2005 (5) TMI 258 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessments.
2. Status of the assessee as a firm or Association of Persons (AOP) for tax purposes.
3. Compliance with sections 184 and 185 of the Income-tax Act.
4. Applicability of the Kerala Abkari Act and relevant Rules to the assessee's business operations.

Issue-wise Detailed Analysis:

1. Reopening of Assessments:
The assessee challenged the reopening of assessments for the years 1993-94, 1994-95, 1995-96, and 1996-97. The Assessing Officer (AO) had reopened the assessments under section 143(3) read with section 147 of the Income-tax Act, treating the assessee-firm as an AOP based on the alleged violation of the Kerala Abkari Act. The CIT(A) upheld the AO's decision, but the Tribunal found that the reassessment proceedings were initiated solely on the basis of a legal interpretation without further factual investigation.

2. Status of the Assessee as a Firm or AOP:
The primary issue was whether the assessee should be assessed as a firm or an AOP. The AO treated the assessee as an AOP, disallowing salary and remuneration paid to partners and applying the maximum marginal rate. The CIT(A) agreed, citing the Kerala High Court's decision in Narayanan & Co., which held that forming a partnership to exploit an Abkari licence was illegal. However, the Tribunal noted that the Supreme Court in the case of Grand Enterprises had held that mere utilization of a partner's licence by the firm does not constitute a transfer of the licence, thus not violating the Abkari Act.

3. Compliance with Sections 184 and 185 of the Income-tax Act:
The Tribunal examined the amended sections 184 and 185, applicable from the assessment year 1993-94, which require a firm to be evidenced by an instrument, specify individual shares of partners, and submit a certified copy of the partnership deed with the first return of income. The Tribunal found that the assessee had complied with these conditions. It emphasized that the distinction between registered and unregistered firms had been removed, and the firm should be assessed as such unless there were specific violations under section 144 or section 185.

4. Applicability of the Kerala Abkari Act and Relevant Rules:
The AO and CIT(A) relied on the Kerala High Court's interpretation that forming a partnership to exploit an Abkari licence constituted an illegal transfer of the licence. However, the Tribunal, following the Supreme Court's decision in Grand Enterprises, held that mere formation of a partnership does not amount to a transfer of the licence unless it is factually established that the licence was transferred or formed part of the partnership property. The Tribunal found no such factual transfer in the present case.

Conclusion:
The Tribunal concluded that the assessee-firm should be treated as a firm for assessment purposes under section 184 of the Income-tax Act. It set aside the CIT(A)'s order and directed the AO to assess the assessee as a firm, not as an AOP. The assessee's appeals were allowed, and the order of the CIT(A) was canceled.