1997 (7) TMI 65 - HC - Income Tax

Summary

Issues:
Challenge to Circular No. 737 dated February 23, 1996 regarding deduction on salary and interest to partners of firms opting for income estimation under sections 44AD and 44AE of the Income-tax Act, 1961. Assessments based on Circular No. 737. Insertion of provisos to sub-sections (2) of section 44AD and (3) of section 44AE with retrospective effect from April 1, 1994.

Analysis:
The judgment of the High Court of Orissa dealt with the challenge to Circular No. 737 issued by the Central Board of Direct Taxes regarding the admissibility of deduction on account of salary and interest to partners of firms opting for income estimation under sections 44AD and 44AE of the Income-tax Act, 1961. The circular was challenged on the grounds that it contradicted previous clarifications issued by the CBDT in Circular No. 684. The petitioners argued that Circular No. 684 was in conformity with the law and that the supersession of it by Circular No. 737 was illegal. Assessments had been completed based on Circular No. 737 in some cases, while in other cases, notices for assessment/reassessment were issued based on the circular, which were challenged in the writ petitions.

The insertion of provisos to sub-section (2) of section 44AD and sub-section (3) of section 44AE by the Finance Act, 1997, with retrospective effect from April 1, 1994, was a crucial aspect of the judgment. These provisos clarified that any deduction allowable under sections 30 to 38 shall be deemed to have been already given full effect to for the purposes of computation under sub-section (1) of sections 44AD and 44AE. Furthermore, where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

The High Court held that the effect of Circular No. 737 was nullified by the newly added provisos with retrospective effect. Consequently, assessments made based on the circular were vacated, allowing the Assessing Officer to redo the assessments based on the amended provisions. For cases where notices were under challenge, the assessees were permitted to bring the amended provisions to the attention of the Assessing Officer for appropriate action. The writ applications were allowed, and no costs were imposed. Judge S. C. Datta concurred with the judgment.