2008 (1) TMI 260 - HC - Income Tax

Issue whether deduction of interest & salary paid to partners could be disallowed or not in a case where the assessment was completed u/s 144(on status of registered firm), is highly debatable AO rectified the assessment order on ground that since assessment was completed u/s 144, the status of firm was required to be taken as association of persons & hence disallowed deduction claim of assessee impugned mistake is not apparent from record, hence rectification order is not valid

Summary

Issues:
1. Interpretation of Section 154(1A) of the Income Tax Act, 1961
2. Admissibility of interest and salary to members of an Association of Persons (AOP)
3. Rectification of assessment from a firm to an Association of Persons (AOP)

Analysis:

Issue 1: Interpretation of Section 154(1A) of the Income Tax Act, 1961
The appeal challenged the ITAT's order allowing the appellant's appeal for the assessment year 1996-97. The appellant contended that the ITAT wrongly implied that Section 154(1A) of the Income Tax Act covers orders passed under Section 144 as well. The Tribunal had previously allowed the deduction of interest and salary to partners, which the AO sought to rectify under Section 154. The High Court held that the AO's attempt to rectify the order was illegal and without jurisdiction. The Tribunal's decision to allow the deduction was binding, and the AO could not nullify it through rectification under Section 154.

Issue 2: Admissibility of interest and salary to members of an Association of Persons (AOP)
The AO, after completing the assessment under Section 144, sought to rectify the status of the assessee from a firm to an AOP, thereby disallowing the deduction of interest and salary paid to partners. The Tribunal had previously allowed the deduction, and the AO's attempt to rectify the order was deemed illegal and without jurisdiction. The High Court emphasized that the issue of deduction of interest and salary paid to partners was debatable, falling outside the scope of Section 154, as it involved prolonged arguments and two conceivable views.

Issue 3: Rectification of assessment from a firm to an Association of Persons (AOP)
The AO's attempt to rectify the assessment from a firm to an AOP under Section 154 was challenged by the assessee. The CIT(A) upheld the rectification, stating that the AO was justified in rectifying the mistake of assessing the firm as a Registered Firm instead of an AOP under Section 184(5) of the Act. However, the Tribunal allowed the appeal, emphasizing that the AO's rectification was illegal and without jurisdiction. The High Court concurred, dismissing the appeal as devoid of merit and stating that no substantial question of law arose for determination.