IT : Mere non-compliance of a notice under section 142(1) having no terms or requirements, cannot be sufficient reason for making assessment under section 144
IT : Where assessee-firm established that amount added under section 68 on account of unsecured loan was current capital introduced by partner in firm, addition could not be made in hands of firm
■■■
[2013] 38 taxmann.com 102 (Agra - Trib.)
IN THE ITAT AGRA BENCH
Bhagwat Prasad Sharma
v.
Joint Commissioner of Income-tax, Range -II, Gwalior*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NOS. 80 & 93 (AGRA) OF 2010
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
JUNE 21, 2013
I. Section 184, read with section 144, of the Income-tax Act, 1961 - Firm - Assessed as such [Provisions w.e.f. 1-4-1993] - Assessment year 2006-07 - Assessee was a firm - Notice was issued under section 142(1) - Assessee made compliance and furnished information required by Assessing Officer - Books of account was also produced - However, case of Assessing Officer was that assessee has failed to comply with all terms of notice issued under sub-section (1) of section 142 - Assessing Officer made assessment under section 144 - He, invoked provisions of section 184(5) and disallowed interest and salary paid to partners - Whether, where revenue had failed to point out that notices issued under section 142(1) was with some queries or terms, merely non-compliance of notice under section 142(1) having no terms or requirements, was not sufficient reason for making assessment under section 144 particularly in case of partnership firm where Assessing Officer wants to invoke section 184(5) and section 185 disallowing interest and remuneration to partners of firm - Held, yes [Para 12] [In favour of assessee]
II. Section 68 of the Income-tax Act, 1961 - Cash credits [In case of firm] - Assessment year 2006-07 - Assessing Officer made addition under section 68 on account of unsecured loan on ground that assessee had failed to prove genuineness of loan and creditworthiness of lender - Submission of assessee was that amount was on account of current capital account; and that title of relevant account as 'loan' was inadvertently used as per prevailing practice but in fact it was a current capital account of partner in books of firm - It was further submitted that since assessee had furnished confirmation, identity and other records to establish that in fact amount was given to firm by partner as a current capital, addition could not be made in hands of firm - Whether since current capital introduced by partner in firm was established, addition could not be made in hands of firm - Held, yes [Para 16] [In favour of assessee]
FACTS-I
| ■ | The assessee-firm was a contractor executing contracts for various Government departments. | |
| ■ | The Assessing Officer made best judgment assessment under section 144 on ground that the assessee had failed to comply with the requirements of notice under section 142(1). He accordingly, invoked the provisions of section 184(5) and disallowed interest and salary paid to the partners. | |
| ■ | The Commissioner (Appeals) confirmed the action of the Assessing Officer. | |
| ■ | On appeal: |
HELD-I
| ■ | The Finance Act, 1992 has brought fourth a conceptual change in the scheme of assessment of firms w.e.f. 1-4-1993, the scheme of registration of firms has been done away with and, hence, there would no longer the distinction from the point of view of registered firms and URFs. Either a partnership firm will be assessed as a firm by virtue of section 184 or else, it will be assessed as an AOP on account of section 185. | |
| ■ | A partnership concern assessed as a firm under section 184 is given some tax advantages. The interest paid to any partner computed at a prescribed rate and remuneration paid to working partner would be allowable under section 40(b). If the assessment were to be made in the status of an AOP, such interest or remuneration given to any partner, will not be allowable deduction. Sub-section (5) starts with an non obstante clause and is of overriding nature. | |
| ■ | Where the firm, despite complying with other procedural formalities, is guilty of contumacious conduct in courting a best judgment, the firm shall not be assessed as such for such assessment year. It would be assessed in the status of an AOP and all other provisions of the Act would apply accordingly, as if it was an AOP. | |
| ■ | The words used in the new section 184(5) are 'shall' signifying the intention of the Legislature that it is used in the mandatory sense only. Thus, where there is a best judgment assessment under section 144 the status would be AOP only and it cannot be contended that inasmuch as the procedural formalities prescribed by section 184 have been complied with, it should be assessed in the status of firm only. [Para 8] | |
| ■ | On plain reading of Sections 144, 184 and 185, it may be noticed that the A.O. is empowered to disallow the interest and remuneration of partners only under the consideration that the assessment was made under Section 144. The assessment under Section 144 of the Act can be made only if the assessee fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143. Further, the A.O. shall provide an opportunity of hearing to the assessee. [Para 10] | |
| ■ | In the light of the above discussion, if the facts of the case are considered, the admitted facts of the case are that the assessee made compliance and furnished information required by the A.O. The books of the account was also produced by the assessee before the Assessing Officer. It was also demonstrated that the notice issued under section 142(1) with queries were complied by the assessee. | |
| ■ | The revenue has failed to point out whether the notice issued under section 142(1) was with any query or with the terms or was issued without terms of the notice. The revenue has failed to point out that the notice issued under section 142(1) was with some terms of the notices. | |
| ■ | Thus, merely non-compliance of a notice under section 142(1) having no terms or requirements is not sufficient reason for making assessment under section 144 particularly in case of partnership firm where the Assessing Officer wants to invoke section 184(5) and section 185 disallowing the interest and remuneration to partners of firm. | |
| ■ | The assessment made by the Assessing Officer under section 144 is not in accordance with the conditions laid down in section 144. | |
| ■ | Therefore, the Assessing Officer has wrongly made assessment under section 144 though in clause 5 of the assessment order he has taken the status as a 'firm' not as 'AOP'. | |
| ■ | Therefore, the orders of revenue authorities are to be set aside and the claim of the assessee in respect of interest and salary paid to partners is to be allowed. [Para 12] |
CASE REVIEW
India Rice Mills v. CIT [1996] 218 ITR 508/85 Taxman 227 (All.); Surendra Mohan Seth v. CIT [1996] 221 ITR 239 (All) and CIT v. Metachem Industries [2000] 245 ITR 160/[2001] 116 Taxman 572 (MP) (para 16) followed.
CASES REFERRED TO
CIT v. Metachem Industries [2000] 245 ITR 160/[2001] 116 Taxman 572 (MP) (para 14), India Rice Mills v. CIT [1996] 218 ITR 508/85 Taxman 227 (All.) (para 14) and Surendra Mohan Seth v. CIT [1996] 221 ITR 239 (All.) (para 14).
Waseem Arshad for the Appellant. Rajendra Sharma for the Respondent.
ORDER
A.L. Gehlot, Accountant Member - These are cross appeals filed by the assessee and Revenue against the order dated 22.01.2010 passed by the learned CIT(A), Gwalior for A.Y. 2006-07.
2. The grounds raised in these appeals are reproduced as below:-
ITA No. 80/Agra/2010 by the assessee:-
"Ground No.1: on the facts & in circumstances of the case the learned Commissioner of Income Tax (Appeal) was not justified in upholding the exparte assessment despite all possible compliance made by the appellant in assessment proceeding & thereby upholding disallowance of interest & salary to partners.
Ground No.2 :- on the facts & in circumstances of the case the learned Commissioner of Income Tax (Appeal) erred in law & on facts in confirming the addition of Rs. 1183637/-on account of Unsecured loan advanced by the partner Shri Pratap Sharma who had acknowledged the aforesaid loan to the appellant firm by a filing an affidavit.
Ground No.3:- on the facts & in circumstances of the case the learned Commissioner of Income Tax (Appeal) was not justified in confirming disallowance of Rs. 100000/- out of the depreciation allowance.
Ground No.4:- on the facts & in circumstances of the case the learned Commissioner of Income Tax (Appeal) was not justified in retaining an adhoc addition of Rs. 2.50 Lac out of the addition of Rs. 15,00,000/- made by the A.O. without any basis, reason or rhyme."
ITA. No. 93/Agra/2010 by the Revenue :-
| "(i) | On the facts & in circumstances of the case the learned Commissioner of Income Tax (Appeal) has erred in deleting the addition of Rs. 5,74,565/- made on account of refund of commercial tax. | |
| (ii) | On the facts & in circumstances of the case the CIT (Appeals) has erred in deleting the addition of Rs. 36,551/-made on account of excess commercial Tax debited to P&L account. | |
| (iii) | On the facts & in circumstances of the case the CIT (Appeals) has erred in deleting the addition of Rs.97,800/- out of addition of Rs. 17,13,367/- made on account of unexplained cash credit. | |
| (iv) | On the facts & in circumstances of the case the CIT (Appeals) has erred in restricting the addition of Rs. 2,50,000/-out of addition of Rs. 15,00,000/- made on account of disallowance out of various expenses." |
3. First we take up ITA No. 80/Agra/2010 appeal filed by the assessee. The brief facts of the case are that the assessee firm is a contractor executing contracts for various Govt. departments. In response to statutory notices the assessee furnished required information and produced books of account. The A.O. made assessment under Section 144 of the Act on the ground that the hearing was adjourned to 22.12.2008 but the assessee did not appear nor any application for adjournment was filed. The A.O. noticed that this being a time barring case, therefore, there is no alternative but to complete the assessment on the basis of material available on record. The assessee has failed to comply with the requirements of notice under Section 142(1) of the Act, therefore, the assessment order was framed under Section 144 of the Act. Since the A.O. made assessment under Section 144 of the Act, therefore, he invoked provisions of Sub section (5) of Section 184 of the Act and disallowed Rs.8,56,315/- as interest paid to the partners and Rs. 2,40,000/-as salary paid to partners.
4. The CIT(A) confirmed the action of the A.O.
5. The ld. Authorized Representative submitted that the A.O. did not provide any opportunity of hearing before making assessment under Section 144 of the Act. The ld. Authorized Representative submitted that notice issued under Section 142(1) was complied with by the assessee vide assessee's letter dated 01.09.2008. The ld. Authorized Representative submitted that the A.O. did not issue any other notice stating requirement of the A.O. The ld. Authorized Representative submitted that A.O. has wrongly made assessment under Section 144 and wrongly disallowed interest and salary to partners.
6. Ld. D.R. on the other hand, relied upon the order of the CIT(A) and submitted that the assessee has failed to comply with the notice under Section 142(1), therefore, the A.O. has rightly made assessment under Section 144 of the Act. He further submitted that since the assessment was made under Section 144, therefore, the assessee is not eligible for interest and salary to partners in accordance with Section 184(5) of the Act.
7. We have heard ld. Representatives of the parties and records perused. Before considering the facts of the case, under consideration, we would like to refer the scheme of assessment as firm and relevant Sections. Sections 184 & 185 of the Act reads as under :-
184. Assessment as a firm—(1) A firm shall be assessed as a firm for the purposes of this Act, if—
| (i) | the partnership is evidenced by an instrument, and | |
| (ii) | the individual shares of the partners are specified in that instrument. |
(2) A certified copy of the instrument of partnership referred to in sub section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.
Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.
(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.
(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.
(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28."
185. Assessment when section 184 not complied with.—Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.'
8. The Finance Act 1992 has brought fourth a conceptual change in the scheme assessment of firms w.e.f. 1st April, 1993 the scheme of registration of firms has been done away with and hence there would no longer the distinction from the point of view of registration firms and URFs. Either a partnership firm will be assessed as a firm by virtue of section 184 or else, it will be assessed as on AOP on account of Section 185. A partnership concern assessed as a firm under Section 184 is given some tax advantages. The interest paid to any partner computed at a prescribed rate and remuneration paid to working partner would be allowable under Section 40(b) of the Act. If the assessment were to be made in the status of an AOP, such interest or remuneration given to any partner, will not be allowable deduction. Sub Section (5) starts with an non-obstante clause and is of overriding nature. Where the firm, despite complying with other procedural formalities, is guilty of contumacious conduct in courting a best judgment, the firm shall not be assessed as such for such assessment year. It would be assessed in the status of an AOP and all other provisions of the I.T. Act would apply accordingly, as if it was an AOP. The words used in the new section 184(5) are "shall" signifying the intention of the Legislature that it is used in the mandatory sense only. Thus, where there is a best judgment assessment under section 144 the status would be AOP only and it cannot be contended that inasmuch as the procedural formalities prescribed by section 184 have been complied with, it should be assessed in the status of firm only.
9. For further appreciating the scheme of assessment of firm, we would like to refer Section 144 which reads as under :-
"144. Best judgment assessment.—(1) If any person—
| (a) | fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or subsection (5) of that section, or | |
| (b) | fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or | |
| (c) | having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, | |
| The Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, [shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment : |
Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :
Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.
(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year."
10. On plain reading of Sections 144, 184 and 185 of the Act, we noticed that the A.O. is empowered to disallow the interest and remuneration of partners only under the consideration that the assessment was made under Section 144 of the Act. The assessment under Section 144 of the Act can be made only on the following circumstances :-
| (1) | fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or subsection (5) of that section, or | |
| (2) | fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or | |
| (3) | having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, | |
| (4) | The A.O. shall provide an opportunity of hearing to the assessee. |
11. In the light of the above discussion, if we consider the facts of the case under consideration, the admitted facts of the case are that the assessee made compliance and furnished information required by the A.O. The books of the account was also produced by the assessee before the A.O. as noted by the A.O. in para 2 of his order. The ld. Authorized Representative also demonstrated that the notice issued under Section 142(1) of the Act with queries were complied by the assessee. The case of the A.O. is that the assessee has failed to comply the condition No.2, which is as under:-
"(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142[or fails to comply with a direction issued under sub-section (2A) of that section, or"
12. But it is relevant to state that the Revenue has failed to point out whether the notice issued under Section 142(1) was with any query or with the terms or was issued without terms of the notice. The Revenue has failed to point out that the notices issued under Section 142(1) was with some terms of the notices. Thus, merely non compliance of a notice under Section 142(1) of the Act having no terms or requirements is not sufficient reason for making assessment under Section 144 particularly in case partnership firm where the A.O. want to invoke Section 184(5) and Section 185 of the Act, disallowing the interest and remuneration to partners firm, the assessment made by A.O. under Section 144 is not in accordance with the conditions laid down in Section 144 of the Act. We, therefore, find that the A.O. has wrongly made assessment under Section 144 though in clause 5 of the assessment order he has taken the status as a "firm" not as "AOP". We, therefore, set aside the orders of Revenue Authorities and allow the claim of the assessee in respect of interest paid to partners of Rs. 8,56,315/-, and salary to partners Rs. 2,40,000/-. Thus, addition of Rs. 8,56,315/- and Rs. 2,40,000/- made by the A.O. are deleted.
13. The Second ground of assessee's appeal is in respect of addition of Rs. 11,83,637/- confirmed by the CIT(A) on account of unsecured loan given by the partner. During the assessment proceeding, the A.O. noticed that the assessee has taken fresh loans aggregating to Rs. 16,83,637/- including loans of Rs. 15,000/- each in the name of Brij Raj Singh Rajawat and Somendra Singh which have been squared up during the year. The assessee failed to comply with the requirement of the A.O. The assessee has failed to prove the genuineness of the loan and creditworthiness of the lender which lies on the assessee. The A.O. made addition of Rs. 17,13,637/- under Section 68 of I.T. Act. The CIT(A) after considering the assessee's submission deleted the addition of Rs. 97,800/- on the ground that in respect of this amount Rs. 97,800/- the assessee has satisfied the condition laid down under Section 68 of the Act. However, the CIT(A) confirmed the addition to the extent of Rs. 16,15,837/-.
14. The ld. Authorized Representative submitted that the assessee is challenging the addition of Rs. 11,83,637 which is the loan advanced by the partner Sri Uday Pratap Sharma. The balance amount is not challenged. The ld. Authorized Representative submitted that the assessee maintained two capital accounts, one is fixed for capital and another is current capital account. This amount of Rs. 11,83,637/- is on account of current capital account. He further submitted that the title of the account "loan" was inadvertently used as per prevailing practice but in fact it is a current capital account of the partner in the books of the firm. The ld. Authorized Representative submitted that the assessee has furnished confirmation, identity and other records to establish that in fact the amount was given to the firm by the partner as a current capital. He submitted that under the circumstances, addition cannot be made in the hands of the firm. The ld. Authorized Representative in support of his contention relied upon the order of Hon'ble M.P. High Court in the case of CIT v.Metachem Industries [2000] 245 ITR 160/[2001] 116 Taxman 572, Hon'ble Allahabad High Court in the cases of India Rice Mills v. CIT [1996] 218 ITR 508/85 Taxman 227, Surendra Mahan Seth v. CIT [1996] 221 ITR 239 and ITAT Agra Bench, in ITA No. 654/Agr/2008 vide order dated 25.05.2010.
15. The ld. D.R., on the other hand, relied upon the order of the ld. CIT(A).
16. We have heard ld. Representatives of the parties and records perused. In the light of the judgments of Hon'ble Allahabad High Court and Madhya Pradesh High Court in the cases of India Rice Mills (supra), Surendra Mahan Seth (supra) and Metachem Industries (supra), we are of the view that the current capital introduced by partner in firm is established and thus the addition cannot be made in the hands of the firm. Following the above judgment the addition of Rs. 11,83,637/- is deleted and balance addition of Rs. 4,32,200/- (16,15,837- 11,83,637/-) sustained by the ld. CIT(A) is also deleted.
17. Ground No. 3 is in respect of addition of Rs. 1,00,000/- out of depreciation allowance. This ground has not been pressed by ld. Authorized Representative, therefore, the same is dismissed.
18. Ground No. 4 is in respect of adhoc disallowance out of expenses. The A.O. made addition of Rs. 15,00,000/- which has been reduced by the ld. CIT(A) to Rs. 2,50,000/- which is reproduced as under:— (Page No. 10 CIT(A)
"10.2 Appellant's submissions alongwith the assessment order have been considered carefully. There is no denying the fact that for preceding asst. year, the appellant has surrendered an amount of Rs. 15 lakhs which have been made the basis by the A.O. for making the addition this year also. However, the A.O. has not pointed out the items of expenditure which have been found to be unverifiable or not incurred. Thus, the A.O. was not justified in making adhoc addition of Rs.15 lakhs during the current year. However, since the appellant has not been able to produce complete bills and vouchers alongwith its books of accounts as mentioned by the A.O. vide order sheet entry dtd. 19.12.2008, it will be the in interest of justice and revenue to restrict the said disallowance to Rs.2.5 lakhs considering the total turnover of the appellant and various disallowance already made as above."
19. We have heard ld. Representatives of the parties and records perused. Considering the nature of business of the assessee and fact that the assessee failed to produce complete bills, vouchers, the addition has been sustained by the ld. CIT(A). The CIT(A) has rightly sustained the addition of Rs.2,50,000/-. Since this is a matter of estimation and the assessee and Revenue both have failed to point out any contrary material based on which a different estimation can be made at this stage, in the light of the fact, order of the CIT(A) is confirmed.
20. Now we take up ITA No. 93/Agra/2010 appeal filed by the Revenue. The first ground is in respect of addition of Rs. 5,74,656/- made by the A.O. invoking Section 43B on account of commercial taxes. Before the ld. CIT(A) the assessee has demonstrated that the A.O. has added the amount without appreciating the facts and accounting principle. The ld. CIT(A) reproduced the reconciliation and explanation of the assessee at page no. 6 of his order. The CIT(A) after considering the assessee's submission held as under :—
"7.2 Appellant's submission alongwith assessment order and assessment records have been considered carefully and the appellant's contention in this regard is found to be correct. No. violation of provisions of Section 43-B of the I.T. Act is made by the appellant on the basis of accounting entries made by it in its books of accounts. The said addition of Rs. 5,74,656/- is hereby, deleted."
21. We have heard ld. Representatives of the parties and records perused. We noticed that the ld. CIT(A) has rightly appreciated the fact and reconciliation and detailed filed of the assessee was found correct. The ld. CIT(A) held that there was no violation of Section 43B of the Act. The Revenue has failed to pointed out any contrary material to the finding of the ld. CIT(A). In the light of these facts, the order of the CIT(A) is confirmed and addition of Rs. 5,74,656/- is deleted.
22. The second ground is in respect of addition of Rs. 36,551/- which is interlinked to ground no. 1. Since ground no. 1 has been rejected, therefore, ground no 2 is also rejected.
23. The third ground pertaining to deletion of addition of Rs. 97,800/- is a common ground as raised by the assessee in Ground No. 2 in its appeal which has been decided in Para No. 13 of this order. Following the said detailed discussions, we confirm the order of CIT(A) in this regard. Thus, this ground of Revenue is dismissed.
24. Ground no. 4 of Revenue's appeal pertains to adhoc disallowance of various expenses. This is also a common ground to ground no. 4 raised the assessee in it's appeal. Ground no. 4 of assessee's appeal has been decided after detailed discussion in Para No. 18 & 19 of this order. Following the said discussion, this ground of Revenue is also dismissed.
25. In the result, appeal of the assessee is partly allowed and appeal of the Revenue is dismissed.
Regards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment