2021 (6) TMI 842 - AT - Income Tax

Estimation of income - interest and salary paid to partners - CIT(A) directing the AO to estimate the profit at 3% in the place of 4% estimated by the AO - HELD THAT - Section 184(5) provides that where in respect of any assessment year, there is on the part of a firm any such failure as mentioned in section 144 of the Act, deduction by way of any payment of interest, salary, bonus, commission or remuneration etc. to any partner of such firm shall not be allowed in computing the income chargeable under the head Profits and gains of business or profession . Section 144 of the Act provides that if any person fails to make the return required under sub-section (1) of Section 139 and has not made a return or a revised return under sub-section(4) or sub-section (5) of that section, or fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section and having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the AO after taking into account all relevant material shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. In the instant appeal it was not a case of the AO where the assessee had not filed its return of income. It was also not a case where the assessee failed to comply with the notice u/s. 142(1) and also it was not a case where the assessee failed to comply with all the terms of a notice issued under section 143(2) of the Act by the AO. The AO made the assessment by estimating the income of the assessee by rejecting the books of account by invoking the provisions of section 145(3) of the Act as he was not satisfied about the correctness of the book results of the assessee. As relying on M/S JAI HANUMAN ENTERPRISES (FIRM) VERSUS ITO, ANGUL WARD, ANGUL, ODISHA 2019 (3) TMI 1606 - ITAT CUTTACK direct the AO to allow the salary paid to partners and allow this ground of appeal

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Estimation of profit percentage.
3. Allowance of interest on partner's capital, remuneration to partners, and depreciation.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was time-barred by 359 days. The assessee filed a condonation petition supported by an affidavit citing health issues and the COVID-19 lockdown as reasons for the delay. The Tribunal considered the petition and rival submissions, referring to the Supreme Court judgment in Collector, Land Acquisition vs. Mst. Katiji (1987) 167 ITR 471, which states that there should be no presumption of deliberateness or negligence in case of delay. The Tribunal found the reasons sufficient and condoned the delay, admitting the appeal for hearing.

2. Estimation of Profit Percentage:
The assessee did not press Ground No. 1 of the appeal, which contested the CIT(A)'s direction to estimate profit at 3% instead of the 4% estimated by the AO. Consequently, this ground was dismissed as not pressed.

3. Allowance of Interest on Partner's Capital, Remuneration to Partners, and Depreciation:
The assessee firm was engaged in trading and had filed its return of income. The AO completed the assessment under section 144 of the Income-tax Act, 1961, rejecting the books of account under section 145(3) and estimating net profit at 4% of the turnover. The AO also disallowed ?1,20,000/- on account of remuneration to partners. The CIT(A) partly allowed the appeal, reducing the net profit estimate to 3% but confirming the disallowance of salary to partners.

The assessee contended that the salary paid to partners should be allowed as per law, citing similar cases where the Tribunal allowed such deductions. The Tribunal examined the provisions of Section 184(5), which disallows deductions for interest, salary, etc., to partners if the assessment is made under section 144 due to specific failures by the assessee. However, the Tribunal noted that the assessee had filed the return of income and partially complied with notices under sections 142(1) and 143(2).

The Tribunal referred to its earlier decisions and concluded that disallowance under Section 184(5) should not apply in every case of assessment under section 144 but only where there is a complete failure as specified. The Tribunal found that the AO had not justified the invocation of Section 184(5) as there was partial compliance by the assessee. Therefore, the Tribunal directed the AO to allow the salary paid to partners, following the precedent set in similar cases.

Conclusion:
The Tribunal condoned the delay in filing the appeal, dismissed the ground regarding the estimation of profit percentage as not pressed, and directed the AO to allow the salary paid to partners, thereby partly allowing the appeal. The decision was pronounced on 14/06/2021.