2015 (2) TMI 1333 - HC - Income Tax

Status of the assessee as AOP as against its claim as firm - completing the assessment on the assessee as an Association of Persons - failure to comply with the requirements of Section 144 - HELD THAT - While rationalizing the provisions relating to assessment of firms it is made clear that, only in the event of a best judgment assessment is made for failure to comply with Section 144 the benefit which is available to a firm u/s 28 can be denied. If a best judgment assessment under Section 144 of the Act is not made, no disallowance u/s 184(5) can be made. No doubt this explanatory note is not in conformity with Section 184(5) of the Act. But, when the CBDT issued the said explanatory note, it is giving relaxation and benefit to the assessee which the statute has not provided. Such a power is vested in the CBDT by virtue of Section 119. Once such a benefit is conferred by way of a circular, the authorities are bound by the same. They cannot sit in judgment over the said explanation and deny the benefit to the assessee. Even though this Court can interpret the said provision and note that there is inconsistency between the provision and the explanation offered, but when the CBDT issued such instruction granting that benefit to the assessee that has to be respected. In that view of the matter, the approach of the three authorities in denying the benefit to the assessee was not justified. It is contrary to the said explanation found in the circular which the CBDT wanted to extend to the assessee in order to overcome the hardship by virtue of the said statutory provision. Therefore, the impugned orders cannot be sustained. As contended that, when the partnership deed was not enclosed to the return filed, there is non-compliance of Section 184(2) and, therefore, the consequences mentioned in Section 184 has to follow. But, it is on record before the assessment, a partnership deed duly certified and signed by all the partners were produced before the assessing authority. There is substantial compliance with sub-section (2) of Section 184. As could be seen from the language employed in Section 185, if there is non-compliance with the provisions of Section 184, the firm shall be so assessed and no deduction would be granted. It is at the time of assessment, if the authority is not given the partnership deed, the firm would be given the benefit. But, at the time of assessment, if the partnership deed was produced, certainly the authorities have to look into the partnership deed and if it is a firm which satisfies the other requirements, then the firm would be entitled to other benefits. Under such circumstances, Section 185 is not attracted.

Summary

Issues Involved:
1. Whether the Tribunal was justified in passing the ex-parte order without affording an opportunity to the appellant while denying the status of the Appellant as a firm.
2. Whether the Tribunal was justified in upholding the denial of status as firm despite the Appellant filing a certified copy of the partnership deed before the conclusion of the assessment.
3. Whether the Tribunal was right in affirming the status of the appellant as an Association of Persons (AOP) as done by the assessing officer.

Detailed Analysis:

1. Ex-parte Order and Opportunity to the Appellant:
The Tribunal passed an ex-parte order without affording an opportunity to the appellant, which was challenged by the appellant. The Tribunal's decision was based on the failure to comply with the requirements under Section 144 of the Income Tax Act, which led to the assessment being concluded without considering the appellant's status as a firm.

2. Filing of Partnership Deed:
The appellant contended that the certified copy of the partnership deed was filed before the conclusion of the assessment. Despite this, the authorities treated the appellant as an AOP under Section 184(5) of the Act, which led to the disallowance of deductions for payment of interest, salary, and other legitimate expenses. The appellant argued that once a return is filed in response to a notice under Section 148, it should be treated as a return under Section 139, and the default under Section 144(1)(a) should be considered rectified.

3. Affirmation of Status as AOP:
The authorities, including the Tribunal, affirmed the status of the appellant as an AOP, relying on the judgment of the Kerala High Court in RADHA PICTURE PALACE v. DEPUTY COMMISSIONER OF INCOME TAX, which held that filing a return under Section 148 does not remedy the failure under Section 144(1). Consequently, the appellant was denied the benefits of deductions under Section 28 of the Act.

Legal Interpretation and CBDT Circular:
The court discussed the interpretation of Section 184(5) and Section 185 of the Act, emphasizing that non-compliance with Section 144 results in the firm being assessed without the benefits of deductions under Section 28. However, the Central Board of Direct Taxes (CBDT) Circular No. 7/2003 provided an explanatory note stating that only if a best judgment assessment is made under Section 144, the firm would be denied the benefits. The court held that the CBDT circular, being binding on the authorities, provided relaxation and benefit to the assessee, which should be respected.

Final Judgment:
The court allowed the appeal, set aside the impugned orders, and answered the substantial questions of law in favor of the assessee. The court emphasized that the authorities should have considered the partnership deed filed before the assessment and granted the benefits accordingly. The authorities' approach was deemed unjustified and contrary to the CBDT circular, leading to the setting aside of the impugned orders. The parties were directed to bear their own costs.