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TMI Blog2006 (10) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee received salary of Rs. 48,49,824. The assessee also incurred expenses of Rs. 50,183 on account of petrol and maintenance of motor car as well as Rs. 3,09,144 on account of car rentals paid to Kotak Mahindra Financials Ltd. Thus the total expenses in respect of car amounted to Rs. 3,59,327, out of which, assessee himself disallowed 20% i.e., Rs. 71,865 for personal use and the balance amount of Rs. 2,87,462 was claimed as deduction against the salary received from the partnership firm. In addition, he also incurred certain other expenditure on account of entertainment, lease rental of computer, purchase of law journals, membership fees etc., and thus, the total expenditure claimed by the assessee amounted to Rs. 4,73,966. Hence, the net amount of Rs. 43,99,358 was declared as business income. The share of profit from the partnership firm being exempt from taxation under section 10 was not included in the total income. Since the assessee had some other income under the head "Income from other sources" the total income was declared at Rs. 48,15,470. 3. In the course of assessment proceedings, the Assessing Officer was of the view that entire claim of the assessee could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred by the assessee. Aggrieved by the same, the assessee as well as the revenue are in appeal before the Tribunal. 6. The learned counsel for the assessee has submitted before us that remuneration received by the assessee from the partnership firm is assessable as business income under section 28 and therefore, any expenditure incurred by the assessee for earning the business income is allowable as deduction and consequently no disallowance could be made by the lower authorities. Reliance has been placed on the decisions of the Tribunal in the case of Santosh Kumar Agarwal v. Asstt. CIT [2001] 78 ITD 394 (Mum.) (SMC) as well as in the case of Sudhir Dattaram Patil v. Dy. CIT [2005] 2 SOT 678 (Mum). 7. On the other hand, the learned DR has supported the Order of the CIT(A) by contending that section 14A has been inserted in the Act by Finance Act, 2001 with retrospective effect i.e., from 1-4-1962 with a view to disallow the expenditure incurred in relation to the exempted income. It was submitted by him that prior to insertion of section 14A, the courts were of the view that where the assessee was earning income from business activity and part of it was exempt from taxation then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act which read as under : "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act: [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]" 10. The perusal of the above provisions clearly shows that any expenditure incurred in relation to the income which is not to be included in the total income has to be disallowed. Prior to assessment year 1993-94, the entire income by way of share of profit from the partnership firm was taxable and consequently any expenditure incurred by the assessee being a partner of the firm was allowable as deduction in view of the Supreme Court judgment in the case of CIT v. Ramaniklal Kothari [1969] 74 ITR 57 . However, with effect from assessment year 1993-94, the share of profit from the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se which are derived from business operations carried on within the taxable territories and those which are derived from business operations carried on without the taxable territories." In deciding this question, their Lordships referred to the earlier judgment of the Hon'ble Supreme Court in the case of CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 and the relevant observations were extracted at pages 48 and 49 of the report. However, we will refer to the relevant portion of that extract as under : ". . . In the case of a composite business i.e., in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of the accrual of profits and their apportionment inter se. . . . In such cases it will be doing no violence to the meaning of the words 'accrue' or 'arise' if the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacturing is being done and the profits which arise by reason of the sale are said to arise at the place where the sales are made and the profits in respect of the import and export business are said to arise at the place where the business is conducted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services is apportioned and the assessee given the benefit of the deduction available under the section to the extent of such consideration." [Emphasis supplied] 13. In view of the above authorities, it has to be held that, where an expenditure is composite one i.e., relating to taxable receipts as well as non-taxable receipts, then, the Assessing Officer is duty bound to disallow the proportionate amount of expenditure relatable to non-taxable or exempted income by invoking the provisions of section 14A of the Act. No doubt, the apportionment must be rational and cannot be capricious. 14. The decisions relied upon by the learned counsel for the assessee are distinguishable. The decision of the Mumbai Bench of the Tribunal in the case of Santosh Kumar Agarwal (supra), the issue regarding deductibility of the expenditure incurred by the partner from the remuneration received by the assessee from the firm related to assessment years 1993-94 and 1994-95 i.e., prior to insertion of section 14A of the Act. As already noted, prior to inserti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enunciated by the highest Court of Law has to be applied where the expenditure is composite one i.e., where the expenditure is related to income which is partly taxable and partly exempted. Thus the above decision of the Tribunal also does not help the assessee. 16. Coming to the merits of the case, we find that car expenses have been incurred by the assessee either for the purpose of partnership business or for personal use. The source of business income is only one. Travelling in the car is either for personal use or for the purpose of his profession in the partnership. Therefore, in our opinion, it has to be held that car was used for the purpose of his profession which generated income partly exempt under section 10(2A) and partly taxable. Therefore, the contention of the assessee that car was used only for earning remuneration from the partnership firm cannot be accepted. Similarly, other expenses related to the profession carried on by him and therefore, related to both types of income. 17. The only question which remains for our consideration is, as to how the apportionment is to be made? In our opinion, neither of the authorities below had adopted a rational approach. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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