Calcutta High Court
Lovelock And Lewes vs Commissioner Of Income-Tax on 7 May, 1993
Equivalent citations: [1994]208ITR95(CAL)
JUDGMENT Shyamal Kumar Sen, J.
1. Pursuant to the direction of this court under Section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the following questions :
For the assessment year 1977-78 :
"Whether, on the facts and in the circumstances of the case and on a true interpretation of the provisions of sections 30, 37 and 36 of the Income-tax Act, 1961, the Tribunal was justified in holding that a part of the rent which was paid by the assessee-firm in respect of the flats occupied by its partners, posted in Delhi and in Bombay branches during the relevant previous year, was rightly disallowed by the Income-tax Officer ?"
For the assessment years 1978-79 to 1983-84 :
"Whether, on the facts and in the circumstances of the case and on a true interpretation of the provisions of sections 30, 37 and 38 of the Income-tax Act, 1961, the Tribunal was justified in holding that a part of the rent which was paid by the assessee-firm in respect of the flat occupied by its partner, posted in Bombay branch during the relevant previous year, was rightly disallowed by the Inspecting Assistant Commissioner, Special Range-V ?"
2. The facts, inter alia, as appears from the statement of case are that the assessee is a registered firm and derives income from profession as chartered accountants. The dispute is about the disallowance of a portion of the rent paid for the flats in Bombay and Delhi. The assessee-firm had its branches at Delhi and Bombay, etc. In October, 1971, the assessee took a flat and a garage in a building known as ANITA from Mrs. Harkirat Anand in Bombay. On the basis of the said agreement, the flat and garage were taken firstly for three years. The rent for the flat was fixed at Rs. 1,650 per month. One of the partners of the firm, Shri D. C. Rajan, who was in charge of the Bombay branch, was residing in the said flat. The Bombay branch has its own office. Sri Rajan was paying a rent of Rs. 660 per month. However, it was claimed that Shri Rajan was discharging his official duties even from his residence and, therefore, the rent paid for the flat and garage of ANITA building should be allowed as business expenses. The Income-tax Officer/Inspecting Assistant Commissioner did not accept the claim of the assessee in respect of the rent of the flat. However, he was convinced that the garage was used for the car of the assessee-firm. Accordingly, he after deducting the rent paid by Shri Rajan and accepting that the rent of garage was paid for the assessee's business disallowed a sum of Rs. 11,880 out of the rent paid for the flat in ANITA building during the years under appeal.
3. Similarly, a disallowance of Rs. 6,920 was made in respect of the Delhi flat. The assessee was having a branch office in Delhi and was also having a flat which was occupied by Shri S. Bhattacharya, a partner of the assessee-firm. Shri Bhattacharya was contributing Rs. 400 per month for the said flat. The assessee claimed such amount as rent paid for the business. The flat was under the occupation of the assessee for nearly 10 months. The Assessing Officer for the reasons indicated above did not accept the claim of the assessee and disallowed Rs. 6,920 for the assessment year 1977-78.
4. The assessee being aggrieved came up in appeal before the Commissioner of Income-tax (Appeals) and contended that the partners were working from the residence and, therefore, the rent paid by the assessee should be allowed as business expenses. It was also contended that the rent disallowed by the Assessing Officer should not have been allocated under Section 67(1)(a) of the Act. The Commissioner of Income-tax (Appeals) did not accept any of the arguments of the assessee and consequently the disallowances were confirmed.
5. The assessee further being aggrieved came up in appeal before the Tribunal and filed before it a copy of the Bombay leasehold and a page indicating the key facts and an explanation for condonation of delay in filing the appeal for the assessment year 1982-83.
6. The Tribunal confirmed the disallowance and rejected the contention of the assessee. Being aggrieved against the said order of the Tribunal, the assessee has moved this court under Section 256(2) of the Income-tax Act.
7. Dr. Pal, learned advocate for the assessee, submitted that the partnership firm has its offices in Bombay and in Delhi. It has been submitted by him that the partner who was in charge of the affairs in Bombay or in Delhi has to reside in the said city for the discharge of the duties as a partner of the firm which is a professional accountants' firm and the rent is paid by the firm itself to the landlord for taking out the tenancy of the flat. He has further contended that when a company or a firm incurs expenditure for taking out a tenancy of a flat for the residence of its employee, the expenditure incurred is undoubtedly allowable as a business expenditure, because the expenditure is for the purposes of the business carried on by the assessee. On the same reasoning, when a firm has to take out the tenancy of a flat for providing residence to its partner, the expenditure is undoubtedly for the purposes of the business and the rent which is paid by the firm will squarely come under Section 30 of the Income-tax Act and such rent is to be allowed as a permissible deduction because the rent is paid by the firm itself and not by the partner for the purposes of the business of the firm. However, according to him, such rent paid by the firm will be subject to the limitation provided under Section 40(b) of the Act. Section 40(b) of the Act provides that notwithstanding anything to the contrary contained in Sections 30 to 39, in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm will not be allowed.
8. Dr. Pal, in the course of arguments, referred to Section 40(b) of the Act. It is correct that disallowance of rent payable by the assessee-firm for the flats used for residence of partners cannot be made under this section. The section restricts the deduction of interest, salary, bonus, commission or remuneration paid to any partner by the firm. The payment of rent, therefore, does not come under the section which could be disallowed. Under the said circumstances, the argument of Dr. Pal that disallowance of the said sum should not have been made under Section 40(b) of the Act is correct. However, the disallowance made by the Assessing Officer has been confirmed with reference to Sections 30 and 38 of the Act. Consequently, the disallowance made by the Assessing Officer for the years under appeal is confirmed. The delay in the facts and circumstances of the case was not found to be correct.
9. Dr. Pal also relied upon the judgment and decision in the case of Bist and Sons v. CIT .
10. In the aforesaid decision, a Hindu undivided family consisting of a father and his son carried on the business and the family availed of all the depreciation allowance thereon and their written down value had come to nil. There was a total disruption in the family and the father and son formed a firm and took over the business as a running concern. The firm thereafter sold the three trucks for an aggregate sum of Rs. 24,252 and the question was whether the sum could be brought to tax in the hands of the firm as a deemed profit under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. The Supreme Court held that the Hindu undivided family and the firm were distinct entities and the depreciation allowed to the family could not be regarded as depreciation allowed to the firm even though the father and the son constituted the partnership firm. The Supreme Court, therefore, held that the second proviso to Section 10(2)(vii) was not attracted and the sum of Rs. 24,252 was not taxable in the hands of the firm as deemed profit under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922.
11. It has also been submitted that the assessee had to pay the rent to get the services of any accountant partner who is placed either in Delhi or in Bombay. If the assessee does not incur the expenditure of paying rent, no partner would agree to stay in Delhi or in Bombay since he is not provided with residential accommodation.
12. It has also been submitted that in order, therefore, to facilitate the carrying on of the business of the firm and to secure the services of efficient partners, the firm has to incur such expenditure for providing residential accommodation to its partners who are placed in cities like Delhi or Bombay. The expenditure, therefore, according to the learned advocate for the assessee, is incurred wholly and/or exclusively for the purpose of the business of the firm.
13. It was, therefore, submitted that the expenditure incurred for payment of rent by the firm to the landlord on the facts and circumstances of the case is allowable either under Section 30(a)(i) or under Section 37 of the Act.
14. The said finding of the Tribunal that the said flats are mainly used for the residence of the partners and not for the purpose of profession of the assessee is a finding of fact which has not been challenged.
15. We have considered the facts on record and the submissions made by the parties.
16. It is on record that the assessee, Messrs. Lovelock and Lewes, is a registered firm and derives income from profession as chartered accountants. The assessee-firm had its branches in Delhi, Bombay, etc. In October, 1971, the assessee-firm took a flat and garage in a building known as "ANITA" from Mrs. Harkirat Anand in Bombay. On the basis of the agreement the flat and garage were taken firstly for three years. The rent for the flat was fixed at Rs. 1,650 per month. One of the partners of the firm, Shri D. G. Rajan, who was in charge of the Bombay branch, was residing in the said flat. The Bombay branch has its own office. Sri Rajan was paying a rent of Rs. 660 per month. However, it was claimed by Shri Rajan that he was discharging his official duties even from his residence and, therefore, the rent paid for the flat and garage of "ANITA" building should be allowed as business expenditure.
17. The Tribunal in its finding noted, inter alia, as follows :
"The assessee is a firm deriving income from profession. Therefore, the income of the assessee is to be computed under the head 'Business' within the meaning of Sections 28 to 43 of the Act. Section 30 deals with the allowance of rent, etc. It has been indicated in Section 30 that deduction for rent, etc., shall be allowed provided the premises are used for the purpose of the business or profession of the assessee. Therefore, the first condition for allowance of the rent is that the premises for which the rent is paid for the purpose of the profession or business must be used for profession or business. The assessee was having its branch offices at Bombay and Delhi. The rent payable for the branch offices are not in dispute. The dispute is with respect to the flats which were taken by the assessee and were being used by the assessee's partner for their residence. The partners were contributing a small part of the rent payable for the flat whereas the balance of the rent was being borne by the assessee-firm. The flats were being used by the partners for their residence. It may be that occasionally they used to discharge professional obligations from the flats. But, primarily, the flats were used for the residence of the partners and not for the purpose of 'profession' of the assessee. Further, Section 38(1) of the Act restricts the allowance of rent proportionately. The fact is that the flats in question were used by the partners for their residence and, therefore, while computing the income of the assessee-firm from profession the rent paid for the flats cannot be allowed as a deduction. The action of the Assessing Officer is, therefore, justified."
18. The contention of the learned advocate for the assessee that the partners might not have agreed to stay in Delhi or Bombay, is a question of fact which can only be determined on the basis of evidence and, as such, we are unable to accept the contention of learned counsel for the assessee on that point since no such point has, in fact, been decided by the Tribunal.
19. The decision of the Supreme Court relied upon by Dr. Pal is not the answer to the fact situation before us. There, the Supreme Court decided an issue arising from altogether different circumstances. There is no identity between a Hindu undivided family and a firm consisting of the members of the self-same Hindu undivided family after its disruption. They are distinct and separate entities. Therefore, the Supreme Court decided that the written down value of the property in the hands of the disrupted Hindu undivided family cannot be imposed upon the firm which the members of disrupted Hindu undivided family elected to constitute for continuing the business in partnership. But, in the present case, the cardinal fact is that there is complete identity between the partnership and its partners. The partnership as such is not a person except for the limited purpose of taxation. The partnership is the compendious name for the partners who constitute it. Therefore, when the firm pays to the partners it pays to itself. Likewise, when the firm extends to the partners a benefit, the benefit avails to the firm itself. That is also the underlying rationale of Section 40(b) of the Income-tax Act, 1961, which gives the mandate that where the firm pays to the partners any salary, commission, remuneration or interest, the said payments should be treated as part of the profits of the partnership firm and should be added to its profits where such payments are debited to the profit and loss account. Here is a situation where the firm extends to the partners the benefit of free residence or concessional residence at the place or places where they conduct business of the firm. True, while they conduct the firm's business in outstation places they render services to the firm, but the services are rendered to no different entity, it is self-service. It is not a case of provision of free or concessional residential, accommodation to an employee because there is no employment relation between the firm and the partner or partners. Partners are all self-employed. So even where the partner carries on the business on behalf of the firm at other cities, the services that are rendered by him are rendered to himself. This necessarily takes us to an analogy. A similar fact situation can be said to appear where a person of origin in Calcutta goes to an outlying place to carry on the business it cannot be open to him to say that the cost of his residence for carrying on the business at such outstation must be treated as the cost of the business carried on.
20. The acceptance of the contentions urged on behalf of the assessee would also create an anomaly. It would on the one hand amount to equating a partner with a business manager in the employ of the firm. The ultimate result, on the other hand, if he were indeed an employee, he would have been chargeable to tax in respect of the value of the benefit of free or conces ional residential accommodation. But, as a partner there is nothing in law as could make the same benefit availed of by him, exigible to tax. Over and above, the divisible profit of the firm equivalent to the extent of the value of the benefit would get reduced, the expenditure being a charge on such profit.
21. Considering the facts and circumstances of the case, we are of the view that the Tribunal was justified in holding that a part of the rent which was paid by the assessee-firm in respect of the flats occupied by its partners, posted in the Delhi and in Bombay branches during the relevant previous year, was rightly disallowed by the Income-tax Officer.
22. Accordingly, both the questions are answered in the affirmative and in favour of the Revenue.
23. There will be no order as to costs.
Ajit K. Sengupta.
24. I agree.