TMI Blog2006 (10) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be reasonable to apportion the expenditure on the basis of the ratio of the income which is exempted and the income which is taxable. In the present case, a chart has been given in the statement of facts filed by the assessee before the CIT(A). According to this chart, the exempted income u/s 10(2A), while the remuneration received from the firm which is taxable as stated in the assessment order. Therefore, it would be reasonable to disallow on pro rata basis. The Order of the CIT(A) is, therefore, set aside and the Assessing Officer is directed to re-compute the disallowance accordingly. However, it is, clarified that assessee himself has disallowed 20% for personal use and therefore, the disallowance u/s 14A is to be made with reference to the balance 80% of the expenditure. In the result, appeal of the assessee stands dismissed while the appeal of the revenue is partly allowed. - K.C. SINGHAL AND A.K. GARODIA, JJ. P.J. Pardiwala for the Appellant. Durgesh Summrott for the Respondent. ORDER K.C. Singhal, Judicial Member. - These are the cross appeals filed by the assessee as well as the revenue against the Order of the CIT(A) dated 21-3-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The matter was carried in appeal before the CIT (A) before whom it was contended as under : "( a )The expenses claimed are less than 10% of the income disclosed for taxation. ( b )The appellant had suo motu disallowed 20% of motor car expenses. ( c )The expenses claimed have not been met by the firm. ( d )The appellant as a partner of the firm has to incur the expenditure to ensure higher professional income from the firm. ( e )The higher the salary paid to the partners, the share of profit of the partners accordingly gets reduced as divisible profits amongst the partners shall be reduced. ( f )The expenses are allowable u/s. 37 (1) of IT. Act as all the conditions stipulated are met. ( g )The Assessing Officer allowed part of the expenses incurred on motor car thereby implying that the Assessing Officer has also admitted that the expenses are incurred for the purposes of business. In case the Assessing Officer was of view that all such expenses are liability of the firm, the Assessing Officer should not have allowed even part of the expenses on motor car. ( h )The expenses on Computer does not deserve any disallowance as a computer is modern-day tool to keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee that entire expenditure is allowable as deduction. He drew our attention to the expenditure incurred by the assessee and submitted that by no stretch of imagination it can be said that expenses on the maintenance of car as well as the other expenses only related to the salary income received from the partnership firm. According to him, the car was maintained to facilitate the business activity of the partnership firm and therefore part of the expenditure was liable to be disallowed in view of section 14A of the Act. However, he left the matter to the Bench as to what reasonable percentage should be disallowed in the present case. 8. Rival submissions of the parties have been considered carefully. There is no dispute between the parties (1) that the income by way of interest on capital and remuneration received by a partner from the partnership firm is to be assessed as business income in view of section 28 of the Act; (2) if the expenditure is incurred by the partner to facilitate the partnership business, then, such expenditure is allowable as deduction subject to the provisions of the Act; (3) that prior to insertion of section 14A in the Income-tax Act, 1961 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any expenditure is incurred by the partner of the firm in relation to the business of the partnership, then, in our opinion, it cannot be said that no part of such expenditure related to the income exempt from tax under section 10(2A). It is the settled legal position that a person may carry on the business either himself in individual capacity or in partnership with others. Therefore, if any person being partner of the partnership firm incurs any expenditure in connection with the partnership business, then, such expenditure would be in relation to the partnership business only and consequently, if any part of the profits arising from the partnership firm, is exempt under section 10(2A), then, to that extent, the expenditure incurred by the assessee, would be disallowable. Since the profits from the partnership firm are partly exempt under section 10(2A) and partly taxable being the remuneration and interest, if any, from the partnership firm, then, in our opinion, the theory of apportionment would apply and the expenditure incurred by the assessee will have to be apportioned reasonably between the taxable income and non-taxable income. 11. The theory of apportionment is j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of section 42(3) of the Act but on general principles of apportionment of income, profits or gains. That was really the ratio of the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co., Bombay and any attempt to distinguish that case from the present one by having resort to the statutory provisions of the Excess Profits Tax Act is really futile. We accordingly of the opinion that the answer given by the High Court to Question No. 2 also was correct." [Emphasis supplied] 12. The next decision of the Apex Court is in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81 . In this case also their Lordships approved the principle of apportionment in respect of receipts as well as expenses. The relevant portion appears at P.No. 120 of the report and the same is quoted below : "For the purposes of income-tax, a principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee after insertion of section 14A of the Act. 15. The second decision relied on by the assessee s counsel is in the case of Sudhir Dattaram Patil ( supra ). This case is also distinguishable on facts. In that case, the assessee had received remuneration from the partnership firm which were assessable as business income under section 28 of the Act against which the assessee sought deduction in respect of the interest paid on borrowed capital. This claim was totally denied by the lower authorities and the matter reached the Tribunal. The Tribunal laid down two propositions. The first proposition was that combined reading of section 14A and section 10(2A) leads to the conclusion that the share of profit from a firm being exempt under section 10(2A), the expenditure incurred in relation to this income, is not allowed as deduction. Thus the assessee is not entitled to claim any expenditure of any nature against the income earned from a firm as share on profit in the capacity of a partner of the firm. The second proposition laid down was that the remuneration received by the partner from the firm is assessable as business income under section 28 of the Act and conse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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