Revision Under Section 264– Firm’s Expenses Claimed in Individual Return

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17 Jun 2019

Assesse claimed expenses incurred on audit fees, car loan interest, depreciation, petrol expenses and travelling expenses in her individual return. AO disallowed the expenses on the ground that assesse share of the profit of the firm was exempt from payment of tax and thus, the expenditure claimed was for the purpose of earning exempt income and therefore, not allowable under section 14A.

The assessment of firm was pending. Assesse submitted revised computation of firm and her individual return and claimed all the expenses in firm. However, AO ignored that computation and made assessment without taking into account those expenses.

Assesse filed revision petition before CIT. CIT disposed of revision petitions in case of the partner, it confirmed the view of AO that the expenditure was in relation to earning exempt income and therefore, not allowable deduction. In case of the firm, the Commissioner was of the opinion that the expenditure cannot be allowed since assesse firm had not revised the return and merely presented the revision of statement and there was no evidence to establish that the expenditure was incurred by the partner wholly for earning the business.

There was nothing in section 264 that places any restriction on the Commissioner’s provisional power to give relief to the assesse in a case where the assesse detects mistakes after the assessment was completed because of which he was over-assessed.

It was always open for him to call for a remand report or place the issue back before AO for passing an appropriate order. The Act proceeds on the fundamental principle of taxing real income. The accounts cannot change taxability or non-taxability of a certain receipt, which depends on the nature of the receipt and the legal principles applicable. Therefore, to verify this aspect, the proceedings were placed before the Commissioner who shall pass a fresh order on the revision petitions of the firm.