(112.3 KiB, 1,056 DLs)

S. 14A disallowance can be made with regard to partner’s share of profits

The assessee, a partner in a firm, received ‘share of profit’ and ‘salary’ from the firm. While the ‘share of profit’ was exempt u/s 10(2A), the ‘salary’ was taxable as business income u/s 28 (v). The assessee claimed deduction for business expenditure incurred by him. The AO held that as the assessee had exempt income, s. 14A applied and a part of the expenditure had to be disallowed. This was confirmed by the CIT (A). Before the Tribunal, the assessee argued that as a partnership firm was merely a compendium of partners having no independent legal personality, the share of profit was not an exempt income in the hands of partner as the firm had paid tax thereon. HELD rejecting the plea:

(i) Though in general law, a firm and its partners are not distinct, this is subject to statutory exceptions. Under the scheme of assessment of firms applicable from AY. 1993-94 a firm is treated as an independent entity and the expenditure by way of remuneration, interest, commission etc. paid to partners is allowable to it as a deduction subject to ceilings and such interest, salary etc is taxable in the hands of the partners. A firm and its partners are consequently separate entities under the Act;

(ii) Accordingly, the fact that the profits are charged to tax in the hands of the firm does not mean that the share of such profits is non – exempt in the hands of the partner. The profits being exempt in the hands of the partner, s. 14-A does apply in computing his total income.

(iii) The disallowance has to be worked out as per Rule 8D in view of Daga Capital 119 TTJ 289 (Mum) having held it to be retrospective.

(345.1 KiB, 382 DLs)

Note: A contrary view has earlier been taken by the Bombay Bench in Sudhir Kapadia vs. ITO & Hitesh Gajaria vs. ACIT. It was held that though a firm is an assessable entity, it is not a full person and though the share of profits is exempt from the levy of tax in the hands of the partner u/s 10 (2A), it was not all-together tax free as the profits had been subjected to tax in the hands of the firm. The exemption granted by s. 10 (2A) was not absolute but only to avoid double taxation. Consequently, s. 14A was not applicable.

(261.7 KiB, 606 DLs)

Depreciation is mandatory for Chapter VI-A deduction

The Full Bench was constituted to consider whether for the purposes of allowing deduction under Ch. VI-A, depreciation could be thrust on the assessee even though it had disclaimed the same for purposes of regular assessment. The assessee argued that as in accordance with Mahendra Mills 243 ITR 56 (SC), depreciation was optional and as Expl. 5 to s. 32 came into force only from AY 2002-2003, depreciation could not be thrust even for purposes of Ch. VI-A. HELD, deciding against the assessee:

(i) Mahendra Mills 243 ITR 56 has to be understood in the context in which the said decision was rendered. The decision was rendered in the context of determining total income under Ch. IV and not in the context of determining the deduction under Ch. VIA. Mahendra Mills has not laid down any proposition of law that by disclaiming depreciation, the assessee can claim enhanced deduction allowable under any other provision in the Act.

(ii) The fact that the assessee may have an option to disclaim current depreciation in computing total income under Ch. IV does not mean that the quantum of deduction allowable u/s 80 – IA is dependent upon the assessee claiming or not claiming current depreciation.

(iii) Ch. VI-A is a Code by itself and the special deduction granted therein has to be computed on the gross total income determined after deducting all deductions allowable under ss. 30 to 43D and any device adopted to reduce or inflate the profits of eligible business has got to be rejected. By not claiming current depreciation, the assessee seeks to inflate the profit linked incentives provided u/s 80-IA which is not permissible.