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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI AMIT SHUKLA, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLE
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B”, MUMBAI BEFORE SHRI AMIT SHUKLA, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.755/MUM/2022(A.Y: 2012-13) Nisarg Associates V. Ld. Pr.CIT – Mumbai – 20 Room No. 418, Piramal Chambers 1304, Ashok Heights, Near NICCO Circle Lalbaug, Mumbai – 400 012 Nikolas Wadi Road, Gundavalli Andheri (East), Mumbai - 400069 PAN: AAHFN4619F (Appellant) (Respondent) Assessee Represented by Shri Ronak G. Doshi and : Shri Chaitanya D. Joshi Department Represented by : Dr. Mahesh Akhade
Date of Hearing : 17.10.2022 Date of Pronouncement : 05.01.2023
O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Principal Commissioner of Income Tax, Mumbai – 20, [hereinafter in short “Ld. Pr.CIT”] dated 30.03.2022 for the A.Y.2012-13 passed u/s.263 of the Income-tax Act, 1961 (in short “Act”).
2 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates 2. Brief facts of the case are, assessee filed its return of income on 27.07.2012 declaring total income of ₹.2,15,600/-. The case was reopened and notice u/s. 148 of the Act was issued on 31.03.2019 and assessment u/s. 143(3) r.w.s 147 of the Act was completed on 21.12.2019 assessing the total income at ₹.2,15,600/-.
On a perusal of the assessment records, Ld. Pr.CIT observed that based on the information received from Investigation wing, Mumbai that there was high value transaction in the account of the assessee. In view of the same, reason was recorded for initiation of proceeding u/s 147 of the Act and accordingly, notices u/s 148 of the Act was issued to the assessee. In response, assessee filed the Return of income on 01.04.2019 declaring the total income at ₹.2,15,600/.
The Assessing Officer accepted the return of income declared by the assessee by passing Assessment Order u/s. 143(3) r.w.s. 147 of the Act on 31.03.2012. Ld Pr.CIT observed that on examination it was noticed that as per Partnership Deed dt.01.09.2009, there are following partners: - 1. M/s. Nilkanth Timber Agency 16% 2. hriPrabhudas Narayan PateL 16% 3. M/s. Yogeshwar Timber Mart 16% 4. Shri PramodDharamshy Patel 16%
3 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates 5. Shri Vasant Arjun Patel 12% 6. Shri VivekDayaram Patel 12% 7. M/s. Arjun Ramji Patel & Co. 12%
He observed that the partnership firm consists of seven partners, as listed above and out of which three partners are partnership firms. These partnership firms, which have been mentioned to be represented by Shri Vinod Valji Patel, representing as a partner of "Nilkanth Timber Agency" Shri ShantilalRamji Patel, representing as a partner of "Yogeshwar Timber Mart" and Shri PurshottamRamji Patel representing as a partner of "Arjun Ramji Patel & Co.", and they have paid following remuneration / salary and interest on capital in the following manner: -
Amount of Interest on Name of the partner Remuneration Capital (Salary) M/s. Yogeshwar Timber Mart 37,852/- 3,58,504/- M/s. Nilkanth Timber Agency 37,855/ 3,58,507/- M/s. Arjun Ramji Patel & Co. 28,391/- 2,66,791/- Total 1,04,098/- 9,83,802-
Ld. Pr.CIT observed that a firm cannot be a partner of another firm. The firm being an artificial juridical person cannot be a partner of another firm, therefore, remuneration and interest on capital is not allowed to be debited from the profit earned by the firm. Therefore, the expenses debited under the head remuneration and interest on capital has wrongly been allowed by the Assessing Officer in the assessment
4 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates order passed u/s. 143(3) r.w.s. 147. Therefore, making the order erroneous and prejudicial to the interest of revenue, and it was found to be a fit case for issue of notice u/s 263. Accordingly, a show cause notice was issued to the assessee
In response assessee filed a letter dated 16.03.2021 filed through ITBA portal, for the sake of clarity it is reproduced below: - "Above captioned notice was received on 28th February 2022 to comply the same by 7th March 2022 and you were kind enough to grant further adjournment to submit reply by 21st March 2022 and we are thankful to the same. We however, now submit as under. We are a partnership firm and engaged in activity of civil contractors and property developments around Mumbai, suburbs and elsewhere. The firm's return was filed on 27.02.2012 declaring income at Rs 215599 and was even assessed u/s 143(1) of IT Act 1961. This assessment year was also subjected to re-assessment u/s 147 rws 143(3) and Order dated 21.12.2019 was passed confirming returned income as assessed income. The basis of re- assessment was that Information was received from Investigation wing Mumbai that there is high value transaction in the books of accounts of assessee. And In view of High value transaction assessment proceeding u/s 147 was initiated with prior approval of PCIT-24. AO called various records and documents, submission and evidence and having satisfied concluded returned income as assessed income. You have stated in the above captioned Sec 263 notice that "On examination of records PCIT 20 noticed that there are 7 partners to the firm and of these three partners are partnership firms represented by their further partners and remuneration / salary of Rs 104098 and Interest on capital was paid at Rs 983802 was paid and these was aggregated to Rs 1087900. You have then mentioned that "However, being firm an artificial judicial person cannot be a partner of another firm, therefore, the expenses debited under head remuneration and interest on capital have wrongly been
5 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates allowed by the Assessing Officer in the Assessment Order passed u/s 143(3) rws 147 on 21.12.2019. Considering above you have stated that, the undersigned proposes to invoke the provision of sec 263 of IT Act, 1961 to set aside, cancel or modify the said assessment Order passed u/s 143(3) rws 147 on 21.12.2019 as same is erroneous and prejudicial to the interest of the revenue in light of facts mentioned above. We say and submit that: AO has recorded that case was selected on the basis of high value transaction. There were also of production of books of accounts and all other records which includes loan confirmation with evidence of source and satisfaction was recorded and its verification your honor may verify the same from the proceeding sheet. All above exercise suggest that full and true enquiry by Assessing Officer which is his duty being carried out as enquiry before assessment as permitted u/s 142(1). Thereafter after dealing the same properly dealt with in writing or orally or otherwise Assessment order U/s 143(3) rws 147 was passed. We reproduce Sec 2(23), 40(b) & Sec 184 of Income Tax Act 1961 & Indian Partnership Act 1932: 2(23) (i) "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009); (ii)"partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include, a. any person who, being minor, has been admitted to the benefits of a partnership; and b. a partner of limited liability partnership as defined in the Limited Liability Partnership Act, 2008(6 of 2009). (iii) "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009):)
SECTION 4 OF INDIAN PARTNERSHIP ACT, 1932 Definition of "partnership", "partner", "firm" and "firm name".
6 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates 4. "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name". 184. Assessment as a firm 1. A firm shall be assessed as a firm for the purposes of this Act, if- 1. the partnership is evidenced by an instrument, and 2. the individual shares of the partners are specified in that instrument. 1. 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. 1. 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. 1. 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. 1. Notwithstanding anything contained in the foregoing provisions of this section, 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 not be assessed as such for the said assessment year and, thereupon, the firm shall be assessed in the same
7 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates manner as an association of persons, and all the provisions of this Act shall apply accordingly. Sec 40(b) of Income tax Act 1961 40(b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner, or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either ca se, is not authorized by, or is not inaccordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorization for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of 4[twelve] per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder- Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred
8 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates to as "partner in a representative capacity" and "person so represented". respectively)-
(i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2- Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3. For the purposes of this clause, "book-profit" means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4. For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;] We have fully complied all the conditions of the provision of 40(b), & Sec 184 by submitting partnership deed (Page 16 to24) also incorporating provision of Salary and Interest to partners and even rightfully allowed claim of salary and interest to partners in accordance with law of sec 40b of IT Act 1961. Therefore, any disallowance on this account we object the same. Only situation of disallowance of salary and interest is there in case of assessment under Sec 144 being best judgment assessment as stated u/s 184(5) rws 185 and which is not the case, as ours is regular re-assessment u/s 143(3) rws 147. Secondly, all the three firms which are registered partnership firm under Indian Partnership Act 1932 (Page 25 to 42) and by virtue of this they are capable for making any contract and they can sue to anybody, and firms can be sued for any violation of laws. Under Income Tax Act 1961 as a scheme of taxation a firm can be
9 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates assessed independent of its partners. Therefore, a partnership firm enjoys quasi- judicial status under Income Tax Act. Your show cause notice dated 24.02.2022 have given observation that, "being firm an artificial judicial person cannot be a partner of another firm, therefore, the expenses debited under head remuneration and interest on capital have wrongly been allowed by the Assessing Officer in the Assessment Order passed u/s 143(3) rws 147 on 21.12.2019. We craves leave to rely on [2017] 80 taxmann.com 121 (Madras) HIGH COURT of 61) where in is held that) in the case of Megatrends Inc. v. Commissioner of Income-tax (Page 60 to 61) where in it is held that: "Section 2(23) of the Income-tax Act, 1961-Firm Definition of Assessment year 2012-13-A firm can be a partner in a firm [In favour of assessee] During the pendency of the appeal, the Appellate Commissioner issued a show cause notice dated 6-11-2015, questioning the very status of the assessee as a partnership and calling upon the assessee to show cause as to why their status should not be changed to that of 'association of persons' Held that there is no law, which says that a firm cannot be a partner in another firm, the impugned order in the writ petition is set aside on the sole ground that the finding that a firm cannot be a partner in a partnership firm, is contrary to law. In view of above we submit department basis that partnership firm cannot become partner in another firm fails and, on this ground, alone notice u/s 263 be quashed and Order of AO is made absolute. WITHOUT PREJUDICE, we submit and raise moot question that what was exercise of enquiry before assessment carried out by Assessing officer? Whether enquiry was futile exercise? Or it's a case that manner of enquiry and view of AO even need to be approved by Commissioner? Secondly Assessment is concluded with verification of documents and evidence submitted without any Disallowance of interest AND salary that means AO did not find any area and did not warrant any additions. It is not case where assessee has claimed any exemption and granted without verification. It is in this background notice u/s 263 is beyond jurisdiction and beyond law. We therefore object the above proceeding.
10 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates Secondly Kindly refer Partnership agreement clause 5 being initial capital is Rs 35000 and thus amount more than Rs 35000 being Rs 22597372 where borrowed money from partners and interest is allowable even otherwise u/s 36(1)(iii) if not under Sec 40b, where conditions are assessee must have borrowed money, it must have used for the purposes of business and must have paid interest and claimed deduction. All these conditions are satisfied. In terms of remuneration its stated in clause 7 of agreement which is in line with Sec 40b and thus same is also allowable or otherwise this is allowable expenses w/s 37 being wholly and exclusively incurred for the purposes of business. In above connection we further submit legal position as regards assessment completed U/s 143(3) by apex court in the case of Auto & Metal Engineers v. Union of India [1998] 229 ITR 399/97 Taxman 363 (SC) as under: The analysis of Supreme Court in Auto & Metal Engineers (supra) held that under the provisions of sections 139 to 158, the process of assessment involves: (i) filing of the return of income under section 142(1); (ii) inquiry by the Assessing Officer in accordance with the provisions of sections 142 and 143; (iii) making of the order of assessment by the Assessing Officer under section 144; and (iv) issuing of the notice of demand under section 156 on the basis of the order of assessment
Thus, enquiry by the AO forms an integral part of assessment. Section 142 provide for provisions in regard to 'enquiry before assessment' as under. "142. Enquiry before assessment. (1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 115WD or section 139 or in whose case the time allowed under sub-section (1) of section 139 for furnishing the return has expired, a notice requiring him, on a date to be therein specified.- (i) where such person has not made a return within the time allowed under sub-section (1) of section 139 or before the end of the relevant assessment year to furnish a return of his income or the income of any other person in respect of which
11 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates he is assessable under this Act, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed: Provided that where any notice has been served under this sub-section for the purposes of this clause after the end of the relevant assessment year commencing on or after the 1st day of April, 1990 to a person who has not made a return within the time allowed under sub-section (1) of section 139 or before the end of the relevant assessment year, any such notice issued to him shall be deemed to have been served in accordance with the provisions of this sub-section. TAX DEPAR (ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or (iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require: Provided that- (a) the previous approval of the Joint Commissioner shall be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts; (b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year.
For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary." Next question is that How to rate an assessment?. Prima facie, therefore, proper enquiry would mean seeking following information: a. ITR copy: b. Financials; c. Books of account or documents as may be required by the AO;
12 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates d. Statutory forms and reports as applicable such tax audit report, MAT calculations, form for deductions, TP forms, etc.; e. Besides, the AO may call for any other information as he may consider necessary.
Thus, if the AO has failed to make an enquiry before assessment as referred to in the provisions of section 142 the assessment may get vitiated and, therefore, would call for revision or reopening, as the case may be. To rate an assessment as proper or improper, adequate or inadequate is something that is not a prerequisite to hold as proper the application of the provisions of section 147 or section 263 in a particular case. Nowhere in the two sections there are words suggesting improper or inadequate enquiry or for that matter non- application of mind. In fact, there can be no order without an enquiry in a scrutiny case in view of inbuilt scheme of enquiry before assessment. Thus, to regard an order as erroneous only because of lack of enquiry or improper or inadequate enquiry amounts to cutting or sizing the sanctity of an assessment procedure. The Income-tax Act mandates enquiry by the Assessing Officer before every assessment. Only thereupon shall he frame an assessment on the basis of accounts, documents and information gathered by him which has a bearing on the assessment. Application of mind is necessary as far as completing the assessment proceedings are concerned but only since the mind is not applied to a particular subject or a desired enquiry is not made or for that matter a deduction claimed is not recomputed as per law does not mechanically authorize any revision or reopening in the absence of any specific mandate under the law. It is only the sequence of facts in a particular case scenario that would advocate a revision at the most in a few selected cases The procedure laid down in section 142(1) is to enable the AO to make such enquiries as he deems fit in order to be satisfied as to the correctness of the return filed or other claims made by the assessee before the officer completes the assessment. In regards to Sec 263 proceeding we crave leave to rely on Malabar Industrial Co Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 which held. "A bare reading of section 263(1) makes it clear that the pre- requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is
13 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopts one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by the Supreme Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue." In the case of Malabar Industrial Co. Ltd. case (supra) before the Supreme Court it was found that there was an annexure to the return filed for the assessment year in question where the amount received by the assessee was noted as compensation and damages for loss of agricultural income being claimed exempt from tax. The Income-tax Officer accepted the same and endorsed nil assessment
14 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates for that year without gathering any supporting material and without making any enquiry. It was only under such circumstances that the Apex Court held that on these facts the conclusion that the order of the Income-tax Officer was erroneous was irresistible. In other words, the facts in this case clearly speak of a subject matter of claim for exemption by way of an annexure/note to the computation of which no enquiry was made before assessment, thus, questioning the validity of the assessment. Had this been supported with a decision of any Court or explicit reasoning the scenario would have changed, no matter no further enquiry was on the subject. We therefore submit that, It is not that in every case where the AO accepts the claim of the assessee without further enquiry it would warrant a revision. When the AO has failed to make an enquiry in regard to a particular claim it does not automatically provide any authority to revise the assessment in the absence of specific mention in the Act. Facts of a case will only help decide if it warrants a revision or not. No enquiry or an assessment without an enquiry is not the sole criterion. It has more to do with the assessee's presentation of facts of the case before the Assessing Officer and the accompanying documents and supporting evidence for claims, if any, made in the return of income, rather than the level of enquiry made by the AO. If full information is available on the record, then the mere fact that no enquiry is made by the AO would not turn tables against the assessee In view of above facts and legal position as forgoing we submit Sec 263 proceeding invoked by you beyond law and without any jurisdiction and we object the same. WITHOUT PREJUDICE FURTHER: All the three partnership firm being (1) Yogeshwar Timber Mart, (2) Arjun Ramji Patel & Co and Nilkanth Timbers Mart are tax assessee and having credited salary and interest income as per statement of account (Page 43 to 44) has offered same as business income we attached ITR Ack Copy and Computation of Income (Page 44 to 53) showing above as income and having taxed in the partners any further taxation will be double taxation and same is beyond law. This has been further assessed u/s 143(1). Copies of this assessment is attached. (Page 54 to 59) We submit having taxed in the hands partners department cannot proceed for further taxation and in this action will lead to situation of double taxation
15 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates Kindly Refer Assistant Commissioner of Income-tax, Circle-1, Kota v. Associated Engineers & Allied Products [2017] 81 taxmann.com 451 (Jaipur - Trib.). Section 40(b) of the Income-tax Act, 1961-Business disallowance - Interest salary, etc., paid by firm to partner (excessive or unreasonable) - Assessment year 2010-11 Where assessee-firm had paid remuneration to partners and said amount was taxable in hands of partners, disallowance of said amount in hands of assessee-firm would result in double taxation; therefore disallowance in case of assessee was to be deleted [In favour of assessee]. Also refer ITAT Pune allowed salary to partners in the case of Assistant Commissioner of Income-tax v. Suman Construction [2009] 34 SOT 495 (Pune) on same principal like 81 taxmann.com 451. (Supra). Following above principal of double taxation in the case of assessee's appeal ITAT Mumbai "A: Bench decision in ITA no 908/Mum/2017 in the case of Ace Property Developers Vs ACIT 24(1) where in it is held that: "We cannot appreciate the basis for sustaining additions as assessee has already has debited to profit and loss account and have further offered remuneration to tax in their hands and rely on ratio of Associated Engineers & Allied Products (Supra) accordingly we direct to set aside CIT(A) Order and delete that additions and allow the ground of appeal of assessee". We therefore submit even on the ground of double taxation above proposed disallowance additions salary, interest to partners fails and notice of proceeding of sec 263 be quashed. We hope you will find above in order and drop the proceeding u/s.263 for which act of kindness we shall be thankful to you."
After considering the detailed submissions of the assessee, Ld.Pr.CIT by relying on the decision of the Apex Court in the case of Dulichand Lakshminarayan v. CIT in which the Hon'ble Supreme Court
16 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates has given a categorical finding that “The word "persons" in section 4 of the Indian partnership Act, which has replaced section 239 of the Indian contract Act, contemplates only natural or artificial i.e. legal persons and therefore a firm is not a person and as such is not entitled to enter into partnership with another firm or Hindu Undivided Family or individual and there is no question of registration of partnership purporting to be one between three firms”. Therefore, he held that assessee is having seven partners, out of which three partners are firms and these are not being 'person' as mentioned in Section 4 of the Indian Partnership Act, the validity of the partnership firm itself is in question in the court of law. A firm being an artificial juridical person cannot be a partner of another firm, therefore the expense debited under the head remuneration to all three partners which are in the nature of firm is not allowable in view the decision of the Supreme Court.
Accordingly, he held that the Assessment Order passed is erroneous in so far as it is prejudicial to the interest of revenue. Accordingly, Assessing Officer was asked to reframe the assessment considering the above directions, and after giving the assessee an opportunity of being heard and producing any evidences in this regard.
17 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates 10. Aggrieved assessee, preferred appeal before us raising following grounds in its appeal: - “GROUND NO. 1: ORDER U/S 263 PASSED IS WITHOUT JURISDICTION. The Learned PCIT-20 has erred in holding that Order Passed by Assessing Officer was erroneous and prejudicial to the interest of revenue and thus the Order passed by PCIT-20 is without jurisdiction. The Appellant pray that the Order passed by PCIT-20 be quashed as not maintainable and void. GROUND NO. 2: DIRECTION FOR DISALLOWANCE OF INTEREST Rs 983902 & SALARY TO PARTNERS RS. 104098 to PARTNERSHIP FIRM. Principal Commissioner of Income Tax -20 (PCIT-20) erred in directing to the Assessing Officer to re-frame the assessment and set a side assessment order passed by AO dated 21.12.2019 for deciding the allowability of interest to Partnership firm of Rs 983902 and Salary to partnshership firm of Rs 104098 and PCIT-20 ought to have appreciated that view adopted Assessing Officer cannot be to be un-sustainable or impossible view. GROUND NO. 3: GENERAL: The Appellant craves leaves to add to, alter, amend and / or delete the above grounds of appeal.”
At the time of hearing, Ld. AR contended that in the absence of 'lack of enquiry’ on the part of the Assessing Officer, the assessment order cannot be treated as 'erroneous for the purpose of section 263. For the above proposition he relied on the following case laws:-
(i). CIT v. Nirav Modi (2016)(390 ITR 292)(Bom HC)SLP dismissed in (2017)(244 Taxman 194)(SC) (ii). MOIL Ltd. v. CIT (2017)(396 ITR 244)(Bom HC)
18 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates (iii). CIT v. Maharashtra Hybrid Seeds Co. Ltd. (2019)(102 taxmann.com 48)(Bom HC) (iv). Narayan TatuRane Vs. ITO (2016)(70 taxmann.com 227)(TMum)
Further, Ld. AR contended that True test for finding out whether Explanation 2(a) has been rightly invoked or not is not simply existence of view, as professed by Pr.CIT about lack of necessary inquiries and verifications, but an objective finding that Assessing Officer has not conducted, at stage of passing order, which is subjected to revision proceedings, inquiries and verifications expected, in ordinary course of performance of duties of a prudent, judicious and responsible public servant that Assessing Officer is expected to be, and relied on the following case laws:-
(i). Sir Dorabji Tata Trust v. DCIJ(E) (2020)(188 ITD 38)(TMum) (ii). Sir Ratan Tata Trust v. DCIT(E) (2020)(188 ITD 151)(TMum) (iii). JRD Tata Trust v. DCIT(E) (2020)(122 taxmann.com 275)(TMum) (iv). Torrent Pharmaceutical Ltd. v .DCIT (ITA164/Ahd/2018, order dated 08/08/2018)(TAhd)
Further, Ld. AR of the assessee contended that, basis of legal position existing at the time of assessment if the claim of the assessee is tenable, even if inquiry is not conducted by the AO, revision u/s. 263 cannot be done and relied on the following case laws
19 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates (i). PCIT v. Coastal Gujarat Power Ltd.(264 Taxman 244) (Bom) (2019) SLP dismissed in PCIT v. Coastal Gujarat Power Ltd.(287 Taxman 183) (SC) (2022) (ii). Piramal Investments Opportunity Fund v.P CIT (ITA.No. 700/M/2021, order dated 11/04/2022)(TMum)
Further, Ld. AR submitted that where two view are possible and the Assessing Officer has taken one of the possible views which resulted in loss of revenue, the order cannot be treated as 'erroneous' for the purpose of section 263. For the above contention, Ld. AR of the assessee relied on the following case laws: -
(i). Malabar Industrial Co. Ltd. Vs. CIT (243 ITR 83) (SC) (ii). CIT Vs. Max India Ltd (295 ITR 282) (SC) (iii). CIT Vs. Gabriel India Ltd. (203 ITR 108) (Bom HC) (iv). CIT Vs. Grasim Industries Ltd. (2014)(226 Taxman 165)(Bom HC) (v). CIT Vs. LIC Housing Finance Ltd. (2014)(367 ITR458)(Bom HC) (vi). Grasim Industries Ltd. Vs. CIT (2010)(321 ITR 92)(Bom HC)
Ld. AR contended that both conditions of section 263 i.e. order is 'erroneous’ and 'prejudicial to the interest of revenue' are conjunctive and in support of the above contentions he relied on the following case laws:- (i). CIT Vs. Greenworld Corporation (181 Taxman 111) (SC) (ii). Malabar Industrial Co. Ltd. Vs. CIT (243 ITR 83) (SC) (iii). CIT Vs. Max India Ltd (295 ITR 282) (SC)
Ld. AR further submitted that Assessing Officer is not required to pass a detailed order covering all aspects examined during the course of
20 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates assessment proceedings, for the above contention he relied on the following case laws: - (i). CIT v. Gabriel India Ltd.[(1993) 203 ITR 108 (Bombay HC)] (ii). CIT v. Honda Siel Power Products Ltd. [(2011) 333 ITR 547 (Delhi HC)] (iii). CIT v. v. Nirma Chemicals Works (P.) Ltd [(2009) 309 ITR 67 (Gujarat HC)] (iv). State Bank of India v. ACIT (2018) (411 ITR 664)(Bom HC)
With regard to Ground No. 2 which is in respect of disallowance of remuneration/salary and interest paid to partners (Partnership firms), Ld. AR submitted that Partnership firm can be a partner in other partnership firm, and relied on the following case laws (i). Chhotalal Devchand v. CIT (1958)(34 ITR 351)(Bom) (ii). (Dulichand Laxminarayan (1956) (29 ITR 535) (SC) distinguished) (iii). Megatrends Inc. CIT (2017)(383 ITR 53)(Mad) (iv). Radha Krishna Jalan v. ITO (2007)(294 ITR 28)(Gau)
Further, Ld. AR submitted that disallowance of salary and interest to partners (being firm) applying section 40b cannot be made de-tors application of provisions of section 184(3) since the status of the assessee being 'Firm’ stands accepted for earlier assessment year and the same has not been disturbed or cancelled. Ld. AR further submitted that once respective partners (i.e. firms) have already offered salary and interest income to tax in their respective return of income, disallowing the same in the hands of Assessee firm again amounts to double
21 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates disallowance which is not permissible: For the above contentions he relied on the following case laws: (i). ACIT v. Associated Engineers & Allied Products (2017)(81 taxmann. Com 451) (TJp) (ii). Ace Property Developers v. ACIT (ITA No. 908/Mum/2017, order dated 26/03/2021) (TMum)
Lastly, Ld. AR submitted that even if the assessee status is held to be “AOP” applying commercial principles, salary, and interest expenses should be allowed.
On the other hand, Ld.DR wondered how interest in remuneration allowable in the case of firm being a partner. He relied on the decision of Supreme Court in the case of Dulichand Lakshminarayan v. CIT and as per which firm cannot be a partner. The reliance on Megatrends Inc. CIT (supra) decision is recalled by Hon'ble Madras High Court. Therefore, he submitted that the issue under consideration is debatable. He submitted that Assessing Officer merely issued a notice without collecting proper and meaningful information and completed the assessment without applying his mind or verification.
In the rejoinder, Ld. AR submitted that even company can be a partner and further in rebuttal to Ld. DR submissions for two views are
22 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates possible then he submitted that the initiation of proceedings u/s. 263 of the Act itself is not proper.
Considered the rival submissions and material placed on record. We observe from the record that only issue raised by Ld Pr.CIT, whether a firm can be a partner and are they eligible to claim the remuneration from the partnership firm, is the main reason to treat the assessment completed u/s 143(3) r.w.s 147 as erroneous and prejudicial to the interest of revenue. We observe that Ld Pr.CIT has heavily relied on the decision of Hon’ble Supreme Court in the case of Dulichand Laxminarayan (supra). After careful consideration of the whole issue, we notice that the assessment was reopened in order to verify the high value transactions. It is fact on record that the Assessing Officer accepted the information submitted by the assessee with regard to composition of partners and their remuneration. During submissions, Ld.AR submitted that Assessing Officer asked specific questions on this subject/issue.
After considering the various submissions, we observe that the issue involved in the decision of the Hon’ble Supreme Court was whether a firm can be admitted as a partner for the purpose of registration. In
23 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates the above case, the firm was represented by all the partners and the name of the partnership was considered as a partner. In this regard Hon’ble Supreme Court held that the word “persons” in section 4 of the 1932 Act contemplates only nature or artificial i.e., legal persons and for the aforesaid reasons, a firm is not a person because a firm name is merely an expression and only a collective name of those individuals who constitute the firm. In the above case, the partnership deed was drafted and executed between 7 partners and among them 3 partnership firms as well as one HUF were designated as partners. Therefore, it was held that the firms cannot be represented as partners.
In the given case, the facts are different. We observe that the partnership deed was drafted as such that the individual partners who are natural persons are included as partners. However, they were represented on behalf of their partnership firm. There is considerable difference, in the present partnership firm, all the partners are individuals as per the definition given in the section 4 of the Partnership Act. It is not a case, firms are being included as partner of the partnership firm. But natural persons are inducted as partners and they are represented respective partnership firm. It is not illegal and for the sake of clarity, we are reproducing the Page No. 1 and 2 of the deed:
24 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates
25 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates
26 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates 25. From the above, it is very clear that the natural persons are the partners of the firm and in turn they were representing their firm. Hence, the contention of the Ld Pr.CIT that the firms cannot act as partners are true but natural persons can be a partner representing a firm is proper and allowable. All the provisions of the Income Tax Act allows the benefit based on the terms of the partnership deed like the clause on partners salary, Interest on capital etc. Even for the above purpose, the deed is very clear that the natural persons alone are inducted as partners not any firm. Therefore, the contention and apprehensions of the Ld Pr.CIT is already addressed. In our considered view, the transactions recorded in the books of the firm is proper and there is no need to disturb the assessment completed u/s 143(3) r.w.s 147 of the Act. Accordingly, we set aside the order passed u/s 263 of the Act.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 05th January, 2023
Sd/- Sd/- (AMIT SHUKLA) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 05/01/2023 Giridhar, Sr.PS
27 ITA NO.755/MUM/2022 (A.Y: 2012-13) Nisarg Associates Copy of the Order forwarded to: 1. The Assessee 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum