Court dismisses partner's petitions, allows firm's petitions. Expenses disallowed by the Commissioner set aside.

The Court dismissed the partner's petitions and allowed the firm's petitions. The Commissioner's orders disallowing expenses were set aside. It was held that if expenses were incurred wholly and exclusively for the firm's business, they should be allowed in the firm's hands. The case was remanded to the Commissioner for a fresh order within four months.

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Issues Involved:
1. Disallowance of expenses claimed by a partner under Section 14A of the Income Tax Act.
2. Whether the expenses claimed by the partner can be allowed in the hands of the partnership firm.
3. The validity of the Commissioner’s objections to the firm’s claim for expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Claimed by a Partner:
The petitioner, a partner of M/s. Hitech Analytical Services, claimed expenses of Rs. 10.70 lacs for the assessment year 2012-13. The Assessing Officer (AO) disallowed these expenses under Section 14A of the Income Tax Act, stating that the partner’s share of profit from the firm was exempt from tax, and thus the expenses were for earning exempt income. The petitioner’s response to the show-cause notice and subsequent communication did not change the AO’s decision, leading to the disallowance of the expenses in the assessment order dated 13.01.2015.

2. Whether the Expenses Claimed by the Partner Can Be Allowed in the Hands of the Partnership Firm:
The firm, whose assessment was pending, filed a revised computation of income on 27.02.2015, claiming the same expenses of Rs. 10.38 lacs. The AO completed the firm’s assessment on 26.03.2015 without addressing this claim. Both the partner and the firm filed revision petitions under Section 264, arguing that the expenses should be allowed either in the partner’s hands or the firm’s. The Commissioner rejected both claims, stating that the expenses were related to earning exempt income for the partner, and for the firm, the claim was invalid due to non-filing of a revised return, lack of evidence, and inconsistency with accounting principles.

3. The Validity of the Commissioner’s Objections to the Firm’s Claim for Expenses:
The Court found no error in the Commissioner’s view regarding the partner’s claim. However, it disagreed with the rejection of the firm’s claim based on the following points:
- Non-filing of Revised Return: The Court held that the non-filing of a revised return should not have been a ground for rejection. The Commissioner had the power to examine the issue and conduct further inquiries if necessary.
- Lack of Evidence: The Court noted that the claim was not verified by the AO of either the partner or the firm. The Commissioner could have called for a remand report or referred the issue back to the AO for verification.
- Accounting Principles: The Court emphasized that taxability depends on the nature of the receipt and legal principles, not merely on accounting entries. The Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd vs. Commissioner of Income Tax stated that income tax is attracted when income is earned.

Conclusion:
The Court dismissed the petitions of the partner (Special Civil Application Nos. 12765 of 2017 and 12768 of 2017) and allowed the petitions of the firm (Special Civil Application Nos. 12764 of 2017 and 12766 of 2017). The Commissioner’s orders under Section 264 were set aside, and it was held that the expenses, if found to be wholly and exclusively incurred for the business of the firm, should be allowed in the firm’s hands. The proceedings were remanded to the Commissioner for a fresh order, with a preference for completion within four months.

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