PRADEEP D. JOSHI, MUMBAI V. ITO 11(3)(2), MUMBAI

ITA 3940/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88437 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 10-03-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 17-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Assessee Lawyers: PRADEEP JOSHI
• Keywords: Business income; Depreciation; Earning of tax free income
• Section: 143(3); 14A; 10

Judgement Text

, L LL LH HH H INCOME TAX APPELLATE TRIBUNAL,MUMBAI - C BENCH. , ! , BEFORE S/SH.VIJAY PAL RAO, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.3940/MUM/2013, ' ' ' ' # # # # / ASSESSMENT YEAR-2003-04 PRADEEP D. JOSHI, 8, MAGHDOOT, 162, MANORAMA NAGARKAR MARG, MAHIM, MUMBAI-400016 PAN:AACPJ3615N VS ITO 11(3)(2), MUMBAI. ( $% / APPELLANT) ( &'$% / RESPONDENT) '() '() '() '() * * * * / ASSESSEE BY : SHRI PRADEEP JOSHI + * / REVENUE BY : SHRI PREMANAND J. ' ' ' ' + ++ + ), ), ), ), / DATE OF HEARING : 10-03-2015 -.# + ), / DATE OF PRONOUNCEMENT : 10-03-2015 ' ' ' '1961 1961 1961 1961 + + + + 254 254 254 254( (( (1 11 1) )) ) )7) )7) )7) )7) 8 8 8 8 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! ' ' ' ' : CHALLENGING THE ORDER DATED 13-02-2013 OF CIT(A)-2, MUMBAI THE ASSESSEE HAD FILED FOLLOWING GROUNDS OF APPEAL:- THE CIT (A) ERRED IN 1. NOT APPRECIATING THE FACTS PLACED BEFORE HIM AND COMING TO A CONCLUSION THAT THE EXPENDITURE VIZ. SR.NO. PARTICULARS AMOUNT (RS.) A INTEREST ON VEHICLE LOAN 67,597/- B VEHICLE EXPENSE 45,246/- C VEHICLE DEPRECIATION 1,23,432/- D INTEREST ON BANK OVERDRAFT 9,851/- E BANK CHARGES 420/- TOTAL 2,46,546/ - WAS NOT WHOLLY AND EXCLUSIVELY INCURRED ON EARNING REMUNERATION OF RS. 3,86,967/- FROM FIRMS(RS.2,50,979/- KULKARNI & KHANOLKAR & RS. 1,35 ,988/- JOSHI & PARULEKAR) AND INTEREST FROM THE FIRMS OF RS. 24,688/- (RS.13,620/- KULKARNI & K HANOLKAR & RS. 11,068/- JOSHI & PARULEKAR). HIS ACTION OF APPORTIONING 50% OF THE SAME AGAINST SHARE OF PROFIT FROM THE FIRMS RS. 3,16,797/- (RS.2,40,289/- KULKARNI & KHANOLKAR & RS. 76.508/- JOSHI & PARULEKAR) IN SPITE OF THE DECISION OF THE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WA REHOUSING CORPORATION (242 ITR 450) FOLLOWED BY THE DECISION OF THE COCHIN BENCH OF THE ITAT IN THE CASE OF DHANALAXMI BANK LTD. VS. ACIT, RANGE 1,TRISSUR IS NOT CORRECT. ALTERNATIVELY L(A) DEDUCTION OF RS.10,271/- (INTEREST ON BANK OVE RDRAFT RS.9,851/- AND BANK CHARGES RS.420/-) BE ALLOWED AGAINST INCOME FROM OTHER SOURCES CONSIS TING MAINLY OF BANK INTEREST, INTEREST ON COMPANY DEPOSITS AND DIVIDEND. AND (B) FULL DEDUCTION OF RS.2,34,275/- (INTEREST ON VE HICLE LOAN RS.67,597/-, VEHICLE EXPENSE RS.45,246/-AND VEHICLE DEPRECIATION RS.1,23,432/-) BE ALLOWED AGAINST INCOME FROM PROFESSION. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR REVISE THE ABOVE GROUNDS OF APPEAL AT THE TIME OF HEARING OF THE ABOVE APPEAL. 2.ASSESSEE-CA.,AN INDIVIDUAL,FILED HIS RETURN OF IN COME ON 20.12.2003, DECLARING TOTAL INCOME AT RS.3.66 LAKHS. THE ASSESSING OFFICER (AO) COMPLETED THE ASSESSMENT U/S. 143(3) OF THE ACT ON 27.10.2005,DETERMINING THE TOTAL INCOME OF THE ASSE SSEE AT RS. 6,82,460/-. 2 ITA NO. 3940/M/2013 PRADEEP D. JOSHI 3. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE MADE B Y THE AO ON VARIOUS COUNTS OUT OF THE INCOME RECEIVED BY THE ASSESSEE FROM THE PARTNERSHI P FIRMS.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE WAS PARTNER IN TWO F IRMS, THAT HE HAD SHOWN REMUNERATION RECEIVED FROM THOSE FIRMS AT RS. 3.86 LAKHS, THAT HE HAD CLA IMED AN EXPENDITURE OF RS. 2.05 LAKHS, THAT THE SHARE OF PROFIT RECEIVED FROM THE FIRMS HAS BEEN CL AIMED EXEMPT U/S.10(2A) OF THE ACT.BEFORE HIM,THE ASSESSEE CONTENTED THAT THE REIMBURSEMENT O F THE EXPENSES CLAIMED FROM THE FIRM WAS AGAINST THE VEHICLE EXPENSES. IT WAS FURTHER ARGUED THAT THE INCOME EARNED BY HIM WAS CHARGEABLE TO TAX UNDER THE HEAD INCOME FROM BUSINESS OR PROF ESSION,THAT EXPENDITURE INCURRED BY HIM WERE WHOLLY AND EXCLUSIVELY FOR CARRYING ON PROFESSION A ND HENCE ALLOWABLE,THAT THE EXPENDITURE ON ACCOUNT OF INTEREST WAS ALSO INCURRED FOR CARRYING OUT THE PROFESSION. HOWEVER, THE AO DID NOT AGREE WITH THE ASSESSEE AND MADE CERTAIN ADDITIONS. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).AFTER CONSIDERING THE ASSESSMENT OR DER AND SUBMISSIONS OF THE ASSESSEE,THE FAA HELD THAT THE ASSESSEE WAS A PARTNER IN TWO FIRMS, THAT THE VEHICLE WAS USED FOR BUSINESS PURPOSES, THAT HE HAD EARNED SHARE OF PROFIT,AMOUNTING TO RS. 3.86 LAKHS,FROM THE FIRMS, THAT THE SHARE OF PROFIT FROM THE FIRMS WAS EXEMPT UNDER SECTION 10 O F ACT. HE DIRECTED THE AO TO ALLOW 50% OF THE EXPENSES CLAIMED BY THE ASSESSEE.BESIDES,A DISALLOW ANCE OF ANOTHER 50% OF THE EXPENSES,U/S.14A OF THE ACT WAS MADE. 5. BEFORE US,THE ASSESSEE STATED THAT HE HAD EARNED IN COME FROM TWO PARTNERSHIP FIRMS, THAT THE FIRMS HAD PAID TAX,THAT THE SHARE-PROFIT RECEIVED B Y HIM WAS NOT EXEMPT INCOME, THAT PROVISIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE IN HIS C ASE. HE RELIED UPON THE CASES OF SUDHIR KAPADIA (ITA NO.7888/M/2003-AY-2000-01 DT. 26.02.2007), BHA RAT S. RAUT (ITA/9212/MUM/2004 DT. 25. 06.2008) AND HITESH D. GAJARIA (ITA/993/MUM/2007-AY -2003-04 DATED 14.11.2008).DEPARTMEN -TAL REPRESENTATIVE (DR)SUPPORTED THE ORDER OF THE FAA. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE IDENTICAL ISSUE HAD ARISEN IN ALL THE ABOVE REFERRE D TRIBUNAL DECISIONS. IN THE CASE OF HITESH D. GAJARIA (SUPRA) THE TRIBUNAL HAD DECIDED THE ISSUE AS UNDER: 4. WE HAVE CONSIDERED THE ARGUMENTS OF' THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT SIMILAR ISSUE WAS CONSIDERED BY 'C' BENCH OF THE MUMBAI TRIBUNAL VIDE ORDER DATED 26TH FEBRUARY, 2007 IN THE CASE OF SHRI SUDHIR KAPADIAVS ITO IN ITA NO.7888/M/03 AND THE TRIBUNAL DEALT WITH THE ISSUE IN THE FOLLOWING MANNER: '4. ITAT, MUMBAI BENCH 'J' IN THE CASE OF SUDHIR DA TTARAM PATIL VS DCIT 2 SOT 678 (MUM) HAS CONSIDERED THE QUESTION OF TAXING THE EXPENDITURE W HILE COMPUTING INCOME OF A PARTNER AGAINST SALARY.' RECEIVED BY THE PARTNER FROM THE FIRM. THE TRIBUNAL HELD THAT THE SALARY FROM THE FIRM IN WHICH THE ASSESSEE IS A PARTNER IS IN THE NATURE OF BUSINESS INCOME U/S 28(V) AND THEREFORE, INTEREST PAID BY THE PARTNER ON MONEY BORROWED FOR CONTRIBUT ING CAPITAL HAS TO BE ALLOWED AS DEDUCTION IN THE HANDS OF THE ASSESSEE. IN RESPECT OF THE NATURE OF THE SHARE IN THE PROFITS OF A FIRM, IN THE HAND S OF THE PARTNER, THE SUPREME COURT HAS CONSIDERED TH E ISSUE IN THE CASE OF CIT, MADRAS VS. R.M. CHIDARNBARAM PILLAI 106 ITR 292 THE COURT WAS EXAMI NING THE NATURE OF SHARE OF PROFITS RECEIVED BY A PARTNER. THE COURT HELD THAT A FIRM IS NOT A L EGAL PERSON EVEN THOUGH IT HAS SOME ATTRIBUTES OF PERSONALITY. IN INCOME TAX LAW A. FIRM IS A UNIT OF ASSESSMENT, BY SPECIAL PROVISIONS, BUT IS NOT A FULL PERSON. SINCE A CONTRACT OF EMPLOYMENT REQUIRE S TWO DISTINCT PERSONS, THE EMPLOYER AND THE EMPLOYEE, THERE CANNOT BE A CONTRACT OF SERVICE, IN STRICT LAW, BETWEEN A FIRM AND ONE OF ITS PARTNERS. PAYMENT OF SALARY TO A PARTNER REPRESENTS A SPECIAL SHARE OF THE PROFITS. SALARY PAID TO A PARTNER RETAINS THE SAME CHARACTER OF THE INCOME OF THE FIRM. ITAT, MUMBAI BENCH 'H' IN THE CASE OF ACIT VS. RUSTOM J. GAGRAT, HAS CONSIDERED THE VE RY SAME ISSUE FOR THE ASSESSMENT YEAR 97-98 IN ITS ORDER DATED 31/12/04 IN ITA NO,3860/M/00, TH ERE IS ALSO THE TRIBUNAL HAS HELD IN FAVOUR OF ASSESSEE THAT DEDUCTION IS PERMISSIBLE UNDER LAW. 5. WHEN WE EXAMINE THE ISSUE IN THE LIGHT OF THE AB OVE JUDGMENT AND DECISIONS, WE FIND THAT THE CLAIM MADE BY THE ASSESSEE IS ACCEPTABLE IN LAW. TH E SUPREME COURT IN THE CASE OF CIT, MADRS VS. R.M. CHIDAMBARAM PILLAI HAS HELD THAT SALARY PAID T O A PARTNER RETAINS THE SAME CHARACTER AS 3 ITA NO. 3940/M/2013 PRADEEP D. JOSHI INCOME OF THE FIRM. THIS LEADS US TO THE NEXT STEP: I.E. THE SHARE OF PROFITS RECEIVED BY THE PARTNER FROM THE FIRM RETAINS THE SAME CHARACTER OF THE INC OME OF THE FIRM : I.E. THE SHARE INCOME RETAINS THE CHARACTER OF BUSINESS INCOME. THE SAID BUSINESS INC OME IS EXEMPT FROM THE LEVY OF TAX ONLY IN THE HANDS OF THE ASSESSEE; BUT IT IS TAXABLE IN THE HAN DS OF THE FIRM. THE ASSESSEE PARTNER GETS ITS SHARE OF PROFIT FROM THE FIRM AFTER FIRM HAS BEEN SUBJECT ED TO TAX IN ITS HANDS. THEREFORE, IT IS NOT POSSIB LE TO HOLD THE VIEW THAT THE SHARE INCOME IN THE HANDS OF A PARTNER IS ALL TOGETHER TAX FREE; ON THE OTHE R HAND THE SHARE IS TAX SUFFERED INCOME IN THE HANDS OF THE FIRM. THEREFORE, SEC 14A IS NOT APPLICABLE IN THAT CASE. THE SHARE INCOME OF THE FIRM IS EXEMP T FROM THE TAX U/S 10(2A), NOT IN THE ABSOLUTE SENSE. IT IS ONLY TO AVOID DOUBLE TAXATION; ONCE IN THE HANDS OF THE FIRM AND SECONDLY IN THE HANDS OF THE PARTNER. THEREFORE WE FIND THAT THE PROVISIO NS OF SECTION 14A WOULD NOT APPLY TO THE ASSESSEE/PARTNER AND IT IS NOT NECESSARY FOR THE AS SESSING AUTHORITY TO DISALLOW THE PROPORTIONATE EXPENDITURE FROM THE CLAIM OF THE ASSESSEE. THEREFO RE, THE DISALLOWANCE OF RS.3, 09,792 IS DELETED AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS.3 ,95,500/- CLAIMED BY THE ASSESSEE.THIS FINDING IS FORTIFIED BY THE FACT THAT THE ASSESSEE PARTNER IS NOT ALLOWED TO CLAIM ANY CONVEYANCE EXPENDITURE FROM THE FIRM AS PROVIDED IN THE PARTNERSHIP DEED [ PLEASE REFER TO STATEMENT OF FACTS FILED BEFORE THE CIT(A)]. WE FIND THAT THE ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF 'E' BENCH OF THE TRIBUNAL IN THE CASE OF SHRI BHARAT S RAUT IN ITA N O.9212/MUM/2004 AND CO NO. 212/MUM/2005 VIDE ORDER DATED 25TH JUNE, 2008. THUS, RESPECTFULL Y FOLLOWING THE PRECEDENT, WE DELETE THE DISALLOWANCE. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 7. RESPECTFULLY FOLLOWING THE ABOVE MENTIONED THREE DE CISIONS OF THE TRIBUNAL,WE HOLD THAT PROVISIONS OF SECTION 14A OF THE ACT ARE NOT APPLIC ABLE IN A CASE WHERE THE PARTNER GETS HIS PROFITS OF SHARE FROM THE PARTNERSHIP FIRM.THEREFORE,REVERS ING THE ORDER OF THE FAA,WE DECIDE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 8. WE HAVE ALREADY DECIDED THE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE,THEREFORE ALTERNATIVE GROUND TAKEN BY HIM BECOMES ACADEMIC IN NATURE.HENCE,IT IS NOT BEING ADJUDICATED. AS A RESULT,APPEAL FI LED BY THE ASSESSEE STANDS ALLOWED. ( 9 '() + : + ) ;<. ORDER PRONOUNCED IN THE OPEN COURT ON 10TH,MARCH,2015 . 8 + -.# > ?' 10 EKPZ , 201 5 . + 7 @ SD/- SD/- ( / VIJAY PAL RAO) ( ! ! ! ! / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER , / MUMBAI, ?' /DATE:10.03 . 2015. SK 8 8 8 8 + ++ + &) &) &) &) A #) A #) A #) A #) / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ B C , 4. THE CONCERNED CIT / B C 5. DR C BENCH, ITAT, MUMBAI / D7 &)' L LL LH HH H , . . . 6. GUARD FILE/ 7 E ') ') ') ') &) &)&) &) //TRUE COPY// 8' / BY ORDER, F / ; DY./ASST. REGISTRAR , /ITAT, MUMBAI