Interest paid to partners can't be disallowed under sec. 14A in hands of firm: Pune ITAT

Facts:

a) A partnership firm was engaged in the business of manufacturing of chemicals. It had claimed deduction of interest paid on partner’s capital.

b) While making assessment, the Assessing Officer observed that investment in mutual funds was made out of interest bearing funds which also included interest bearing partner's capital.

c) The Assessing Officer was of the view that assessee had incurred expenditure including interest expenses which were attributable to earning tax-free dividend income from investment in mutual funds. Thus, the expenditure so incurred on interest was required to be disallowed.

d) Further, the CIT(A) confirmed the action of the Assessing Officer.Aggrieved-assessee filed the instant appeal before ITAT.

The ITAT held in favour of assessee as under:

1) Interest and salary received by the partners are treated on a different footing by the Act and not in its ordinary sense of term. The Section 28(v) treats the passive income accrued by way of interest as also salary received by a partner of the firm as a 'business receipt' unlike different treatments given to similar receipts in the hands of entities other than partners.

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed

IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.

Facts:

a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 taxmann.com 215 (Mumbai - Trib.)

‘Javed Akhtar’ got 50% deduction for getting his Society’s lift replaced benefitting his professional work

Where assessee had incurred expenditure on replacement of new lift to remove hardship and inconvenience in his professional work as well as family life, 50 per cent of total expenditure which was considered to be for professional purpose was allowed as revenue expenditure.

Facts:

a)The assessee, a lyricist, did his professional work from two premises occupied by him in a building for professional and residential purposes. Assessee offered replacement of old lift with new one on the condition that lift would belong to society and would be used by all members. Assessee claimed expenditure on installation of lift as an allowable expenditure under section 37(1).

b)The Assessing Officer did not accept the claim of the assessee. On appeal, the CIT(A) was of the view that the installation of lift was a capital expenditure. Since the lift was installed both for personal and professional purposes, the CIT(A) held that 50% of expenditure was of capital nature and depreciable.

On appeal, the Tribunal held as under:

1)It was apparent from the facts that the assessee had incurred expenses for replacement of the lift due to compelling circumstances as he was facing inconvenience and hardship on his professional front as well as in his private life due to frequent break down of the old lift in the building.

2)Thus, it was clear that the advantage of the new lift was not restricted exclusively to the professional activity of the assessee but assessee as well as his family members also enjoyed such facility.

3)Though other residents of the buildings were also using the lift, yet, for considering the allowability of expenditure the use of lift by other residents in the building was not relevant. The assessee had incurred the expenditure keeping in view his professional and family requirements.

4)For allowing the expenditure under section 37, the mandatory condition is that the expenditure has to be laid out wholly and exclusively for the purpose of business or profession, however, it should not be on the capital field.

5)Since the assessee did not acquire any advantage on the capital account or any new asset for its professional purpose and the lift was not an apparatus for generating the professional income, it could not be considered as an expenditure of capital nature.

6)The assessee had incurred expenditure in the compelling circumstances for removing the inconvenience and hardship faced by him in his professional work as well as non-professional life. The said expenditure had been incurred so that professional activity of assessee would be carried out more efficiently and profitably.

7)Thus, 50% of the total expenditure was to be considered to be for the professional purposes and was to be allowed as revenue expenditure. – JAVED AKHTAR V. ACIT [2014] 46 taxmann.com 395 (Mumbai - Trib.)