Whether when salary of assessee, an MLA, falls under head 'income from other sources' and is exempt u/s 10(14), any deduction can be claimed for expenditure under Sec 57 - NO: ITAT

 THE issues before the Tribunal are - Whether when the salary of the assessee, an MLA, falls under the head 'income from other sources' and is exempt u/s 10(14), any deduction can be claimed for the expenditure under Sec 57; Whether all sorts of allowances received by the assessee can be claimed as exempted u/s 10(14) read with Rule 2BB(i); Whether Sec 57 provides for any deduction of expenditure from salary income of an MLA and whether when the assessee makes gifts to his son but fails to prove the source, the same is to be added as unexplained cash credit. And the ruling goes against the assessee.

Facts of the case

Assessee is an individual. He filed his ROI for Assessment Year 2007- 08, declaring income of Rs. 1,28,330 on 9.3.2009. The return was processed and the case was taken up for scrutiny by issue of notice under section 143(2) and 142(1). The AO noted that during the relevant period, the assessee was an MLA drawing pension, salary and other allowances from the Govt. of Karnataka. The assessee had claimed exemption of expenses to the extent of Rs 4,37,881. The Assessing Officer after examination of the assessee’s claims and income tax provisions, allowed the exemption amounting to Rs 1,61,400, but also disallowed the balance amount. Besides this, a gift of Rs. 15 lakhs allegedly made by the assessee to his son Sri

B.N.Vijay Kumar was treated as an unexplained cash credits under section 68 of the Act and brought to tax in his hands. The AO accordingly completed the assessment by an order under section 143(3) of the Act on 26.12.2009 determining the total income of the assessee at Rs. 19,04,811. Against the order of the AO, the assessee filed an appeal and the CIT(A) dismissed the assessee’s appeals on both issues of dispute (i) being the claim for exemption of expenditure under section 10(14) and 10(17) and exemption under section 57 of the Act and (ii) unexplained gift of Rs. 15 lakhs by order dt.27.12.2010.

On appeal, the counsel for the assessee submitted before the Tribunal that the assessee being an MLA during the relevant period, the salary and other allowances received in such status was to be taxed under the head ‘Income from other sources.’ On this issue department also admitted that, there was no dispute with regard to the fact that ‘salary’ and other allowances received by an MLA, arising out of such position, were to be assessed to tax under the head ‘Income from other sources’ as held in the case of CIT Vs. Shiv Charan Mathur (2008-TIOL-521-HC-RAJ-IT).

The assessee's counsel also submitted that, apart form being allowed exemption under section 10(14) and 10(17) of the Act, the assessee should be allowed deduction under section 57 of the Act also. In support of his claim assessee relied upon the decision of the Indore Bench of the Tribunal in the case of Jaswant Singh Vs. ITO.

The Departmental representative pointed out that the CIT(A) had noted that conveyance allowance and clerical allowance, were admissible exemption subject to documentary proof being filed for grant of such allowances and expenses thereof. It was also contended that the assessee’s claim for deduction of expenditure under section 57 was incorrect and he was not eligible for deduction under section 57(iii) as claimed by him. DR further pointed out that the finding in the case of Jaswant Singh was covered against the assessee, as the Tribunal in that case upheld the finding of the CIT(A) that the provisions of section 57 of the Act did not provide for deduction from the salary income and other allowances of an MLA received by him in such office even though that income was to be assessed not under the head ‘salaries’ but as ‘Income from other sources.’

Having heard the assessee, the Tribunal held that,

++ the Legislature has been quite conscious about the allowances granted to the MLAs or the MPs and time to time they are bringing enactments to grant exemption of particular type of allowances from the total income of the MLAs or MPs. Had it been a case that for all allowances section 10(14) can be invoked subject to proof of the expenditure to be incurred in respect of that purpose to which the allowances are given, there would be no need to make a necessary amendment time to time in section 10(17). We are, therefore, of the view that while dealing with the issue of special allowances granted to the MLAs or MPs has to be keept in mind both the provisions of sections 10(17) and 10(14) of the Act and only those allowances are to be exempted from the total income of the assesses which are specified in these sections or rule 2BB of IT Rules. Under section 10(17), the Legislature has prescribed a particular limit up to which the allowances are to be exempted from the total income of the assessees but section 10(14) is to be read with rule 2BB of the IT Rules and only those allowances are to be allowed to be exempted from the total income which are specifically mentioned in rule 2BB subject to proof of its being spent for the purpose to which it is received or granted. In light of the above, the CIT(A) order is set aside and the matter is restored to the file of Assessing Officer with a direction to re-examine the issue and grant an exemption of the conveyance allowance and the clerical allowance after making necessary verification of the expenditure incurred for the said purpose. Rest of the allowances i.e. telephone allowance, consultancy allowance and contingency allowance do not fall either in the purview of section 10(14) or 10(17) and they cannot be allowed to be exempted from the total income of the assessees. So far as medical allowances are concerned, the Assessing Officer should verify the nature of these allowances. If it is a reimbursement of the medical expenses incurred by the MLA, it may be allowed in the light of the judgment of the Rajasthan High Court in the case of Shiv Charan Mathur. Otherwise, no exemption can be allowed as it does not fall either in the purview of section 10(14) or 10(17) of the Income Tax Act;

++ section 57 of the Act does not provide for any deduction of various items of expenditure claimed by him under section 57(iii) of the Act from out of the salary and other allowances received by him in his status as an MLA since such income is assessable to tax under section 56 as ‘income from other sources’. It was further held that as per the provisions of the Income Tax Act, 1961, there is no provision for any deduction under section 57 from the fixed salary and allowances received by the assessee by virtue of his election to the State legislative and the assessee could not have been allowed his estimated claim too. It should be noted that the provisions of section 57 of the Act do not provide for any deduction of expenditure from such salary income, etc of an MLA. Only those exemptions as laid out as per the provisions of section 10(14) read with Rule 2BB(1) and section 10(17) of the Act are allowable from an MLA’s salary and other allowances granted in such capacity as held in the case of M. Venkata Subbaiah (supra). Applying the same ratio to the instant case, we uphold the learned CIT(A)’s action in rejecting the assessee’s claim for allowing deduction of expenditure under section 57 of the Act;

++ during the assessment proceedings before AO, the assessee had given a gift of Rs 15 lakhs to his son Sri B. N. Vijay Kumar as reflected in the son’s capital account in his proprietorship concern M/s. Sri Siddarameswara Traders. Assessee when questioned about the source of Rs. 15 lakhs gifted to his son, merely furnished an explanation in letter dt.17.12.2009 without any corroborative evidence or documentary proof to substantiate the claim and therefore the Assessing Officer, finding that two cash deposits of Rs. 8 lakhs and Rs. 7 lakhs in the assessee’s Canara Bank account on 17.7.2006 preceded the gift of Rs. 15 lakhs given on the same day, held that the source of the gifts was unexplained and brought these cash credits to tax in his hands as unexplained cash deposits under section 68 of the Act. Before the CIT(A) too the assessee put forward similar explanations in an attempt to explain the source of the gifted amount of Rs. 15 lakhs, but failed to furnish and corroborative documentary evidence.The AR who specifically asked by this bench to produce a copy of the sanction order of the loan of Rs. 15 lakhs from Canara Bank and inspite of being given an opportunity failed to produce the sanction order for the said loan of Rs. 15 lakhs. No evidence was also filed in respect of the gift being made out of withdrawals from firm or HUF as claimed. In this view of the matter, we decide to uphold the finding of the authorities below that the source of the alleged gift of Rs. 15 lakhs is unexplained and their action in bringing the unexplained cash credit amounting to Rs. 15 lakhs to tax in the assessee’s hands under section 68 as income from other sources