2010 (9) TMI 766 - HC - Income Tax

High Court rules partnership firms illegal under Excise Act & IMFL Rules

Commissioner of Income-tax Versus Swarna Bar Restaurant

Commissioner of Income-tax Versus Swarna Bar Restaurant - [2011] 334 ITR 387 Issues Involved:1. Entitlement to be assessed as partnership firms.2. Consequential benefits of payment of salaries and interest on the capital of partners.3. Reopening of assessment based on escapement of income.4. Compliance with the A.P. Excise Act and IMFL Rules.5. Validity of partnerships under amended sections 184 and 185 of the Income-tax Act.6. Applicability of Supreme Court judgments to the amended provisions.7. Binding nature of CBDT Circular No. 636 on the Revenue.Detailed Analysis:1. Entitlement to be Assessed as Partnership Firms:The Income-tax Tribunal Appeals were preferred by the Revenue against the orders of the Income-tax Appellate Tribunal, which held that the respondent-assessees were entitled to be assessed as partnership firms and for consequential benefits of payment of salaries, interest on the capital of partners, etc.2. Consequential Benefits of Payment of Salaries and Interest on the Capital of Partners:The Income-tax Officer added remuneration paid to the partners and interest on the capital of partners to the total income of the assessee, as the partnership was not recognized due to non-compliance with the A.P. Excise Act.3. Reopening of Assessment Based on Escapement of Income:The Income-tax Officer reopened the assessment under section 143(1) of the Income-tax Act, on the grounds of escapement of income in the form of remuneration to partners and interest on partner's capital, citing the Supreme Court judgment in Bihari Lal Jaiswal v. CIT.4. Compliance with the A.P. Excise Act and IMFL Rules:The assessee had not obtained permission from the Excise Department before entering into the partnership, which was prohibited under the A.P. Excise Act. The Tribunal held that the partnership was illegal and void, and the firm could not be treated as a valid partnership for the purposes of the Income-tax Act.5. Validity of Partnerships under Amended Sections 184 and 185 of the Income-tax Act:The Tribunal noted that after the Finance Act 18 of 1992, sections 184 and 185 of the Income-tax Act were amended, removing the distinction between registered and unregistered firms. The Tribunal held that the assessing authority no longer had the power to examine the genuineness of the partnership post-amendment.6. Applicability of Supreme Court Judgments to the Amended Provisions:The Tribunal held that reliance on Supreme Court judgments considering the provisions of the unamended sections 184 and 185 was misplaced. The Supreme Court judgments in Bihari Lal Jaiswal, Moti Lal Chunnilal (Tak), and Maddi Venkataraman and Co. P. Ltd. were deemed not applicable post-amendment.7. Binding Nature of CBDT Circular No. 636 on the Revenue:The respondents argued that CBDT Circular No. 636 was binding on the Revenue under section 119 of the Income-tax Act. The circular clarified that post-amendment, the assessing authority could not inquire into the genuineness of the firm if the partnership was evidenced by an instrument specifying individual shares of partners.Conclusion:The Andhra Pradesh High Court set aside the orders of the Tribunal, holding that the partnership firms were illegal and void under the A.P. Excise Act and IMFL Rules. The court concluded that the power of the assessing authority to ascertain the validity of the partnership firm remained unchanged even after the amendment of sections 184 and 185 by the Finance Act 18 of 1992. The appeals by the Revenue were allowed, and the Tribunal's orders were reversed.