VARSMA ENGINEERS GROUP,JABALPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), JABALPUR

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) IN THE INCOME TAX APPELLATE TRIBUNAL, JABALPUR BENCH, JABALPUR (SMC) (through Virtual Hearing) BEFORE SH. SANJAY ARORA, HON'BLE ACCOUNTANT MEMBER ITA No.224/JAB/2018 Assessment Year: 2008-09 Varhsma Engineer’s Group, Assistant Commissioner of vs. Income Tax, Vijay Nagar, Circle – 1(1), Jabalpur (M.P.) Jabalpur (M.P.) [PAN: AAEFV 7885Q] (Appellant) (Respondent) Appellant by Sh. H.S. Modh Adv. Respondent by Smt. Swati Agarwal, Sr. DR Date of hearing 12/10/2021 Date of pronouncement 22/10/2021

ORDER Per Sanjay Arora, AM This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-1, Jabalpur (‘CIT(A)’ for short) dated 01/10/2018, dismissing the assessee’s appeal contesting its’ assessment under section 147 read with section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the Assessment Year (AY) 2008-09 vide order dated 16/06/2014. 2. The brief facts of the case are that the assessee, a partnership firm in contract business, was assessed at a total income of Rs.6,19,810 for the relevant year vide assessment u/s. 143(3) of the Act dated 23.12.2010 (PB pgs. 45-47). Subsequently, notice u/s. 148(1) was issued on 29.7.2013, and its’ income reassessed at Rs.12,81,445 (Rs.12,81,450) by disallowing interest (Rs.1,98,930) 1

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) and remuneration (Rs. 4,62,705) to partners. It is the reopening of assessment as well as the disallowance on merits that is challenged in the instant appeal. The respective cases 3.1 The assessee’s case qua reopening is that it is a case of change of opinion inasmuch as no new material had been brought on record or specified in the reasons recorded (PB pg.9). The basis of the reopening is that the revised partnership deed, effective 1.4.2007, i.e., the beginning of the relevant previous year, was notorized on 4.2.2010 (PB pgs.41-43), wrongly mentioned as 4.10.2010 in the reasons recorded. The partnership deed was on record, as apparent from the audit objection (PB pg.14) and examined by the Assessing Officer (AO). What untrue information can thus be attributed to the assessee which only would validate the reopening inasmuch as it is beyond a period of four years from the end of the relevant assessment year? The reason to believe itself is not of the AO himself, as the law contemplates, but only in view of the audit objection aforesaid. Even the copy of the reasons recorded was supplied to the assessee only at the first appellate stage. There is no violation of section 184, as alleged therein, as the partnership deed was executed on a plain paper on, as stated therein, 1.4.2007, duly signed by all the partners, and it is only later that it was decided to record it on a stamp paper, which was purchased on 31.03.2008 and duly notarized 4.2.2010, so that nothing adverse can be inferred there-from. A deed on a plain paper is an equally valid instrument, i.e., it being not properly stamped would not detract from it being regarded as a valid instrument of partnership. Further, it is not necessary for the partners to sign all the pages of the partnership deed, so that nothing turns on the non-signing by them the front pages of the deed. Shri Modh, the ld. counsel for the assessee, would also quickly address the other two reasons informing the AO’s reason to believe escapement of income from tax, i.e., as per the reasons recorded. One, that the return of income was filed on 28.10.2009 (correct date: 02/10/2009) as against the due date of 2

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) 30.9.2008. The same does not by itself, by any stretch of imagination, lead to any valid reason to believe escapement of income from assessment. Two, interest to senior citizen at Rs.1,87,083 was allowed in violation of section 40(a)(ia) as there was no proof of the payee being, as claimed, a senior citizen. Declaration from the depositor in Form-15H stood duly submitted to the Department on 07.4.2008, as recorded by the AO in the reassessment order. Adverting thereto, he would submit that there could thus be no reason to believe a non-disallowance of interest u/s. 40(a)(ia). 3.2 The Revenue’s case is that the signing on the copy of the deed by all the partners is a pre-requisite for compliance of section 184, so that the same stands contravened, resulting in the disallowance of salary and interest to partners and, consequently, escapement of income from assessment to that extent. The partnership deed has been executed only on 31.03.2008, or later, so that it cannot be said to be evidenced by an instrument of partnership, i.e., for the year under consideration. The claim of the deed having been executed on a plain paper on 1.4.2007 is only an afterthought, i.e., on the discovery of the contravention of law. This is apparent from the conduct and the fact of the assessee furnishing the stamped deed in the first instance, i.e., in the course of the original assessment proceedings. The copy of the reasons recorded stand furnished by the AO by way of meeting the assessee’s objection, and which in fact forms the basis of the assessee’s stating of the reassessment proceedings as being based thereon and, thus, as not valid in law. As held by the ld. CIT(A), a deed not stamped or notarized (authenticated), is not a proper instrument of partnership. 4. I have heard the parties, and perused the material on record. 4.1 Both the parties have, in my view, travelled outside the purview of the question that requires to be addressed so as to answer the assessee’s challenge

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) to the assumption of jurisdiction, i.e., the validity the reasons/s recorded u/s. 148(2). It is not necessary at this stage to discuss the disallowance on merits. 4.2 The first thing that needs to be clarified is if the reason/s to believe escapement of income from assessment to tax based on an audit objection could be a valid reason. The matter, which was subject to difference of opinion by different High Courts, has been settled by the Apex Court in Indian & Eastern Newspaper Society vs. CIT [1979] 119 ITR 996 (SC). It was explained that while a matter of fact could be validly brought to the notice of the assessing authority by the internal audit party, a declaration or exposition of law must be a creation by a formal source, i.e., either legislative or judicial authority. The opinion of the Auditor on a point of law, thus, cannot be regarded as an information leading to a reason to believe for the purpose of s.147. Here, again, the Hon'ble Court drew a distinction between the opinion aforesaid, and the communication of law. If, therefore, the Auditor has only made the assessing authority aware of the law impinging on the matter, the same could not be disqualified inasmuch as it is not an expression of opinion by him. In the facts of the case, all that the Revenue Audit has brought forth for the consideration of the Assessing Officer are some facts, which may have a bearing on the compliance or otherwise of s.147; s. 40(a)(ia); and s.184 (leading to the consequence of s.185). That the same appealed to the AO is another matter. The reasons recorded, thus, cannot be faulted with on this score i.e., for being based on an audit objection/s. The assessee’s argument, thus, fails. 4.3 Next, I may dwell on the first proviso to s.147, i.e., if the assessee had not disclosed fully and truly all material facts necessary for its’ assessment for the relevant year. This is as even if the reason/s recorded, reproduced as under (in the relevant part), is valid, there cannot be a valid reopening unless this additional condition is also satisfied: ‘Further, on going through the records, it is found that the photocopy of front pages of revised partnership deed submitted does not bear the signatures of the partners which 4

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) is one of the requirements of the deed as and when revised. The photocopy of the deed has been notarized on 4/10/2010 whereas the deed is effective from 01/04/2007. Also, it cannot be ascertained from the copy of the deed as to when the non-judicial stamps were purchased. The matter needs to re-examined for contravention to the provision of the section 184 of the I.T. Act.’ In my view, the said condition is clearly satisfied qua the afore-stated reason. The assessee admittedly did not file the certified copy of the revised partnership deed dated 1.4.2007 along with the return of income, as required by law, and which (return of income) was itself furnished only on 28/10/2009, i.e., at a delay of over a year, even as there is admittedly a change in the constitution of the firm during the relevant year (w.e.f. 1.4.2007). Then, again, on being called upon to do so during the assessment proceedings, did not do so fully and completely, failing to furnish the reverse side of the stamp paper, which side only bears the date on which the said paper is purchased. Why? This date is of prime significance as it would imply, unless material contrary thereto is led, that the instrument of partnership was executed on an after the said date, being 31.3.2008 in the instant case. Section 40(b)(iii) restricts the allowance of salary and interest to partners, which is only to be as authorized by and in accordance with the instrument of partnership, from the date of the said instrument. Clearly, therefore, there could be no allowance of interest and salary to partners in view of s. 40(b)(iii). The story of the revised document, which does not even bear the signature of the outgoing partner, being executed on plain paper on 1.4.2007, is completely un-evidenced and without any basis on facts. Why, even the stamped partnership deed does not record this fact, i.e., of it having been executed on 01/4/2007 on plain paper, which is now (31/3/2008 or thereafter) being subject to stamp duty. Rather, it wrongly records of having been executed on 01/4/2007, while the said date could be 31/3/2008 at the earliest. In fact, the document was notorized only on 04/2/2010, further two years later, i.e., during the course of the assessment proceedings. There is no occasion or reason to purchase the stamp paper on 31/3/2008, a year after the change in constitution. 5

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) 4.4 Next, I may discuss the reasons recorded. About the first two, the lesser said the better inasmuch as they are both legally and factually infirm. Late furnishing of the return of income by itself affords no ground to entertain any reason to believe escapement of income from assessment. Likewise, there is no allegation of non-filing of the declaration (F-15H) by the assessee, which only could lead to a valid reason to believe disallowance u/s. 40(a)(ia), not effected in the original assessment. No wonder, the ld. Sr. DR, Ms. Agarwal did not respond to the assessee’s case qua these two reasons in her arguments. Coming to the third and the last reason, which is subject matter of the impugned order in the main, as well as was of the arguments during hearing, the same stands reproduced at para 4.3 above. It reveals two reasons, which are discussed as follows: a. The first reason recorded is as to the contravention of s. 184 due to non- signing of the front pages of the partnership deed by the partners. A non- compliance of s.184 results in non-allowance of interest and salary to partners (s.185). The document is to be read as one whole, with pages being in continuation (PB pgs. 41-44). Therefore, the non-signing by the partners of the front pages thereof cannot be regarded as a non-compliance or contravention of s.184, so as to attract s.185. b. The second reason stated is that the partnership deed is notarized on 4.10.2010 (in fact, on 4.2.2010/PB pgs. 41-44), so that it needs to be ascertained if there was a violation of s.184. There is thus an admission in the reasons recorded itself of there being no definite information with the Revenue as to the date of the instrument and, thus, of the possible consequence/s thereof. How could the same lead to a reason to believe contravention of s.184 and, resultantly, escapement of income from assessment? The Revenue is only making a guess in view of the long time interval between possible date of execution (as stated in the deed itself), i.e., 1.4.2007, and the date of its notarization; rather, admitting that the matter needs to be examined and ascertained. That is, there is a reason to suspect, and not a reason to believe for want of the relevant information. Both the reasons recorded are, thus, not valid grounds for reopening, which, accordingly, fails. The same have in fact not been discussed by the ld. CIT(A). 6

Varhsma Engineers’ Group v. Asst. CIT ITA No. 224/Jab/2018 (AY 2008-09) 4.5 During hearing, a number of other arguments were also assumed by the parties, viz. the validity of a partnership deed on a plain paper; the non-signing of the revised deed by the outgoing partner, Sh. Deocharan Mishra, i.e., in original, which was therefore also not certified by him, etc. All these do not form part of or even arise from the reasons recorded, which cannot be supplemented and, therefore, to no consequence. It is this that led to the observation, at the beginning of the findings by the Tribunal, that the parties have travelled outside the scope of the challenge under reference. The same, to the extent these raise legal issues, could be raised only where the reassessment proceedings had been held as validly initiated. 5. In the result, the assessee’s appeal is allowed. Order pronounced in the Open Court on October 22, 2021 Sd/- (Sanjay Arora) Accountant Member Dated: 22/10/2021 * Aks/ Copy of the Order forwarded to: 1. The Appellant: M/s. Varhsma Engineers’ Group, 656, Vijay Nagar, Jabalpur (M.P.) 2. The Respondent: Assistant Commissioner of Income Tax, Circle – 1(1), Jabalpur (M.P.) 3. The Pr. CIT-1, Jabalpur 4. The CIT(Appeal)-1, Jabalpur 5. The Sr. DR, ITAT, Jabalpur 6. Guard File // True Copy //