2015 (10) TMI 175 - AT - Income Tax

Appeal allowed by ITAT, disallowances overturned for interest & salaries to partners

The ITAT allowed the appeal, overturning the disallowances of interest and salaries paid to partners under section 184(5) in a firm's taxable income for ... Disallowance for payments in respect of remuneration and interest on capital paid to the partners - whether in computation of taxable income of the firm, can be made under section 184(5) when even though assessment is completed under section 144 but the assessee has not committed any such failure as is set out in section 144 - Held that:- A plain look at the 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. 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 disabling 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. Thus as noted from the observations made by the CIT(A) the assessment under section 144 has been upheld on the basis of section 145(3) even as it is not disputed that the failures enumerated in section 144 itself were not committed. Learned CIT(A) indeed erred in invoking disallowances under section 184(5) for interest and salaries paid to the partners. Therefore, delete these disallowances - The assessee will get the relief accordingly. - Decided in favour of assessee. Issues:1. Disallowances for payments in respect of remuneration and interest on capital under section 184(5) in a firm's taxable income.Analysis:1. The appeal was against the order passed by the CIT(A) for the assessment year 2005-06 under section 144 of the Income Tax Act, 1961.2. The main issue was whether disallowances for payments in respect of remuneration and interest on capital paid to partners could be made under section 184(5) when the assessment was completed under section 144 but the assessee had not committed any failure as specified in section 144.3. The assessment was done under section 144 as the assessee did not comply with hearing notices, leading to disallowances of interest and salaries paid to partners. The AO also added back capital introduced by partners. The CIT(A) upheld the disallowances under section 184(5) for interest and salaries paid to partners, despite no failure as per section 144 being committed. The CIT(A) also held that the assessee was prevented from producing evidence due to the AO's refusal to grant an adjournment.4. The ITAT considered the relevant legal provisions, including sections 184, 144, and 145. It noted that the disallowance under section 184(5) is linked to failures as mentioned in section 144. If the assessment under section 144 is due to the AO's dissatisfaction with the accounts, the provisions of section 184(5) do not apply. The ITAT found that the CIT(A) erred in invoking disallowances under section 184(5) for interest and salaries paid to partners when the assessment under section 144 was upheld based on section 145(3) and not due to failures under section 144.5. Consequently, the ITAT allowed the appeal, deleting the disallowances of interest and salaries paid to partners. The relief was granted to the assessee based on the findings. No other grievances were raised or considered.