A.C. CHENNA REDDY (FIRM), MUMBAI V. ACIT CEN CIR-2, THANE

ITA 333/MUM/2009

• Counselvise Citation: 33319914 RSA 2009
• Duration Of Justice: 2 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 13-04-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 15-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJEEV AGARWAL
• Keywords: Search and seizure; Rule of consistency; Block assessment
• Section: 143(3); 131; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, A, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI R K PANDA, ACCOUNTANT MEMBER I T A NO: 333/MUM/2009 (ASSESSMENT YEAR: 2002-03) M/S A C CHENNA REDDY (FIRM), MUMBAI APPELLANT (PAN: AAIFA5938P) VS ASSISTANT COMMISSIONER OF INCOME TAX RESPONDENT CENTRAL CIRCLE 2, THANE APPELLANT BY: MR PRAKASH JHUNJHUNWALA RESPONDENT BY: MR RAJEEV AGARWAL O R D E R R V EASWAR, PRESIDENT: THIS APPEAL BY THE ASSESSEE PERTAINS TO THE ASSESS MENT YEAR 2002-03 AND IT ARISES OUT OF THE ASSESSMENT MA DE BY ORDER DATED 29.03.2005 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. THE ASSESSEE HAS BEEN ASSESSED IN THE STATUS OF A FIRM ON PROTECTIVE BASIS ON AN INCOME OF ` 2,74,330/-, BEING INCOME FROM LABOUR AND EARTH WORK CONTRACTS. 2. THE APPEAL ARISES THIS WAY. THERE WAS A SEARCH UNDER SECTION 132 ON 26.03.2003 IN THE GROUP CASES OF M/S A C CHENNA REDDY IN TIRUPATI, ANDHRA PRADESH. ALL THE CASES W ERE CENTRALIZED IN MUMBAI IN SEPTEMBER 2003. THE ASSESSEE CLAIMS T O BE A PARTNERSHIP FIRM CONSISTING OF 18 PARTNERS, ENGAGED IN LABOUR AND EARTH WORK CONTRACTS. THE RETURN OF INCOME WAS FIL ED ON 19.09.2002 WHICH WAS ACCOMPANIED BY THE TAX AUDIT REPORT, PROF IT AND LOSS ITA NO: 333/MUM/2009 2 ACCOUNT, BALANCE SHEET AND OTHER DETAILS. IN THE C OURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO PRODUCE THE PARTNERS FOR EXAMINATION. 10 PARTNERS OUT OF 18 PARTNERS APPEARED AND THEIR STATEMENTS ON OAT H WERE RECORDED UNDER SECTION 131 ON 23.03.2005 AND 24.03. 2005. AFTER EXAMINATION OF THE PARTNERS, THE ASSESSING OFFICER TOOK THE VIEW THAT THEY WERE ALL WELL TUTORED AND THE REPLIES GIV EN BY THEM WERE SIMILAR IN ALMOST ALL THE ASPECTS OF THE QUESTIONS POSED TO THEM. HE NOTED THAT NONE OF THEM HAD ANY PAST EXPERIENCE OF CIVIL CONTRACT WORKS BEFORE JOINING THE FIRM, THAT THEY DID NOT KN OW EACH OTHER, THAT THEY KNEW ONLY A C CHENNA REDDY WHO WAS THE MAN BEH IND THE FIRM, THAT THEY DID NOT HAVE ANY KNOWLEDGE OF THE A FFAIRS OR ACCOUNTS OF THE FIRM WHICH WERE BEING MANAGED BY ONE KONDA R EDDY, WHO WAS A RELATIVE OF A C CHENNA REDDY, THAT ALL THE SO CALLED PARTNERS WERE ONLY LABOUR SUPERVISORS OF A C CHENNA REDDY, T HAT THEY DID NOT MAKE ANY WITHDRAWALS FROM THEIR CAPITAL ACCOUNT S IN THEIR CAPACITY AS PARTNERS, THAT THEY DID NOT MAKE ANY CA PITAL CONTRIBUTION TO THE FIRM AND THAT IN THESE CIRCUMSTANCES THE FIR M CANNOT BE CONSIDERED TO BE A GENUINE FIRM FOR PURPOSES OF ASS ESSMENT. THE ASSESSING OFFICER FURTHER NOTICED THAT THE MATERIAL S SEIZED DURING THE SEARCH INDICATED THAT ALL THE CONTRACTS WERE RE CEIVED AND EXECUTED BY A C CHENNA REDDY HIMSELF, THAT HE WAS L OOKING AFTER THE ENTIRE WORK ALL BY HIMSELF, THAT MOST OF THE CO NTRACTS WERE IN HIS NAME THOUGH THE INCOME WAS OFFERED IN THE HANDS OF VARIOUS FIRMS, THAT IN THE ACCOUNTS OF THE FIRMS THE INCOME WAS DI STRIBUTED BY DEBITING THE SALARY AND INTEREST TO A LARGE NUMBER OF PARTNERS IN ITA NO: 333/MUM/2009 3 SUCH A MANNER THAT THE INCOME OF EACH OF THE PARTNE RS WAS BELOW THE TAXABLE LIMIT AND THAT IN THIS WAY THE FIRMS WE RE BEING CREATED ONLY FOR PURPOSES OF REDUCTION OF THE REAL TAX LIAB ILITY. HE ACCORDINGLY HELD AS FOLLOWS: - 9. IN VIEW OF THE ABOVE FACTS, I HOLD THAT M/S A C CHENNA REDDY IS NOT A GENUINE FIRM, RATHER IT IS A FRONT CREATED BY SHRI A C CHENNA REDDY TO DIVERT HI S INCOME AND DEFRAUD THE REVENUE BY FURTHER SUBDIVIDING THE DIVERTED INCOME. CORRECT INCOME FR OM ALL CONTRACTS SHOWN IN THE HANDS OF THE VARIOUS SO CALLED FIRMS INCLUDING THIS FIRM SHALL BE TAXED IN THE HANDS OF SHRI A C CHENNA REDDY IN THE BLOCK ASSESSMENT PROCEEDINGS PENDING IN THIS CASE. TO SAFEGUARD THE INTEREST OF THE REVENUE, THE ASSES SING OFFICER HOWEVER ACCEPTED THE RETURNED INCOME ON PROTECTIVE BASIS. 3. ON APPEAL, THE ASSESSEE MADE WRITTEN SUBMISSIONS DATED 19.02.2007, IN WHICH IT WAS CONTENDED THAT THE FIRM WAS A GENUINE FIRM, THAT IT WAS REGISTERED UNDER THE SALES TAX LA W AND ASSESSED REGULARLY FOR SALES TAX PURPOSES, THAT THE CONTRACT S WERE TAKEN ONLY FROM GOVERNMENT DEPARTMENTS AFTER SUBMITTING TENDER S, THAT SINCE THE CONTRACTS ARE AT DIFFERENT PLACES, PARTNERSHIP FIRMS WERE FORMED WITH VARIOUS PERSONS STAYING AT THOSE PLACES TO TAK E ADVANTAGE OF THE GOVERNMENT TENDERS, THAT IT WAS A BUSINESS DECI SION TO HAVE A PARTNERSHIP FIRM AND NOT A DEVISE TO EVADE OR REDUC E THE TAX AND THAT IN ANY CASE THERE WAS NO EVIDENCE TO ESTABLISH THAT THE FIRM WAS NOT GENUINE. IT WAS ALSO SUBMITTED THAT IT WAS NOT NECESSARY FOR THE GENUINENESS OF THE FIRM THAT THE PARTNERS S HOULD HAVE ACCOUNTING KNOWLEDGE. IT WAS POINTED OUT THAT THER E WERE WITHDRAWALS IN THE CAPITAL ACCOUNT OF EACH AND EVER Y PARTNER. IT WAS ITA NO: 333/MUM/2009 4 THUS PLEADED THAT THE FIRM WAS GENUINE AND OUGHT TO HAVE BEEN ASSESSED ON SUBSTANTIVE BASIS. 4. THE CIT(A) FORWARDED THE WRITTEN SUBMISSIONS TO THE ASSESSING OFFICER, ASKING HIM TO VERIFY AND GIVE HI S COMMENTS ON THE CLAIMS MADE BY THE ASSESSEE. THE ASSESSING OFF ICER SUBMITTED A REPORT TO THE CIT(A). HE REPORTED THAT THE ASSES SEE HAD SHIFTED ITS OFFICE FROM MULUND (EAST) TO SOME OTHER PLACE W ITHOUT ANY INTIMATION TO THE ASSESSING OFFICER AND THEREFORE N O DETAILS COULD BE COLLECTED FROM THE ASSESSEE ON THE WRITTEN SUBMISSI ONS MADE BEFORE THE CIT(A). THE ASSESSING OFFICER HOWEVER P OINTED OUT FROM THE RECORD THAT FOR THE ASSESSMENT YEAR 2001-02 THE FIRM WAS ASSESSED ON PROTECTIVE BASIS AND THE APPEAL OF THE ASSESSEE TO THE CIT(A) HAD BEEN DISMISSED BY ORDER DATED 09.11.2004 . FOR THE ASSESSMENT YEAR 2003-04, IT WAS POINTED OUT, THE AS SESSMENT WAS COMPLETED UNDER SECTION 143(1) WITHOUT ANY SCRUTINY . 5. THE ASSESSING OFFICERS REPORT WAS SENT TO THE A SSESSEE FOR ITS COMMENTS. THE ASSESSEE REITERATED THAT THERE W AS NO CHANGE IN THE ADDRESS AND STATED THAT ALL THE CORRESPONDENCE CAN BE SENT AT THE MULUND ADDRESS. IT ALSO ENCLOSED THE COPY OF T HE PARTNERSHIP DEED GIVING THE NAMES AND ADDRESSES OF ALL THE 18 P ARTNERS. ON 22.10.2007 THE ASSESSING OFFICER SUBMITTED A SUPPLE MENTARY REPORT TO THE CIT(A), IN WHICH IT WAS STATED THAT 3 PARTNE RS WERE PRODUCED BEFORE HIM FOR EXAMINATION ON 15.10.2007, THAT THEY ADMITTED THAT THEY WERE BEING PAID SALARY / WAGES BY A C CHENNA R EDDY FOR THEIR SERVICES, THAT THEY GOT OVERTIME ALLOWANCE FOR EXTR A WORK AND WHEN THEY WORKED LESS SOME WAGES WERE DEDUCTED FROM THEI R SALARY. ITA NO: 333/MUM/2009 5 THE ASSESSING OFFICER ALSO NOTED THAT THOUGH A C CH ENNA REDDY HAD ASSURED THAT THE OTHER PARTNERS WILL BE PRODUCE D BEFORE THE ASSESSING OFFICER BY 19.10.2007, THEY WERE NOT PROD UCED. HE THEREFORE REITERATED HIS VIEW THAT THE FIRM WAS ONL Y A NAMESAKE AND IS ACTUALLY A PROPRIETARY CONCERN OF A C CHENNA RED DY. 6. THE AFORESAID SUPPLEMENTARY REMAND REPORT WAS SE NT BY THE CIT(A) TO THE ASSESSEE FOR COMMENTS ON 09.01.2008 R EQUESTING COMPLIANCE BY 15.01.2008. THERE WAS NO COMPLIANCE ON THIS DATE AND THEREAFTER THREE MORE NOTICES WERE ISSUED TO TH E ASSESSEE, ALL OF WHICH WENT WITHOUT COMPLIANCE. THE CIT(A) THERE FORE INFERRED THAT THE ASSESSEE HAD NO COMMENTS TO OFFER VIS--VI S THE SUPPLEMENTARY REPORT. HE THEREAFTER EXAMINED THE A SSESSMENT ORDER, THE WRITTEN SUBMISSIONS, THE REMAND REPORT A ND OTHER RELEVANT DOCUMENTS. ON GOING THROUGH THEM HE FOUND THAT THE ASSESSING OFFICERS CONCLUSION CANNOT BE FAULTED. HE ACCORDINGLY UPHELD THE SAME. HE ALSO HELD THAT MERE DOCUMENTAT ION REGARDING THE EXISTENCE OF PARTNERSHIP IS NOT SUFFICIENT EVID ENCE TO PROVE THAT A GENUINE FIRM WAS IN EXISTENCE AND THE ASSESSING O FFICER WAS WELL WITHIN HIS POWERS UNDER THE ACT TO GO BEYOND SUCH D OCUMENTS AND ESTABLISH WHETHER FACTUALLY THERE WAS OR WAS NOT A GENUINE FIRM IN EXISTENCE. THE CIT(A) FURTHER DIRECTED THE ASSESSI NG OFFICER TO CONSIDER REOPENING THE ASSESSMENT FOR THE ASSESSMEN T YEAR 2003-04 WHICH WAS COMPLETED ORIGINALLY UNDER SECTIO N 143(1) ACCEPTING THE FIRMS RETURN. HE THUS DISMISSED THE ASSESSEES APPEAL. ITA NO: 333/MUM/2009 6 7. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRI BUNAL. TWO ARGUMENTS WERE TAKEN ON BEHALF OF THE ASSESSEE : - (1) THAT THE ASSESSING OFFICER HAS NO POWER TO EXAMINE THE GENUINENESS OF THE FIRM UNDER SECTION 184 OF THE ACT; AND (2) IN ANY CASE THE STATEMENTS OF THE PARTNERS WHICH HAVE BEEN RECORDED BY THE ASSESSING OFFICER ARE SUFFICIENT EVIDENCE TO ESTABLISH THAT A GENUINE FIRM HAD COME INTO EXISTENCE. ON THE OTHER HAND, THE LEARNED CIT DR CONTENDED THA T THE ASSESSING OFFICER WAS WELL WITHIN HIS POWERS TO EXA MINE WHETHER THE FIRM WAS GENUINE OR NOT AND THAT EVEN ON MERITS , THERE WAS SUFFICIENT EVIDENCE TO SHOW THAT THE PARTNERS OTHER THAN A C CHENNA REDDY WERE MERE ALIASES OF A C CHENNA REDDY AND THA T NO GENUINE FIRM WAS IN EXISTENCE. 8. SECTION 184 AS IT STANDS NOW WAS INTRODUCED BY T HE FINANCE ACT, 1992, WITH EFFECT FROM 01.04.1993. FROM THE A SSESSMENT YEAR 1993-94 THE ASSESSMENTS OF FIRMS AND THE PARTNERS U NDERWENT A CHANGE. THE PROCEDURE FOR REGISTRATION OF A PARTNE RSHIP FIRM WITH THE BENEFIT OF REDUCED RATES OF TAX WAS ABOLISHED. THE FIRM WAS TO BE ASSESSED AT THE NORMAL RATES AND THE SHARE OF TH E PARTNERS BECAME EXEMPT FROM TAX UNDER SECTION 10(2A) WHICH W AS SIMULTANEOUSLY INTRODUCED WITH EFFECT FROM 01.04.19 93. SINCE THE PROCEDURE FOR REGISTRATION OF PARTNERSHIP FIRMS UND ER THE INCOME TAX ACT BECAME REDUNDANT AFTER THE CHANGE, SECTION 185 WHICH PROVIDED FOR A DETAILED PROCEDURE FOR THE REGISTRAT ION ALSO UNDERWENT A CHANGE AND FROM 01.04.1993 IT WAS PROVIDED IN THI S SECTION THAT IF THE FIRM DOES NOT COMPLY WITH THE PROVISIONS OF SEC TION 184 THEN IT ITA NO: 333/MUM/2009 7 WILL BE ASSESSED AS IF IT IS AN ASSOCIATION OF PERS ONS. SECTION 186 WHICH PROVIDED EARLIER FOR THE CANCELLATION OF REGI STRATION IF THE ASSESSING OFFICER WAS OF OPINION THAT THERE WAS NO GENUINE FIRM IN EXISTENCE AS REGISTERED, WAS ALSO OMITTED FROM 01.0 4.1993. THUS ON AND FROM 01.04.1993 THE PROCEDURE FOR REGISTRATI ON OF THE FIRM AND THE CONSEQUENCES OF A FIRM NOT BEING GENUINE AL L BECAME REDUNDANT AND WERE DROPPED FROM THE ACT. UNDER SEC TION 184 AS IT STOOD FROM 01.04.1993, A FIRM SHALL BE ASSESSED AS A FIRM IF (1) THE PARTNERSHIP IS EVIDENCED BY AN INSTRUMENT; AND (2) THE INDIVIDUAL SHARES OF THE PARTNERS ARE SPECIFIED IN THAT INSTRU MENT. THE FIRM HAS TO SUBMIT A CERTIFIED COPY OF THE PARTNERSHIP DEED ALONG WITH THE RETURN OF INCOME FILED FOR THE ASSESSMENT YEAR 1993 -94 ONWARDS. SUB-SECTION (3) PROVIDED THAT IF A FIRM IS ASSESSED AS SUCH FOR ANY ASSESSMENT YEAR, AND IF THERE IS NO CHANGE IN THE C ONSTITUTION OF THE FIRM OR THE SHARES OF THE PARTNERS, THE FIRM SHALL CONTINUE TO BE ASSESSED IN THE SAME CAPACITY FOR ALL THE SUBSEQUEN T YEARS. IF THERE IS ANY CHANGE IN THE CONSTITUTION OR THE SHAR ES, THE FIRM HAS TO SUBMIT A CERTIFIED COPY OF THE MODIFIED PARTNERSHIP DEED SEEKING ASSESSMENT OF THE NEWLY CONSTITUTED FIRM. SECTION 185 AS INSERTED FROM 01.04.1993 PROVIDED THAT WHERE A FIRM DOES NOT COMPLY WITH SECTION 184, IT SHALL BE ASSESSED FOR THAT ASSESSME NT YEAR IN THE SAME MANNER AS AN ASSOCIATION OF PERSONS AND ALL TH E PROVISIONS OF THE ACT SHALL APPLY ACCORDINGLY. FROM 01.04.2004, THE FINANCE ACT, 2003, AMENDED SECTION 185 TO PROVIDE THAT IN CASE O F DEFAULT BY THE FIRM WITH RESPECT TO THE PROCEDURE PRESCRIBED IN SE CTION 184, THE CONSEQUENCE WILL BE THAT THE FIRM SHALL BE SO ASSES SED THAT NO ITA NO: 333/MUM/2009 8 DEDUCTION BY WAY OF ANY PAYMENT OF INTEREST, SALARY , BONUS, COMMISSION OR REMUNERATION MADE BY THE FIRM TO ANY PARTNER SHALL BE ALLOWED IN COMPUTING THE INCOME OF THE FIRM UNDE R THE HEAD BUSINESS. THIS IN BRIEF IS THE NEW SCHEME OF TAX ATION OF FIRMS FROM 01.04.1993. 9. THE ARGUMENT ON BEHALF OF THE ASSESSEE THAT UNDE R THE NEW SCHEME OF TAXATION THE ASSESSING OFFICER HAS NO POW ER TO ENQUIRE INTO THE GENUINENESS OF THE FIRM IS INSPIRED BY THE POSITION THAT IN THE NEW SECTION 185 THE ASSESSING OFFICER HAS NOT B EEN GIVEN SUCH A POWER, WHEREAS IN THE OLD SECTION 185 WHICH PROVI DED FOR A DETAILED PROCEDURE FOR REGISTRATION OF THE FIRM, TH E ASSESSING OFFICER WAS EXPRESSLY CONFERRED THE POWER TO ENQUIRE INTO T HE GENUINENESS OF THE FIRM AND ITS CONSTITUTION AS SPECIFIED IN TH E INSTRUMENT OF PARTNERSHIP AND ONLY IF HE WAS SATISFIED THAT THERE WAS A GENUINE FIRM IN EXISTENCE CAN HE GRANT REGISTRATION AND IF HE WAS NOT SO SATISFIED, HE HAD TO PASS AN ORDER REFUSING REGISTR ATION OF THE FIRM. SOME AUTHORITIES WERE ALSO CITED BEFORE US IN THE F ORM OF ORDERS OF THE SEVERAL BENCHES OF THE INCOME TAX APPELLATE TRI BUNAL IN SUPPORT OF THE PROPOSITION. WE ARE AFRAID THAT SUC H AN EXTREME PROPOSITION CANNOT BE COUNTENANCED AND WE ARE ALSO SATISFIED, AS WE SHALL PRESENTLY SHOW, THAT THE ORDERS OF THE TRI BUNAL ON WHICH THE ASSESSEE HAS PLACED RELIANCE DO NOT SUPPORT HIM ON THIS POINT. IT CANNOT BE POSTULATED THAT THE LEGISLATURE INTEND ED THAT EVEN A NON-GENUINE FIRM CAN BE ASSESSED AS SUCH. WHEN SEC TION 184 CONTEMPLATES THE ASSESSMENT OF A FIRM AS SUCH, IT C ONTEMPLATES A GENUINE FIRM IN EXISTENCE. FOR THAT MATTER ANY ASS ESSMENT OF A ITA NO: 333/MUM/2009 9 TAXABLE ENTITY UNDER THE INCOME TAX ACT PRESUPPOSES THAT THE ENTITY IS GENUINE. IF THE ENTITY IS NOT GENUINE AND IS A ALIAS FOR SOMEBODY ELSE, THEN THE LEGISLATURE CANNOT BE ATTRIBUTED THE INTENTION TO CONFER GENUINENESS UPON SUCH AN ENTITY BY SOME DEEM ING PROVISION, NOR CAN WE ATTRIBUTE AN INTENTION ON THE PART OF THE LEGISLATURE TO CONDONE SUCH A FATAL FLAW BUT STILL RECOGNIZE THE SAME AS A TAXABLE ENTITY. IT MUST BE REMEMBERED THAT PR IOR TO 01.04.1993 THE PROCEDURE FOR REGISTRATION OF THE FIRM WAS PRES CRIBED IN DETAIL ONLY BECAUSE THE FIRMS WERE ASSESSED AT A NOMINAL O R CONCESSIONAL RATE OF TAX AND THEIR PARTNERS WERE ASSESSED AT THE NORMAL RATES OF TAX ON THEIR SHARE INCOME. FROM 01.04.1993 THE PRO CEDURE WAS CHANGED AND THE FIRM WAS ITSELF MADE LIABLE TO TAX AT THE NORMAL RATES OF TAXATION AND THE SHARE INCOME OF THE PARTN ERS WAS EXEMPT UNDER SECTION 10(2A). THE ABSENCE OF A PROCEDURE F OR REGISTRATION OF THE PARTNERSHIP FIRMS FROM THE AFORESAID DATE DO ES NOT MEAN THAT A FIRM WHICH SEEKS AN ASSESSMENT CAN BE A NON-GENUI NE FIRM, AN ALIAS OR BENAMI FOR SOMEBODY ELSE. THE ACT GIVES T HE ASSESSING OFFICER THE POWER TO ASSESS A PERSON TO TAX UNDER S ECTION 143. THERE IS NO EXPRESS POWER CONFERRED IN THE SECTION UPON THE ASSESSING OFFICER TO ENQUIRE INTO THE GENUINENESS O F THE PERSON. THAT HOWEVER DOES NOT MEAN, AND IT CAN NEVER BE ARG UED, THAT AN ASSESSING OFFICER CANNOT EXAMINE OR ENQUIRE INTO TH E GENUINENESS OF A PERSON LIABLE TO TAX. A SPECIFIC POWER CONFER RED UPON THE ASSESSING OFFICER TO EXAMINE OR ENQUIRE INTO THE GE NUINENESS OF A PERSON AS DEFINED IN SECTION 2(31) OF THE ACT, WHO IS LIABLE TO PAY TAX UNDER THE CHARGING SECTION 4 IS IN OUR OPINION NOT NECESSARY AT ITA NO: 333/MUM/2009 10 ALL. THE POWER EXPRESSLY CONFERRED UPON THE ASSESS ING OFFICER UNDER SECTION 185 OF THE ACT, AS IT STOOD BEFORE 01 .04.1993 WAS DROPPED ONLY BECAUSE IT WAS REDUNDANT AND NOT BECAU SE THE LEGISLATURE THOUGHT THAT IT WOULD PERMIT EVEN A NON -GENUINE FIRM TO COURT AN ASSESSMENT AND HELP SOME OTHER PERSON TO R EDUCE THE REAL TAX LIABILITY. IT WOULD BE PREPOSTEROUS TO ASSUME THAT THE ABSENCE OF ANY EXPRESS POWER CONFERRED UPON THE ASSESSING OFFI CER UNDER SECTION 184, AS IT STANDS AFTER 01.04.1993, IS WITH A VIEW TO HELP TAX EVASION. THE ARGUMENT ADVANCED ON BEHALF OF THE AS SESSEE AMOUNTS TO THIS, NAMELY, THAT THE FIRM MAY BE A NON -GENUINE FIRM GOT UP WITH THE MOTIVE OF EVADING LEGITIMATE TAXES, BUT THE ASSESSING OFFICER HAS NO POWER TO ENQUIRE INTO THE SAME BECAUSE NO SUCH POWER IS EXPRESSLY CONFERRED UNDER SECTION 184. THE ARGUMENT HAS ONLY TO BE STATED TO BE REJECTED AND I S IN FACT UNMOUTHABLE, IF WE MAY SAY SO WITH RESPECT. UNDER GENERAL PRINCIPLES, EVERY ASSESSING OFFICER HAS THE POWER T O EXAMINE THE GENUINENESS OF NOT ONLY THE PERSON, AS DEFINED IN S ECTION 2(31) OF THE ACT, BUT ALSO EVERY TRANSACTION WHICH HAS BEEN ENTERED INTO BY SUCH PERSON DURING THE RELEVANT PREVIOUS YEAR. 10. SECTION 2(23) OF THE INCOME TAX ACT DEFINES THE WORDS FIRM, PARTNER AND PARTNERSHIP. IT SAYS THAT THESE WO RDS SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN THE INDIA N PARTNERSHIP ACT, 1932. THE INDIAN PARTNERSHIP ACT, 1932, DEFIN ES A PARTNERSHIP IN SECTION 4 AS THE RELATION BETWEEN PERSONS WHO HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARR IED ON BY ALL OR ANY OF THEM ACTING FOR ALL. IN DEPUTY COMMISSIONE R OF SALES TAX ITA NO: 333/MUM/2009 11 VS. K KELUKUTTY (1985) 155 ITR 158 (SC), THE SUPREM E COURT NOTED THAT IT IS THE RELATIONSHIP BETWEEN THOSE PERSONS W HICH CONSTITUTES THE PARTNERSHIP AND SUCH RELATION IS FOUNDED IN THE AGREEMENT BETWEEN THEM. A PARTNERSHIP AGREEMENT, OBSERVED TH E SUPREME COURT, IS THE SOURCE OF PARTNERSHIP AND IT GIVES EX PRESSION TO THE OTHER INGREDIENTS DEFINING THE PARTNERSHIP. THE RE LATIONSHIP BETWEEN THE PARTNERS IS AN ORGANIC RELATIONSHIP. A T PAGE 163 164 OF THE REPORT THE SUPREME COURT FURTHER NOTED THAT IN EVERY CASE WHEN THE ASSESSEE PROFESSES THAT IT IS A PARTNERSHI P FIRM AND CLAIMS TO BE TAXED IN THAT STATUS, THE FIRST DUTY OF THE A SSESSING OFFICER IS TO DETERMINE WHETHER IT IS, IN LAW AND IN FACT, A PART NERSHIP FIRM . IN THAT CASE THE SUPREME COURT WAS CONCERNED WITH THE PROVISIONS OF THE KERALA GENERAL SALES TAX ACT WHICH DID NOT CONT AIN ANY PROVISION BEARING ON THE IDENTITY OF A PARTNERSHIP FIRM EXCEPT TO DEFINE A FEW TERMS SUCH AS ASSESSEE OR DEALER E TC. THESE DEFINITIONS INCLUDED A PARTNERSHIP FIRM. THERE WAS NO PROVISION IN THE SALES TAX ACT TO INDICATE WHAT WOULD BE THE NAT URE OF TWO SEPARATE AGREEMENTS ENTERED INTO BETWEEN THE SAME P ARTNERS, BUT WITH RESPECT TO CARRYING ON DIFFERENT BUSINESSES. WHETHER THOSE TWO AGREEMENTS CAN BE COMBINED AND TREATED AS ONE PARTN ERSHIP FIRM FOR PURPOSES OF THE SALES TAX LAW WAS THE QUESTION BEFORE THE SUPREME COURT, THE ANSWER TO WHICH WAS NOT PROVIDED IN THE STATE SALES TAX LAW. IT WAS IN THIS CONTEXT THAT THE SUP REME COURT OBSERVED AT PAGE 164 : - ..BUT FOR DETERMINING WHETHER THERE IS A FIRM, TH E ASSESSING OFFICER WILL APPLY THE PARTNERSHIP LAW, SUBJECT OF COURSE, TO ANY SPECIFIC PROVISION IN THA T REGARD IN THE TAX LAW MODIFYING THE PARTNERSHIP LAW . IF ITA NO: 333/MUM/2009 12 THE TAX LAW IS SILENT, IT IS THE PARTNERSHIP LAW ON LY TO WHICH HE WILL REFER. HAVING DECIDED THE LEGAL IDEN TITY OF THE ASSESSEE THAT IT IS A PARTNERSHIP FIRM, HE W ILL THEN TURN TO THE TAX LAW AND APPLY ITS RELEVANT PROVISIONS FOR ASSESSING THE PARTNERSHIP INCOME . THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IS A TTRACTED TO THE PRESENT CASE. IT IS THE DUTY OF THE ASSESSING OFFIC ER UNDER SECTION 184 OF THE INCOME TAX ACT TO EXAMINE WHETHER THE FI RM WHICH SEEKS AN ASSESSMENT AS SUCH HAS BEEN LAWFULLY CONSTITUTED AND FOR DETERMINING THIS QUESTION HE HAS TO EMBARK UPON THE ENQUIRY AS TO WHETHER THE ESSENTIALS OF SECTION 4 OF THE PARTNERS HIP ACT HAVE BEEN SATISFIED. WE ARE NOT ABLE TO APPRECIATE AT A LL AS TO HOW, WHEN THE ASSESSING OFFICER EMBARKS UPON SUCH AN ENQUIRY, HE CAN DIVORCE THE QUESTION OF GENUINENESS FROM THE ENQUIR Y CONDUCTED BY HIM INTO THE QUESTION WHETHER THE ESSENTIALS OF THE PARTNERSHIP AS DEFINED IN SECTION 4 OF THE ACT HAVE BEEN SATISFIED . THE RELATIONSHIP BETWEEN THE PARTNERS IS THAT OF AGENCY AND IT IS TH E DUTY OF THE ASSESSING OFFICER TO EXAMINE WHETHER SUCH A RELATIO NSHIP IN FACT EXISTS. UNLESS SUCH A RELATIONSHIP GENUINELY EXISTS , HE CANNOT CONSIDER THAT THE PARTNERSHIP HAS BEEN VALIDLY CONS TITUTED. WHEN SECTION 184 REFERS TO A FIRM, IT REFERS TO A FIRM V ALIDLY CONSTITUTED UNDER THE PARTNERSHIP ACT, WHICH IN TURN MEANS THAT IT IS A GENUINE FIRM. 11. WE MAY NOW TURN TO THE AUTHORITIES CITED BY THE ASSESSEE IN SUPPORT OF THE CONTENTION THAT THE ASSESSING OFFICE R CANNOT EXAMINE THE GENUINENESS OF THE FIRM UNDER SECTION 184 OF TH E ACT AS IT EXISTS NOW. THE FIRST IS AN ORDER OF THE MUMBAI D BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. MANSI ENTERPRISES (2007) 17 SOT 564 (MUM). ITA NO: 333/MUM/2009 13 A CAREFUL PERUSAL OF THE ORDER SHOWS THAT THE PROPO SITION CANVASSED ON BEHALF OF THE ASSESSEE BEFORE US WAS NOT DECIDED . THE QUESTION THERE WAS WHETHER MERELY BECAUSE A PARTNER WAS NOT AWARE ABOUT THE BUSINESS ACTIVITIES OF THE FIRM, THE FIRM CAN B E RENDERED NON- GENUINE FOR THE PURPOSE OF SECTION 184. THE TRIBUN AL HELD THAT MERELY BECAUSE A PARTNER WAS NOT AWARE ABOUT THE BU SINESS ACTIVITIES OF THE FIRM, THE FIRM CANNOT BE SAID TO BE NON-GENUINE. THIS ORDER, CONTRARY TO WHAT THE ASSESSEE CONTENDS, SHOWS THAT IT IS OPEN TO THE ASSESSING OFFICER TO EXAMINE THE GENUIN ENESS OF THE PARTNERSHIP FIRM UNDER SECTION 184 EVEN AFTER THE A MENDMENT MADE WITH EFFECT FROM 01.04.1993. THE SECOND IS THE ORD ER OF THE BANGALORE A BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. H E D BROS. CO. (2005) 1 SOT 881 (BANG). THIS DECISION I S OF A COORDINATE BENCH AND IT CERTAINLY SUPPORTS THE ASSE SSEE. HOWEVER, THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF DE PUTY COMMISSIONER OF SALES TAX VS. K KELUKUTTY (SUPRA) D OES NOT APPEAR TO HAVE BEEN BROUGHT TO THE NOTICE OF THE BENCH. I N THAT CASE THE ASSESSING OFFICER HAD RELIED UPON THE JUDGMENT OF T HE SUPREME COURT IN THE CASE OF BIHARILAL JAISWAL VS. CIT (199 6) 217 ITR 746 (SC), TO HOLD THAT THE PARTNERSHIP FIRM WAS NOT GEN UINE. APPARENTLY THE TRIBUNAL CONSIDERED THAT THIS JUDGMENT WAS NOT APPLICABLE TO THE CASE BEFORE IT, AS THE CASE INVOLVED THE ASSESSMENT YEAR 1994-95, BY WHICH TIME SECTION 184 HAD BEEN WHOLLY SUBSTITUT ED. HOWEVER, A RESPECTFUL PERUSAL OF THE JUDGMENT SHOWS THAT AT PA GE 759 THE SUPREME COURT HAS OBSERVED THAT IT WOULD BE WRONG TO THINK THAT WHILE ACTING UNDER THE INCOME TAX ACT, THE INCOME T AX OFFICER ITA NO: 333/MUM/2009 14 NEED NOT LOOK TO THE LAW GOVERNING THE PARTNERSHIP WHICH IS SEEKING REGISTRATION . THIS OBSERVATION FULLY ACCORDS WITH THE RATIO O F THE EARLIER JUDGMENT OF THE SUPREME COURT IN THE CASE O F DEPUTY COMMISSIONER OF SALES TAX VS. K KELUKUTTY (SUPRA). APPARENTLY THE ATTENTION OF THE BANGALORE BENCH OF THE TRIBUNAL WA S NOT DRAWN TO THE AFORESAID OBSERVATION OF THE SUPREME COURT. TH US THE DECISION OF THE BANGALORE BENCH, WITH RESPECT, IS NOT IN CON FORMITY WITH THE RATIO OF THE TWO JUDGMENTS OF THE SUPREME COURT CIT ED HEREINABOVE. 12. IN THE ORDER OF THE HYDERABAD SMC BENCH OF TH E TRIBUNAL IN THE CASE OF ITO VS. AMRUTHA WINES (2008) 21 SOT 401 (HYD), THERE ARE OBSERVATIONS TO THE EFFECT THAT UNDER THE AMEND ED PROVISIONS OF SECTION 184 THE ASSESSING OFFICER IS NOT EMPOWERED TO EXAMINE THE GENUINENESS OF THE FIRM. AGAIN IN THIS ORDER THERE IS NO REFERENCE TO THE JUDGMENTS OF THE SUPREME COURT CITED ABOVE. IN ANY CASE THE ORDER IS THAT OF SINGLE MEMBER BENCH. 13. THE ORDER OF THE PUNE BENCH OF THE TRIBUNAL IN ITO VS. RURAL SUPPLIERS (2002) 82 ITD 281 (PUNE), DOES NOT SUPPOR T THE ASSESSEE AT ALL. THERE THE TRIBUNAL EXAMINED THE DECISION O F THE INCOME TAX AUTHORITIES THAT THE PARTNERSHIP FIRM WAS NOT GENUI NE ON MERITS AND WE DO NOT FIND ANY OBSERVATION IN THE SAID ORDER TH AT UNDER THE NEW PROVISIONS OF SECTION 184 THE ASSESSING OFFICER IS NOT EMPOWERED TO EXAMINE THE GENUINENESS OF THE PARTNERSHIP FIRM. 14. IN CIT VS. TIRUPATI OIL CORPORATION (2001) 248 ITR 194 (BOM), THE QUESTION ARGUED BEFORE US WAS NOT DECIDE D. WHAT WAS DECIDED THEREIN WAS WHETHER THE UNDISCLOSED INCOME OF A PARTNER CAN BE TREATED AS UNDISCLOSED INCOME OF THE FIRM FO R THE PURPOSES ITA NO: 333/MUM/2009 15 OF CHAPTER XIV-B OF THE INCOME TAX ACT, 1961. THE HONBLE BOMBAY HIGH COURT HELD THAT THE ASSESSING OFFICER O UGHT TO HAVE INVOKED SECTION 158BD AND THE BLOCK ASSESSMENT MADE ON THE FIRM WITHOUT FOLLOWING THE PROCEDURE PRESCRIBED UNDER TH AT SECTION WAS BAD IN LAW. 15. ONE OF THE CONTENTIONS URGED BEFORE US ON BEHAL F OF THE ASSESSEE WAS THAT BASED ON SUB-SECTION (3) OF SECTI ON 184. IT SAYS THAT WHERE A FIRM IS ASSESSED AS SUCH FOR ANY ASSES SMENT YEAR, IT SHALL BE ASSESSED IN THE SAME CAPACITY FOR EVERY SU BSEQUENT YEAR PROVIDED THERE IS NO CHANGE IN THE CONSTITUTION OF THE FIRM OR THE SHARES OF THE PARTNERS AS EVIDENCED BY THE PARTNERS HIP DEED ON THE BASIS OF WHICH THE ASSESSMENT AS A FIRM WAS FIRST S OUGHT. IT IS POINTED OUT ON BEHALF OF THE ASSESSEE THAT RIGHT FR OM THE ASSESSMENT YEAR 1997-98 THE ASSESSEE WAS ASSESSED A S A FIRM AND IT WAS NOT OPEN TO THE ASSESSING OFFICER, FOR T HE FIRST TIME IN THE ASSESSMENT YEAR 2002-03 TO EXAMINE THE GENUINENESS OF THE FIRM. WE ARE UNABLE TO ACCEPT THE CONTENTION. THERE HAS BEEN A DEVELOPMENT AFTER THE COMPLETION OF THE ASSESSMENTS FOR THE EARLIER YEARS AND THIS IS THAT ON 26.03.2003 THERE WAS A SE ARCH UNDER SECTION 132 OF THE INCOME TAX ACT, 1961. THE ASSES SEE HAD FILED ITS RETURN ON 19.09.2002 ITSELF AND THE ASSESSMENT WAS PENDING AND IT IS DURING THE PENDENCY OF THE RETURN THAT A SEAR CH WAS CONDUCTED IN THE GROUP CASES AND THEY WERE CENTRALIZED IN MUM BAI. IT IS AFTER THE SEARCH THAT THE ASSESSING OFFICER TOOK UP THE A SSESSMENT OF THE RETURN FILED BY THE FIRM AND PROCEEDED TO EXAMINE W HETHER THERE WAS A GENUINE FIRM IN EXISTENCE. IN SUCH CIRCUMSTA NCES WHEN THERE ITA NO: 333/MUM/2009 16 WAS MATERIAL BEFORE HIM, WHICH HAS BEEN REFERRED TO IN PARAGRAPH 8 OF THE ASSESSMENT ORDER, WHICH THROWS CONSIDERABLE DOUBT AS TO THE GENUINENESS OF THE FIRM, IT IS NOT OPEN TO INVOKE T HE PROVISIONS OF SECTION 184(3) TO CONTEND THAT SINCE THE FIRM HAS B EEN ASSESSED AS SUCH IN THE EARLIER YEARS, ITS GENUINENESS CANNOT B E EXAMINED IN THE ASSESSMENT FOR THE ASSESSMENT YEAR UNDER APPEAL . THE STATUS OF AN ASSESSEE IS TO BE DETERMINED BY THE ASSESSING OFFICER ON A CONSIDERATION OF ALL THE FACTS AND CIRCUMSTANCES OF THE CASE. GENUINENESS OF A FIRM GOES TO THE VERY ROOT OF THE MATTER. THE ASSESSING OFFICER WAS THEREFORE WELL WITHIN HIS POW ERS TO EXAMINE THE GENUINENESS OF THE FIRM IN THE LIGHT OF THE MAT ERIALS GATHERED DURING THE SEARCH. HIS POWERS CANNOT BE CURTAILED MERELY BECAUSE OF SUB-SECTION (3) OF SECTION 184, WHICH ONLY PROVI DES FOR THE RULE OF CONSISTENCY. THIS RULE IS SUBJECT TO EXCEPTIONS AN D ONE SUCH EXCEPTION IS WHERE THERE IS JUST CAUSE FOR A DEPART URE FROM THE PAST PRACTICE IN THE LIGHT OF THE EVIDENCE AND MATERIAL GATHERED BY THE ASSESSING OFFICER. THE SUB-SECTION CANNOT BE INTER PRETED AS A FETTER ON THE POWER OF THE ASSESSING OFFICER TO CON DUCT SUCH AN ENQUIRY. 16. FOR THE ABOVE REASONS WE REJECT THE FIRST CONTE NTION URGED ON BEHALF OF THE ASSESSEE, NAMELY, THAT THE ASSESSING OFFICER HAD NO POWER TO ENQUIRE INTO THE GENUINENESS OF THE FIRM U NDER THE PROVISIONS OF SECTION 184 OF THE ACT AFTER 01.04.19 93. 17. THE SECOND CONTENTION IS ON MERITS. WE FIND TH AT THE ASSESSING OFFICER HAS BEEN ABLE TO GET STATEMENTS F ROM ABOUT 10 PARTNERS AND THEY HAVE BEEN COMPILED IN THE PAPER B OOK. THESE ITA NO: 333/MUM/2009 17 STATEMENTS WERE RECORDED IN THE COURSE OF THE ASSES SMENT PROCEEDINGS. THE ASSESSING OFFICER HAS BRUSHED ASI DE THE REPLIES GIVEN IN THE STATEMENTS BY SAYING THAT ALL THE PART NERS APPEARED TO BE WELL TUTORED AND THEY HAVE GIVEN SIMILAR REPLIES FOR ALL THE QUESTIONS. HE HAS ALSO STATED THAT THE PARTNERS DI D NOT CONTRIBUTE ANY CAPITAL NOR DID THEY WITHDRAW ANY SUM FROM THEI R CAPITAL ACCOUNT. HE HAS ALSO STATED THAT THE PARTNERS DID NOT KNOW ANYTHING ABOUT THE BUSINESS ACTIVITIES OF THE FIRM. HOWEVER, A CURSORY PERUSAL OF SOME OF THE STATEMENTS SHOWS THA T SOME BASIC AND RELEVANT DETAILS INCLUDING THE CAPITAL, ACTIVIT IES OF THE FIRM, ETC. HAVE BEEN GIVEN BY THE PARTNERS. THEY HAVE ALSO IN SOME CASES REFERRED TO THEIR PROFIT SHARE. IT IS NOT PROPER T O BRUSH ASIDE THE STATEMENTS. IN OUR OPINION, THE FACT THAT THE ASSE SSEE FIRM HAD CLAIMED TO HAVE TAKEN GOVERNMENT CONTRACTS IS ALSO RELEVANT BECAUSE BEFORE AWARDING CONTRACTS THE GENUINENESS O R CREDENTIALS OF THE ASSESSEE FIRM WOULD HAVE BEEN EXAMINED BY TH E GOVERNMENT. ALL THESE ARE RELEVANT CONSIDERATIONS WHICH THE ASSESSING OFFICER OUGHT TO HAVE KEPT IN MIND. WE G ET THE IMPRESSION THAT THE ENTIRE EVIDENCE BOTH FOR AND AG AINST THE ASSESSEES CLAIMS HAS TO BE APPRISED AGAIN IN ORDER THAT A PROPER CONCLUSION IS DRAWN REGARDING THE GENUINENESS OF TH E FIRM. IT IS ALSO NOTEWORTHY THAT THE ASSESSMENT WAS COMPLETED WITHIN SIX DAYS OF THE RECORDING OF THE STATEMENTS FROM THE PARTNERS W HICH MAY NOT HAVE LEFT MUCH TIME TO THE ASSESSING OFFICER TO EXA MINE THEM PROPERLY AND DRAW THE APPROPRIATE INFERENCES AND CO NCLUSIONS. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS ALSO FI LED AN ORDER ITA NO: 333/MUM/2009 18 DATED 09.07.2010 IN THE CASE OF SHRI A C CHENNA RED DY (INDIVIDUAL) IN IT(SS)A NO: 02/MUM/2009 FOR THE BLOCK PERIOD 01. 04.1996 TO 26.03.2003 PASSED BY THE MUMBAI A BENCH OF THE TR IBUNAL. THE TRIBUNAL HAS RESTORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH DIRECTIONS TO HIM TO DECIDE THE ASSESSMENT AFR ESH AND ACCORDING TO LAW AFTER PROVIDING SUFFICIENT OPPORTU NITY OF BEING HEARD TO THE ASSESSEE THEREIN. IN THESE CIRCUMSTANCES AN D HAVING REGARD TO THE EVIDENCE IN THIS CASE, WE SET ASIDE THE ORDE RS OF THE DEPARTMENTAL AUTHORITIES AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL TAKE A FRESH DECISION REGARDING THE GENUINENESS OF THE FIRM IN THE LIGHT OF OUR OBSERVA TIONS MADE ABOVE AND IN ACCORDANCE WITH LAW, AFTER GIVING ADEQUATE O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE DIRECT ACCORDINGLY AND ALLOW THE ASSESSEES APPEAL, IN PART, FOR STATISTICAL PURPOSE S ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH APRIL 2011. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER PRESIDE NT MUMBAI, DATED 20 TH APRIL 2011 SALDANHA COPY TO: 1. M/S A C CHENNA REDDY (FIRM) SHRI G G AGARWAL, ADVOCATE 5, JOLLY BHAWAN NO.2 7, NEW MARINE LINES CHURCHGATE, MUMBAI 400 020 2. ACIT, CENTRAL CIRCLE 2, THANE 3. CIT-CENTRAL, PUNE 4. CIT(A)-I, THANE 5. DR A BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI