2003 (2) TMI 3 - HC - Income Tax

Section 144 - the best judgment assessment - whether the order passed by the Assessing Officer and the directions issued under section 144A, by the Additional Commissioner treating the partnership firm as an association of persons liable to assessment under section 185 are proper. petitioner submit that it is possible to ascertain the profit. He contend that still there is possibility to ascertain the profit in case a firm is converted into a company then the business of the firm is succeeded by the company within the meaning of section 170(1) and the firm will be assessed up to the date of succession - plea of the petitioner to allow rectification of the defect if permissible; that has to be considered by the Additional Commissioner at the first instance not directly by this court in exercise of writ jurisdiction under article 226 of the Constitution of India - impugned order passed by the Additional Commissioner is quashed. Writ petitions are partly allowed. The Additional Commissioner is directed to reconsider the matter under section 144A,

Summary

Issues:
1. Proper assessment of a partnership firm under the Income-tax Act, 1961.
2. Validity of treating the firm as an association of persons under section 185 of the Act.
3. Dispute regarding the dissolution of the partnership firm and subsequent formation of a new firm.
4. Interpretation of provisions related to best judgment assessment and failure to file returns.

Analysis:

1. The judgment revolves around the assessment of a partnership firm under the Income-tax Act, 1961. The key issue is whether the Assessing Officer's order and the Additional Commissioner's directions under section 144A were appropriate in treating the partnership firm as an association of persons liable for assessment under section 185 of the Act.

2. The dispute arises from the dissolution of the partnership firm due to the death of a partner and the subsequent formation of a new firm. The Assessing Officer and the Additional Commissioner held that the accounts of the dissolved firm were not closed, and profits were not distributed among the partners accurately for the relevant periods. This led to the decision to treat the firm as an association of persons for assessment purposes.

3. The petitioner contended that the actions taken were not in accordance with the law, emphasizing that both the dissolved firm and the newly constituted firm were registered partnership firms. The petitioner argued that assessment should have been made under section 144A, and invoking section 185 to assess as an association of persons was legally incorrect.

4. The judgment delves into the provisions of section 184 and section 144 of the Act. It highlights that failure to file returns and comply with notices can lead to assessment as an association of persons under section 185. However, the court emphasized the importance of considering whether defects in maintaining accounts could be rectified under section 139(9) before resorting to assessment under section 185.

5. The court directed the Additional Commissioner to reevaluate the matter under section 144A and decide within a specified timeframe. The judgment underscores the need to explore possibilities of rectifying defects in compliance with the law before resorting to drastic measures like assessing a partnership firm as an association of persons.