Kachhi Heritage Vs ACIT
ITA No. 1591/Pun/2017
Short overview of the case:
During the assessment proceedings, it was noted by the Assessing Officer that in the P & L account, the assessee has debited a sum of Rs.25,00,000/- as “partners salary”. The assessee furnished copy of partnership deed as directed by the Assessing officer and on perusal of the said partnership deed, it was noticed that partnership deed was executed on a stamp paper of Rs.200/-. Thereafter, the Assessing Officer observed that for the purpose of Section 184, the partnership firm assessed must be evidenced by the an instrument. If it was not evidenced by an instrument, it would be assessed as Association of Persons. The Assessing Officer further opined that as per the Partnership Act, the instrument must be executed on a stamp paper of not less than Rs.500/-. In this case, the deed has been executed on a stamp paper of Rs.200/- and therefore, the AO considered it as not valid instrument constituting partnership firm. Finally, the AO assessed the assessee as AOP instead of partnership firm and remuneration of Rs.25,00,000/- was disallowed.
On appeal, the CIT(A) observed that the partnership deed had to be executed on stamp paper not less than Rs.500/-. He therefore upheld the addition made by the Assessing Officer.
On appeal, the ITAT held that,
Whether partnership deed can be rejected and partners’ salary can be assessed as AOP only on the ground that the deed of partnership firm was not executed on requisite stamp paper – NO: ITAT
the crux of the grievance is whether in determining the partnership firm for the purpose of taxation is it important to only look in to the technical aspect, procedural aspect or whether it is actually important to go into the sum and substance of the matter to analyze each and every transaction, correspondence and dealing of the partners vis-à-vis third parties etc. In considered view, it is always a substantive law that prevails over the procedural law. What would be the amount of stamp paper in which deed has to be executed is only the matter of procedure whereas, the factors like contribution of each partner in the partnership firm, distribution of profits among the partners, remuneration paid to the partners, all these various terms and conditions constitutes the substantive law. These areas have to be analyzed in order to decide the status of the assessee for the purpose of taxation. In this case, the Revenue Authorities have rejected the deed of partnership firm and assessed the assessee as AOP only on the ground that the deed of partnership firm was executed not on requisite stamp paper. They have not analyzed or commented on any terms and conditions of the partnership deed and has never stated that any of the provisions in such partnership deed of the assessee is contrary to the provisions of law. The intention of the legislature is clear that for the purpose of Income Tax Act, there has to be substantive evidences of existence of partnership firm and that substantive evidence is supported by the procedural fact of an instrument being executed in this regard;
the assessee is also registered as partnership firm in the records of the Assistant Registrar of firm, Pune and while granting registration, the Assistant Registrar of firm did not object to any of the clause of the partnership deed and only query was raised regarding the registration fees of Rs.1500/- which was deposited and the assessee was asked to send the money order for that purpose. Even the stamp duty on the partnership deed was accepted by the Assistant Registrar of Firms, Pune. The technical or procedural aspect cannot take away or override the substantive rights. Substantive laws establishing rights and liabilities of persons natural or otherwise in this case it is of the partnership firm and such status of the assessee is accepted by the Revenue. In such scenario, the procedural laws merely prescribing the manner in which such rights and responsibilities may be exercised, in this case the stamp paper on which the partnership deed has been executed cannot alter the status already determined substantively. The Department is accepting all the genuineness of existence of the partnership firm and only for this technical aspect of deed executed in the lessor denomination stamp paper has framed the assessment treating the assessee as AOP. The Revenue Authorities may call upon the assessee in due course for rectification of this technical defect. In the totality of facts and circumstances, the assessee is duly constituted partnership firm.