provide such evidence. - The CIT(A) also noted that the assessee had not shown how these expenses were linked to earning business income and confirmed that these were personal expenses meant for maintaining personal accounts. Legal Provisions and Precedents: - Section 28(v) of the Income Tax Act specifies that income received by a partner from a partnership firm is chargeable under the head "Profits and gains of business or profession." - The court referred to the Gujarat High Court’s decision in Matubhai Chunilal Patel v. CIT, which held that the burden of proving that expenses were incurred for business purposes lies with the assessee. - The Supreme Court’s judgment in N. Khadervali Saheb v. N. Gudu Sahib clarified that a partnership firm is not a separate legal entity from its partners, implying that the income of the partner from the firm is treated as business income. Tribunal’s Analysis: - The Tribunal examined whether the assessee, by merely being a partner in a firm, is engaged in any business activity. It concluded that a partnership firm’s business activities do not automatically imply that individual partners are carrying out business activities. - The Tribunal noted that expenses could be claimed against income if incurred to generate such income. However, the assessee failed to demonstrate that the claimed expenses were incurred for earning business income. - The Tribunal also highlighted that the share of profit received by the assessee from the firm is exempt under Section 10(2A) of the Act, and no expenses can be claimed against such exempt income. - Regarding remuneration from the firm, the Tribunal stated that any expenses incurred by the partner in connection with the firm's business should be reimbursed by the firm, and the firm should claim the deduction. Therefore, the assessee cannot claim such expenses independently. Consistency Principle: - The Tribunal addressed the principle of consistency, citing the Supreme Court’s decision in Radhasoami Satsang v. CIT, which allows consistency in tax treatment across years unless there is a material change in facts or law. - The Tribunal concluded that the principle of consistency does not apply in this case as the issue is legal in nature and involves the correct interpretation of business activities and allowable deductions. Conclusion: - The Tribunal upheld the decisions of the AO and CIT(A), confirming that the expenses claimed by the assessee were personal and not incurred for business purposes. - The appeal of the assessee was dismissed. Order Pronounced: - The order was pronounced in the Court on 01/10/2019 at Ahmedabad, dismissing the appeal of the assessee.
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