1989 (2) TMI 148 - AT - Income Tax

Tribunal Clarifies Tax Disallowance Rules for Firms

The Tribunal allowed the revenue's appeals, setting aside the AAC's orders and restoring the ITO's decisions for the assessment years in question. It ... A Firm, Assessment Year Issues:1. Whether the Appellate Tribunal should uphold the orders of the AAC regarding the deletion of additions made by the ITO on account of salary and interest paid to partners of the firm treated as URF.Comprehensive Analysis:The appeals by the revenue were directed against the orders of the AAC for the assessment years 1978-79, 1979-80, 1981-82, and 1982-83, all dated 19-12-1985. The primary grievance in these appeals was that the AAC had deleted the additions made by the ITO on account of salary and interest paid to the partners of the firm treated as URF. The appeals were heard ex parte as there was no representation from the partners of the firm. The ITO had taken the status of the assessee as URF due to non-furnishing of necessary documents. The ITO disallowed salary and interest paid to partners in the assessments. The AAC accepted the claim of the assessee that taxing the same income twice amounts to double taxation, leading to the deletion of the additions. The Tribunal considered the relevant provisions of law as the assessee did not appear for the hearing.For the assessment years 1978-79 and 1979-80, the ITO disallowed the salary and interest paid to partners due to the status of the assessee being treated as URF. The AAC accepted the assessee's argument against double taxation, leading to the deletion of these additions. However, the Tribunal noted that there is no distinction between a firm and a registered firm in the computation of total income. The provisions of section 40(b) of the Income-tax Act disallow any payment of interest, salary, etc., made by the firm to any partner. The Tribunal found that the AAC erred in considering the assessment of partners in the process of computing total income, leading to the reversal of the AAC's orders and restoration of the ITO's orders for each year. The Tribunal emphasized that registration of a firm is not part of the assessment process itself and that the provisions of section 40(b) apply to any firm, regardless of registration status.In conclusion, the Tribunal allowed the appeals by the revenue, setting aside the orders of the AAC and restoring the ITO's orders for each year. The judgment clarified that the provisions of section 40(b) disallowing payments to partners apply to any firm, and the distinction between registered and unregistered firms is relevant for the determination of tax liability, not the computation of total income.