2018 (1) TMI 546 - HC - Income Tax

Revision u/s 263 - addition u/s 14A of the Act with regard to certain shares which had been issued in their favour individually as member of the firm and had not been issued to the firm itself - capital assets in the shape of shares were in the name of the partnership himself - Held that - One thing which is clear that the assessee was not trading in shares. The business was a different nature and it was to sale motorcycle and its parts. It is admitted to the assessee that the amount which was received as capital assets in the shape of shares were in the name of the partnership himself and did not form any part of the capital account of the firm and, therefore, the claim made by the firm under Section 36(1)(iii) read with Section 14-A was not allowable in favour of the partners as such deduction can only be granted to a firm. Thus since the assessee failed to establish that the capital assets which had received were ever part of the firm s capital account. The deduction which had been allowed to them under that head could not have been allowed. It has rightly been disallowed. Insofar as the other aspects are concerned, the Tribunal has recorded that the assessee is a firm and is also assessed as a firm. - Decided against assessee

Issues:
1. Justification of Tribunal's order regarding the Commissioner of Income Tax's decision.
2. Completion of due enquiry by the Assessing Officer for allowing salary and interest to partners.
3. Validity of upholding the Commissioner's order under Section 263 of the Act.
4. Correctness of assessing dividend received on shares by partners.
5. Assessment of the firm as an Association of Persons (AOP) under Section 185.
6. Allowance of investment in shares and related interest under Section 36(i)(iii) and Section 40(b) of the Act.

Analysis:

1. The appeal was filed against the Tribunal's order regarding the Commissioner of Income Tax's decision. The questions of law raised included the justification of the Tribunal's view that the Commissioner's order was erroneous and prejudicial to revenue interests. The High Court upheld the Tribunal's decision, stating that the order was correctly deemed erroneous and prejudicial to the revenue.

2. The issue of due enquiry completion by the Assessing Officer for allowing salary and interest to partners was raised. The Tribunal's majority judgment questioned the adequacy of the enquiry. The High Court concurred with the Tribunal's view, emphasizing that the conditions specified in Sections 184 and 185 were not met, leading to the firm being assessed differently than claimed.

3. The Tribunal's decision to uphold the Commissioner's order under Section 263 of the Act was challenged. The High Court supported the Tribunal's stance, noting that the Commissioner's order was based on distinct grounds from the notice issued under the said section, justifying the Tribunal's decision.

4. The correctness of assessing dividend received on shares by partners was disputed. The Tribunal's majority judgment raised concerns about the lack of evidence supporting profit distribution in accordance with the partnership deed. The High Court agreed with the Tribunal, dismissing the appeal and supporting the decision to disallow the deduction.

5. The assessment of the firm as an Association of Persons (AOP) under Section 185 was questioned. The Tribunal's majority judgment assessed the firm differently, overlooking compliance with Sections 184 and 185. The High Court upheld the Tribunal's decision, affirming the firm's liability to be assessed as an AOP.

6. The allowance of investment in shares and related interest under Sections 36(i)(iii) and 40(b) of the Act was debated. The Tribunal's majority judgment differed from the Assessing Officer's decision. The High Court concurred with the Tribunal, upholding the disallowance of the deduction and dismissing the appeal.

In conclusion, the High Court dismissed the appeal, answering the questions of law against the assessee and in favor of the department, based on a detailed analysis of each issue raised in the case.

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