Validity of action of AO with regards to Assessment completed u/s.144 and issue of notice u/s154

[THIRUGNANAM KALIYAPERUMAL]

An assessee firm filed it’s Return of income in electronic form for the assessment year 2007-08. The firm is contractors. The case was selected for scrutiny assessment in CASS. In response to notice u/s.143(2), the representative of firm had appeared before the AO, and submitted a letter along with paper return (ITR-5), Audited balance sheet, profit and loss account, duly signed Form 3CB and 3CD and stated in that letter that due to the pressure of work of partners of firm, the partner are not able to produce the books of accounts called, and in order early completion of assessment, we offer higher income at 8% on Gross contract receipts. The AO accepted the offer of firm, and completed the assessment u/s.144. The AO allowed the interest and salary payments to partners from the income determined at 8% of Gross Contract receipts. After four months, the AO issued a notice U/s.154 to the assessee firm, and stated that the assessment was completed u/s.144, the assessee was not entitled to deduction by way of any payment of interest and salary to partner in view of provisions of section 185(5) of IT Act. Hence it is proposed to rectify the said mistake which is apparent from the record by disallowing the assessee claim for payment towards partner’s interest and salary. Please state whether the action of AO is correct with regards to Assessment completed u/s.144 and issue of notice u/s 154? Please state relevant case law if any. E-mail: [email protected]

[Surender Gupta]

I think this is clear case of error apparently. Assessment is made under section 144 only in certain circumstances. Those circumstances may be accepted by the assessee voluntarily or not is immaterial since once the conditions of section 144 are complied with and accepted by the assessee, a partnership firm, the provisions of section 184(5) read with section 185 are applicable mandatory. The provisions of Section 184(5) read with 185 are overriding provisions and can not be ignored. Once the AO completed the assessment allowing the deduction of amount paid to partners on account of salary and interestis clearly a mistake which can be rectified by the AO. You may note that any mistake which is apparent can be rectified u/s 154. Is is immaterial that such mistake is of law or of facts.

[krishna rao radha sri]

Please refer to judgement of Allahabad High Court in the case of CIT Vs.Vijay Constructions in IT Appeal nos: 79, 82 to 84 published in ( 2007 ) 213 CTR 105 (Allahabad) where in in a similar case has allowed remuneration and interest even under SEc.144 Assessment.

AI Summary

Rectification under section 154 can correct apparent mistakes in summary assessments, affecting partner remuneration deductions. An assessing officer who completed a summary assessment accepting an offered income computation later issued a rectification notice to disallow partner interest and remuneration as barred by partnership-disallowance provisions, treating the earlier allowance as an apparent mistake correctible under rectification powers; this stance conflicts with authority upholding such deductions in summary assessments and raises the question whether rectification may alter deductions accepted under the summary assessment procedure.