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TMI Blog2012 (6) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee by : Shri Sunil H. Talati Revenue by : Shri S.K. Gupta, CIT-DR with Shri Kartarsingh, CIT-DR PER BENCH : Vide order dated 18-01-2012, the Hon ble President, Income Tax Appellate Tribunal, referred the following question to this Special Bench in the case of Shri Vishnu Anant Mahajan Vs. Asstt.Commissioner of Income-tax. Whether the ld.CIT(A) was justified in disallowing 76% of the depreciation and other related expenses by apportioning them in the ratio of exempt to taxable income by applying provisions of section 14A of the Act on the share income from the firm which is exempt from tax u/s.10(2A) of the Act ? 2. The assessee is an individual and derives income by way of share of profit from the firm of M/s.Mahajan Amar Doshi, capital gains, interest, dividend and house property. The findings of the AO are that the assessee is a separate and distinct legal entity from the partnership firm. Although, the assessee is the legal owner of the motor car, but that does mean that the expenditure so incurred is for earning the business income. The earning of other incomes apart from share in the partnership firm does not advance the case of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Partnership Act, 1932. Although the definition of the term person includes within its ambit an individual and a firm also under Section 2(31), but the provision contained in section 2(23) should not be lost sight of while interpreting section 14A. 3.1 He further submits that the issue of disallowance of the expenditure incurred by a partner has been discussed directly in a number of cases, which support the aforesaid contention. In this connection, reference is made to the decision on C Bench of Mumbai Tribunal in the case of Shri Sudhir Kapadia, ITA No.7883/Mum/2003 for A.Y.2001-2002 dated 26-2-2007, a copy of which has been placed on record. The facts are that the assessee was a Chartered Accountant and a partner in a firm of Chartered Accountants. In his computation of income deduction of Rs.3,95,500/- was claimed in respect of expenditure incurred on motor car and depreciation allowance thereon. The AO applied the provision contained in Section 14A since the share was not includible in the total income under Section 10(2A). Consequently he disallowed certain amount from the overall expenditure which was attributed to the earning of share income. The Tribunal came to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64/- under Section 14A. The assessee was engaged in legal profession in the year under consideration. He received salary of Rs.13,26,000/- from the partnership firm and share of profit of Rs.40,25,000/. Against this income, he claimed expenditure of Rs.14,27,819/- leading to income of Rs.39,23,180/-. Out of this income, share of profit of Rs.40,25,600/- was excluded under Section 10(2A) and thus, the loss of Rs,1,01,819/- was computed. The major portion of the expenditure was incurred on conference, seminar and court assignment abroad. The salary income from the partnership firm was assessable as business income under Section 28(v). The Tribunal considered a number of decisions while deciding this case. We think it proper at this stage to discuss those cases which have been dealt with before us. 3.3 In the case of CIT Vs. A.W. Figgies Co., (1953) 24 ITR 405 (SC), it is observed that change in the constitution of the firm does not amount to the succession of the business. Therefore, the technical view of the firm under the Partnership Act cannot be carried over to the I.T. Act. However, under the Partnership Act, a firm has not separate or distinct existence. Thus, it is argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach case taking into account commonality of management, interlacing of funds etc. But this does not mean that the firm is a distinct person, separate and apart from the partners. 3.7 In the case of Bist Sons Vs. CIT, 116 ITR 131 (SC), the facts are that a HUF consisted of father and son. They were carrying on business of forest contractors. Due to total disruption of the family, the separated members constituted a firm and took over business as a running concern. The business of erstwhile HUF consisted of three trucks on which deprecation had been allowed and the WDV had come to NIL. The trucks were sold by the partnership firm. The court came to the conclusion that the depreciation allowed to the HUF was a step taken in the assessment of the HUF for determining its total income. That does not mean that the depreciation allowed to the HUF could be regarded as depreciation allowed to the partnership firm. Therefore, the sale proceeds realized by the firm was not taxable as balancing charge. It is urged before us that this case distinguishes between disrupted HUF and the firm subsequently constituted and not between a firm and its partners. 3.8 In the case of CIT Vs. Chase Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to them at normal rates. It was this double taxation, for which the scheme of taxation was changed. The Board Circular is relevant only in this context. Now, the firm is allowed to deduct salary and interest paid to the partners as provided under Section 40(b) of the Act and the balance amount is taxed in the hands of the firm at a flat rate. The salary and interest allocated to the partners are taxed as business income under Section 28(v) in the hands of the partners at normal rates applicable to them. This shows that under the Act, the firm and the partners are treated separately, which also flows from the definition of term person in section 2(31). Therefore, the concepts under the Act and under the Partnership Act are different. Thus, in effect the arguments of the learned CIT-DR is that while a firm is a transparent vehicle under the Partnership Act, it is a translucent vehicle under the I.T. Act, the reason being that two are taxed on their separate incomes and what is taxed in the hands of the firm is not further taxed in the hands of the partners. 4.1 He referred to various decisions considered in the case of Dharmasingh M. Popat. The case of S.G.Investments Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Popat . The question in the case of Bist Sons was totally different, regarding the value of trucks in the hands of the partnership, which were earlier owned by the HUF and whose WDV had become NIL. In the case of CIT Vs. Kaluram Puranmal, 119 ITR 564 (Bom), the transactions between the partners and the firm are held to be transaction between two separate legal entities which supports the case of the Revenue. In the case of Chase Trading Co., similar proposition of law has been reiterated. The decision in the case of C.A. Abraham Vs. ITO and Another , (1961) 41 ITR 425 (SC) has been applied by the Hon ble Tribunal in the case of Dharmasingh M. Popat (supra), in which it has been held that the word assessment includes both computation, imposition of tax liability and the machinery for enforcement thereof.. 4.3 It has also been submitted that the case of ITO Vs. Daga Capital Management P. Ltd., (2009) 117 ITD 169 (Mum)(SB), Wimco Seedling Ltd. Vs. DCIT, 107 ITD 267 (Del)(TM) deal with the limited companies, and as such, are not applicable to the facts of the instant case. The decision in the case of Godrej Boyce Mfg. Co. Ltd. Vs. DCIT, 328 ITR 81 (Bom) can be relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es a combined reading of the provisions contained in sections 2(23) and 2(31) of the Act. Obviously, a firm cannot be equated with a limited company, which has been granted a separate and distinct legal persona under the Companies Act and which has been recognized under the Income Tax Act as such. 7. We have given careful consideration to various cases relied upon by the contesting parties. These cases inter-alia show that a firm can validly enter into an agreement with a partner regarding purchase and sale of assets etc.[Kaluram Puranmal; Chase Trading Co.]. Further it has been held that whenever the field is occupied by the tax law, the provision contained therein will become applicable, but where the field is left vacant, we will have to take assistance from the provisions contained in the Partnership Act for filling the vacuum under the tax law. [K. Kulakutty]. In so far as the issue before us is concerned, a firm and its partners are assessable separately on their total income in their names, notwithstanding the position of law under the Partnership Act that a firm is a compendium or the collective name of the partners. Thus, in so far as the taxation is concerned, the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of quantum of disallowance. The learned CIT(A) has disallowed the expenditure in the ratio of income not included in the total income and the income received from the firm. In the absence of any argument regarding any error in this part of the decision, it is held that he was right in doing so. 8. Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshang D. Nanavati (supra) that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Bebverages Pvt. Ltd. Vs. DCIT (2009) 314 ITR 314. The ld. CIT (DR) has not been able to displace the ratio of these cases. Thus, on consideration, we find that section 14A uses the words expenditure incurred by the assessee in relation to income . A statutory allowance under section 32 is not an expenditure. Therefore, we are in agreement with the decision of the Division Bench in the case of Hoshang D. Nanavati. 9. Question referred to us is answered accordingly. The Division Bench shall dispose of the appeal in conformity with this decision. Order pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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