Business Expenses Incurred Wholly for Proprietorship and Partnership Activities cannot be Denied on Mere Presumption: ITAT deletes Addition u/s 37(1) [Read Order]
The Tribunal observed that the AO and CIT(A) incorrectly assumed the assessee was a working partner in only one firm, while he was actively involved in two firms and ran a proprietorship business
The Ahmedabad bench of Income Tax AppellateTribunal (ITAT), Ahmedabad, held that business expenses incurred wholly for proprietorship and partnership activities cannot be denied on a mere presumption and consequently deleted Rs 9.99 lakh addition under section 37(1) as the disallowance made by the AO was a proportionate disallowance on the assumption that the assessee was a working partner in only one firm.
The assessee, Bharatbhai Dahyabhai Patel, a civil contractor and investor in land and buildings, is a partner in thirteen firms engaged in construction and land trading.
Out of these, he actively participated in two firms while remaining a non-working partner in the others. In addition, he maintained his sole proprietorship, M/s. Almitee Construction, which was engaged in civil contracting activities.
For the year under consideration, the assessee declared a total income of ₹26,76,660 and claimed business expenses amounting to ₹10,83,194. These expenses were claimed against income from his proprietorship and the two firms where he was actively involved.
The case was selected under CASS for verification of alleged excess expenses claimed against remuneration. AO observed that the expenses pertained to multiple firms and disallowed a proportionate amount of ₹9,99,872, reasoning that only a part of the expenses could be claimed against remuneration from a single firm.
Aggrieved, the assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], contending that the expenses were incurred wholly and exclusively for earning income from the two firms where he was a working partner and his proprietorship business.
He argued that the AO’s assumption of involvement in only one firm was incorrect and that the disallowance was therefore unjustified.
Despite submissions and evidence, CIT(A) upheld the AO’s disallowance, relying on the principle that common expenses cannot be allowed against specific incomes.
The assessee then approached the ITAT. Upon consideration, the Tribunal noted that the AO and CIT(A) erred in assuming that the assessee was a working partner in only one firm.
The assessee had demonstrated that he actively worked in two partnership firms while also managing his proprietorship. No evidence was produced to show that the expenditure claimed was unrelated to the business operations of the assessee.
Relying on Section 37(1) of the Income Tax Act, 1961, which permits deduction of expenses wholly and exclusively incurred for business purposes, the Tribunal held that the proportionate disallowance was not justified.
The expenses of ₹10,83,194/- were wholly connected to the income earned from the two working partnership firms and the proprietorship business. Accordingly, the addition of ₹9,99,872/- was deleted, and the assessee’s appeal was allowed.
The two-member bench comprising Suchitra Kamble (Judicial Member) and Vice-President Dr. B.R.R. Kumar ( Vice President) emphasised that statutory provisions allowing genuine business deductions cannot be overridden by erroneous assumptions regarding the assessee’s role in multiple firms.
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