IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMADABAD Before Shri D.K.Tyagi, Judicial Member and Shri T.R. Meena, Accountant Member ITA No. 3002/Ahd/2009 Assessm ent Year :2006-07 Shri Vishnu Anant Mahajan V/s. Assistant Commissioner of Mahajan Lane, Raopura, Incom e Tax, Circle 5, Vadodara Baroda P No. ACGPM6005P (Appellant) .. (Respondent) Shri Sunil H. Talati, A.R. By Appellant /By Respondent Shri Kartar Singh CIT.D.R. /Date of Hearing 08.08.2012 /Date of Pronouncement 21.09.2012 ORDER PER : T.R.Meena, Accountant Member This is appeal at behest of Assessee which has emanated from order of CIT(A)-VI, Baroda, order dated 28.08.2009 for assessment year 2006-07. effective grounds of appeal are as under: 1. Ld. CIT(A) has erred in confirming in part disallowance made by AO as below: a) Depreciation on Car of Rs.85,643/- b) Interest on Car Loan Rs. 17,466/- c) Repairs and Insurance of Car of Rs. 21,917/- I T No . 3 00 2 /A h d/ 2 00 9 . Y.: 06- 0 7 Page 2 on ground that assessee has partly derived exempted income u/s 10(2A) being Profits & Gains of Profession. 2. Ld. CIT(A) erred in applying provisions of Section 14A of Income Tax Act, 1961, and working out disallowance in proportion of exempt income. claims of above deduction be allowed in full. 3. Ld. CIT(A) erred on facts and in law in invoking provisions of section 14A which was never invoked by A.O. and in making proportionate disallowance. 4. disallowance confirmed by CIT(A) is not justified either on facts and on law, same be so deleted now and claims be allowed in full as disallowance of depreciation and vehicle related expenses are incurred in earning professional income from firm which is remuneration and interest from partnership firm both of which are to be included as professional income u/s 28 as per business / professional income. 2. fact of case is that assessee is individual and partner with 50% share of profit in firm, M/s. Mahajan & Amar Doshi, Baroda. In addition to partners share income, appellant had income from capital gain, interest and dividend income. appellant had claimed that expenses on account of depreciation on car which is in name of assessee. reasonable opportunity of being heard was given to appellant at time of assessment proceeding. After examining details of appellant, ld. A.O. made addition on account of depreciation, interest paid on car loan and expenses incurred on car in total at Rs.1,38,820/-. 3. Being aggrieved by order of A.O., appellant carried matter before CIT(A) who had confirmed 76% of depreciation and other I T No . 3 00 2 /A h d/ 2 00 9 . Y.: 06- 0 7 Page 3 related expenses on basis of 14A of IT Act at Rs.1,25,005/-. He allowed appeal partly. Co-ordinate Bench, Ahmadabad has referred following question of law to Special Bench in assessee s own case as under: Whether ld. CIT(A) was justified in disallowing 76% of depreciation and other related expenses by apportioning them in ratio of exempt to taxable income by applying provisions of section 14A of Act on share income from firm which is exempt from tax u/s. 10(2A) of Act? Hon ble Special Bench has held as under: 7. We have given careful consideration to various cases relied upon by contesting parties. These cases inter-alia show that firm can validly enter into agreement with partner regarding purchase and sale of assets etc. [Kaluram Puranmal; Chase Trading Co.]. Further it has been held that whenever field is occupied by tax law, provision contained therein will become applicable, but where field is left vacant, we will have to take assistance from provisions contained in Partnership Act for filling vacuum under tax law. [K. Kulakutty]. In so far as issue before us is concerned, firm and its partners are assessable separately on their total income in their names, notwithstanding position of law under Partnership Act that firm is compendium or collective name of partners. Thus, in so far as taxation is concerned, firm is not pass-through vehicle. It is translucent vehicle, as only salary and interest paid to partners are taxable under Section 28(v) as business income. It has been so provided because there cannot be really be relationship of employer and employee or debtor or creditor between firm on one hand and partners on other hand. Even earlier, salary and interest allocated to partners were taxable as business income. I T No . 3 00 2 /A h d/ 2 00 9 . Y.: 06- 0 7 Page 4 real change in scheme of taxation is that firm is taxed at flat rate of income after deduction of interest and salary paid to partners, and interest and salary are taxed in hands of partners as business income. Thus, it is clear that amount taxed in hands of firm is not taxed again in hands of partners. This change has led to avoidance of double taxation because firm does not have to pay tax on salary and interest income paid to partners and partners do not have to pay tax on share income allocated to them. This is achieved by insertion of section 10(2A) and 28(v) in Act. In so far as share income is concerned, field is occupied by tax law, as it is enacted that share income shall not form part of total income of partners. Therefore, in view of this specific provision and fact that firm and partners are separately assessable entities, it will be difficult to hold that share income is not excluded from total income of partner because firm has already been taxed thereon. When section 10(2A) speaks of its exclusion from total income, it means, total income of person whose case is under consideration. instant case is that of partner and therefore what is to be examined is whether share income is excluded from his total income. answer is obviously in affirmative. In such situation, provision contained in section 14A will come into operation and any expenditure incurred in earning share income will have to be disallowed. Thus, we agree with learned CIT(A) that provision contained in section 14A is applicable to facts of case. Further, it has been held in case of Godrej & Boyce Mfg. Co. Ltd. (supra) that all facts may be taken into consideration for determining quantum of disallowance to be made. This portion of judgment is applicable only in respect of determination of quantum of disallowance. learned CIT(A) has disallowed expenditure in ratio of income not included in total income and income received from I T No . 3 00 2 /A h d/ 2 00 9 . Y.: 06- 0 7 Page 5 firm. In absence of any argument regarding any error in this part of decision, it is held that he was right in doing so. 8. Coming to question regarding depreciation being expenditure or not, it has been held in case of Hoshang D. Nanavati (supra) that section 14A deals only with expenditure and not any statutory allowance admissible to assessee. decision has been arrived at after considering decision in case of Nectar Bebverages Pyt. Ltd. Vs. DCIT (2009) 314 ITR 314. Id. CIT (DR) has not been able to displace ratio of these cases. Thus, on consideration, we find that section 14A uses words "expenditure incurred by assessee in relation to income . statutory allowance under section 32 is not expenditure. Therefore, we are in agreement with decision of Division Bench in case of Hoshang D. Nanavati. 9. Question referred to us is answered accordingly. Division Bench shall dispose of appeal in conformity with this decision. 4. Now appeal is re-heard as per order of Special Bench as referred above. Hon ble Special Bench had already decided that depreciation is statutory allowance admissible to assessee. But Section 14A deals with only expenditure. Thus, depreciation being not part of expenditure is not to be considered for disallowance u/s.14A of IT Act. Therefore, we respectfully following decision of Special Bench in assessee s own case, dated 25.05.2012 delete addition on account of depreciation. For remaining additions, ld. Counsel for appellant s I T No . 3 00 2 /A h d/ 2 00 9 . Y.: 06- 0 7 Page 6 arguments were not found convincing to us. Therefore, we confirm order of CIT(A) to that extant only. 5. In result, assessee s appeal is partly allowed. This Order pronounced in open Court on 21.09.2012 Sd/- Sd/- (D.K.Tyagi) (T.R. Meena) Judicial Member Accountant Member True Copy S.K.Sinha / Copy of Order Forwarded to:- 1. / Appellant 2. / Respondent 3. / Concerned CIT 4. - / CIT (A) 5. , , / DR, ITAT, Ahmedabad 6. [ / Guard file. By order/ , / , Strengthen preparation & delivery of orders in ITAT 1) Date of taking dictation 19.09.2012 2) Direct dictation by Member straight on XXX computer/laptop/dragon dictate 3) Date of typing & draft order place before Member 20.09.2012 4) Date of correction ,, ,, 5) Date of further correction XXX 6) Date of initial sign by Members 21.09.2012 7) Order uploaded on 21.09.2012 8) Original dictation pad has been enclosed in this file Yes 9) Final order and 2nd copy send to Bench Clerk on 21.09.2012 Shri Vishnu Anant Mahajan v. ACIT.-Circle-5