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2013 (8) TMI 222 - AT - Income TaxDeduction u/s 40(b) - Partnership firm or association of persons - A.O. allowed deduction to assessee - CIT revised the order u/s 263, considered assessee as AOP and disallowed deduction - Held that - Assessee was a renowned partnership firm and was well aware that number of partners cannot exceed 20. It is a well settled principle of law that what is permissible is tax planning, but not evasion. When an attempt is made by a concern to evade tax using subtle camouflages, bounden duty of the authorities is to find out the real intention. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs - assessee was indirectly trying to bring in M/s Deloitte Haskins & Sells, Mumbai, another firm, which was already a participating firm, as its partner, circumventing the limit of maximum 20 members. It is also obvious that Assessing Officer despite having the amendment deed with him, had not gone into these aspects. Assessment order is a crisp one accepting the income returned by the assessee. Assessee has not been able to place any record to show that Assessing Officer had called for any details regarding the number of partners during the course of assessment. A crisp order by itself might not show that Assessing Officer had not applied his mind. But, when the circumstances show that despite availability of materials, is that Assessing Officer had not looked into such aspects nor applied his mind. Assessee had claimed substantial amount as remuneration to its partners under Section 40(b) of the Act and this was allowed as such without considering the crucial aspect of the legality of its claim of status as a firm. CIT went over board when he directed the Assessing Officer to modify the assessment order by treating the assessee as an AOP and disallow the claim of remuneration to its partners. The CIT ought have simply set aside the order of A.O. for consideration of issue afresh, since it was erroneous insofar as it was prejudicial to the interests of Revenue and to this extent, order of ld. CIT required modification - Decided partly in favour of assessee.
Issues Involved:
1. Validity of the order passed under Section 263 of the Income-tax Act, 1961. 2. Determination of the number of partners in the firm. 3. Legality of the assessee's claim for remuneration paid to partners under Section 40(b) of the Act. 4. Jurisdiction of the CIT to interfere with the assessment order under Section 263. Issue-wise Detailed Analysis: 1. Validity of the Order Passed Under Section 263 of the Income-tax Act, 1961: The assessee challenged the order dated 26.3.2012 passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income-tax Act, 1961, which revised the assessment order completed on 31.12.2010 under Section 143(3) of the Act. The CIT issued a show cause notice stating that the number of partners in the firm had exceeded 20 due to an amendment in the partnership deed on 1st May 2007, wherein one partner was added in a representative capacity, thus allegedly violating the Indian Partnership Act, 1932. The CIT contended that the firm should be treated as an Association of Persons (AOP) and disallowed the deduction under Section 40(b) of the Act, which was allowed in the original assessment. 2. Determination of the Number of Partners in the Firm: The assessee argued that the number of partners did not exceed 20, as the amendment dated 1.5.2007 indicated only 20 partners. The assessee relied on the Supreme Court decisions in CIT v. Bagyalakshmi & Co. and Rashik Lal and Co. v. CIT, which clarified that an individual could represent a group of persons as well as himself, thereby occupying a dual position. The assessee contended that the right of the partner in a representative capacity did not alter the number of partners in the firm. The CIT, however, noted that the partnership deed clearly mentioned the addition of a partner in a representative capacity, thus exceeding the maximum limit of 20 partners. 3. Legality of the Assessee's Claim for Remuneration Paid to Partners Under Section 40(b) of the Act: The CIT directed the Assessing Officer (AO) to modify the assessment order and disallow the claim of remuneration paid to partners under Section 40(b) of the Act, as the firm was to be treated as an AOP. The assessee contended that the AO had considered the partnership deeds before completing the assessment and that the view taken by the AO was a possible one, thus the CIT did not have jurisdiction to interfere under Section 263. The assessee relied on the decision of the Punjab & Haryana High Court in CIT v. Max (India) Ltd. 4. Jurisdiction of the CIT to Interfere with the Assessment Order Under Section 263: The CIT was not convinced by the assessee's arguments and held that the AO had committed an error by not considering the number of partners and allowing the claim under Section 40(b). The CIT invoked his revisionary powers under Section 263, stating that the AO's non-application of mind was prejudicial to the interests of Revenue. The Tribunal noted that the AO had the amendment deed but did not examine the aspects related to the number of partners. The Tribunal agreed that the AO's order was erroneous and prejudicial to the interests of Revenue, thus justifying the CIT's invocation of Section 263. Conclusion: The Tribunal confirmed the CIT's invocation of powers under Section 263 but modified the CIT's order. The Tribunal directed the AO to consider the assessee's claim afresh without being constrained by the CIT's direction to treat the assessee as an AOP and disallow the remuneration claim. The appeal filed by the assessee was partly allowed, and the AO was instructed to proceed in accordance with the law. The order was pronounced on 4th July 2013 at Chennai.
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