Status of Partnership firms from assessment year 1993-94- filing of certified copy of instrument of partnership in AY 1993-94 and later on deed of variations, if any, are mandatory - held Kerala high Court.

[C.A. DEV KUMAR KOTHARI]

Partnership firms:

There were significant changes in provisions relating to assessment of an entity as a firm w.e.f. 01.04.1993 that is assessment year 1993-94. S. 184 and 185 were substituted. Changes were also made in allowable deductions in hands of firm, exemptions in hands of partners etc.

Scope of this write-up:

In this write-up we are mainly concerned with prerequisites for assessment in status of firm and consequences of failure of compliance. The matter is discussed with reference to a recent judgment of the HIGH COURT OF KERALA in the case of Bhaskar & Co. Vs. CIT in ITA No. 457 of 2009 decided on September 15, 2009. In this case the status of firm was denied and the assessee was assessed as an AOP, because in assessment year 1993-94 assessee did not file a certified copy of the partnership deed with its return for assessment year 1993-94.

Section 184 w.e.f. 01.04.1993, and subsequent amendments reads as follows:

[Assessment as a firm.

184. (1) A firm shall be assessed as a firm for the purposes of this Act, if—

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in that instrument.

(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.

Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.]

Sub-section (5) was substituted by the Finance Act,  2003, w.e.f. 1-4-2004.) The Court was concerned with position prior to such amendment and at the relevant time Sub-section (5) read as follows (with highlights provided):

"(5) Notwithstanding anything contained in the foregoing provisions of this section, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, 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 association of persons, and all the provisions of this Act shall apply accordingly."

Section 185:

The section 185 was also amended w.e.f. 01.04.2004 to similar effect in case of non compliance of S. 184. The old and new S.185 are also reproduced below:

New S. 185 w.e.f. 01.04.2004

[Assessment when section 184 not complied with.

185. Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.]

S. 185 prior to 01.04.2004 was as follows and the court was concerned with the same:

Substituted by the Finance Act, 2003, w.e.f. 1-4-2004. Prior to its substitution, section 185 read as under:

"185. Assessment when section 184 not complied with.—Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly."

Old and amended S. 184 (5) and S. 185:

Thus at the relevant time, the provisions which the court considered had effect that  non-compliances referred o in S. 144  and 194 were to render the firm liable to be assessed as an AOP. After amendment it appears that though the firm shall be assessed as a firm, however, deductions of sums referred to in subsection (5) of 184 and 185  shall not be allowed to the firm and the same shall also not be taxable in hands of partners as business income. In nutshell , these sums shall not be allowed to firm, the firm shall pay tax on income without allowing these deductions and as  consequently the partners shall get exemption of the same and shall not be assessed to pay tax thereon. Similar are provisions and consequences in case a firm does not comply with the conditions of S. 184.

Lenient view is required:

Even if a copy of deed in not filed with the return, major information about existence of a firm, partners, their profit share ratio etc. are available in the return as well as in assessment records of firm in case of an old firm assessed earlier. The purpose of requirement for filing of certified copy of deed of partnership duly signed by all partners is to void and changes afterwards. The effect of provisions of partnership deed are otherwise reflected in the return of income and other accompanying documents.  Therefore, filing of such documents should not be considered as mandatory but directory. This is because the firms are usually small organizations, which are not very much organized to look after intricacies of complex tax laws, usually they look after their tax affairs themselves or with help of clerks, their tax consultants, if any, are also generally general tax practioners and not well versed in complex laws. Even senior practioners and consultants can commit a mistake in reading and understanding of complex law. Relevant information is available in the form of return and accompanying documents.

In case of AY 1993-94 (the first year of new provision) or in case of changes in deed or new firm, the firm and its partners face a new requirement for the first time. Therefore, a lenient view is required to be taken. Particularly in case of AY 1993-94 when the firm was assessed as firm in earlier year (AY 1992-93) and the AO is already having a copy of partnership deed in his record, and the same deed was in force for the previous year relevant to assessment year 1993-94, without any changes, then taking a strict view on provisions is not desirable.

In such cases non filing of certified copy of partnership deed should be considered as a technical defect and in any case the assessee should have liberty to file the same afterwards even if it was not filed with the return or prior to filing of return.  The A.O. should be allowed a express power to admit filing of certified copy of deed afterwards, provided the main provisions relating to sharing of profit and payment of other sums to partners are in tune with those reflected in the return of income.

Suppose with the return for assessment year 1993-94 or any subsequent year in which there is some change in partnership deed, or in case of a new firm constituted after new provisions came into force, a certified copy of relevant document is not filed with the return the assessee should be allowed to file the same afterwards as during assessment proceedings or even in appeal proceedings.

However, the court has taken a strict view of new provisions. It appears that other contentions were also not raised by assessee before authorities or courts.

Bhaskar & Co. v. CIT:

In this case the Tribunal has held that as the assessee did nto comply with requirement of S. 185 by filing a certified copy of the deed with the return of AY 1993-94 the assessee was to be assessed as an AOP and not as a firm.The same view has been confirmed by the High Court. The court has considered the matter on the following lines:

The question  considered was " whether non-filing of a certified copy of instrument of partnership along with returns filed for the assessment years 1993-94 and 1994-95 is fatal to assessee's claim for assessment in the status as a 'firm'"?.

The contention of counsel for the assessee were as follows:

That the firm was assessed in that status until 1992-93.

There was no need to  furnish certified copy of the instrument of partnership.

There was no change in the deed of partnership.

The firm once assessed in that status, is entitled to be assessed in the same status for all subsequent years by virtue of operation of Section 184(3) of the Act, if there was no change in the constitution of the firm for any of those years.

The Standing Counsel for revenue contended as follws:

that assessment year 1993-94 is the first year in which assessee's claim for assessment in the status, of firm after the amended provisions came into force has to be considered.

The assesses was bound to produce certified copy of the instrument of partnership along with return.

Prior to the introduction of amended provisions which came into force with effect from 1.4.1993, a firm could be assessed either as a registered firm on complying with the formalities or otherwise only as an 'Association of Persons' (should be unregistered firm- per author).

However, with effect from 01.04.1993 , registration of firm is dispensed with, but for the first time, if a firm seeks registration in that status for any assessment year commencing on or after 1.4.1993, the firm has to furnish the certified copy of the instrument of partnership along with the return for the relevant assessment year

Per court:

Even old firms like  assessee, which enjoyed registration as a 'firm' up to the assessment year 1992-93, is required to furnish certified copy of instrument of partnership if assessment was claimed in the status of firm for any assessment year commencing from 1993-94 onwards.

If the assessee is assessed as firm for any assessment year commencing from 1993-94 onwards based on the certified copy of instrument of partnership produced, then by virtue of operation of sub-section (3), the firm will be assessed in the same status for all subsequent years without production of any certified copy of instrument of partnership until there is a change in the constitution of the firm.

Subsection (4) of Section 184 requires production of revised instrument of partnership along with return for the assessment year relevant for the previous year in which such change in the partnership took place.

Sub-section (3) refers to the assessment in the status as a 'firm' based on the assessment made pursuant to production of certified copy_; of instrument of partnership referred to in 'sub-section (2) of Section 184 and not the assessment made as a registered firm for any assessment year prior to 1993-94.

Non-production of certified copy will naturally lead to disallowance of claims of deduction toward payment of interest, remuneration, bonus etc. paid to partner by the firm by virtue of Section 185 of the Act.

The production of certified copy of instrument of partnership is mandatory for claiming assessment in the status of a - firm for any -assessment year commencing from 1993-94 onwards irrespective of whether such assesses was assessed as a registered firm up to 1993-94 ( should be 1992-93 - per author).

In principle, therefore, the court upheld the findings of the Tribunal.

Authors view:

With respect the author feels that the counsels of  the assessee appears to have restricted their contention that assessee was assessed as firm in AY 1992-93 and there is no change in partnership deed so they should be assessed as firm for AY 1993-94 and 1994-95 also. There was no information as to when the assessee had last furnished copy of deed in earlier years, whether the assessee furnished copy of the deed before completion of assessment.

What were reasons for not furnishing of the certified copy of deed?

Explanation that the case of assessee is that of a genuine partnership firm, profits have been distributed as per deed etc.

Whether, assessee sought condonation of delay in furnishing of copy of deed etc.?

Learning from the case:

The document like partnership deed should be filed with the AO as soon as possible even prior to filing of return.

Even if a requirement for filing of document with return has not been complied with a revised return can be filed along with copy of such documents or the documents can be filed separately as may be suitable in given circumstances.

In case of delay in filing of such documents, documents can be filed as soon as possible with a petition for condonation of delay can be filed giving reasons for such delay.

In such circumstances all possible contentions should be raised and one should not rely on some contentions.

Production of certified copy of instrument of partnership is mandatory for claiming assessment in status of a firm for any assessment year commencing from 1993-94

HIGH COURT OF KERALA

Bhaskar & Co. v. CIT

ITA No. 457 of 2009

September 15, 2009

RELEVANT EXTRACTS:

4. The question to be considered is whether non-filing of a certified copy of instrument of partnership along with returns filed for the assessment years 1993-94 and 1994-95 is fatal to assessee's claim for assessment in the status as a 'firm'. The contention of counsel for the assessee is that the firm, which was assessed in that status until 1992-93, need not furnish certified copy of the instrument of partnership, for assessment in the status as 'firm' for the subsequent assessment years because there was no change in the deed of partnership. In other words, according to him, the firm once assessed in that status, is entitled to be assessed in the same status for all subsequent years by virtue of operation of Section 184(3) of the Act, if there was no change in the constitution of the firm for any of those years. The Standing Counsel on the other hand, contended that assessment year 1993-94 is the first year in which assessee's claim for assessment in the status, of firm after the amended provisions came into force has to be considered. Therefore, according to him, the assesses was bound to produce certified copy of the instrument of partnership along with return, it is pertinent to note that prior to the introduction of amended provisions which came into force with effect from 1.4.1993, a firm could be assessed either as a registered firm on complying with the formalities or otherwise only as an 'Association of Persons'. However, with effect from the assessment year 1993-94 onwards, registration of firm is dispensed with, but for the first time, if a firm seeks registration in that status for any assessment year commencing on or after 1.4.1993, the firm has to furnish the certified copy of the instrument of partnership along with the return for the relevant assessment year. In our view, even an assessee, which enjoyed registration as a 'firm' up to the assessment year 1992-93, is required to furnish certified copy of instrument of partnership if assessment was claimed in the status of firm for any assessment year commencing from 1993-94 onwards. Once the status as 'firm' is made for any assessment year commencing from 1993-94 onwards based on the certified copy of instrument of partnership produced, then by virtue of operation of sub-section (3), the firm will be assessed in the same status for all subsequent years without production of any certified copy of instrument of partnership until there is a change in the constitution of the firm. For assessment as firm after change in the constitution of the firm, sub-section (4) of Section 184 requires production of revised instrument of partnership along with return for the assessment year relevant for the previous year in which such change in the partnership took place. Sub-section (3) refers to the assessment in the status as a 'firm' based on the assessment made pursuant to production of certified copy_; of instrument of partnership referred to in 'sub-section (2) of Section 184 and not the assessment made as a registered firm for any assessment year prior to 1993-94. The consequence of non-production of certified copy will naturally lead to disallowance of claims of deduction toward payment of interest, remuneration, bonus etc. paid to partner by the firm by virtue of Section 185 of the Act We, therefore, hold that the production of certified copy of instrument of partnership is mandatory for claiming assessment in the status of a - firm for any -assessment year commencing from 1993-94 onwards irrespective of whether such assesses was assessed as a registered firm up to 1993-94 ( should be 1992-93). In principle, we therefore, uphold the findings of the Tribunal.