Jaswant Lal Kuthiala vs Income-Tax Officer.
1984 Latest Caselaw 102 Del

ORDER

Per Shri U. S. Dhusia, Judicial Member - The only issue raised in this appeal, filed by the assessed, is regarding his claim for expenditure of Rs. 12,543, incurred by the assessed during the accounting year, relevant to the assessment year 1977-78.

2. The assessed had made a gross expenditure of Rs. 13,130 under different heads, as reproduced below :

Rs.

Rs.

1.

Salaries

3,446

2.

traveling

1,578

3.

Repairs

4.

Bank charges

5.

Trade subscription

1,075

6.

Postage

7.

Stationery and printing

8.

Legal charges

9.

General charges

10.

Depreciation

5,850

The assessed, who returned an income of Rs. 1,00,240, derived income from dividend of shares, interest on securities, income from property and interest and shares from various firms. According to the assessed, these expenses were incurred for earning income derived from the aforesaid sources, particularly from business. The ITO turned down his plea for allowing these expenses against the income derived under different heads. He observed : I do not find any section in the Income-tax Act, under which expenses of the nature mentioned by the assessed are allowable. Having failed before the ITO, the assessed went in appeal before the Commissioner (Appeals) and contended that he had incurred the aforesaid expenditure for deriving income under various heads. It was also explained by him that a similar claim for expenses had been allowed in the preceding years. Therefore, the claim for expenses should be allowed in this year also. The Commissioner (Appeals) considered the plea of the assessed but he could not be persuaded to accept the claim of the assessed fully. He allowed the assessed a deduction of Rs. 5,771 only out of his total claim of Rs. 13,130. It is in respect of the claim for the balance amount of Rs. 12,543 that the assessed is in appeal before us.

3. According to the learned counsel for the assessed, these expenses were spent towards earning of income derived under different heads including business. He also pointed out that his similar claim for expenses was allowed for the preceding year. He referred to an order of this Bench in the case of ITO v. Gurcharan Singh [IT Appeal No. 229 of 1982], where a similar claim in respect of the expenses incurred on conveyance was considered as a necessary outgoing incurred by a partner for running the business of the partnership firm in which he was a partner.

4. On a consideration of the facts, it does not appear that we can turn down the plea of the assessed. In our view, the Commissioner (Appeals), who allowed a part of the expenditure, did not notice that the assessed was a joint Hindu family and there were some coparceners who were to be taken into confidence about the earning of the joint family. That would necessarily imply the need of maintaining office for proper accounting of the income receipts and expenditure. The Commissioner (Appeals) also did not notice that the appellant was a partner in several firms which had their business operations in remote sites in forests. As a partner, the assessed was required to incur expenses on conveyance and traveling. We find that the Supreme Court in CIT v. Ramniklal Kothari [1969] 74 ITR 57, was called upon to consider the deductibility of expenditure incurred by a partner on salary and bonus to staff, expenses for maintenance and depreciation of the motor cars and traveling expenses. Their Lordships upheld the claim of the assessed over such expenses and dismissed the plea of the revenue that the assessed could not be allowed the deduction of these expenses as he was not carrying on any independent business himself. Therefore, we are not prepared to hold that where an assessed had returned an income of more than Rs. 1,00,000 derived from different sources including share of profit from partnership firms, his claim for expenditure of Rs. 13,000 or so under specified heads was such that no nexus was to be found between the expenditure and the earning of the income and could not be allowed as a business outgoing. That was not the finding of the ITO in the preceding year and that could not be the finding of the Commissioner (Appeals) also since he had allowed a part of the expenditure. It is only about the remaining part of the expenditure that the Commissioner (Appeals) has found it difficult to accept the claim for want of evidence regarding the work done by the employees for the purpose of earning the income in question. On a careful consideration of facts and pronouncement of the Supreme Court in the aforesaid case, the Commissioner (Appeals) was plainly misdirected insisting upon the evidence of work, done for earning the income. Keeping proper accounts of earning is also a part of the earning of income and if for that purpose an establishment is maintained which requires employment of a chowkidar and a peon, we cannot hold that no nexus has been found between the expenditure and earning of the income. Therefore, in our view, the finding of the Commissioner (Appeals) is not liable to be accepted as the correct finding on the issue. Except for the expenditure of Rs. 1,075 incurred on trade subscription, we do not find that the claim of the assessed can be turned down in respect of the remaining expenditure as an outgoing of business. However, we would further hold that an amount of Rs. 1,000 should be treated as an expenditure incurred on inadmissible items. This would leave Rs. 10,000 incurred by the assessed which, in our view, should be considered as necessary outgoing, incurred for earning income from business.

5. In the result, the appeal is partly allowed.

Per Shri P. K. Mehta, Accountant Member-I would not have perhaps thought of differing from my learned colleague if the issues involved were only a one-time matter and not a recurring one from year to year. The submissions of the assesseds counsel are correctly recorded in para 3 of the Judicial Members order. I have gone through the orders of the ITO and the Commissioner (Appeals) and the Supreme Court authority in Ramniklal Kotharis case (supra). It is seen from the assessment order that the assessed derived income under different heads, namely, house property, interest on securities, other interest, dividend, directors fee and share of income from two firms. As is recorded by the ITO in the assessment order, the assessed had claimed expenses amounting to Rs. 13,130 against receipts of interest from bank and other interest amounting to Rs. 662. It had not in the statement filed claimed the expenditure against share of income from the two firms. The ITO pointedly asked from the assessed under which head it had claimed the expenses amounting to Rs. 13,130 and the reply given was that these expenses were incurred for the various businesses and were necessary to run those businesses and should be allowed as a deduction. It is apparent that the assessed did not bifurcate the expenditure allowable to different heads of income but made its claim on an overall basis against various heads of income. This approach has continued right up to the stage of the Tribunal. From this its follows that the assessed had at no stage even segregated the expenditure which it had incurred for earning the share of income from the two firms, leaving aside allocation of expenditure in respect of other heads of income. It had also not produced any documentary evidence in support of the plea of incurring expenditure rather the bulk of the expenditure against share income. The ITO, no doubt, was not right in law when he said that under the Income-tax Act, 1961 (the Act) there was no section under which expenses of the nature mentioned by the assessed were allowable but he has stated that he went into the nature of items of expenditure claimed by the assessed and noted down the explanation given in the course of discussion with the assessed. From this it follows again that there was no documentary evidence and the assessed made only claims before both the lower authorities.

7. I have gone through the Supreme Court authority, Ramniklal Kotharis case (supra). The question referred to the Supreme Court was a question of the legal aspect of the controversy only and not about the substantiation of the claim of an assessed to have incurred the expenditure for the purpose he was claiming to have incurred it. The question before the Supreme Court was as under :

"Whether the expenses incurred by the assessed (who was not carrying on any independent business of his own), in earning income from various firms in which he was a partner, are allowable in law as deductions ?" (p. 59)

The Supreme Court went into the aspect whether the expenditure was allowable in accordance with the provisions of law. As stated earlier, it had not to go into the question of either the establishment of the expenditure having been incurred for the purposes claimed or the lack of evidence relating thereto. The Bombay High Court has considered the decision of the Supreme Court in Ramniklal Kotharis case (supra) while dealing with a similar situation in the case of Phiroze H. Kudianavala v. CIT [1978] 113 ITR 873. After considering the Supreme Court authority in Ramniklal Kotharis case (supra) and the Patna High Court authority in CIT v. Atma Ram Modi [1969] 71 ITR 199, the Bombay High Court observed as follows :

"... Therefore, if a partner is able to establish in any case that the expenditure claimed by him was incurred as a matter of commercial expediency and for the purpose of earning profits from the partnership business, the partner would be entitled to claim the deduction of the amount under section 10(2) (xv) of the 1922 Act, or, under the general principles in respect of years covered by the 1961 Act ..." (p. 873)

It is clear that the establishment of the fact of incurring the expenditure on ground of commercial expediency and for the purpose of earning profits from the partnership business is a definite requisite. On the facts of this case, we do not find that the assessed has established by any proper evidence that the expenditure on salaries, traveling, repairs, trade subscriptions, depreciation and part of the items not allowed by the Commissioner (Appeals) were incurred for the purpose of earning share of income from the two firms. The order of my colleague seeks to allow the expenditure only against that source. In regard to salary claim, it is indeed difficult how the services of a peon and chowkidar would help in earning the share of income from the two firms. Knowing this difficulty, it was explained before the ITO that they were kept to help in maintaining the private office of the assessed. Where was this private office of the assessed and what work it did is not clarified by the assessed. If the private officer in fact existed, it should have kept some records in relation to the earning of the income from the two firms and this record would have been made available to give the necessary particulars not only in regard to the salary item but other disputed items. The assessed has done nothing of that kind. It is not understood what kind of private office was kept and how it was to relate to the assesseds claim of expenditure on it being for the purpose of earning share of income from the two firms. There was nothing said at the hearing about what is referred to in first three sentences of para 4 of the order of the Judicial Member. In fact, there is no material known to me on which these observations are based about the requirement to take into confidence some coparceners by maintaining an office-for proper accounting of income receipts and expenditure. In fact, no record has been produced at any stage where receipts and expenditure with details showing the nature of these items have been recorded. In fact, if such records were available, most of the problems of the assessed would have been over. Again about traveling, what traveling could be done by spending Rs. 1,578 only to supervise the business operation on remote sites in forest where the business of the two firms was carried on. It is also to be noted that when the car was being maintained, it was used for personal purposes too and in this connection it is relevant to refer to the assessment order of the earlier year where one-third of car expenses was disallowed for personal use. The Judicial Member has also held that expenditure of Rs. 1,075 incurred on trade subscription was not allowable and he also made a further estimate of another Rs. 1,000 for inadmissible expenditure. However, another head where maximum expenditure is claimed is depreciation. A claim for depreciation on typewriter, furnitures, electric fans and motor car, etc., of Rs. 5,850 is made. It is not possible to allow depreciation claim on typewriter, furnitures, electric fans and motor car unless it is brought out by suitable evidence that some work was carried on for the purpose of earning share of income from the two firms. I could not find, despite thinking over this matter for quite sometime, any convincing evidence about the assessed maintaining an office or carrying on any worthwhile activity for the purposes of earning share of income from the two firms. A claim for expenditure made by an assessed is not to be accepted merely on the basis that the assessed has made it or is persisting in making it before the appellate authorities. Even the action of the ITO for the preceding assessment year will not justify allowing of the claim on this year as it is apparent from the order of the ITO for the assessment year 1976-77 that he did not go into the question in any proper manner. The ITO making the assessment under appeal raised the question and went into it.

8. The only question that survives is that when no documentary evidence is forthcoming on any broad probabilities, something can be allowed to the assessed for the assessment year under consideration. The total expenses claimed were Rs. 13,130 out of which the Commissioner (Appeals) has already allowed expenses of Rs. 577. This leaves for consideration balance expenses amounting to Rs. 12,553. Just on broad probabilities like some activity being carried on occasionally for the purpose of earning share of income from the firms, I will consider that an allowance of Rs. 2,400 may be given on estimate basis. The balance amount in my view, is clearly disallowable.

9. I will like to clarify that the assessed can produce suitable evidence in any future year to substantiate its claim and my findings here will not prejudice it in any way. The decision for this year if based on the stand of the assessed before the two lower authorities and the Tribunal.

10. In the result, the appeal gets partly allowed.

THIRD MEMBER ORDER

Per Dr. V. Balasubramanian, Vice President - Section 255(4) of the Act sets out the manner of resolving a point of difference between the two members of the Tribunal, who have differed. While the exact scope of this section is not clear, prima facie, it would appear that the Third Member deciding the issue has to agree with one or the other member so as to give a majority opinion for decision of the issue. The question referred to me in the present case, namely, about the extent of allow ability of expenditure of Rs. 12,543 claimed by the assessed relates to the extent of disallowance of expenditure in the particular case. While the learned Judicial Member has set a figure as Rs. 11,000 as the allowable expenditure and the learned Accountant Member Rs. 2,400, the extent of allowance which I as a Third Member can work out may not necessarily be either of the above two. It would not be proper for the Third Member to be compelled to adopt one of the figures of allowance either. Having regard to the facts in the present case, the parties have agreed that the extent allow ability the Third Member fixes may be treated as corresponding to the higher figure either the differing members have fixed.

2. The assesses-HUF derives income from property, interest on securities, share profits from three firms and dividends. The assessed claimed a sum of Rs. 10,985 by way of expenditure from the above items of income. The assessed was maintaining books of account in which were incorporated the receipts from the various sources as well as the impugned expenditure claimed. These items of expenditure came under the head salaries traveling, repairs, bank charges, postage, etc. Depreciation was also included. The ITO analysed these items of expenditure and held that they were not allowable expenditure against the several items of income returned by the assessed. According to him they were mere personal expenses. The Commissioner (Appeals) allowed a sum of Rs. 577 out of the above claim under the head bank charges, postage, stationery printing, legal charges and general charges. With regard to the balance, the matter came up on appeal before the Tribunal. The learned Judicial Member analysing the items of expenditure held that even holding that a part of the expenditure incurred could be treated as inadmissible, a sum of Rs. 10,000 should be allowed. The learned Accountant Member held that a claim of expenditure can be allowed only after it is proved as necessary for the purpose of earning the income. This, according to him, had not been done in the present case. Even so on broad probabilities like some activity being carried on occasionally for the purpose of earning share of income from the firms he allowed on an estimate expenditure of Rs. 2,400. Hence, the point of difference referred to me was phrased as above.

3. The assesseds counsel as well as the learned counsel for the department were heard. For the assessed, it is pointed out that the incurring of the expenditure itself has not been doubted or questioned by the authorities or the learned members of the Tribunal. He had activities of various types which have to be co-ordinated. An office was maintained for the purpose. Books of account were also maintained. The expenses, therefore, incurred should be allowed. For the department, it is pointed out that even if the expenses were shown to have been incurred and necessary, substantial personal expenditure should have been included for instance, subscription to magazines, motor car expenditure, postage, etc. The entire amount cannot, therefore, be allowed. He has stressed the duty of the assessed to prove with evidence that an item of expenditure was necessary and incurred actually for earning a particular item of income. Apart from the fact that there was no clinching evidence in this regard, the assessed has not even bifurcated the items of expenditure claimed among the various sources of income. Referring to Ramniklal Kotharis case (supra), the learned counsel pointed out that even holding that such expenditure is allowable against income from firm, etc., the actual incurring as well as relevance to the earning of income have not been proved.

4. The Commissioner (Appeals) and both the learned members of the Tribunal have allowed some expenditure out of the overall claim. None of these authorities have also referred to the failure of the assessed to properly allocate any item of expenditure to any particular item of income. Even though the learned Accountant Member has made out his case for disallowing the entire expenditure, he has allowed a part of it. Certain items of expenditure like legal fees allowed by the Commissioner (Appeals) have not been challenged by the department. That the assessed is maintaining books of account and has incurred this expenditure cannot be denied. That there would be some personal expenditure cannot also be denied. The question, therefore, is one of, as the question referred to me clearly indicates, the extent of expenditure to be allowed. Having analysed in detail the items and the heads under which the expenditure is claimed, I would hold that a sum of Rs. 7,000 should be allowed out of the overall claim of Rs. 13,000. Since this merges with the allowance made by the learned Judicial Member, to this extent I agree with him. The matter will not go back to the original Bench for disposal of the appeal.