Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

The assessee, a partner in the firm, derived income by way of remuneration and interest from the firm in addition to the share of profits in the firm which was exempt u/s.10(2A). Apart from the income from the firm, the assessee also had income under the head house property, capital gains, interest income and dividend income. The assessee had suo motu disallowed 1/10th of depreciation allowance of motor car. The Assessing Officer (AO) disallowed expenditure u/s.14A. Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the share of profits from the firm is exempt u/s.10(2A), expenditure was required to be disallowed u/s.14A. Since the assessee derived 76% of professional income as share from firm and balance 24% by way of remuneration and interest income, the CIT(A) allocated the expenses to income not includible in total income u/s.10(2A). Thus, business income by way of remuneration and interest from firm was taxed in the hands of the assessee u/s.28(v) after allowing 24% of the expenditure. 76% of the expenditure was disallowed. Aggrieved, the assessee preferred an appeal to the Tribunal.

 Held:

A firm is not a separate entity under the general law, whereas under the Income-tax Act, it is a separate entity distinct from its partners. Remuneration and interest on capital of partners is allowed as a deduction to the firm and the same are taxable in the hands of the partners u/s.28(v), whereas the profits of the firm, after deducting remuneration to partners and interest on capital of partners, are taxed in the hands of the firm. The partners do not pay tax on the share of profits from the firm since the same are exempt u/s.10(2A). Section 10(2A) provides that the share of partner shall not be included in his total income, hence it is not possible to hold that share of profit is not excluded from the total income of the partner because the firm has already been taxed thereon. Since share of profits are excluded from the total income of the partner, section 14A would apply and any expenditure incurred to earn the share of profits needs to be disallowed. In the case of Hoshang D. Nanavati v. ACIT, (ITA No. 3567/Mum./2007 for A.Y. 2003-04, order dated 18-3- 2011), while considering the question as to whether depreciation is an expenditure or not, it has been held that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. A statutory allowance u/s.32 is not an expenditure. Being in agreement with the decision of the DB in the case of Hoshang Nanavati (supra), the SB held that depreciation cannot be disallowed u/s.14A.