2018 (5) TMI 1022 - AT - Income Tax

Disallowance of salary and interest paid to the partners - estimation of income - rejection of books of accounts - determination of income - Held that - Assessment has been made by the Assessing Officer by estimating the income of the assessee by rejecting the books of account by invoking the provisions of section 145(3) of the Act as he was not satisfied about the correctness of the book results of the assessee. Thus, it is not a case where the assessment is made by the Assessing Officer u/s.144 of the Act. It is a case where assessment u/s.143 is made in a manner laid down u/s.144. - Assessing Officer directed to determine the income of the assessee after allowing deduction for payment of salary and interest to partners from the estimated income of the assessee - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of salary and interest paid to partners by Assessing Officer.
2. Interpretation of provisions of section 184(5) of the Income Tax Act, 1961.
3. Allowance of deduction for salary and interest paid to partners in the case of rejected book results.

Analysis:

Issue 1: Disallowance of salary and interest paid to partners
The Assessing Officer disallowed salary and interest paid to partners by invoking section 145(3) read with section 144 of the Income Tax Act. The AO rejected the book results of the assessee due to non-production of purchase and sales bills, estimating income at 4% of the turnover. Consequently, no salary and interest were allowed to partners as per section 184(5) of the Act. The CIT(A) upheld this decision.

Issue 2: Interpretation of section 184(5) of the Income Tax Act
Section 184(5) states that if there is a failure on the part of a firm as mentioned in section 144, no deduction for interest, salary, etc., paid to partners shall be allowed. Section 144 empowers the AO to make an assessment to the best of his judgment in case of non-compliance with filing returns or notices. However, in the present case, the assessment was made under section 143 by rejecting the books of account under section 145(3), not under section 144.

Issue 3: Allowance of deduction for salary and interest paid to partners
The Tribunal referred to a previous case where deduction for salary and interest paid to partners was allowed when book results were rejected. Following this precedent, the Tribunal set aside the lower authorities' decisions and directed the AO to determine the income after allowing the deduction for salary and interest paid to partners from the estimated income.

In conclusion, the appeal of the assessee was allowed, emphasizing that the assessment was not made under section 144, and thus, deduction for salary and interest paid to partners should be permitted.