CHAUHAN & CHAUHAN, MUMBAI V. ITO 19(1)(3), MUMBAI

ITA 2293/MUM/2010

• Counselvise Citation: 229319914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 05-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 23-03-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R C JAIN
• Section: 271(1)(c); 142(1); 263; 63; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI J. SUDHAKAR REDDY (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO. 2293/MUM/2010 ASSESSMENT YEAR- 2005-06 M/S. CHAUHAN & CHAUHAN, 638, GORI HOUSE, TPS-III, 8 TH ROAD, KHAR(W) MUMBAI-400 053 PAN-AACFCO584F VS. THE ITO 19(1)(3), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RESPONDENT) ITA NO. 2294/MUM/2010 ASSESSMENT YEAR- 2005-06 M/S. CHAUHAN & CHAUHAN, 638, GORI HOUSE, TPS-III, 8 TH ROAD, KHAR(W) MUMBAI-400 053 PAN-AACFCO584F VS. THE ITO 19(1)(3), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RESPONDENT) A PPELLANT BY: SHRI R.C. JAIN RESPONDENT BY: SHRI R.K. GUPTA O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 15.1.2010 PASSED BY THE LD. CIT(A)-30 FOR THE ASSESSMENT YEAR 2005-06. ITA NO. 2293/M/2010 2. THE RETURN OF INCOME WAS FILED ON 27.10.2005 DEC LARING TOTAL INCOME AT RS. 5,06,920/-. THE CASE WAS SELECTED FO R SCRUTINY AND NOTICE U/S. 143(2) WAS ISSUED ON 10.10.2006 ON THE ASSESSE E. THE NOTICES U/S. M/S. CHAUHAN & CHAUHAN 2 142(1) AND 143(2) WERE ALSO ISSUED TO THE ASSESSEE DUE TO SOME INADVERTENT LAPSE RESULTING INTO NON-REPRESENTATION IN THE ASSESSMENT PROCEEDINGS, THE ASSESSMENT WAS COMPLETED U/S. 144 OF THE I.T. ACT. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFI CER PASSED THE ORDER WITH RESPECT TO REMUNERATION TO PARTNERS/MEMBERS AS FOLLOWS: THE STATUS OF THE FIRM IS HEREBY TREATED AS AN AOP AND THEREFORE ANY REMUNERATION OR INTEREST TO ITS MEMBE RS IS NOT ALLOWABLE AS DEDUCTION AS PER THE PROVISIONS OF SEC . 184(5). THE ASSESSEE HAS GIVEN RS. 3,08,638/- AS REMUNERATI ON TO ITS MEMBERS. THE SAME IS HEREBY DISALLOWED AND ADDED B ACK TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDI NGS U/S. 271(1)(C) READ WITH EXPLANATION 1 OF THE I.T. ACT I S INITIATED SEPARATELY. 3. THE AO REFERRED TO REMUNERATION OR INTEREST AT P ARA 7 OF HIS ORDER BUT WHILE COMPLETING THE DISALLOWANCE TOOK INTO ACC OUNT ONLY THE REMUNERATION TO PARTNERS AMOUNTING TO RS. 3,08,638/ -. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE T HE LD. CIT(A). THE LD. CIT(A) AT PARA 8.4 HELD AS FOLLOWS: IN GROUND NO. 2(C), THE APPELLANT HAS CHALLENGED T HE DISALLOWANCE OF REMUNERATION PAID TO THE PARTNERS O F RS. 3,08,638/-. THE SAID AMOUNT WAS DISALLOWED U/S. 18 4(5) OF THE ACT. SINCE THE ASSESSMENT IN THE CASE OF THE A PPELLANT WAS COMPLETED U/S. 144 AND ON ACCOUNT OF OVERRIDING PROVISIONS CONTAINED IN SEC. 184(5) R.W.S. 144 OF I .T. ACT, 1961, THE DISALLOWANCE MADE ON THIS ACCOUNT BY THE AO IS CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE U S AND HAS RAISED THE FOLLOWING GROUND: 6. THE ASSESSEE HAS NOT PRESSED GROUND NO. 1 THEREF ORE IT IS DISMISSED AS NOT PRESSED. 7. GROUND NO. 2 & 3 RAISED BY THE ASSESSEE READ AS FOLLOWS: M/S. CHAUHAN & CHAUHAN 3 2. THE LD. CIT(A) WHILE UPHOLDING THE ASSESSMENT U /S. 144 OF I.T. ACT, 1961 ERRED IN LAW IN CONFIRMING ASSESSMENT IN THE STATUS OF A.O.P. 3. THE LD. CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF REMUNERATION TO PARTNERS OUGHT TO HAVE DIRECTED THE ITO NOT TO TAX THE REMUNERATION OF RS. 3,08,638/- IN TH E HANDS OF PARTNERS IN ACCORDANCE WITH LAW. 8. THE ASSESSEE HAS PREFERRED AN APPEAL AGAINST THE STATUS OF THE ASSESSEE COMPANY TAKEN AS A.O.P. AND THE DISALLOWAN CE OF REMUNERATION PAID TO PARTNERS. SECTION 185(4) OF THE ACT READS AS FOLLOWS: NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION 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 SEC. 144, THE FIRM SHALL BE SO ASSESSED THAT NO DEDUCTION BY WAY OF AN Y PAYMENT OF INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION , BY WHATEVER NAME CALLED, MADE BY SUCH FIRM TO ANY PARTNER OF SU CH FIRM SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER TH E HEAR PROFITS AND GAINS OF BUSINESS OR PROFESSION AND SUCH INTERE ST, SALARY, BONUS, COMMISSION OR REMUNERATION SHALL NOT BE CHAR GEABLE TO INCOME-TAX UNDER CLAUSE (V) OF SEC. 28. 9. WE FIND THAT IT IS CLEAR FROM THE ABOVE PROVISIO N THAT ONCE THE ASSESSMENT OF A FIRM IS MADE U/S 144, THEN THE ASSE SSMENT SHOULD BE MADE IN THE STATUS OF AOP AND ALL THE PROVISIONS AP PLICABLE TO AOP WOULD THEN APPLY. CONSEQUENTLY REMUNERATION PAYABLE TO PA RTNERS IS ALSO NOT ALLOWABLE. IN A SIMILAR SITUATION THE ITAT KUTTACK IN THE CASE OF SAI CONSTRUCTION V ITO 127 TTJ 15 (CTK) (UO) HAS HELD AS UNDER: THAT THE DISALLOWANCE OF SALARY AND INTEREST TO PAR TNERS WHICH STAND AGITATED BY THE ASSESSEE IN THE SECOND LIMB OF GROU ND NO 1 IS UPHELD IN VIEW OF THE CLEAR STATUTORY MANDATE SEC 1 84(5). SO HOWEVER IT MAY BE CLARIFIED THAT BAR ON DEDUCTION O F SALARY AND INTEREST TO PARTNERS OF A FIRM DOES NOT OPERATE ABS OLUTELY AND THE PARTNERS SHALL, ON MOVING THE RESPECTIVE AOS BE ENT ITLED TO BE DISALLOWED AMOUNT(S) BEING DELETED FROM THEIR TAXAB LE INCOME(S). EVEN WHERE RETURNED AND ASSESSED, IN VIEW OF THE CL EAR PROVISIONS OF SEC 184(5) R/W/S 28(V) OF THE ACT. M/S. CHAUHAN & CHAUHAN 4 RESPECTFULLY FOLLOWING THE DECISION OF THE CUTTACK BENCH OF THE ITAT SUPRA, WE UPHOLD THE ORDER OF THE LOWER AUTHOR ITIES TREATING THE STATUS OF THE ASSESSEE AS AOP, MAKING THE ASSESSMEN T U/S 144 AND THE DISALLOWANCE OF REMUNERATION PAID TO PARTNERS.. THE PARTNERS CAN MOVE THE RESPECTIVE AOS FOR EXCLUSION OF THE REMUNERATIO N, IF ANY INCLUDED IN THEIR TAXABLE INCOME, IN VIEW OF THE PROVISIONS OF SEC 184(5) READ WITH SEC 28(V). 10. IN THE RESULT, SUBJECT TO DIRECTIONS REGARDING THE REMUNERATION IN THE HANDS OF THE PARTNERS, THE APPEAL OF THE ASSESS EE IS DISMISSED. ITA NO. 2294/M/2010 10. THE ASSESSMENT U/S. 144 OF THE I.T. ACT WAS COM PLETED ON 24.12.2007 TREATING THE STATUS OF THE ASSESSEE IS A OP. HOWEVER, WHILE COMPLETING THE DISALLOWANCE THE ITO TOOK INTO ACCOU NT THE REMUNERATION PAID TO PARTNERS AND OMITTED TO TAKE INTEREST PAYME NT TO MEMBERS OF THE AOP. 11. THE ASSESSEE HAS COME UPON APPEAL IN ITA NO. 22 93/M/10 AGAINST THE ORDER OF THE LD. CIT(A) CONFIRMING THE ORDER OF THE AO WITH RESPECT TO REMUNERATION PAID TO PARTNERS. NOW BY ORDER U/S. 2 63 OF THE I.T. ACT, THE LD. CIT HAS HELD THAT ONCE THE ORDER OF PARTNERSHIP FIRM IS PASSED U/S. 144 OF THE I.T. ACT, THE PROVISION OF SEC. 184 OF T HE I.T. ACT WILL CAME INTO OPERATION. THEREFORE, ALLOWING CLAIM OF INTEREST P AID TO PARTNERS IS ERRONEOUS AND THEREFORE REQUIRES TO BE WITHDRAWN. THE AO IS THEREFORE DIRECTED TO WITHDRAW THE CLAIM OF INTEREST ALLOWED IN THE ASSESSMENT. HE FURTHER HELD THAT WHILE PASSING THE ORDER, THE AO I S ALSO DIRECTED TO APPLY THE PROVISION OF PROVISO TO SEC. 28(V) OF THE I.T. ACT IN THIS CASE OF INDIVIDUAL RETURN OF THE PARTNERS IF THEY HAVE INCL UDED REMUNERATION AND INTEREST IN THE TOTAL INCOME. M/S. CHAUHAN & CHAUHAN 5 12. THE ASSESSEE HAS COME UPON APPEAL AGAINST THE O RDER OF THE CIT PASSED U/S. 263 AND HAS RAISED THE FOLLOWING GROUND S: 1. THE LD. CIT ERRED IN INVOKING THE PROVISIONS OF SEC. 263 OF I.T. ACT, 1961 AS THE ORDER U/S. 144 DT. 24 TH DEC. 2007 WAS NOT ERRONEOUS SO AS TO BE PREJUDICIAL TO T HE INTEREST OF REVENUE. 2. THE LD. CIT COULD NOT HAVE PASSED ORDER U/S. 263 OF I.T. ACT, 1961 AFTER THE APPEAL FILED BY APPELLANT WITH CIT(A) WAS DISPOSED OFF. 3. THE LD. CIT DID NOT APPRECIATE THAT HAVING REGAR D TO PROVISIONS OF SEC. 284(5) R.W.S. 185 AND 28(V) OF I .T. ACT, 1961 THE DISALLOWANCE OF INTEREST IN THE CASE OF APPELLANT COULD NOT BE CHARGED TO TAX IN THE HANDS OF PARTNERS. 4. THE LD. CIT ACCORDINGLY ERRED IN DIRECTING THE I TO TO DISALLOW INTEREST OF RS. 1,14,045/- PAID TO PARTNER S. 13. IN ITA NO. 2993/M/2010 WE HAVE ALREADY DECIDED THE ISSUE WITH RESPECT TO REMUNERATION PAID TO PARTNERS. SEC. 184 (5) NOT ONLY SPEAKS OF REMUNERATION TO PARTNERS BUT ALSO PAYMENT OF INTEREST, SALARY, BONUS AND COMMISSION. THEREFORE, THE DECISION IN ITA NO. 2993/M/10 WILL GOVERN THE CASE OF PAYMENT OF INTEREST OF RS. 1,14, 045/- PAID TO PARTNERS ALSO AND THEREFORE THE SAME DECISION IS TO BE FOLLO WED. 14. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E ARE DISMISSED. ORDER PRONOUNCED ON THIS 24 TH DAY OF JUNE, 2011 SD/- SD/- (J. SUDHAKAR REDDY) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEM BER MUMBAI, DATED 24 TH JUNE , 2011 RJ M/S. CHAUHAN & CHAUHAN 6 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI M/S. CHAUHAN & CHAUHAN 7 DATE INITIALS 1 DRAFT DICTATED ON: 21 .0 6 .2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 22 .0 6 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______