2008 (4) TMI 383 - AT - Income Tax

Part of appeal upheld for firm after partners' deaths. Interest income taxability affirmed. Assessment over two years.

The Tribunal partly allowed the appeal, upholding the validity of the assessment on the firm despite the partners' deaths, affirming the taxability of ... Reassessment Issues:1. Validity of reopening of assessment2. Assessment on a defunct firm3. Taxability of interest income on accrual basisDetailed Analysis:Issue 1: Validity of reopening of assessmentThe case involved an appeal against the order passed by the CIT(A)-I, Visakhapatnam, pertaining to the assessment year 2001-02. The AO issued a notice under section 148 of the IT Act to assess the interest income received by the assessee firm under section 244(1A) of the IT Act. The assessee contended that the assessment on a defunct firm was not justified. The first appellate authority upheld the AO's decision, stating that the firm was not dissolved and the AO was empowered to assess the old firm's income under section 189(1) of the Act. The Tribunal considered the partnership deed and the conduct of the partners, concluding that the firm continued to exist despite the death of partners. The Tribunal held that the notice issued under section 148 and the subsequent assessment under section 144 r/w 147 were in accordance with the law.Issue 2: Assessment on a defunct firmThe contention raised by the assessee was that the firm had become defunct due to the death of two partners, leading to the interest income not being taxable in the hands of a defunct firm. The Tribunal analyzed the partnership deed, which stated that the firm's duration was at will and that the remaining partners could continue the business in case of a partner's exit. The Tribunal observed that there was no evidence to suggest the firm was dissolved, and the bank account remained operational. The encashment of the refund cheque by the partners indicated the firm's continuity. The Tribunal held that the assessment on the old firm was valid as per the provisions of the Partnership Act and the conduct of the partners.Issue 3: Taxability of interest income on accrual basisThe Tribunal addressed the taxability of interest income received under section 244(1A) on accrual basis. The Tribunal noted that the interest accrued upon the order passed by the Tribunal, entitling the assessee to the refund and interest. The AO assessed the interest income in one year, but the Tribunal directed the AO to assess the interest income in two years, 2000-01 and 2001-02, as per the mercantile system of accounting followed by the assessee. The Tribunal clarified the date of accrual of interest and instructed the AO to assess the interest income accordingly.In conclusion, the Tribunal partly allowed the appeal, emphasizing the validity of the assessment on the firm, the taxability of interest income, and the proper assessment based on the accrual basis of accounting.