2019 (12) TMI 517 - AT - Income Tax

Revision u/s 263 - AO allowed the deduction of interest and remuneration to partners while passing order u/s 144 ignoring the provisions of section 184 - Hawala Transactions - allegation that the assessee is a beneficiary of accommodation entries provided by some entities identified as hawala operators - in spite of the statutory notice issued under section 143(2) of the Act, the assessee neither appeared nor made any compliance - AO has completed the assessment invoking the provisions of section 144 of the Act, to the best of his judgment. Whether the assessment order passed is erroneous and prejudicial to the interests of Revenue due to non application of the provision contained under section 184(5) of the Act while allowing interest / remuneration paid to the partners? HELD THAT - In the facts of the present case, admittedly, the Assessing Officer has completed the assessment under section 144 of the Act to the best of his judgment alleging non compliance to the statutory notices issued under section 142(1) and 143(2) of the Act. Provisions of section 184 of the Act lay down the procedure for the assessment in case of a partnership firm. Sub section (5) of section 184 of the Act, which begins with a non obstante clause, makes it clear that in a case where the assessment is completed under section 144 of the Act for any such failure on the part of the firm as mentioned in the said provision, assessment has to be made without allowing any deduction by way of payment of interest, salary, bonus, commission or remuneration, etc., to any partner. Thus, once the assessment is completed under section 144 of the Act, the provision of section 184(5) of the Act gets triggered automatically and it will override all other provisions of the Act. In the facts of the present case, by the very reason of the Assessing Officer completing assessment under section 144 of the Act, the provision of section 184(5) would automatically come into play. However, while completing the assessment, the Assessing Officer completely overlooking the provisions of section 184(5) of the Act has allowed deduction on account of interest / remuneration paid to partners - In the facts of the present case, the failure on the part of the Assessing Officer to apply or at least even examine the applicability of section 184(5) of the Act, certainly makes the assessment order erroneous and prejudicial to the interests of Revenue. Therefore, the exercise of power under section 263 of the Act to revise the assessment order is valid. Appeal dismissed.

Summary

Issues:
1. Validity of order passed under section 263 of the Income Tax Act, 1961.
2. Compliance with statutory notices by the assessee.
3. Application of section 184(5) of the Act in assessment under section 144.

Analysis:
1. The appeal was filed by the assessee challenging the order passed under section 263 of the Income Tax Act, 1961 for the assessment year 2010-11. The learned Principal Commissioner found that the Assessing Officer had allowed deductions towards interest and remuneration paid to partners, contrary to section 184(5) of the Act. The Principal Commissioner set aside the assessment order, directing the Assessing Officer to reassess the income after following due procedure. The issue was whether the assessment order was erroneous and prejudicial to the interests of Revenue due to non-application of section 184(5) of the Act.

2. The assessee contended that it had complied with all statutory notices issued by the Assessing Officer, and therefore, the provision of section 184(5) should not apply. The Departmental Representative argued that once an assessment is completed under section 144, no deduction for interest or remuneration to partners can be allowed as per section 184(5). The Tribunal noted that the Assessing Officer had not examined the applicability of section 184(5) while allowing the deductions, leading to a failure in necessary inquiry regarding the deduction claimed by the assessee.

3. The Tribunal analyzed the relevant statutory provisions, highlighting that section 184(5) of the Act overrides other provisions when an assessment is completed under section 144. The failure of the Assessing Officer to consider section 184(5) rendered the assessment order erroneous and prejudicial to Revenue. The Tribunal upheld the order passed under section 263, emphasizing that the failure to apply or examine the applicability of section 184(5) made the assessment order invalid. The Tribunal dismissed the appeal, affirming the decision of the Principal Commissioner.

In conclusion, the Tribunal upheld the order passed under section 263, emphasizing the importance of correctly applying statutory provisions during assessments to avoid errors prejudicial to Revenue.