Partnership Firm : If Assessee failed to comply with notices issued u/s 142(1) then salary and interest paid to partners would not be allowable as deduction if assessment is carried out u/s 144

short overview : As there was part non-compliance by assessee with first notice under section 142(1) and complete non-compliance with subsequent notice under section 142(1), the AO was right in framing assessment order under section 144 and in denying allowance of interest and salary paid to partners by taking support of provisions of section 184(5).

Assessee was issued notices under section 142(1) on various dates. In some dates, there was partial compliance and in some cases, there was no compliance by assessee. Therefore, the AO framed assessment under section 144 for non-compliance with such notices. Further, while framing such assessment, the AO made disallowances towards interest on partners’ capital and remuneration to partners under section 184(5). Assessee contended that the disallowance under section 184(5) would not be applicable in the cases of framing assessment under section 144.

it is held that Section 184(5) categorically states that, when “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”. In the instant case, there being part non-compliance by assessee with first notice under section 142(1) and complete non-compliance with subsequent notice under section 142(1), AO was right in framing assessment order under section 144 and in denying allowance of interest and salary paid to partners by taking provisions of section 184(5).

Decision: Against the assessee.

IN THE ITAT, CUTTACK BENCH

CHANDRA MOHAN GARG, J.M.

Eastern Engineering Venture v. ITO

ITA No. 325/Ctk/2017

A.Y. 2009-10

2 May, 2019

Chandra Mohan Garg, J.M.

This is an appeal filed by the assessee against the order of the Commissioner (Appeals)-2, Bhubaneswar, dated 23-5-2017 for the assessment year 2009-10.

2. The assessee has raised the following grounds of appeal :–

“(1) For that the learned Commissioner (Appeals) was not justified in disposing of the appeal ex party without appreciating the facts properly which violates principles of natural justice.

(2) For that the reopening of proceeding under section 147 by the learned assessing officer was erroneous and unwarranted since the reason assigned for reopening the assessment was not factually correct and thus the assessment order perverse and not sustainable in the eye of law. The learned GST appeal has erred in law by confirming the action of assessing officer.

(3) For that the learned Commissioner (Appeals) has erred in law by confirming the disallowances Rs. 1,81,023 and Rs. 2,37,030 towards interest on partners capital and remuneration to partners under section 184(5). Payment of interest and salary to partner needs to allowed in full.

(4) For that the disallowances confirmed by the learned Commissioner (Appeals) under section 184(5) is neither based facts and not sustainable in the eye of law. Hence the said disallowances of Rs. 4,18,053 (1,81,023 + 2,37,030) should be allowed for the sake of natural justice.”

3. The assessee has raised two issues in the grounds of appeal. However, at the time of hearing, learned counsel for the assessee only emphasized regarding ground Nos. 3 and 4 pertaining to the disallowances for payments in respect of remuneration and interest on capital paid to the partners made under section 184(5) of the Income Tax Act, 1961 (for short ‘the Act’) even though assessment is completed under section 144/147 of the Act.

4. The learned Authorised Representative did not argue ground Nos. 1 and 2 of appeal. Thus, I deem it that the assessee is not interested in pressing these grounds of appeal and, therefore, same are dismissed as not pressed.

5. The assessee is a firm and derives income from contract works. Initially, the assessment was framed under section 144 of the Act. Later on, the assessing officer noticed that the assessee had disclosed a gross contract receipt of Rs. 77,16,653. However, in 26AS date, the gross contract receipt from different contractees is Rs. 78,16,653, thereby disclosing a sum of Rs. 1,00,000 than the disclosed gross receipt in the return of income; Therefore, the assessing officer was of the view that income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Thereafter, he issued notice under section 148 of the Act. No return of income was furnished in response to notice under section 148 of the Act but the reopening was challenged by the assessee. Subsequently, notices under section 142(1) of the Act were issued on various dates. It is observed that in some dates there was partial compliance and in some cases; there was no compliance by the assessee. Therefore, the assessing officer passed order under section 147 read with section 144 of the Act on 2-3-2015 determining the total income at Rs. 6,25,330

6. On appeal before the Commissioner (Appeals), the assessee also partially complied the notices and in some other dates, no compliance was made. Before the Commissioner (Appeals), it was the contention of the assessee that the assessing officer should have allowed salary and interest paid to partners for determining the income of the assessee. However, the Commissioner (Appeals) was of the view that under section 184(5) of the Act, the assessee is not entitled for deduction by way of any payment of interest, salary, bonus, commission or remuneration by whatever name called made by the firm to the partner, if the assessment order is passed as a result of failure of the assessee as mentioned in section 144 of the Act. Hence, he confirmed the action of the assessing officer.

7. I have heard the rival submissions and perused the relevant materials on record of the Tribunal. Learned counsel for the assessee first of relied dn the decision of this Bench of the Tribunal in the case of Jed Hanumon Enterprises v. ITO in ITA No. 233/Ctk/2017 for the assessment year 2012-13 Order, dated 12-3-2019 and contended that this issue is covered in favour of the assessee. He submitted that the disallowance under section 184(5) of the Act is not applicable in the cases of framing assessment under section 144 of the Act. He submitted that the assessee has also appeared and sought adjournment before the assessing officer. He submitted that the Income Tax Authorities should have allowed deduction of interest and salary to partners.

8. On the other hand, learned Departmental Representative vehemently opposed the contention of learned Authorised Representative of the assessee.

9. There is no dispute that the assessment was done under section 144 as the assessee had not complied to the hearing notices served upon the assessee. Later on the assessing officer had reason to believe that income had escaped assessment. Therefore, he issued notice under section 148 of the Act and also issued notices under section 142(1). There were some partial compliances and in some cases, no compliance was made. Hence, he framed assessment under section 147/144 of the Act. Section 184 and sections 144 and 145, which are relevant for the purposes of adjudicating on this question, are reproduced below for ready reference :–

“Section 184. Assessment as a firm–(l)

(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.

Section 144. Best judgment assessment–(1) If any person–

(a) 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

(b) 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, or

(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

the assessing officer, after taking into account all relevant material which the assessing officer has gathered, shall, after giving the assessee an opportunity of being heard, 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 :–

Provided that such opportunity shall be given by the assessing officer by serving a notice calling upon the assessee to show-cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :–

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.

(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1-4-1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.

Section 145. Method of accounting–(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the assessing officer may make an assessment in the manner provided in section 144.”

10. A plain reading of these two legislative provisions shows that the disallowance under section 184(5) comes into play not as a result of the assessment under section 144 but as a result of the lapses as mentioned in section 144. In other words, the disallowance under section 184(5) does not have a cause and effect relationship with assessment being framed under section 144. In this regard, it is noteworthy that section 184(5) categorically states that when “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”. This provision comes into play only when the assessment is framed under section 144 only as a result of the assessee’s committing any such failure as is contemplated under section 144. However, in a situation in which the assessment is completed in the manner as prescribed in section 144 but such a course of action has been adopted because of “the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee”, referred to in section 145(3), clearly the disabling provisions of section 184(5) do not come into play.

11. Clause (b) of sub-section (1) of section 144 of the Income Tax Act, 1961 provides that when the assessee fails to comply with all the terms of notice issued under sub-section (1) of section 142 of the Act or fails to comply with the direction issued under sub-section (2A) of that section, then the assessing officer is empowered to frame the assessment order as per provisions of section 144 of the Act i.e., best judgment assessment.

12. In the present case, learned Authorised Representative in all fairness, accepted that in compliance to notice, dated 10-10-2014 under section 142(1) of the Act, the assessee only submitted bank statement and did not submit audit report for the current year and past two years along with complete names and address of sundry creditors and sundry debtors. Learned Authorised Representative has contended that by furnishing copy of bank statement, the assessee partly complied with the Notice, dated 10-10-2014. Therefore, the rigours of section 184(5) of the Act cannot be triggered against the assessee for disallowing interest and salary to its partners.

13. I am in agreement with this contention that the assessee partly complied with the Notice, dated 10-10-2014 of the assessing officer by furnishing only copy of bank statement and other documents as required by the assessing officer. Furthermore, from the table reproduced by the assessing officer at p. 2 para 2 of the assessment order, I further observe that the assessing officer also issued another notice under section 142(1) of the Act on 5-2-2015, which was duly served on the assessee but there was no compliance by the assessee. From para 4.3 of the assessment order, I also observe that the assessing officer has categorically noted that after several notices under section 142(1) of the Act a show-cause notice, dated 5-2-2015 along with another notice under section 142(1) of the Act was intimated/served on the assessee informing that failure to produce audit report and books of account, the case shall be disposed of by invoking the provisions of section 145(3) of the Act. The assessing officer has reproduced the contents of show-cause notice. Thereafter, the assessing officer in para 4.4 further noted that the assessee has also failed to comply with the terms of notice under section 142(1) of the Act i.e., dated 5-2-2015. Hence, the assessment should be framed by invoking the provisions of section 144 of the Act. In this situation, I am satisfied with the contention of the assessing officer which were brought to my notice during the hearing by learned Departmental Representative that there was non-compliance to notice under section 142(1), dated 5-2-2015 of the Act by the assessee. Therefore, the assessing officer was compelled to take recourse of provisions of section 144 of the Act in framing assessment under best judgment assessment.

14. In view of above noted facts and circumstances of the case, I incline to hold that the facts and circumstances of the case are different from the facts of the case relied by learned Authorised Representative of the assessee in the case of Hanuman Enterprises (supra) as in that case there was part non-compliance by the assessee and in the present case, there is a part non-compliance regarding notice, dated 10-10-2014 and complete non-compliance regarding Notice, dated 5-2-2015. Therefore, the assessing officer was right in framing assessment order under section 144 of the Act and in denying allowance of interest and salary paid to the partners by taking support of provisions of section 184(5) of the Act. Hence, the sole ground of the assessee being devoid of merits is dismissed.

15. In the result, appeal filed by the assessee is dismissed.