2022 (2) TMI 396 - HC - Income Tax

Reopening of assessment u/s 147 - partners of the partnership firm, failed to show the remuneration and interest received from the partnership firm when the return of the writ applicant was processed u/s 143(1) - HELD THAT - Tribunal took notice of the fact that the CIT Appeals had directed to tax the amount of remuneration/interest on the partners capital account in the hands of the partners. AO had allowed the claim of the deduction for the remuneration/interest on the partners capital account however, the same was added back by the AO on the ground that it was not claimed as a deduction in the profit and loss account. CIT- A directed to delete the addition made in the hands of the firm and further directed to tax the same in the hands of the partner of the firm. The aforesaid was not approved by the Tribunal taking the view that there was no good ground to tax the remuneration/interest on the capital in the hands of the partners and the CIT(Appeal) could be said to have exceeded its jurisdiction by issuing such directions to the AO for the dispute which was not arising from the order of the AO. In view of such findings recorded by the Appellate Tribunal, nothing survives in the present matter so far as the reopening of the assessment of the partner of the partnership firm is concerned. Coordinate Bench of this Court while issuing Notice vide order dated 28.11.2018, had directed by way of ad-interim relief that the final order shall not be passed without the permission of the Court. However, the final order of assessment ultimately came to be passed. In such circumstances, the Co-ordinate Bench vide order dated 04.10.2021 directed that there shall be no coercive action inclusive of penalty in connection with the order of the assessment. In view of the aforesaid, even the final order of assessment will have to be quashed and set aside. Writ application succeed and is hereby allowed.

Issues Involved:
1. Validity of the Notice issued under Section 148 of the Income Tax Act, 1961.
2. Reopening of the assessment under Section 147 for A.Y. 2011-12.
3. Non-disclosure of remuneration and interest received from the partnership firm.
4. Objections against the reopening of assessment.
5. Directions by CIT(A) regarding taxation of remuneration/interest in the hands of partners.
6. Jurisdiction of CIT(A) in directing the AO.
7. Final order of assessment and related relief.

Issue-wise Detailed Analysis:

1. Validity of the Notice issued under Section 148 of the Income Tax Act, 1961:
The writ applicant challenged the Notice issued by the Income Tax Department dated 31.03.2018 under Section 148 for reopening the assessment for A.Y. 2011-12. The Notice was questioned on the grounds of non-disclosure of remuneration and interest received from the partnership firm.

2. Reopening of the assessment under Section 147 for A.Y. 2011-12:
The department intended to reopen the assessment on the basis that the writ applicant, a partner in a partnership firm, failed to show the remuneration and interest received when the return was processed under Section 143(1) on 06.03.2012. The total remuneration and interest were ? 75,11,147/-, with each partner having a 50% share.

3. Non-disclosure of remuneration and interest received from the partnership firm:
The writ applicant objected, stating that no income was received in the form of remuneration and interest from the partnership firm, thus there was no question of adding such income in the return.

4. Objections against the reopening of assessment:
The objections raised by the writ applicant were disposed of on 01.11.2018, with the department asserting that the share of profit from the firm included remuneration and interest as per the partnership deed, which had not been debited from the profit and loss account of the firm.

5. Directions by CIT(A) regarding taxation of remuneration/interest in the hands of partners:
The CIT(A) directed that the remuneration/interest on the partner's capital should be taxed in the hands of the partners, despite it not being claimed in the profit and loss account. This direction was challenged and subsequently overturned by the Income Tax Appellate Tribunal (ITAT).

6. Jurisdiction of CIT(A) in directing the AO:
The ITAT found that CIT(A) exceeded its jurisdiction by directing the AO to tax the remuneration/interest in the hands of the partners. The Tribunal held that it was not compulsory to claim remuneration/interest on the partner's capital account despite the specific clause in the partnership deed, and there was no issue to tax it in the hands of the partners.

7. Final order of assessment and related relief:
A Coordinate Bench had earlier directed that no final order should be passed without the Court's permission. Despite this, a final order was passed, leading to a direction that no coercive action, including penalties, should be taken. Consequently, the final order of assessment dated 25.09.2021 was quashed and set aside.

Conclusion:
The writ application succeeded, and the impugned Notice dated 31.03.2018, as well as the final order of assessment dated 25.09.2021, were quashed and set aside. The findings of the ITAT were pivotal, indicating that the CIT(A) had overstepped its jurisdiction, and there was no basis for taxing the remuneration/interest in the hands of the partners.

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