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2009 (7) TMI 860 - AT - Income TaxReason To Believe - In this case, assessee filed the return in the status of registered firm on 30th Oct., 1998 declaring income at Rs. 2,09,570 for the year under consideration - In this case the different firms came together and constituted another firm through its representatives - Coming to the instant case of the assessee there is no case even for the Revenue that all the partners of both the firms were not the signatories of the larger firm - The agreement is in truth between three major members out of those who constitute the yarn shop and four outsiders - The reopening on the basis of a decision that was already existing at that point of time which was held to be ignorance of law could not be a ground for initiating reassessment proceedings - There was no escapement of income and, therefore, consequential reopening was also bad in law - Decided in the favour of the assessee
Issues Involved:
1. Validity of the assessment status as an Association of Persons (AOP) without proper notice under Section 148 of the Income Tax Act. 2. Legality of a partnership firm constituted by two other partnership firms. 3. Justification for reopening the assessment under Section 147 of the Income Tax Act. 4. Validity of the assessment status as a partnership firm-AOP. 5. Validity of the reassessment and change of status from a firm to AOP. Issue-wise Detailed Analysis: 1. Validity of the assessment status as an Association of Persons (AOP) without proper notice under Section 148 of the Income Tax Act: The assessee contended that the notice was issued in the status of a partnership firm, and therefore, the impugned orders of the Revenue authorities taking the status of AOP are without a valid notice. The Tribunal found that the notice under Section 148 was indeed issued to the partners in their representative capacity, and some notices were not served as the individuals were not available at their known addresses. The Tribunal concluded that the change of status from a firm to AOP without proper notice was unjustified, leading to the setting aside of the liability on this ground alone. 2. Legality of a partnership firm constituted by two other partnership firms: The assessee argued that a partnership between a firm and another firm is not illegal and relied on the decisions of the Hon'ble Bombay High Court in Chhotalal Devchand vs. CIT and the Hon'ble Supreme Court in Kylasa Sarabhaiah vs. CIT. The AO, however, held that partnership firms cannot become partners in another firm and treated the status as AOP. The Tribunal, referencing the partnership deed and the Supreme Court's decision in Kylasa Sarabhaiah, concluded that the partners of the two firms individually signed the partnership deed, making the partnership valid. The Tribunal rejected the AO's reliance on the Supreme Court's decision in Dulichand Laxminarayan vs. CIT, distinguishing the facts of that case from the present one. 3. Justification for reopening the assessment under Section 147 of the Income Tax Act: The assessee contended that the reopening of the assessment was contrary to the principles laid down by various High Courts and the Supreme Court, particularly citing CIT vs. Bhanji Lavji and ITO vs. Nawab Mir Barkat Ali Khan Bahadur. The Tribunal noted that the AO reopened the assessment on the grounds that the status of the assessee was taken wrongly in the original assessment, leading to escapement of income. The Tribunal found the reopening unjustified as no new material had come into existence, and the reopening was based on a reappraisal of the same facts. 4. Validity of the assessment status as a partnership firm-AOP: The Tribunal observed that the IT Act does not provide for an assessment in the status of a partnership firm-AOP. The Tribunal noted that the partnership deed was registered under the Indian Partnership Act, and all partners of both firms signed individually, making the firm valid. The Tribunal concluded that the assessment in the status of partnership firm-AOP was bad in law. 5. Validity of the reassessment and change of status from a firm to AOP: The Tribunal found that the refusal of reassessment by the Revenue authorities was not justified. The Tribunal relied on the Supreme Court's decision in Kylasa Sarabhaiah and the Bombay High Court's decision in Chhotalal Devchand, which supported the assessee's case. The Tribunal held that the change of status from a firm to AOP was not justified, and there was no escapement of income. Conclusion: The Tribunal allowed the appeals by the assessee, holding that the refusal of registration was not justified, there was no escapement of income, and the consequential reopening was bad in law. The change of status from a firm to AOP was also not justified. The appeals for the assessment years 1998-99 to 2000-01 were allowed.
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