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TMI Blog2012 (6) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership firm. Although, the assessee is the legal owner of the motor car, but that does mean that the expenditure so incurred is for earning the business income. The earning of other incomes apart from share in the partnership firm does not advance the case of the assessee regarding the claim of the expenditure. The assessee has also disallowed suo motu 1/10th of depreciation allowance which indicates that the asset has been used for personal purpose. 2.1 The learned CIT(A) considered the facts of the case and rival submissions. His interpretation about the view of the AO is that the expenses and depreciation allowance do not pertain to the assessee as an individual, but pertain to the partnership firm in which he is a partner. The share income from the firm is not to be included in the total income of the assessee by dint of provision contained in Section 10(2A). Therefore, the provision contained in Section 14A regarding "expenditure incurred in relation to income not included in total income" becomes applicable. The assessee derives 76% of professional income as share from the firm and the balance amount by way of remuneration and interest income from the firm. He, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied the provision contained in Section 14A since the share was not includible in the total income under Section 10(2A). Consequently he disallowed certain amount from the overall expenditure which was attributed to the earning of share income. The Tribunal came to the conclusion that it will not be feasible to hold that share income in the hands of the partner is altogether tax free income. The share has suffered tax in the hands of the firm. Section 10(2A) has been introduced to avoid double taxation of the same income, once in the hands of the firm and then in the hands of the partner. This view is fortified by the fact that any partner in the firm is not allowed to claim any conveyance expenditure from the firm as provided in the partnership deed. Further, it is submitted that this case has been followed by 'H' Bench of the Mumbai Tribunal in the case of Hitesh D. Gajaria, in ITA No.983/Mum/2007 for A.Y.2003-2004 dated 14.11.2008, a copy of which has been placed on record. It is also submitted that there is a contrary decision rendered by the 'H' Bench of the Mumbai Tribunal in the case of Hoshang D. Nanavati Vs. ACIT, in ITA No.3567/Mum/2007 for A.Y.2003-2004 dated 18-3- 2011, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm does not amount to the succession of the business. Therefore, the technical view of the firm under the Partnership Act cannot be carried over to the I.T. Act. However, under the Partnership Act, a firm has not separate or distinct existence. Thus, it is argued before us that the business of the firm is the business of the partners. The income has been taxed in the hands of the firm. Therefore, it cannot be said that the share income received by the partner has not been subjected to tax or excluded from the total income under Section 10(2A). This provision is only a safeguard against double taxation of the same income in the hands of the firm and the assessee partners. 3.4 In the case of Dulichand Laxminarayan Vs. CIT, (1956) 29 ITR 535(SC), it has been, inter alia, held that section 4 of 1932 Act contemplates only the nature of the entity and whether such an entity can enter into another partnership with any firm, HUF or individual. The general concept is that the firm is not an entity or a person in law, but is merely an association of individuals. Therefore, the registration cannot be granted to a partnership purporting to be one between three firms, a Hindu undivid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale proceeds realized by the firm was not taxable as balancing charge. It is urged before us that this case distinguishes between disrupted HUF and the firm subsequently constituted and not between a firm and its partners. 3.8 In the case of CIT Vs. Chase Trading Co., 236 ITR 665 (Bom), it has, inter alia, been held that under the Act, the partnership firm is an assessable entity. In the course of its business, the firm may borrow or lend from or to its partners, sell or purchase goods and other assets. These are commercial transactions. Such transactions would not be amenable to the principle that one cannot trade with oneself. It is urged that this case recognizes the transaction of a firm with its partners, but in so far as the business of the firm itself is concerned, the same is jointly carried out by the partners and its profits belong to the partners. 3.9 On the basis of aforesaid discussion, it is argued that the Tribunal erred in coming to the conclusion in the case of Dharmasingh M. Popat that the scheme of assessment as applicable from A.Y.1993-1994 is not merely procedural, but also includes the computation of income of partnership firm as well as its partners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that two are taxed on their separate incomes and what is taxed in the hands of the firm is not further taxed in the hands of the partners. 4.1 He referred to various decisions considered in the case of Dharmasingh M. Popat. The case of S.G.Investments & Industries Ltd., 89 ITD 44 (Kol) is distinguishable in the sense that it deals with a limited company. Such is also the case of Primer Conslidated Capital trust (I) Ltd., 4 SOT 793 (Mum). 4.2 In the case of Phiroze H. Kudianawala, 113 ITR 873 (Bom) the facts are that the assessee, a partner in a firm of architects, incurred certain expenses. The agreement provided that certain expenses will be incurred by partners. The Court held that if business expediency is proved, a partner could claim expenses incurred by him for earning share income. This decision has been distinguished on the ground that it relates to the period when share income was taxable in the hands of the partners and there was no provision corresponding to section 10(2A). The decision in the case of R.M. Chidambram Pillai, 106 ITR 292 (SC) is not really applicable to the facts of the case because it was held that the nature of income in the hands of the firm and par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SB), Wimco Seedling Ltd. Vs. DCIT, 107 ITD 267 (Del)(TM) deal with the limited companies, and as such, are not applicable to the facts of the instant case. The decision in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT, 328 ITR 81 (Bom) can be relevant to the extent that it has been held that even prior to insertion of Rule 8D, all circumstances can be considered and disallowance can be made on a reasonable basis. 4.4 Finally, it is argued that the scheme of taxation of a firm and its partners is that profit is taxed in the hands of the firm and, thus, the shares are excluded from the total income of the partners. A firm and its partners are two separate assessable entities and taxation of the profit of the firm in its hands does not lead to a conclusion that it has been taxed in the hands of the partners on the ground that the firm and its partners constitute only one entity. This field is occupied by the IT. Act under which profit is taxable in the hands of the firm and it is excluded from its total income of partners under Section 10(2A). The total income of the firm is different from total income of the partners. Accordingly, the learned CIT(A) rightly invoked the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its partners are assessable separately on their total income in their names, notwithstanding the position of law under the Partnership Act that a firm is a compendium or the collective name of the partners. Thus, in so far as the taxation is concerned, the firm is not a pass-through vehicle. It is a translucent vehicle, as only the salary and interest paid to the partners are taxable under Section 28(v) as business income. It has been so provided because there cannot be really be a relationship of employer and employee or debtor or creditor between the firm on one hand and the partners on the other hand. Even earlier, the salary and interest allocated to the partners were taxable as business income. The real change in the scheme of taxation is that the firm is taxed at a flat rate of income after deduction of interest and salary paid to the partners, and interest and salary are taxed in the hands of the partners as business income. Thus, it is clear that the amount taxed in the hands of the firm is not taxed again in the hands of the partners. This change has led to avoidance of double taxation because the firm does not have to pay tax on salary and interest income paid to the par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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