M.E. Jalil Vs. Income-tax Officer - Court Judgment

Excerpt:
1. the first contention in this appeal is that the a ac was not justified in not allowing the expenses out of share income from the firm commercial steel engg. corpn. the assessee, who is an engineer, was technical partner in the firm and he was carrying out technical activities of the firm, conducting business on behalf of the firm and he was maintaining firm's office at his own residence also. he had to engage technical personnel to conduct the business of the firm and he gave them guidance in this respect. it is argued by the assessee that he had to incur expenses on behalf of the firm which he claimed out of his share income. the aac did not allow any of the expenses claimed and his finding was that the expenses should have been claimed in the books of the firm and that the same.....

Judgment:
1. The first contention in this appeal is that the A AC was not justified in not allowing the expenses out of share income from the firm Commercial Steel Engg. Corpn. The assessee, who is an engineer, was technical partner in the firm and he was carrying out technical activities of the firm, conducting business on behalf of the firm and he was maintaining firm's office at his own residence also. He had to engage technical personnel to conduct the business of the firm and he gave them guidance in this respect. It is argued by the assessee that he had to incur expenses on behalf of the firm which he claimed out of his share income. The AAC did not allow any of the expenses claimed and his finding was that the expenses should have been claimed in the books of the firm and that the same cannot be allowed out of the share income of the assessee from the firm. The assessee has argued that it was highly unjust to tax the income but not to allow the expenses incurred to earn the income. The departmental representative argued that the expenses pertained to the business of the firm were correctly not allowed in the hands of the assessee.

2. The assessee has relied upon the following case laws--Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC), State of Madras v. Moulvie Estate [1968] 70 ITR 138 (Mad.) and CAIT v. Tippemry Estates Co. [1970] 76 ITR 396 (Mad.).

3. We have considered the arguments on both the sides. The cases of Tipperary Estates Co. (supra) and Moulvic Estate (supra), pertained to agricultural income-tax, where salary paid to a partner was allowed as an expenditure while working out the agricultural income. These two cases are not relevant to the facts here. In the case of Jugal Kishore Baldeo Sahai (supra), remuneration paid to the karta of a HUF which was bona fide for looking after the business of the family was allowed as a business expenditure.

4. There is another case of the Supreme Court reported at CIT v.Ramniklal Kothari [1969] 74 ITR 57, in which their Lordships of the Supreme Court have held as under: Business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. The share of the partner is business income in his hands for the purpose of Section 10(1) of the Indian Income-tax Act, 1922, and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner.

Held, accordingly, that the respondent, who was a partner in four firms but did not carry on any independent business, was entitled to deduct from his share of the profits from the firms' amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor cars and travelling expenses expended by him in earning the income from the firms, (p. 57) Thus, their Lordships of the Supreme Court have held that a partner who incurs expenses for the purpose of business of the firm was entitled to deduction from his share of the profits of the firm the expenses so incurred. In the book of the learned authors Kanga and Palkhivala's Law and Practice of Income-tax, 7th edition, volume 1, it is mentioned as under: Deductions allowable to partner from his share of profits of firm--Normal expenses of the firm, e.g., salaries paid for services rendered to the firm, should be claimed in the firm's own assessment and cannot be allowed to a partner in his individual assessment. But the consensus of judicial opinion under the 1922 Act was that a partner was entitled to claim a deduction from his share of the firm's profits in respect of expenditure incurred by him wholly and exclusively for the purpose of earning his share of profits, e.g., interest paid by him on moneys borrowed for investment in the firm--since it is the true profits and gains, ascertained on ordinary principles of commercial accounting, which are taxable under this head. Such a deduction was held allowable under Section 10(1) or Section 10(2) of the 1922 Act, corresponding to Section 28 and Sections 30 to 37 respectively of this Act. The position under the present Act is the same as under the 1922 Act. Section 67(3) now expressly provides for a deduction, in computing a partner's share of the firm's profits, in respect of interest paid by him on capital borrowed for the purpose of investment in the firm. This section gives statutory recognition to the well settled principle in respect of a deduction which is most commonly claimed by partners in their individual assessments. But Section 67(3) cannot be construed as indicating that a partner is not entitled to a deduction in respect of any expenditure other than interest on capital borrowed for investment in the firm. (See above under 'Profits and gains', p.

340, and 'List of allowances is not exhaustive', p. 352. See also under Section 67(3), 'Interest paid by partner on capital borrowed for investment in firm), (p. 353) 5. Thus, according to the clear verdict of their Lordships of the Supreme Court and the opinion of the learned authors quoted above, the expenses incurred on behalf of the firm by a partner have to be allowed as deduction out of the share income. We do not agree with the finding of the AAC that the expenses cannot be allowed in the hands of the assessee and these should have been claimed in the hands of the firm.

In fact, the share income computed by the ITO/AAC is inclusive of the allowances that the assessee has received from the firm for the rent of the house and for incurring various expenses on behalf of the firm.

Thus, the share income is inclusive of all those amounts which the assessee received from the firm for the various purposes, namely, for carrying on business of the firm and for incurring expenses in that connection, but unfortunately the ITO/AAC have not allowed the expenses incurred by the assessee for this purpose. It was not justified at all.

it would be relevant to mention how the share income has been computed by the AAC. The AAC computed the share income at Rs. 31,752, which consisted of the following amounts:Share of profit 4,600Commission 8,302Rental for official residence and office 4,550 17,452Special allowance for upkeep of office 14,300 31,752 Thus, the share income of Rs. 31,752 consisted not only of the share of profit, commission but rent received for the office and special allowance received for upkeep of office. Those amounts have been taxed in the hands of the assessee but the expenses incurred by the assessee have been ignored completely. In our opinion, it was against the principle of natural justice and also the principles of law laid down by their Lordships of the Supreme Court in the case cited above.

6. The following expenses have been claimed by the assessee against the share income: 7. The assessee was also living in that house and, hence, in our opinion, one-third of the house rent may reasonably be considered as his personal expenses. The balance of Rs. 2,800 is hereby allowed to be deducted out of the share income, legal expenses of Rs. 634 incurred were in connection with the business and have to be allowed out of the share income. Travelling expenses have been claimed at Rs. 5,675. The assessee's argument is that he had to go on tours and journeys have to be undertaken by him and by employees and he has got the details of the dates and places of journey and the expenses are vouched. Travelling expenses of Rs. 5,675 arc also hereby allowed out of the share income.

Salary and wages of Rs. 12,320 have been claimed. The assessee, it is argued, had to employ professionals and office staff for managing his business to earn profit on behalf of the firm. It is stated that professionals like engineers, draftsman and typist had to be employed along with other persons to pursue the matters of the firm in various offices. The salary and wages as claimed are also hereby allowed along with the miscellaneous expenses of Rs. 1,358 which had been claimed.

Thus, the expenses of Rs. 2,800 + Rs. 634 + Rs. 5,675 + Rs. 12,320 + Rs. 1,358, totalling to Rs. 22,787 are allowed against the share income assessed.

8 to 11. [These paras are not reproduced here as they involve minor issues.)