M/S. JAI HANUMAN ENTERPRISES (FIRM),ANGUL vs. ITO, ANGUL WARD, ANGUL

आयकर अपीऱीय अधिकरण, “एस.एम.सी”, न्यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, CUTTACK श्री चन्द्र मोहन गगग, न्द्याययक सदस्य के समऺ । BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER आयकर अऩीऱ सं./ITA No.233/CTK/2017 (नििाारण वषा / Assessment Year :2012-2013) M/s Jai Hanuman Vs. ITO, Angul Ward, Angul, Enterprises(Firm), Odisha At-Sanjeebani Market, Angul-759122 स्थायी ऱेखा सं./ जीआइआर सं./ PAN/GIR No. : AAEFJ 7680 F (अऩीऱाथी /Appellant) (प्रत्यथी / Respondent) .. यनधागररती की ओर से /Assessee by : Shri P.R.Mohanty & Shri S.K.Dehuri, AR राजस्व की ओर से /Revenue by : Shri Subhendu Dutta, DR सुनवाई की तारीख / Date of Hearing : 08/03/2019 घोषणा की तारीख/Date of Pronouncement 12/03/2019 आदेश / O R D E R This appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-2, Bhubaneswar, dated 28.02.2017 passed in First Appeal No.0024/2015-16 for the assessment year 2012-2013. 2. Ld. Assessee‟s Representative (AR) submitted that the assessee does not want to press the ground Nos.1 & 2, accordingly, the same are dismissed as not pressed. Grounds No.5 & 6 are of general in nature, therefore, the same are not being adjudicated. 3. Now, the remaining effective grounds are ground No.3 & 4, which read as under :- “3. That, the Learned C.I.T (Appeals) has misconstrued/ misappreciated the facts and his order dated 28th February

2 ITA No.233/CTK/2017 2017 in sustaining the additions of interest income for Rs.10,61,806/- disclosed in the P&L account as income from other sources is contrary to facts, arbitrary, excessive, erroneous, bad in law and legally not sustainable. 4. That, the Learned C.I.T (Appeals) has misconstrued/ misappreciated the facts and his order dated 28.02.2017 confirming the action of Learned assessing officer of invoking the provisions of Section-144 of the Act and action of treating the status of the firm as AOP on the ground of noncompliance of notice U/S 142(1) & 143(2) of the Act and thereby denying the deduction of salary and interest to partners is against the principle of natural justice, contrary to facts, arbitrary, excessive, erroneous and bad in law.” Ground No.3 4. I have heard the arguments of both the sides and carefully perused the relevant material placed on the record of the Tribunal. Ld. AR submitted that the amount of interest income of Rs.10,61,806/- disclosed in the profit and loss account is business income of the assessee. Ld. AR further submitted that the assessee firm had availed an overdraft facility from Bank of India which was sanctioned against the pledged of fixed deposit of the borrower during the financial year 2011-2012. Ld. AR submitted that the fixed deposits have been made by the assessee for availing overdraft facility for the purpose of business of assessee and the assessee has paid interest on the amount availed by the assessee firm as overdraft from the bank. Therefore, the interest earned on fixed deposit is inextricably linked with the business activity of the assessee. Hence, the interest has to be treated as business income of the assessee. Ld. AR vehemently pointed out that the ld. CIT(A) has wrongly noted in para 5.3 of the first appellate order that the assessee himself has offered the income as non-business income as in the return of income for A.Y.2012-

3 ITA No.233/CTK/2017 2013, the assessee has not shown any income from other sources, therefore, source of income earned on fixed deposits and the interest amount have been shown in the profit and loss account and the same has been included in the return of income as business income. Ld. AR humbly submitted that so far as due tax on the interest is concerned; the assessee cannot gain anything, if the head of income is changed from business income to income from other sources. For the purpose of other benefits, the assessee wants that the interest income should be treated as business income of the assessee as per the provisions of Income Tax Act, 1961 (in short „the Act‟). 5. Replying to the above, ld. Department Representative (DR) supported the first appellate order and submitted that when the assessee himself has shown the interest income on fixed deposits as business income then the firm cannot change its stand that the same should be treated as business income of the assessee. 6. However, on being asked by the bench, ld.DR could not controvert that in the ITR filed i.e. the Income Tax Return for A.Y.2012-2013 of the assessee firm, the assessee has not shown any income from other sources, therefore, I am inclined to hold that the findings of ld. CIT(A) are not correct and misconceived. From the copy of the certificate issued by the Bank of India, Angul Branch, filed at page 20 of the paper book, I am satisfied that the assessee firm had availed overdraft facility from the bank which was sanctioned in the financial year 2011-2012 against the pledged of fixed deposit by the assessee firm and overdraft amount was used by

4 ITA No.233/CTK/2017 the assessee firm for the purpose of business and interest was also paid thereon. In this situation, earning of impugned interest on fixed deposit is inextricably linked with the business activity of the assessee and the impugned interest income has to be treated as business income of the assessee and the same cannot be put under the head „income from other sources‟ in spite of fact that the assessee has shown this interest income in the profit and loss account and has not shown any amount as income from other sources. Accordingly, ground No.3 of the assessee is allowed and the AO is directed to treat the interest income on fixed deposit amounting to Rs.10,61,806/- as business income. Thus, the ground No.3 of the appeal of the assessee is allowed. Ground No.4: 7. I have heard the arguments of both the sides and carefully perused the relevant material placed on the record of the Tribunal. Ld AR submitted that the ld. CIT(A) was not correct and justified in confirming the action of AO in invoking the provisions of Section 144 of the Act and treated the status of the assessee firm as AOP on the ground of non- compliance of notice u/s.142(1) & 143(2) of the Act and in denying deduction of salary and interest to partners u/s.184(5) of the Act. Ld. AR vehemently pointed out that from the table drawn by the AO at page No.2 of the assessment order, it is clear that there was non-compliance of some notices and on some dates the assessee‟s representative appeared and furnished audit report, list of sundry debtors and bank statement etc. Therefore, it is not a case of complete non-compliance by the assessee.

5 ITA No.233/CTK/2017 Ld. AR further drew the attention of the Bench towards para No.4.1 of the assessment order and submitted that the books of accounts were rejected by the AO due to non-production of books of accounts and the non- compliance of some notices u/s.143(2) & 142(1) of the Act has no relevance with rejection of books of accounts, therefore, interest and salary paid to the partners cannot be disallowed. Ld. AR also pointed out that the partners have shown salary as interest income in their respective returns and have paid tax thereon, therefore, no possibility of any revenue loss to the exchequer. Ld.AR also pointed out that the same amount cannot be taxed twice as the partners have offered the interest and salary income in their return of income and have paid taxes thereon, therefore, the same cannot be taxed in the hands of the assessee firm by making disallowance u/s.184(5) of the Act. 8. ld. AR has also placed reliance on the decision of ITAT Lucknow „A” Bench in the case of Surendra Prasad Misra Vs. ITO, (2006) 104 TTJ 0292 and submitted that disallowance u/s.184(5) of the Act, per se, is not applicable in the cases of framing assessment u/s.144 of the Act. There must be complete failure on the part of the assessee where non- cooperation or non-production of books of accounts is not sufficient to assess the firm as an AOP instead of the partnership firm and denying deduction of interest and salary to partners. 9. Replying to the above, ld. DR strongly supported the assessment order as well as first appellate order and submitted that the AO has drawn a detail table at page 2 of the assessment order which clearly reveals that

6 ITA No.233/CTK/2017 there was no cooperation from the assessee and assessee firm was not complied with the notices issued to it u/s.142(1) & 143(2) of the Act which resulted into rejection of books of accounts. Ld. DR strenuously contended that the AO issued show cause notice on 23.01.2015 along with a notice u/s.142(1) of the Act intimating the assessee that in case of non-production of books of accounts as called for in the notice, the assessment shall be completed u/s.144 of the Act while invoking provisions of Section 145(3) of the Act and on the said date the assessee only produced bank statement and list of sundry debtors and no reply of questionnaire was furnished nor there was any documents as called for in the notice produced including books of accounts. Ld.DR submitted that in this situation the AO has assumed valid jurisdiction to invoke the powers u/s.184(5) of the Act and in denying allowance of interest and salary to the partners. 10. Placing rejoinder to the above, ld. AR submitted that it is not the case of complete non-compliance but on some dates the assessee‟s representative attended the proceedings and complied with the notices issued u/s.143(2) & 142(1) of the Act. Merely non-compliance of some notice and non-production of books of accounts does not legally empower the AO to invoke provisions of Section 184(5) of the Act for denying interest and salary paid to the partners. 11. On careful consideration of the above rival submissions of both the sides, first of all, I find it profitable to reproduce the relevant provisions of Section 184(5) of the Act, which reads as under :-

7 ITA No.233/CTK/2017 “[Assessment as a firm. 184 (1)xxxxxxxxxx (2) xxxxxxxxxxx (3) xxxxxxxxxxx (4) xxxxxxxxxxxx „(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.” In view of the above provisions, I observe that 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". Thus, the provision of Section 184(5) of the Act empowers the AO in denying deduction of interest and salary to the partners, where he has invoked the provision of Section 144 of the Act. 12. I also find profitable in taking cognizance of relevant provision of Section 144 of the Act, which reads as under :- 144. Best judgment assessment (1) ] If any person- (a) fails to make the return required 2 under sub- section (1) of section 139] and has not made a return or a revised return under subsection (4) or sub- section (5) of that section,] or

8 ITA No.233/CTK/2017 (b) fails to comply with all the terms of a notice issued under subsection (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.]” From the relevant para 4.1 of the assessment order, wherein the AO has rejected the book results of the assessee u/s.145(3) of the Act, I observe that the AO has mentioned about non-compliance of two notices. First notice dated 03.11.2014 issued u/s.142(1) of the Act placing the date of hearing on 11.11.2014, in the last column of remarks, there is no mention of non-compliance by the assessee. Therefore, regarding this notice, I am not satisfied with the allegation leveled by the authorities below that there was any non-compliance of notice dated 03.11.2014 on the part of the assessee. Secondly, the AO himself in the second part of para 4.1 stated

9 ITA No.233/CTK/2017 that show cause letter dated 23.01.2015 was issued with the notice u/s.142(1) of the Act intimating the assessee that in case of non- production of books of accounts as called for in the notice, the assessment shall be completed u/s.144 of the Act invoking provisions of Section 145(3) of the Act. The AO further stated that the assessee on the fixed date of hearing i.e. on 23.01.2015 only produced bank statement and list of sundry debtors and there was no reply of questionnaire nor the documents as called for in the notice produced, however, there is no allegation that the assessee did not produce the books of accounts. Therefore, I can safely presume that the allegation of non-production of books of accounts has no legs to stand against the assessee. In the totality of facts and circumstances of the case, I clearly observe that there was a part compliance of the assessee and part non-compliance of the assessee regarding notices issued by the AO but it is not the case of complete non-compliance. 13. In the order of “A” bench of the Lucknow Tribunal in the case of Surendra Prasad Misra (supra), it was held that mere non-cooperation of the assessee making it difficult to determine the correct income may justify an assessment u/s.144 of the Act but that by itself is not sufficient to assess the firm as an AOP u/s.184(5) of the Act. 14. In view of the above discussion and keeping in mind the relevant provisions of Sections 144, 145(3) and 184(5) of the Act, I am of the considered view that the disallowance u/s.184(5) of the Act cannot be treated in every case of assessment u/s.144 of the Act but this provision

10 ITA No.233/CTK/2017 can be invoked as a result of the lapses as mentioned by the legislature u/s.144 of the Act. Meaning thereby, the disallowance u/s.184(5) of the Act does not have a cause and effective relevancy with the assessment framed u/s.144 of the Act and this provision can be invoked only as a result of assessee‟s committing any failure as mentioned u/s.144 of the Act. Considering the totality of circumstances of the present case and the allegation leveled by the AO in the assessment order against the assessee, I am of the considered view that the AO has merely erred in taking provisions of Section 184(5) of the Act without any justified and reasonable basis and without bringing any specific allegation of non- compliance against the assessee. Therefore, disallowance u/s.184(5) of the Act cannot be held as correct and sustainable. I may point out that there was some non-compliance on the part of the assessee but while invoking provisions of Section 145(3) of the Act and proceeding to frame assessment u/s.144 of the Act, the AO has not alleged any other notice except notice dated 03.11.2014 and notice dated 23.01.2015. As I have already mentioned that regarding notice dated 03.11.2014, there is no mention of any non-compliance in the remarks column as mentioned in the assessment order by the AO and in respect of notice dated 23.01.2015 the AO himself noted that the assessee produced bank statement, list of sundry debtors and the assessee did not file reply of questionnaire and documents called for but the AO has not alleged that the assessee did not produce books of accounts as required by the said notice. In these circumstances, invoking provisions of Section 184(5) of

11 ITA No.233/CTK/2017 the Act cannot be held as justified and I decline to accept the findings of authorities below and, thus, the same are dismissed. Accordingly, ground No.4 is allowed and the AO is directed to allow the interest and salary paid by the assessee firm to its partners. 15. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 12/03/2019. Sd/- (CHANDRA MOHAN GARG) न्यानयक सदस्य / JUDICIAL MEMBER कटक Cuttack; ददनांक Dated 12/03/2019 प्र.कु.मम/PKM, Sr.P.S. आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : 1. अऩीऱाथी / The Appellant- . M/s Jai Hanuman Enterprises(Firm), At-Sanjeebani Market, Angul-759122 2. प्रत्यथी / The Respondent- ITO, Angul Ward, Angul, Odisha 3. आयकर आयुक्त(अऩीऱ) / The CIT(A), आयकर आयुक्त / CIT 4. 5. ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, कटक / DR, ITAT, Cuttack 6. गार्ग पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रयत //True Copy// (Senior Private Secretary) आयकर अपीऱीय अधिकरण, कटक / ITAT, Cuttack