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Income Tax Appellate Tribunal, CUTTACK BENCH, CUTTACK
Before: SHRI CHANDRA MOHAN GARG
This is an appeal filed by the assessee against the order of
the Commissioner of Income Tax(Appeals)-2, Bhubaneswar dated
23.5.2017 for the assessment year 2009-2010.
The assessee has raised the following grounds of appeal:
“1) For that the Ld. CIT (A) was not justified in disposing of the appeal ex-party without appreciating the facts properly which violates principles of natural justice.
2) For that the reopening of proceeding u/s. 147 by the Ld assessing officer was erroneous and unwarranted since the reason assigned for re-opening the assessment was not factually correct and thus the assessment order perverse
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and not sustainable in the eye of law. The Ld GST appeal has erred in law by confirming the action of assessing officer.
3) For that the Ld CIT (A) has erred in law by confirming the disallowances Rs. 1,81,023/- and Rs. 2,37,030/- towards interest on partners capital & remuneration to partners U/s 184(5). Payment of interest and salary to partner needs to allowed in full.
4) For that the disallowances confirmed by the Ld CIT (A) U/s 184(5) is neither based facts and not sustainable in the eye of law. Hence the said disallowances of RS. 4,18,053/- (181023+237030) should be allowed for the sake of natural justice.”
The assessee has raised two issues in the grounds of appeal.
However, at the time of hearing, ld counsel for the assessee only
emphasized regarding Ground Nos.3 & 4 pertaining to the
disallowances for payments in respect of remuneration and
interest on capital paid to the partners made under section 184(5)
of the Income tax Act, 1961 (for short ‘the Act’) even though
assessment is completed under section 144/147 of the Act.
The ld A.R. did not argue Ground Nos.1 & 2 of appeal.
Thus, I deem it that the assessee is not interested in pressing
these grounds of appeal and, therefore, same are dismissed as
not pressed.
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The assessee is a firm and derives income from contract
works. Initially, the assessment was framed u/s.144 of the Act.
Later on, the Assessing Officer noticed that the assessee had
disclosed a gross contract receipt of Rs.77,16,653/-. However, in
26AS date, the gross contract receipt from different contractees is
Rs.78,16,653/, thereby disclosing a sum of Rs.1,00,000/- than the
disclosed gross receipt in the return of income. Therefore, the AO
was of the view that income chargeable to tax had escaped
assessment within the meaning of section 147 of the Act.
Thereafter, he issued notice u/s.148 of the Act. No return of
income was furnished in response to notice u/s.148 of the Act but
the reopening was challenged by the assessee. Subsequently,
notices u/s.142(1) of the Act were issued on various dates. It is
observed that in some dates there was partial compliance and in
some cases, there was no compliance by the assessee.
Therefore, the Assessing Officer passed order u/s.147 r.w.s 144 of
the Act on 2.3.2015 determining the total income at Rs.6,25,330/-
On appeal before the CIT(A), the assessee also partially
complied the notices and in some other dates, no compliance was
made. Before the CIT(A), it was the contention of the assessee
that the AO should have allowed salary and interest paid to
partners for determining the income of the assessee. However,
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the CIT(A) was of the view that u/s.184(5) of the Act, the
assessee is not entitled for deduction by way of any payment of
interest, salary, bonus, commission or remuneration by whatever
name called made by the firm to the partner, if the assessment
order is passed as a result of failure of the assessee as mentioned
in section 144 of the Act. Hence, he confirmed the action of the
Assessing Officer.
I have heard the rival submissions and perused the relevant
materials on record of the Tribunal. Ld counsel for the assessee
first of relied on the decision of this bench of the Tribunal in the
case of M/s. Jai Hanuman Enterprises vs ITO IN ita
No.233/CTK/2017 for the assessment year 2012-13 order dated
12.3.2019 and contended that this issue is covered in favour of of
the assessee. He submitted that the disallowance u/s.184(5) of
the Act is not applicable in the cases of framing assessment under
section 144 of the Act. He submitted that the assessee has also
appeared and sought adjournment before the AO. He submitted
that the income tax authorities should have allowed deduction of
interest and salary to partners.
On the other hand, ld D.R. vehemently opposed the
contention of ld A.R. of the assessee.
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There is no dispute that the assessment was done under
section 144 as the assessee had not complied to the hearing
notices served upon the assessee. Later on the Assessing Officer
had reason to believe that income had escaped assessment.
Therefore, he issued notice u/s.148 of the Act and also issued
notices u/s.142(1). There were some partial compliances and in
some cases, no compliance was made. Hence, he framed
assessment u/s.147/144 of the Act. Section 184 and Section 144
and 145, which are relevant for the purposes of adjudicating on
this question, are reproduced below for ready reference:
“Section 184- Assessment as a firm (1) …..
(2) ….. Explanation….. (3) ……. (4) ……...
(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.
Section 144- Best judgement assessment
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(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 sub-section (5) of that section; or
(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 1504[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 subsection (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.
Section 145 - Method of accounting.
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(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.
A plain reading of these two legislative provisions shows
that the disallowance under section 184(5) comes into play not as
a result of the assessment under section 144 but as a result of the
lapses as mentioned in section 144. In other words, the
disallowance under section 184(5) does not have a cause and
effect relationship with assessment being framed under section
In this regard, it is noteworthy that Section 184(5)
categorically states that when “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”. This provision comes into play
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only when the assessment is framed under section 144 only as a
result of the assessee’s committing any such failure as is
contemplated under section 144. However, in a situation in which
the assessment is completed in the manner as prescribed in
section 144 but such a course of action has been adopted because
of “the Assessing Officer is not satisfied about the correctness or
completeness of the accounts of the assessee”, referred to in
section 145(3), clearly the disabling provisions of Section 184(5)
do not come into play.
Clause (b) of sub-section(1) of Section 144 of the Income
tax Act, 1961 provides that when the assessee fails to comply with
all the terms of notice issued under sub-section(1) of section 142
of the Act or fails to comply with the direction issued under sub-
section(2A) of that section, then the AO is empowered to frame
the assessment order as per provisions of section 144 of the Act
i.e. best judgment assessment.
In the present case, ld A.R. in all fairness, accepted that in
compliance to notice dated 10.10.2014 u/s.142(1) of the Act, the
assessee only submitted bank statement and did not submit audit
report for the current year and past two years alongwith complete
names and address of sundry creditors and sundry debtors. Ld
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A.R. has contended that by furnishing copy of bank statement, the
assessee partly complied with the notice dated 10.10.2014.
Therefore, the rigours of section 184(5) of the Act cannot be
triggered against the assessee for disallowing interest and salary
to its partners.
I am in agreement with this contention that the assessee
partly complied with the notice dated 10.10.2014 of the Assessing
Officer by furnishing only copy of bank statement and other
documents as required by the AO. Furthermore, from the table
reproduced by the AO at page 2 para 2 of the assessment order, I
further observe that the Assessing Officer also issued another
notice u/s.142(1) of the Act on 5.2.2015, which was duly served
on the assessee but there was no compliance by the assessee.
From para 4.3 of the assessment order, I also observe that the
Assessing Officer has categorically noted that after several notices
u/s.142(1) of the Act a show cause notice dated 5.2.2015
alongwith another notice u/s.142(1) of the
Act was intimated/served on the assessee informing that failure
to produce audit report and books of account, the case shall be
disposed of by invoking the provisions of section 145(3) of the
Act. The Assessing Officer has reproduced the contents of show
cause notice. Thereafter, the AO in para 4 4 further noted that
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the assessee has also failed to comply with the terms of notice
u/s.142(1) of the act i.e. dated 5.2.2015. Hence, the assessment
should be framed by invoking the provisions of section 144 of the
Act. In this situation, I am satisfied with the contention of the
Assessing Officer which were brought to my notice during the
hearing by ld D.R. that there was non-compliance to notice
u/s.142(1) dated 5.2.2015 of the Act by the assessee. Therefore,
the Assessing Officer was compelled to take recourse of provisions
of section 144 of the Act in framing assessment under best
judgement assessment.
In view of above noted facts and circumstances of the case,
I incline to hold that the facts and circumstances of the case are
different from the facts of the case relied by ld A.R. of the
assessee in the case of M/s. Hanuman Enterprises (supra) as in
that case there was part non-compliance by the assessee and in
the present case, there is a part non-compliance regarding notice
dated 10.10.2014 and complete non-compliance regarding notice
dated 5.2.2015. Therefore, the Assessing Officer was right in
framing assessment order u/s.144 of the Act and in denying
allowance of interest and salary paid to the partners by taking
support of provisions of section 184(5) of the Act. Hence, the sole
ground of the assessee being devoid of merits is dismissed.
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In the result, appeal filed by the assessee is dismissed.
Order pronounced on 02/05/2019. Sd/- (Chandra Mohan Garg) JUDICIALMEMBER Cuttack; Dated 02/05/209 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant : Eastern Engineering Venture, Similipada, Angul
The respondent : ITO, Angul Ward, Angul. 3. The CIT(A)-2, Bhubaneswar 4. Pr.CIT- 2, Bhubaneswar 5. DR, ITAT, Cuttack 6. Guard file. //True Copy//
By order
Sr. Pvt. Secretary, ITAT, Cuttack
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