In a recent tax dispute, the issue of deductibility of car expenses by a partner was brought to light. The assessee in question was a partner in five different firms and received a share of profit, remuneration, and interest from each. The partner had claimed a deduction for the interest paid on their car loan against the income received from the firms.
However, the Assessing Officer disallowed the interest expense deduction on the grounds that it was purely personal in nature and not related to any business activity. The Assessing Officer argued that the partner was not carrying out any business activity on their own and that the amount of share of profit was not chargeable to tax in the hands of the assessee.
Despite this, the remaining amounts of interest and remuneration received by the partner were chargeable to tax under the head of Business and profession, which had been duly disclosed by the assessee in their return of income. The partner argued that the interest on the car loan should not be denied for the purpose of deduction.
The Income Tax Appellate Tribunal (ITAT) in Ahmedabad ultimately ruled in favor of the assessee. The ITAT held that the interest on the car loan was indeed deductible against the interest and remuneration income received from the firms, as the income was chargeable to tax under the head of Business and profession.
The ITAT reasoned that the interest expense was incurred wholly and exclusively for the purpose of earning the income from the firms, as the partner needed the car to commute to and from the business premises. The ITAT also noted that the deduction claimed was not in relation to any personal use of the car, but rather for the purpose of conducting business activities.
The decision in this case is important as it highlights the importance of understanding the nature of expenses incurred by partners and the relevance of such expenses to the income earned by the firm. The ITAT’s ruling affirms the principle that expenses incurred by partners can be deductible against income received from the firm, as long as the expenses are wholly and exclusively incurred for the purpose of earning such income.
Overall, this case serves as a reminder for taxpayers and tax professionals to be diligent in their tax planning and to seek professional advice in order to ensure that all deductions claimed are valid and in line with the relevant tax laws and regulations. By doing so, taxpayers can avoid potential disputes with tax authorities and ensure that they are maximizing their deductions in a legitimate and legal manner.
[Mayank Ratibhai Patel v. ITO (2023) 146 taxmann.com 470 (ITAT Ahmedabad)]