JEHANGIR NARIMAN MISTRY, MUMBAI V. ITO 11(2)(4), MUMBAI

ITA 2396/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7925 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 07-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 26-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R S SRIVASTAV
• Keywords: Depreciation; Business expenditure; Salary income; Earning of tax free income
• Section: 143(3); 14A; 37(1)

Judgement Text

I.T.A NO.2396/ MUM/2010 JEHANGIR NARIMAN MINSTRY 1 IN THE INCOME TAX APPELLATE TRIBUNAL, H BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, HONBLE PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I.T.A NO.2396/ MUM/2010 ASSESSMENT YEAR: 2005-06 JEHANGIR NARIMAN MINSTRY .. APPELLANT MULLA & MULLA & CRAIGIE BLUNT & CAORE, ADVOCATE & SOLICITOR,, MULLA HOUSE, 51, M.G.ROAD, FORT, MUMBAI. PA NO.AAFPM 5438 D VS INCOME TAX OFFICER 11(2)(4) .. RESPONDEN T AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. APPEARANCES: NISHANT THAKKAR, FOR THE APPELLANT R.S.SRIVASTAV, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 27 TH JANUARY, 2010, IN THE MATTER OF ASSESSMENT UNDER S ECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 200 4-05. 2. GROUND NOS.1 TO 3 & 5, WHICH WE WILL TAKE TOGETH ER, RAISE THE FOLLOWING GRIEVANCE: THE CIT (A) ERRED IN CONFIRMING THE APPLICABILITY OF SECTION 14A TO THE FACTS OF THE CASE OF THE APPELLANT. 2. THE CIT (A) FAILED TO APPRECIATE THAT THE APPELL ANTS SHARE IN PARTNERSHIP PROFITS CANNOT BE REGARDED AS EXEMPT INCOME FOR THE PURPOSE S OF SECTION 14A. 3. ASSUMING WITHOUT ADMITTING THAT SECTION 14A WOUL D APPLY TO THE FACTS IN HAND, THE CIT(A) FAILED TO APPRECIATE THAT THE FOLLOWING BEIN G ALLOWANCES GRANTED UNDER THE ACT DO NOT COME WITHIN THE MEANING OF THE EXPRESSIO N EXPENDITURE UNDER SECTION 14A. A) ` ` .10,649 PAID TOWARDS INSURANCE PREMIUM I.T.A NO.2396/ MUM/2010 JEHANGIR NARIMAN MINSTRY 2 B) ` .1,64,947 BEING DEPRECIATION ALLOWABLE ON HONDA CIT Y CAR. C) ` ` .1,338 BEING DEPRECIATION ON MOBILE PHONE, AND D) ` .6,053 BEING DEPRECIATION ON COMPUTER 5. THE CIT (A) ERRED IN DIRECTING THE AO TO REWOR K THE DISALLOWANCE IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D. 3. BRIEFLY STATED THE MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE, AN ADVOCATE AND SOLICITOR BY PROFESSION, IS A PARTNER IN M/S. MULLA & MULLA & CRAIGIE BLUNT & CAROE, ADVOCATES AND SOLICITOR. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS RECEIVED REMUNERATION OF ` .5,46,000 AS A WORKING PARTNER AND ` .23,03,334 TOWARDS SHARE OF PROFIT IN THE PARTNERSH IP, FROM THE SAID FIRM, WHICH WAS CLAIMED AS EXEMPT UND ER SECTION 10(2A) OF THE ACT. THE EXPENDITURE CLAIMED BY THE ASSESSEE CONSISTS OF `.6 3,046 AS ENTERTAINMENT EXPENDITURE, ` .10,469 AS INSURANCE PREMIUM, ` .1,64,947 AS DEPRECIATION ON HONDA CITY CAR, ` .1,338 AS DEPRECIATION ON MOBILE TELEPHONE, ` .6,053 AS DEPRECIATION OF COMPUTER AND ` .1,00,000 AS FEES PAID TO MAHABELSWAR CLUB. WHILE THE PAYMENT OF CLUB FEES WAS DECLINED AS DEDUCTION, AS REGARDS THE BALANCE DEDUCTIONS, THE ASSESSING OFFIC ER DISALLOWED THE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPT FROM TAX, AND HELD THA T SINCE PROFIT SHARE RECEIVED BY THE ASSESSEE FROM THE PARTNERSHIP FIRM IS NOT EXEMPT FR OM TAX IN THE HANDS OF THE ASSESSEE, EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO SU CH INCOME ARE TO BE DISALLOWED UNDER SECTION 14 A. THE ASSESSING OFFICER FURTHER HELD TH AT IN THE ABSENCE OF SPECIFIC DETAILS OF EXPENSES INCURRED TO EARN SUCH INCOME, THE TOTAL EX PENSES TO BE DISALLOWED IN THE SAME RATIO WHICH PROFIT SHARE IN THE FIRM BEARS TO THE TOTAL R ECEIPTS FROM THE FIRM I.E. ON ACCOUNT OF PROFIT SHARE AS ALSO REMUNERATION. THE DISALLOWANCE THUS WORKED OUT TO RS ` .2,79,580. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APP EAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AS WELL FACTUAL MATRIX OF THE CASE. 5. WE FIND THAT AS HELD BY HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ & BOYCE MFG CO. LTD V DCIT(328 ITR 81), RULE 8D IS APPLICAB LE ONLY WITH EFFECT FROM THE A.Y. 2008-09. IN THIS VIEW OF THE MATTER, THE CIT (A) CLEARLY ERR ED IN HOLDING THAT RULE 8D IS APPLICABLE. TO THIS EXTENT, WE VACATE THE ORDER OF THE CIT (A). 6. AS REGARDS THE QUESTION AS TO WHETHER DISALLOWAN CE UNDER SECTION 14A, AS MADE BY THE ASSESSING OFFICER, CAN BE SUSTAINED, WE MAY MEN TION THAT THIS CASE WAS HEARD ALONGWITH THE CASE OF HOSHAN D NANAVATI, ANOTHER PARTNER IN T HE SAME PARTNERSHIP FIRM, AND ADMITTEDLY I.T.A NO.2396/ MUM/2010 JEHANGIR NARIMAN MINSTRY 3 MATERIAL FACTS AND CIRCUMSTANCES IN BOTH OF THESE C ASES WERE IDENTICAL. LEARNED REPRESENTATIVES HAD SPECIFICALLY AGREED THAT WHATEV ER WE DECIDE IN THE CASE OF HOSHANG D NANAVATI WILL APPLY MUTATIS MUTANDIS HERE AS WELL, AS COMMO N ARGUMENTS WERE ADVANCED FOR BOTH OF THESE APPEALS. IT IS IN THIS BACKDROP THAT WE MAY REFER TO THE FOLLOWING OBSERVATIONS IN OUR ORDER OF EVEN DATE IN ITA NO.3567/M/2007 IN THE CASE OF HOSHANG D NANAVATI VS DCIT: 5. HAVING CONSIDERED THE RIVAL CONTENTIONS AND HAV ING PERUSED THE MATERIAL ON RECORD, WE ARE OF THE CONSIDERED VIEW THAT THE DISA LLOWANCE UNDER SECTION 14A CANNOT INDEED COVER DEPRECIATION INASMUCH AS WHAT CAN BE D ISALLOWED UNDER SECTION 14A IS ONLY EXPENDITURE INCURRED BY THE ASSESSEE AND NOT A LLOWANCE ADMISSIBLE TO HIM. HONBLE SUPREME COURT IN THE CASE OF NECTAR BEVERAGES P. LTD (SUPRA) HAVE CLEARLY NOTED THE DISTINCTION BETWEEN AN EXPENDITURE AND AL LOWANCE AND THE SAME PRINCIPLE AND HELD THAT THE EXPRESSION EXPENDITURE WILL NOT INCLUDE ALLOWANCES SUCH AS DEPRECIATION ALLOWANCE. THIS PRINCIPLE, WHICH WAS A PPLIED BY THEIR LORDSHIPS IN RESPECT OF TAXABILITY UNDER SECTION 41(1), APPLIES TO THE FACTS SITUATION BEFORE US AS WELL. DEPRECIATION IS ADMITTEDLY IN THE NATURE OF ALLOWANCE AND, THEREFORE, IT CANNOT BE SUBJECT MATTER OF DISALLOWANCE UNDER SECTION 14A, W HICH MUST REMAIN CONFINED TO EXPENDITURE INCURRED BY THE ASSESSEE. SIMILARLY, A S FAR AS DEDUCTION UNDER SECTION 80D IS CONCERNED, IT CANNOT BE SUBJECT MATTER OF DISALL OWANCE UNDER SECTION 14A EITHER. THE DEDUCTION UNDER SECTION 80D IS NOT ADMISSIBLE B ECAUSE IT IS AN EXPENDITURE FOR THE PURPOSE OF EARNING AN INCOME BUT BECAUSE, BY VIRTUE OF SPECIFIC PROVISION UNDER SECTION 80D, PAYMENT OF PREMIUM OF HEALTH INSURANCE, WHICH IS INHERENTLY PERSONAL EXPENSES OF THE ASSESSEE, IS ADMISSIBLE AS DEDUCTION. THIS DEDU CTION CANNOT, THEREFORE, BE SUBJECT MATTER OF DISALLOWANCE UNDER SECTION 14A, WHICH, AS WE HAVE NOTED EARLIER, IS CONFINED TO EXPENDITURE INCURRED FOR THE PURPOSE OF AN INCOM E WHICH IS NOT INCLUDIBLE IN TOTAL INCOME OF THE ASSESSEE. AS FAR AS QUESTION OF PAYM ENT OF RS 9,000 TO ROTARY CLUB IS CONCERNED, WE FIND THAT DEDUCTION HAS BEEN CLAIMED UNDER SECTION 37(1) OF THE ACT AND, THEREFORE, ONE HAS TO PROCEED ON THE BASIS THAT THE SE EXPENSES ARE IN THE NATURE OF BUSINESS EXPENDITURE. THE PLEA THAT EXPENSES ARE IN THE NATURE OF COST INCURRED ON SOCIAL CAUSE IS NOT SUPPORTED BY ANY MATERIAL ON RE CORD, AND WE ARE, THEREFORE, UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSEE SO FAR AS INCLUSION OF ROTARY CLUB MEMBERSHIP FROM DISALLOWANCE UNDER SECTION 14A IS CONCERNED. C OMING TO THE QUESTION AS TO THE BASIS ON WHICH REMAINING EXPENSES ARE TO BE APPORTI ONED BETWEEN THE EXPENDITURE INCURRED FOR THE PURPOSE OF PROFIT SHARE AND EXPEND ITURE INCURRED FOR THE PURPOSE OF EARNING REMUNERATION FROM PARTNERSHIP FIRM, WE ARE UNABLE TO SEE MUCH GUIDANCE FROM SECTION 16(1) AS IT IS STOOD AT THE RELEVANT P OINT OF TIME. IN OUR CONSIDERED VIEW THE PURPOSE OF STANDARD DEDUCTION UNDER SECTION 16( 1) WAS TO GRANT DEDUCTION IN RESPECT OF INCIDENTAL EXPENDITURE INCURRED IN CONNE CTION WITH EARNING THE SALARY INCOME, WHICH INVOLVED ATTENDING OFFICE OR PLACE OF EMPLOYMENT. HOWEVER, IN THE PRESENT CASE, SINCE THE ASSESSEE EARNS REMUNERATION INCOME AS ALSO PROFIT SHARE FROM THE SAME ACTIVITY OF ATTENDING OFFICE, IT WOULD NOT BE FAIR TO TREAT ALL SUCH INCIDENTAL EXPENDITURE ONLY FOR THE PURPOSE OF EARNING REMUNER ATION INCOME. IN OUR CONSIDERED VIEW AND PARTICULARLY HAVING REGARD TO THE SMALLNES S OF THE AMOUNT INVOLVED IT WOULD BE JUSTIFIED TO ALLOCATE THESE EXPENSES IN THE SAME RATIO IN WHICH THESE EXPENSES WERE ALLOCATED BY THE ASSESSING OFFICER. AS WE DO SO, W E MAKE IT CLEAR THAT WE HAVE ADOPTED THIS METHOD ON THE PECULIAR FACTS OF THIS CASE AND HAVING REGARD TO THE SMALLNESS OF THE AMOUNT INVOLVED AND THE SAME CRITERIA SHOULD NOT BE CONSTRUED ON UNIVERSAL APPLICATION IN THE CASES WHERE THE ASSESSEE HAS EAR NED INCOME FROM PROFIT SHARE AS ALSO FROM REMUNERATION FROM THE SAME FIRM. IN EFFE CT, THUS, WHILE AMOUNTS OF RS 78,733, BEING DEPRECIATION ON CAR, AND RS 6,471, BE ING ADMISSIBLE DEDUCTION UNDER I.T.A NO.2396/ MUM/2010 JEHANGIR NARIMAN MINSTRY 4 SECTION 80 D IN RESPECT OF HEALTH INSURANCE PREMIUM , ARE EXCLUDED FROM AMOUNTS WHICH CAN BE CONSIDERED FOR DISALLOWANCE UNDER SECT ION 14 A, OUT OF THE REMAINING AMOUNT CLAIMED AS DEDUCTION I.E. RS 47,707 ( RS 1,32,911 RS 78,733- RS 6,471) 76.19% ( I.E. 46,17,600X100/ 46,17,600+ 14,43,000) ARE TO BE DISALLOWED UNDER SECTION 14 A OF THE ACT. 6. WITH THESE OBSERVATION, WE RESTRICT THE DISALLOW ANCE UNDER SECTION 14A IS RESTRICTED TO RS 36,348. THE ASSESSEE GETS THE RELI EF ACCORDINGLY. WE ONCE AGAIN EMPHASIZE THAT THIS DECISION IS RENDERED ON THE PEC ULIAR FACTS OF THIS CASE AND HAVING REGARD TO THE SMALLNESS OF AMOUNTS INVOLVED, AND, T HEREFORE, IT CANNOT BE CONSTRUED AS LAYING DOWN PROPOSITIONS OF LAW OF GENERAL APPLICAT IONS. THE BROAD LEGAL ISSUES URGED BY THE LEARNED COUNSEL REMAIN OPEN FOR ADJUDICATION IN AN APPROPRIATE CASE. 7. ACCORDINGLY, FOLLOWING THE VIEW SO TAKEN BY US I N THE CASE OF HOSHANG D NANAVATI (SURPA), WE HOLD AS FOLLOWS:- I) RS.1,64,947 AS DEPRECIATION ON HONDA CITY CAR, R S.1,338 AS DEPRECIATION ON MOBILE TELEPHONE AND RS.6,053 AS DEPRECIATION ON COMPUTER WILL NOT BE INCLUDED IN EXPENSES TO BE ALLOCATED FOR EARNING PROFIT SHARE FROM PARTNERSHIP FIRM. II) AS REGARDS OTHER EXPENSES, DISALLOWANCE OF EXPE NSES WILL BE MADE BY APPORTIONING THESE EXPENSES IN THE SAME RATIO AS IS THE RATIO OF PROFIT SHARE FROM THE PARTNERSHIP FIRM TO TOTAL RECEIPTS, I.E. PROFIT SHARE AS ALSO REMUNERATION RECEIVED, FROM THE PARTNERSHIP FIRM. 8. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO GIVE RELIEF IN QUANTUM DISALLOWANCE IN TERMS OF OUR ABOVE DIRECTIONS. THE OBSERVATIONS MAD E IN HOSHANG NANAVATI (SUPRA) WILL APPLY IN THIS CASE AS WELL, AND THE ASSESSING OFFIC ER WILL ACCORDINGLY REDUCE THE DISALLOWANCE UNDER SECTION 14 A BY REWORKING OUT THE QUANTUM OF DISALLOWANCE. 9. GROUND NOS. 1 TO 3 & 5 ARE THUS PARTLY ALLOWED I N THE TERMS INDICATED ABOVE. 10. AS REGARDS GRIEVANCE RAISED IN GROUND NO. 4, I. E. AGAINST DISALLOWANCE OF CLUB FEES OF ` .1,00,000 PAID TO MAHABELSWAR CLUB, LEARNED COUNSEL S CONTENTION IS THAT THE FEES SO PAID TO THE CLUB IS ANNUAL FEES AND NOT ENTRANCE FEES. HOW EVER, AS THIS CONTENTION IS NOT SUPPORTED BY FACTS ON RECORD, WE DEEM IT FIT AND PROPER TO RE MIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR RE-ADJUDICATION. IN CASE THE AMOUNT IS FOUND TO BE ANNUAL SUBSCRIPTION IN NATURE, FOLLOWING THE JUDGMENT OF HONBLE BOMBAY HIGH COUR T JUDGMENT IN THE CASE OF OTIS ELEVATOR CO. (I) LTD., 195 ITR 682, THE IS TO BE ALLOWED AS DEDUCTION. GROUND NO.4 IS ACCORDINGLY RESTORED TO THE FILE OF THE ASSESSING OFFICER TO RE -ADJUDICATE THIS ISSUE AFRESH. I.T.A NO.2396/ MUM/2010 JEHANGIR NARIMAN MINSTRY 5 11. GROUND NO. 4 IS THUS ALLOWED FOR STATISTICAL PU RPOSES. 12. IN THE RESULT, APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON 18 TH MARCH, 2011 SD/- (R.V.EASWAR) HONBLE PRESIDENT SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 18 TH MARCH, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),3, MUMBAI 4. COMMISSIONER OF INCOME TAX, 11 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH H, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI