2011 (4) TMI 885 - AT - Income Tax

Assessment of firm on protective basis - search u/s 132 - Whether AO has power to examine the genuineness of the firm - Held that - Unable to accept the assessee s contention that it is not open to AO to examine the genuineness of the firm as that here has been a development after the completion of the assessments for the earlier years and this is that on 26-3-2003 there was a search under section 132. The assessee had filed its return on 19-9-2002 itself and the assessment was pending and it is during the pendency of the return that a search was conducted in the group cases and they were centralized in Mumbai. It is after the search that the AO took up the assessment of the return filed by the firm and proceeded to examine whether there was a genuine firm in existence. In such circumstances when there was material before him which throws considerable doubt as to the genuineness of the firm, it is not open to invoke the provisions of section 184(3) to contend that since the firm has been assessed as such in the earlier years, its genuineness cannot be examined in the assessment for the assessment year under appeal. AO was therefore well within his powers to examine the genuineness of the firm in the light of the materials gathered during the search. His powers cannot be curtailed merely because of sub-section (3) of section 184, which only provides for the rule of consistency. AO has been able to get statements from about 10 partners and they have been compiled in the paper book - a cursory perusal of some of the statements of partners shows that some basic and relevant details including the capital, activities 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 to brush aside the statements. Thus the fact that the assessee firm had claimed to have taken Government contracts is also relevant because before awarding contracts the genuineness or credentials of the assessee firm would have been examined by the Government. All these are relevant considerations which the AO ought to have kept in mind - restore the matter to the file of the AO with directions to him to decide the assessment afresh - assessee s appeal allowed by of remand to AO.

Summary

Issues Involved:

1. Power of the Assessing Officer to examine the genuineness of a firm under section 184 of the Income-tax Act, 1961.
2. Merits of the evidence regarding the genuineness of the firm.

Issue-wise Detailed Analysis:

1. Power of the Assessing Officer to Examine the Genuineness of a Firm:

The core issue is whether the Assessing Officer (AO) has the authority to examine the genuineness of a partnership firm under section 184 of the Income-tax Act, 1961, as amended from 1-4-1993. The appellant contended that the AO lacks this power under the current provisions of section 184, which does not explicitly grant the AO the authority to scrutinize the genuineness of the firm, unlike the previous section 185. The Tribunal rejected this argument, emphasizing that the AO inherently possesses the power to assess the genuineness of any taxable entity, including a partnership firm. The Tribunal referred to the Supreme Court's judgment in Dy. CST v. K. Kelukutty, which underscores that determining the legal identity of an assessee as a partnership firm requires applying partnership law principles. The Tribunal concluded that the absence of an express provision does not imply that the AO is barred from examining the genuineness of a firm. The Tribunal stated, "It cannot be postulated that the Legislature intended that even a non-genuine firm can be assessed as such."

2. Merits of the Evidence Regarding the Genuineness of the Firm:

On the merits, the Tribunal reviewed the evidence and statements of the partners recorded by the AO. The AO had dismissed these statements, suggesting that the partners were well-tutored and lacked knowledge about the firm's business activities. However, the Tribunal noted that some statements provided relevant details about the firm's capital and activities, indicating that the partners had some understanding of the business. The Tribunal also considered the fact that the firm had secured government contracts, which would have required some verification of its credentials. The Tribunal found that the AO may not have adequately considered all evidence, stating, "We get the impression that the entire evidence both for and against the assessee's claims has to be apprised again in order that a proper conclusion is drawn regarding the genuineness of the firm." Consequently, the Tribunal set aside the orders of the departmental authorities and remanded the matter to the AO for a fresh decision, ensuring a thorough examination of the evidence and providing the assessee with an adequate opportunity to be heard.

Conclusion:

The Tribunal allowed the appeal in part for statistical purposes, directing the AO to re-examine the genuineness of the firm in light of the Tribunal's observations and in accordance with the law, ensuring a fair and comprehensive assessment process.