Tribunal directs income assessment, allows deductions for salary & interest to partners.

The Tribunal allowed the appeal, directing the Assessing Officer to determine income after allowing deduction for salary and interest paid to partners, as book results were rejected. The Tribunal emphasized that the assessment was not made under section 144, thus the deduction should be permitted under section 184(5) of the Income Tax Act.

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Issues:
1. Disallowance of salary and interest paid to partners by Assessing Officer.
2. Interpretation of provisions of section 184(5) of the Income Tax Act, 1961.
3. Allowance of deduction for salary and interest paid to partners in the case of rejected book results.

Analysis:

Issue 1: Disallowance of salary and interest paid to partners
The Assessing Officer disallowed salary and interest paid to partners by invoking section 145(3) read with section 144 of the Income Tax Act. The AO rejected the book results of the assessee due to non-production of purchase and sales bills, estimating income at 4% of the turnover. Consequently, no salary and interest were allowed to partners as per section 184(5) of the Act. The CIT(A) upheld this decision.

Issue 2: Interpretation of section 184(5) of the Income Tax Act
Section 184(5) states that if there is a failure on the part of a firm as mentioned in section 144, no deduction for interest, salary, etc., paid to partners shall be allowed. Section 144 empowers the AO to make an assessment to the best of his judgment in case of non-compliance with filing returns or notices. However, in the present case, the assessment was made under section 143 by rejecting the books of account under section 145(3), not under section 144.

Issue 3: Allowance of deduction for salary and interest paid to partners
The Tribunal referred to a previous case where deduction for salary and interest paid to partners was allowed when book results were rejected. Following this precedent, the Tribunal set aside the lower authorities' decisions and directed the AO to determine the income after allowing the deduction for salary and interest paid to partners from the estimated income.

In conclusion, the appeal of the assessee was allowed, emphasizing that the assessment was not made under section 144, and thus, deduction for salary and interest paid to partners should be permitted.

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