1998 (4) TMI 158 - AT - Income Tax

Summary

Issues Involved:
1. Status of the firm under section 184(2) of the Income Tax Act.
2. Disallowance of salary paid to a partner.
3. Applicability of section 143(1)(a) for changing the status of the firm.
4. Procedural compliance and the right to cure defects.
5. Applicability of section 167B(2) for levying tax at the maximum marginal rate.

Detailed Analysis:

1. Status of the Firm under Section 184(2):
The primary issue revolves around whether the firm should be assessed as a firm or as an Association of Persons (AOP) due to the non-filing of the certified copy of the partnership deed with the initial return of income.

The Revenue argued that the firm did not comply with section 184(1)(ii) by failing to submit the partnership deed along with the return filed on 27-12-1993. Consequently, the Assessing Officer assigned the status of AOP to the firm under section 185.

The assessee contended that the requirement to file the certified copy of the partnership deed is procedural and can be cured by filing a revised return, which was done on 24-3-1995. The DCIT(A) agreed, holding that the defect was curable and the firm complied with section 184 by filing the revised return.

2. Disallowance of Salary Paid to Partner:
The Assessing Officer disallowed the salary paid to a partner amounting to Rs. 18,000, determining the income at Rs. 5,070. The DCIT(A) restored the matter to the Assessing Officer to reconsider the claim after examining the partnership deed in accordance with section 40(b)(ii).

3. Applicability of Section 143(1)(a):
The Revenue argued that the Assessing Officer was justified in adopting the status of AOP under section 143(1)(a) due to the non-submission of the partnership deed. However, the DCIT(A) held that changing the status while processing the return under section 143(1)(a) was beyond its scope. The Tribunal supported this view, stating that the change of status is not a permissible prima facie adjustment under section 143(1)(a).

4. Procedural Compliance and the Right to Cure Defects:
The Tribunal emphasized that the requirement to file the partnership deed is procedural. The assessee could file the certified copy of the instrument of partnership along with a return under section 139(4) or a revised return under section 139(5), which was done on 24-3-1995. Therefore, the firm complied with section 184, and the consequences under section 185 did not apply.

5. Applicability of Section 167B(2):
The Tribunal noted that the Assessing Officer did not provide any notice before changing the status from a firm to AOP, violating principles of natural justice. Moreover, the Tribunal found that section 167B(2) was not applicable as the shares of the partners were determinate and known, and the total income of the partners did not exceed the taxable limit.

Conclusion:
The Tribunal upheld the DCIT(A)'s decision, directing the Assessing Officer to adopt the status of the firm and dismissed the Revenue's appeal. The Tribunal concluded that the procedural requirement of filing the partnership deed was cured by the revised return, and the change of status under section 143(1)(a) was not permissible. The appeal was dismissed, affirming the assessee's status as a firm.