By TIOL News Service

ALLAHABAD, FEB 15, 2018: THE ISSUE BEFORE THE BENCH is - Whether partners of firm can claim deduction u/s 36(1)(iii) r.w sec 14A, in respect of shares received in the name of partnership itself which did not form any part of capital account of the firm. NO is the verdict.

Facts of the case:

The Assessee-firm, engaged in the business of sale and purchase of Bajaj two Wheelers, Five Wheelers/Motorcycle, had filed its return for the relevant AY. Consequently, the case was selected for scrutiny and notice u/s 143(2) was issued by the AO raising certain queries with regard to the source of investment in the capital account of the partners, which was finally processed u/s 143(3) on an income of Rs.91,210/- in the status of the firm. Subsequent to the same, a notice u/s 263 was issued by the CIT claiming that the assessment order was erroneous and prejudicial to the interest of Revenue. It was stated that certain benefits were sought by the Assessee u/s 14A towards some shares which were issued in their favour individually as member of the firm and had not been issued to the firm itself.

When the matter reached before the Tribunal, a difference of opinion arose between the Judicial and the Accountant Member, as the Judicial Member set aside the order of CIT and restored the assessment order, whereas the Accountant Member did not concurred with such decision. Accordingly, the matter was referred to the third member of the Tribunal, who passed an order agreeing with the view taken by the Accountant Member.

the High Court held that,

++ it is noted that the Assessee was not trading in shares. Its business was of a different nature consisting of sale of motorcycle and its parts. It is admitted that the amount which was received as capital assets in the shape of shares, were in the name of the partnership himself and did not form any part of the capital account of the firm and, therefore, the claim made by the firm u/s 36(1)(iii) r.w. sec 14A is not allowable in favour of the partners, as such deduction can only be granted to a firm;

++ this Court also expresses its concurrence with the opinion of the Third member, that since the Assessee has failed to establish that capital assets which were received were part of the firm's capital account. Therefore, the deduction which had been allowed to them under that head could not have been allowed. Insofar as the other aspects are concerned, the Tribunal has recorded that the Assessee is a firm and is also assessed as a firm.

(See 2018-TIOL-276-HC-ALL-IT)