Aquasub Engineering, Coimbatore V. DCIT, Coimbatore

CO 112/CHNY/2016

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 2767 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 03-02-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 18-01-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 03-08-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G SURESH; S SUBRAMANIAN
• Assessee Lawyers: SUNDER RAO
• Keywords: Rule of consistency

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI [ CAMP: COIMBATORE ] . . . , ! .#$#%, ' !( BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ./ ITA NO.1958/MDS/2016 & C.O. NO.111/MDS/2016 (IN I.T.A. NO. 1958/MDS/2016) % *% / ASSESSMENT YEAR : 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE 4, COIMBATORE. V. M/S AQUA PUMP INDUSTRIES, TUDIYALUR POST, COIMBATORE 641 034. PAN : AADFA 8027 C (,-/ APPELLANT) ( RESPONDENT & CROSS-OBJECTOR) ./ ITA NO.1959/MDS/2016 & C.O. NO.112/MDS/2016 (IN I.T.A. NO.1959/MDS/2016) % *% / ASSESSMENT YEAR : 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE 4, COIMBATORE. V. M/S AQUA SUB ENGINEERING, THUDIYALUR POST, COIMBATORE 641 034. PAN : AADFA 8028 P (,-/ APPELLANT) ( RESPONDENT & CROSS-OBJECTOR) ,- . / / APPELLANT BY : SHRI SUNDER RAO, CIT 01,- . / / RESPONDENTS BY : SHRI G. SURESH, CA & SHRI S. SUBRAMANIAN, CA 2 . 3' / DATE OF HEARING : 18.01.2017 45* . 3' / DATE OF PRONOUNCEMENT : 03.02.2017 2 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 / O R D E R PER BENCH: THESE APPEALS FILED BY THE REVENUE IN RESPECT OF THE ASSESSEES CONCERNED FOR THE IMPUGNED ASSESSMENT YEA R ARE DIRECTED AGAINST THE ORDERS DATED 31.03.2016 OF THE COMMISSI ONER OF INCOME TAX (APPEALS)-3, COIMBATORE. 2. GROUNDS TAKEN BY THE REVENUE ARE COMMON. IT ASS AILS DELETION OF DISALLOWANCE ON CLAIM MADE BY THE ASSESSEES UNDE R SECTION 40(B) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). 3. FACTS APROPOS ARE THAT THE ASSESSEES HAD FILED R ETURNS IN THE STATUS OF PARTNERSHIP FIRM FOR THE IMPUGNED ASSESSM ENT YEAR. DURING THE COURSE OF ASSESSMENT PROCEEDING, IT WAS NOTED B Y THE ASSESSING OFFICER THAT THE PARTNERSHIP FIRMS CONSISTED OF THE FOLLOWING PARTNERS:- IN M/S AQUA PUMP INDUSTRIES: - S.NO. NAME OF THE PARTNERS 1. SHRI R. KUMARAVELU HUF 2. THE MARIGOLD TRUST 3. THE CHRYSANTHEMUM TRUST IN M/S AQUA SUB ENGINEERING:- 3 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 S.NO. NAME OF THE PARTNERS 1. SHRI R. KUMARAVELU HUF 2. THE MARIGOLD TRUST 3. THE CHRYSANTHEMUM TRUST THE ASSESSING OFFICER WAS OF THE OPINION THAT IN TH ESE PARTNERSHIP FIRMS, THERE WAS NOT EVEN A SINGLE PARTNER WHO WAS A NATURAL PERSON. AS PER THE A.O., ALL THE PARTNERS WERE LEGAL OR ART IFICIAL ENTITIES AND THE PARTNERSHIP FIRMS COULD NOT EXIST WITH ARTIFICIAL P ERSONS ALONE. WHEN THIS WAS PUT TO THE ASSESSEES, THEIR REPLY WAS THAT AN INDIVIDUAL COULD BE A PARTNER REPRESENTING HUF WHERE HE WAS A MEMBER . RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF APEX COURT IN TH E CASE OF RASHIK LAL & CO. V. CIT (1998) 229 ITR 458. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED. ACCORDING TO HIM, BY VIRTUE OF SECTION 40(B) OF THE ACT, ONLY AN INDIVIDUAL COULD BE A PARTNER IN A PAR TNERSHIP FIRM AND AN ENTITY LIKE HUF COULD NOT BE A PARTNER. HE, THEREF ORE, TREATED THE ASSESSEES AS ASSOCIATION OF PERSONS. INTEREST PAID TO THE PARTNERS AND REMUNERATION TO THE WORKING PARTNERS WERE DISAL LOWED AND ASSESSMENTS COMPLETED. 4. AGGRIEVED, THE ASSESSEES MOVED APPEALS BEFORE TH E CIT(APPEALS). ARGUMENT OF THE ASSESSEES WAS THAT T HEY WERE ALREADY 4 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 GRANTED REGISTRATION BY DCIT, SPECIAL RANGE II, COI MBATORE BY ORDER UNDER SECTION 185(1)(A) ON 23.08.1993 AND THE FIRMS WERE ENJOYING THAT STATUS SINCE ASSESSMENT YEAR 1991-92. AS PER THE ASSESSEES, THE DEED OF PARTNERSHIP WAS EXECUTED BY THREE INDIVIDUA LS, NAMELY, SHRI R. KUMARAVELU, MRS. HOMAI KUMARAVELU AND DR. H.S. ADEN WALLA. JUST BECAUSE THEY REPRESENTED EITHER HUF OR TRUST, AS PE R THE ASSESSEES, WOULD NOT MEAN THAT THE PARTNERSHIP FIRMS WERE NOT GENUINE ONE. THE ASSESSEES ALSO RELIED ON THE JUDGMENT OF APEX COURT IN THE CASE OF CHANDRAKANT MANILAL SHAW V. CIT (1992) 193 ITR 1 AN D ALSO THAT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF ISHWAR BHU VAN HINDU HOTEL V. CIT (2006) 281 ITR 139. THE CIT(APPEALS) WAS AP PRECIATIVE OF THE CONTENTION TAKEN BY THE ASSESSEES. ACCORDING TO HI M, IN THE CASE OF RAM LAXMAN SUGAR MILLS V. CIT (1967) 66 ITR 613, TH E HON'BLE SUPREME COURT HAD HELD THAT THE KARTA OF A HUF COUL D ENTER INTO AN AGREEMENT OF PARTNERSHIP WITH ANOTHER UNDIVIDED FAM ILY MEMBER OR STRANGER. FURTHER, ACCORDING TO HIM, HON'BLE SUPRE ME COURT IN THE CASE OF RASHIK LAL & CO. (SUPRA) CLEARLY HELD THAT THOUGH A HUF COULD NEVER BE A PARTNER OF A PARTNERSHIP FIRM, IF A PERS ON NOMINATED BY A HUF JOINS A PARTNERSHIP, THE PARTNERSHIP WOULD BE B ETWEEN THE NOMINATED PERSON AND THE OTHER PARTNERS OF THE FIRM . THEREFORE, 5 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 ACCORDING TO HIM, A KARTA OF HUF COULD BE A PARTNER AND THE RELATIONSHIP OF THE KARTA AS A PARTNER VIS--VIS TH E FIRM AND OTHER PARTNERS MAY NOT BE RELEVANT IN DECIDING WHETHER TH E PARTNERSHIP WAS GENUINE OR NOT. INSOFAR AS APPLICATION OF SECTION 40(B) OF THE ACT WAS CONCERNED, AS PER THE LD. CIT(APPEALS), THIS DID NO T PROHIBIT THE KARTA OF A HUF OR A TRUSTEE OF A TRUST BECOMING PARTNERS OF A FIRM. AS PER THE LD. CIT(APPEALS), FOR THE CONCERNED PARTNERSHIP FIR MS, THESE PERSONS COULD BE CONSIDERED AS INDIVIDUALS. HE RELIED ON T HE JUDGMENT OF HON'BLE APEX COURT IN CIT V. BAGYALAKSHMI & CO. (55 ITR 660) AND ALSO THE COMMENTARY OF CHATURVEDI & PITHISARIA AS C ONTAINED IN PAGE 3805 OF INCOME TAX LAW VOLUME 3 SIXTH EDITION 2014. HE THUS HELD THAT THE ASSESSEES WERE GENUINE PARTNERSHIP FIRMS A ND THEREFORE, REMUNERATION PAID TO WORKING PARTNERS AND INTEREST PAID TO THE PARTNERS COULD NOT BE DISALLOWED. HE DELETED THE DISALLOWAN CE MADE. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE S TRONGLY ASSAILING THE ORDER OF THE LD. CIT(APPEALS), SUBMIT TED THAT ALL THE THREE PARTNERS IN THE FIRMS WERE PARTNERS IN REPRESENTATI VE CAPACITY. ACCORDING TO THE LD. D.R., UNLESS ONE OF THESE PERS ONS WAS A NATURAL INDIVIDUAL, A PARTNERSHIP FIRM COULD NOT BE FORMED. RELIANCE WAS ONCE AGAIN LAID ON THE JUDGMENT OF APEX COURT IN RASHIK LAL & CO. (SUPRA). 6 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 6. PER CONTRA, LD. AR STRONGLY SUPPORTING THE ORDER OF THE LD. CIT(APPEALS), SUBMITTED THAT THE PARTNERSHIP DEEDS CLEARLY PROVIDE THAT THE PARTNERSHIPS WERE ENTERED INTO BY THE CONCERNED INDIVIDUALS. JUST BECAUSE THEY REPRESENTED A TRUST OR HUF, AS PER THE LD. A.R., WOULD NOT MAKE THE PARTNERSHIP A NON-GENUINE ONE. IN ANY CASE, ACCORDING TO HIM, THE PARTNERSHIP FIRMS HAD ACQUIRED THE STAT US OF REGISTERED FIRMS AS EARLY AS ASSESSMENT YEAR 1991-92 UNDER SECTION 1 85(1)(A) OF THE ACT AND THEREFORE, THE ASSESSING OFFICER COULD NOT DISTURB A CONSISTENT POSITION TAKEN BY THE REVENUE FOR MORE THAN TWO DEC ADES. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS CAREFULLY. THE QUESTION BEFORE US IS WHETHER THE P ARTNERSHIP WAS ONE FORMED BETWEEN THE HUF AND TWO TRUSTEES OR BETWEEN THREE INDIVIDUALS. ONE MORE QUESTION ALSO ARISES WHETHER A VALID PARTNERSHIP COULD BE FORMED BETWEEN THREE PERSONS IN REPRESENTA TIVE CAPACITY. RELEVANT CLAUSES IN PARTNERSHIP DEED IN THE CASE OF AQUA SUB ENGINEERING READ AS UNDER:- THIS DEED OF PARTNERSHIP ENTERED THIS TWENTY FOURTH DAY OF MAY, ONE THOUSAND NINE HUNDRED AND NINETY AMONG: 7 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 (1) MR. R. KUMARAVELU, SON OF LATE MR. R. RAMASWAM Y, AGED ABOUT 37 YEARS, RESIDING AT 703, AVANASHI ROAD , COIMBATORE, HEREINAFTER CALLED THE PARTY OF THE FI RST PART; (2) MRS. HOMAI KUMARAVELU, W IFE OF MR. R. KUMARAVELU, AGED ABOUT 28 YEARS, RESIDING AT 703, A VANASHI ROAD, COIMBATORE, HEREINAFTER CALLED THE PARTY OF SECOND PART; (3) DR.H.S. ADENWALLA, SON OF LATE SORAB HIRJI ADENWALLA, AGED ABOUT 59 YEARS, RESIDING AT JUBILEE MISSION HOSPITAL, TRICHUR HEREINAFTER CALLED THE PARTY OF THIRD PART; AND (4) MRS. DAMAYANTI RAMACHANDRAN, WIFE OF LATE MR. R. RAMACHANDRAN, AGED ABOUT 43 YEARS, RESIDING AT 16 A.T.D STREET, RACE COURSE, COIMBATORE, HEREINAFTER CALLED THE PARTY OF THE FOURTY PART 8. SIMILAR IS THE WORDINGS IN THE CASE OF AQUA PUMP INDUSTRIES ALSO. THE ASSESSING OFFICER HAD CONSIDERED THESE F IRMS TO HAVE BEEN FORMED BETWEEN THESE PERSONS IN THEIR REPRESENTATIV E CAPACITY AND NOT IN THEIR INDIVIDUAL CAPACITY, CONSIDERING THE FOLLO WING CLAUSE APPEARING IN PAGE 2 OF THE PARTNERSHIP DEED. THE SAID CLAUSE IS REPRODUCED HEREUNDER:- WHEREAS, THE PARTIES HERETO OF THE SECOND AND THIRD PARTS ARE PARTNERS IN A REPRESENTATIVE CAPACI TIES RESPECTIVELY, REPRESENTING THE CHRYSANTHEMUM TRUST, AND THE MARIGOLD TRUST, BEING TRUSTS EVIDENCED BY TWO INDENTURES OF TRUST DATED THE 8 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 TWENTYFIFTH DAY OF FEBRUARY, ONE THOUSAND NINE HUND RED AND NINETY. WHEREAS, MR. R. KUMARAVELU THE PARTY HERETO OF THE FIRST PART REPRESENTS THE HINDU UNDIVIDED FAMIL Y CONSISTING OF HIMSELF, HIS WIFE AND MINOR DAUGHTER, OF WHICH HINDU UNDIVIDED FAMILY HE IS AT PRESENT THE KARTHA. 9. IN OUR OPINION, THE ABOVE CLAUSE WOULD NOT IPSO FACTO CONVERT PARTNERSHIP FIRM AS ONE ENTERED BETWEEN TWO TRUSTS AND AN HUF. THIS IS BECAUSE OF THE REASON THAT IN THE FIRST PART OF PARTNERSHIP WHERE THE DESCRIPTION OF PARTIES ARE GIVEN, IT IS NEVER STATE D THAT THE PARTIES WERE REPRESENTING ANY TRUST OR HUF. EVEN IF WE TAKE THA T SHRI R. KUMARAVELU WAS REPRESENTING AN HUF, BY VIRTUE OF JU DGMENT OF APEX COURT IN THE CASE OF RASHIK LAL & CO. (SUPRA), HE C OULD ALSO BE CONSIDERED AS A PARTNER IN HIS INDIVIDUAL CAPACITY. PARA 13 OF THE JUDGMENT OF APEX COURT IS REPRODUCED HEREUNDER:- A HINDU UNDIVIDED FAMILY CANNOT BE IN A BETTER POSITION THAN A FIRM IN THE SCHEME OF THE PARTNERSH IP ACT. THE REASONS THAT LED THIS COURT TO HOLD THAT A FIRM CANNOT JOIN A PARTNERSHIP WITH ANOTHER INDIVIDUAL WILL A PPLY WITH EQUAL FORCE TO A HINDU UNDIVIDED FAMILY. IN LAW, A HINDU UNDIVIDED FAMILY CAN NEVER BE A PARTNER OF A PARTNE RSHIP FIRM. EVEN IF A PERSON NOMINATED BY THE HINDU UNDIV IDED FAMILY JOINS A PARTNERSHIP, THE PARTNERSHIP WILL BE BETWEEN THE NOMINATED PERSON AND THE OTHER PARTNERS OF THE FIRM. HAVING REGARD TO THE DEFINITION OF PARTNERSHIP AN D PARTNERS AND IN VIEW OF THE PRINCIPLE LAID DOWN I N DULICHANDS CASE [1956] 29 ITR 535 (SC), IT IS NOT POSSIBLE TO HOLD THAT A HINDU UNDIVIDED FAMILY BEING A FLUCT UATING 9 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 BODY OF INDIVIDUALS, CAN ENTER INTO A PARTNERSHIP W ITH OTHER INDIVIDUAL PARTNERS. IT CANNOT DO INDIRECTLY WHAT I T CANNOT DO DIRECTLY. IF THE KARTA OR ANY OTHER MEMBER OF A HIN DU UNDIVIDED FAMILY JOINS A PARTNERSHIP, HE CAN DO SO ONLY AS AN INDIVIDUAL. HIS RIGHTS AND OBLIGATIONS VIS-A-VIS OT HER PARTNERS ARE DETERMINED BY THE PARTNERSHIP ACT AND NOT BY HI NDU LAW. 10. WHAT THEIR LORDSHIP HELD IS THAT EVEN IF A PERS ON NOMINATED BY A HUF JOINS A PARTNERSHIP, THE PARTNERSHIP COULD BE DEEMED AS ONE BETWEEN SUCH NOMINATED PERSON AND OTHER PARTNERS OF THE FIRM. THE APEX COURT DID NOT HOLD THAT SUCH PARTNERSHIP WOULD ONLY BE AN ASSOCIATION OF PERSONS. IN ANY CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEES WERE GRANTED THE STATUS OF REGISTERED FIR M BY VIRTUE OF PROVISIONS OF SECTION 185(1) OF THE ACT SINCE ASSES SMENT YEAR 1991- 92. THE POSITION CONTINUED FOR A PERIOD OF TWENTY YEARS AND IT WAS AFTER SUCH TWENTY YEARS, THE ASSESSING OFFICER ATTE MPTED TO DISTURB THIS. WHEN A SET OF FACTS WHICH PERMEATES FROM EAR LIER YEARS, IS CONSISTENTLY THE SAME, IT WOULD NOT BE APPROPRIATE TO DISTURB THE CONCLUSIONS REACHED BASED ON SUCH FACTS. NO DOUBT, RULE OF RES JUDICATA MAY NOT BE APPLICABLE TO THE INCOME-TAX PROCEEDING S, BUT THE RULE OF CONSISTENCY DEMANDS THAT A POSITION CONSIST ENTLY TAKEN SHALL NOT BE DISTURBED UNLESS THERE WERE SIGNIFICANT CHAN GE IN FACTS. INSOFAR AS RELIANCE PLACED ON SECTION 40(B) OF THE ACT BY T HE A.O. IS 10 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 CONCERNED, THERE IS NOTHING IN THAT SECTION TO CONC LUDE THAT A PARTNERSHIP COULD NOT BE FORMED BY A KARTA OF AN HU F IN HIS INDIVIDUAL CAPACITY WITH OTHER PERSONS. THE SAME, IN OUR OPIN ION, WOULD ALSO APPLY WHERE AN INDIVIDUAL WHO JOINS PARTNERSHIP IN A REPRESENTATIVE CAPACITY. IT CAN ALWAYS BE CONSIDERED THAT HE WAS DOING SO IN HIS INDIVIDUAL CAPACITY. THIS POSITION HAS BEEN REITER ATED BY HON'BLE APEX COURT IN THE CASE OF BAGYALAKSHMI & CO. (SUPRA), WH ICH HAS ALSO BEEN RELIED ON BY THE LD. CIT(APPEALS). CONSIDERING THE FACTS OF THE CASE, WE ARE INCLINED TO UPHOLD THE ORDERS OF THE CIT(APP EALS). THE APPEALS OF THE REVENUE STAND DISMISSED. 11. THE CROSS-OBJECTIONS FILED BY THE ASSESSEES BEI NG IN SUPPORT OF THE ORDERS OF THE CIT(APPEALS), HAVE BECOME INFRUCT UOUS. 12. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE AS WELL AS THE CROSS-OBJECTIONS OF THE ASSESSEES ARE DISMISSED. ORDER PRONOUNCED ON 3 RD FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . . . ) ( ! .#$#% ) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) /JUDICIAL MEMBER ' / ACCOUNTANT MEMBER /CHENNAI, 7 /DATED, THE 3 RD FEBRUARY, 2017. 11 I.T.A. NO.1958 & 1959/MDS/16 C.O. NOS.111 & 112/MDS/16 KRI. . 0389 :9*3 /COPY TO: 1. ,- /APPELLANT 2. 01,- /RESPONDENT 3. 2 ;3 () /CIT(A)-3, COIMBATORE 4. PRINCIPAL CIT-2, COIMBATORE 5. 9< 03 /DR 6. =% > /GF.