2005 (9) TMI 267 - AT - Income Tax

Assessment As AOP - registration of the firm - deduction on account of remuneration and interest to partners - failure on the part of the firm as mentioned in s. 144 of the Act - Addition u/s 68 - HELD THAT - In the present case due to the non-co-operative attitude of the assessee there may be justification on the part of the AO to make the assessment u/s 144 of the Act. However s. 184(5) does not come into operation automatically when the assessment is made u/s 144 of the Act. Had that been the case then the provisions would have been worded somewhat in this manner Where an assessment is made u/s 144 of the Act the firm shall not be assessed as such for the said assessment year and thereupon the firm shall be assessed in the same manner as an AOP and all the provisions of this Act shall apply accordingly. However this is not the situation. Sec. 184(5) comes into play only when there is a complete failure as mentioned in s. 144 of the Act. The situational difference has to be noted while applying the failures while making assessment u/s 144 and while applying them for the purposes of s. 184(5) of the Act. While making an assessment u/s 144 due to non-compliance the AO may find it difficult to determine the exact income of the assessee and therefore may have to resort to best judgment. However while applying those failures for the purpose of s. 184(5) the failure has to be complete because that would give rise to the presumption that the firm is not genuine and hence cannot be treated and assessed as such. Mere non-co-operation on the part of the assessee cannot render the firm to be non-genuine. In the present case the several failures to comply with the notices may have rendered the determination of the correct income of the assessee but that certainly does not lead to the conclusion that the firm is not genuine and therefore has to be assessed as an AOP. In the light of this discussion we hold that the AO was not justified in treating the assessee as an AOP and direct the AO to treat it as a firm. In the result the appeal of the assessee is allowed. Addition u/s 68 - Merely on the basis of the terms of partnership it cannot be presumed that the assessee must have maintained any books of account. As a matter of fact even the AO has accepted this position as fait accompli which drove him to determine the income on estimate basis. Therefore now it does not lie in the mouth of the learned Departmental Representative to presume the existence of books of account. We are also in agreement with the contention that this being the first year of the assessee s business and since the capital is stated to have been introduced right from the first day of the partnership there is no basis to presume that the assessee must be having any undisclosed income. This was also the view expressed by the Supreme Court in the case of CIT vs. Bharat Engg. Construction Co. 1971 (9) TMI 14 - SUPREME COURT . Thus considering all these aspects we confirm the deletion of the addition. In the result the appeal of the Department is dismissed. Summarizing the result of this order the appeal of the assessee is allowed and the appeal of the Department is dismissed.

Summary

Issues involved:
1. Registration of the assessee-firm.
2. Application of net profit rate and deletion of addition under Section 68 of the Act.

I. Registration of the assessee-firm:
The primary issue in the assessee's appeal was the registration of the firm for the assessment year 1999-2000. The assessee had not fully disclosed income in the return, leading to notices under various sections. The assessment was completed under Section 144, treating the assessee as an Association of Persons (AOP) due to non-compliance. The contention was that Section 144 applies only in cases of complete failure, not partial non-compliance. The Tribunal held that mere non-cooperation does not render the firm non-genuine, directing the AO to treat it as a firm, not an AOP.

II. Application of net profit rate and deletion of addition under Section 68 of the Act:
In the Department's appeal, the first ground was against the application of a 10% net profit rate by the AO for a contractor engaged in civil construction work. The CIT(A) applied an 8% rate, which was upheld by the Tribunal due to the arbitrary nature of the AO's decision. The second ground involved the deletion of an addition under Section 68 of the Act related to unexplained capital contributions. The AO added the sum to the total income, but the CIT(A) deleted it citing the first year of business and lack of evidence. The Tribunal upheld the deletion, emphasizing that the absence of maintained books does not imply undisclosed income in the absence of concrete evidence.

In conclusion, the Tribunal allowed the assessee's appeal while dismissing the Department's appeal, resolving the issues related to registration, net profit rate application, and unexplained capital contributions comprehensively.