2016 (4) TMI 260 - HC - Income Tax

Validity of Show cause notice - Appellate Commissioner power to alter the status of an assessee in the course of the appellate proceedings - whether a firm cannot be a partner in another firm and that only natural legal persons can be partners in a partnership firm? - Held that - The show cause notice issued by the Appellate Commissioner was obviously wrong, it was liable to be set aside. The writ petition is allowed and the impugned order in the writ petition is set aside on the sole ground that the finding that a firm cannot be a partner in a partnership firm, is contrary to law.

Summary

Issues involved:
1. Challenge to show cause notice questioning the status of the appellant as a partnership firm.
2. Interpretation of whether a firm can be a partner in another firm.
3. Examination of the Appellate Commissioner's authority to alter the status of an assessee during appellate proceedings.

Comprehensive analysis:
Issue 1: The appellant challenged a show cause notice questioning their status as a partnership firm. The High Court noted that the appellant had been assessed as a partnership firm previously, and the order of assessment also recognized them as such. The Court highlighted that the appellant had the opportunity to contest the show cause notice on its merits rather than through a writ petition under Article 226.

Issue 2: The Appellate Authority in the appeal raised a concern that a firm cannot be a partner in another firm, leading to the disallowance of certain expenditures claimed by the appellant. The High Court emphasized that there is no legal prohibition preventing a firm from being a partner in another firm, contrary to the Appellate Authority's interpretation.

Issue 3: The appellant's counsel cited a judgment from the Jharkhand High Court to argue that the Appellate Commissioner lacks the power to alter the assessee's status during appellate proceedings. However, the High Court clarified that the Jharkhand High Court's decision was based on specific grounds related to pre-concluding issues and altering statuses across multiple assessment orders. The Department's Standing Counsel referred to an Explanation under Section 251, granting the Appellate Commissioner authority to consider and decide any matter arising from the proceedings. Despite this, the High Court found the show cause notice to be erroneous and set it aside, without delving into the Appellate Commissioner's jurisdiction.

In conclusion, the High Court allowed the writ appeal, overturning the lower court's decision. The judgment highlighted that the finding that a firm cannot be a partner in a partnership firm was legally incorrect, leading to the dismissal of the show cause notice. The Court refrained from commenting on the Appellate Commissioner's powers, focusing solely on the incorrect interpretation of the law in the show cause notice.