In a partnership firm, there are two sources of income for the
partners remuneration and share of profits. While the profit share is exempt
under the provisions of the Income Tax Act (I-T Act), the remuneration is
taxable for the partner.
In many cases, it is observed
that partners have cars registered in their personal names but are used for
business or official purposes. In such cases, many a times taxpayers claim the
depreciation benefit for the car (that is largely used for official purposes)
against the taxable remuneration income earned from the firm.
In one of the recent cases
that came up before the Special Bench of the Ahmedabad Tribunal, a taxpayer had
income by way of profits from a firm in which he was a partner, capital gains,
interest, dividends and from house property.
The taxpayer had claimed the
depreciation benefit on his car against the remuneration income, after
deducting one-tenth of the depreciation towards usage of the car for personal
purposes. However, the tax officer disallowed the claim for depreciation on the
grounds that the expenditure so incurred is not necessarily for earning the
business income from the partnership firm.
At the first level of appeal,
the appellate authority observed that 76 per cent of taxpayer’s professional
income is by way of share of profit and the balance by way of remuneration and
interest income from the firm. In pursuance to the relevant provisions of the
I-T Act, the authority ruled that as expenses incurred in relation to income,
not chargeable to tax are not allowed to be claimed (under Section 14A), only
24 per cent of the depreciation benefit is allowable against the remuneration
and interest income earned from the firm. Thus, the balance 76 per cent of the
expense was disallowed.
Not happy with the said order,
the taxpayer appealed before the Special Bench. The taxpayer argued that under
the Indian Partnership Act, the partnership firm and partners are not distinct
and therefore, the business carried on by firm can be construed as business
carried on by partners, too.
By virtue of this, any
expenditure incurred by the partners for the business should be allowed to be
deducted from their business income. The taxpayer also argued that the profit
share from the firm does not qualify as ‘income not chargeable to tax’ since
the same has already suffered tax in the hands of the firm. As said under
Section 10(2A) of the I-T Act, the tax on profits have already been paid and so
the same is exempt from tax in the hands of the partners. In view of the same,
the provisions of Section 14A of the I-T Act are not applicable in this case.
The taxpayer relied on a number of judgements in support of the above claim.
The tax department’s counsel
argued that the car has not been used by the taxpayer for the purpose of
business (official purpose), but for the purpose of business of the firm. Thus,
the expenditure could not be allowed to be claimed by the taxpayer. The counsel
further argued that while under the Indian Partnership Act, the firm and its
partners are synonymous, under the I-T Act, the law is quite clear that a firm
and its partners are two separate entities liable to taxation. Both the firm
and the partners are taxed the arguments of both sides, held that although a
firm is nothing but the collective name of the partners under the Partnership
Act, as far as the I-T Act is concerned, it is an entity distinct and separate
from its partners. So, while the remuneration and interest earned by partners
from the firm is taxable in the hands of the partners, the same is allowed as
an expense for the firm from its profits. Once the firm pays taxes on its proof
of the partners. Therefore, in view of specific provisions available under the
Act, the Tribunal did not accept the taxpayers claim that the profit share is
not excluded from his total income because the firm has already paid tax on it.
The Tribunal also held that
Section 10(2A) of the I-T Act talks about exclusion from total income, that is,
income of the person under consideration. In the said however, the Tribunal
held expenditure incurred in real assets (in their personal name, used for the
firm’s needs) against the remuneration and interest income from their firms.
Any other expenditure to be claimed, namely traveling, conveyance, books,
printing and stationery and so on, will need to be proportionately apportioned
between the exempt profit share and taxable remuneration.
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