TaxTMI 
TaxTMI 
2018 (1) TMI 241
X X X X Extracts X X X X
X X X X Extracts X X X X
....all the assesses. Subsequently on 16.09.2016 all the assesses received a show cause notice u/s 263 of the Income Tax Act, 1961 (Act) from the respondent. The assessees had given the same to Shri Mukesh Khaitan, ACA, who in turn handed over the brief to another Chartered Accountant for representing the case before the Principal C.I.T. The impugned order was passed on 21.03.2017 directing the AO to make a de novo assessment on the issue set out in the impugned order u/s 263 of the Act. The said order was received by the assessees on 24.03.2017. The assessees had handed over the order for necessary suggestions to Shri Mukesh Khaitan, ACA for further course of action. It appears that Shri Mukesh Khaitan did not seek any legal opinion for filing the appeal against the orders u/s 263 dated 21.03.2017. In the meantime the assessees received a notice from the AO u/s 142(1) of the Act dated 30.03.2017 for framing de novo assessments pursuant to the impugned order u/s 263 of the Act dated 21.03.2017. Thereafter the assessees themselves contacted a senior lawyer, who opined that order of Pr.CIT passed u/s 263of the Act dated 21.03.2017 was an appealable order before the Tribunal and an appeal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. 5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk. 6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so." 5. Further reliance was placed on the decision of Mumbai Bench of ITAT in the case of Earthmetal Electricals (P)Ltd. Vs ITO (2005) 4 SOT 484 (Mum). In the aforesaid case there was a delay of 70 days in filing the appeal by the assessee. The assesee had explained the reasons for the delay as owing to the action of the Chartered Accountant in misplacing the assessee's appeal papers. The appeal was filed by the assessee after getting a letter from the Tax Recovery Officer. The explanation for the delay in filing the appeal as to the act of the Chartered Accounta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rm M/s.Avantika Advisory Services LLP. They claimed the said receipt as exempt u/s.10(2A) of the Act. Section 10 of the Act deals with incomes which is not included in the total income. Subsection (2A) to section 10 of the Act reads as follows: " in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.: For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits;" 10. In the course of assessment proceedings for AY 2013-14, the AO, in the case of Shri Vinod Agarwal, issued a notice u/s 142(1) of the Act dated 15.01.2015calling upon the assessee to furnish certain details. This notice was in relation to A.Y.2007-08 to 2013-14. Another notice u/s 142(1) of the Act dated 23.01.2015 was issued by the AO with reference to A.Y.2013-14 in which the AO specifically called from the Assessee the follow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ove reads as follows : "5. INTERIM ACCOUNTS The Existing Partners shall finalize Accounts from the beginning of the financial year to 31st December, 2012 i.e. 9 months from 01.04.2012 to 31.12.2012. The loss upto 31.12.2012 should be debited in the Accounts of the Existing Partners. The new partners shall not be responsible for any Loss and Liability upto 31.12.2012. " 13. There was a loss of Rs. 20,17,79,738/- upto 31.12.2013 in the business of M/s. Avantika Advisory Services LLP. The same was distributed amongst the existing partners alone since the new partners were not responsible for those losses as per clause-5 of the supplementary LLP agreement dated 01.01.2013. For the period between 01.01.2013 to 31.03.2013 there was a profit of Rs. 20,20,37,712/-. The same was distributed as per clause-3 of the partnership agreement in the ratio of 24% each in favour of the new partners .i.e. Assessees in thee appeals and 1% each in the account of the existing partners. 14. As far as the partnership firm M/s. Avantika Advisory Services LLP is concerned for the previous year relevant to A.Y.2013-14 it filed the return of income declaring the total income of Rs. 3,88,780/-. As we ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wers u/s 263 of the Act, was of the view that the aforesaid orders of the AO were erroneous and prejudicial to the interest of the revenue. He accordingly issued a show cause notice u/s 263 of the Act dated 16.09.2016. The principal contention of the Pr.CIT in the show cause notice was as follows :- "On analysis of assessment records, it is observed that the assessee became partner of Avantika Advisory Services LLP (PAN:AASFA3815F) on 01.01.2013 vide supplemental LLP agreement dated 01.01.2013. As per the supplemental, LLP agreement (clause 3), the partners of the LLP were entitled to share of Profit and Losses in definite proportions and assessee's share of Profit and Loss was 24%. As per the terms of the supplemental LLP agreement it was clearly provided that new partners will not be responsible for any loss and liability upto 31.12.2012. Thereafter for the period 01.01.2013 to 31.03.2013, Avantika Advisory Services LLP reported a profit of Rs. 20,20,37,712/- which was distributed among all the partners in the ratio defined in the supplemental LLP agreement whereby the assessee's share of profit was Rs. 4,84,89,051/-. The assessee claimed exemption of Rs. 4,86,42,696/ -....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed that 'total income' of the firm for sub section (2A) of section 10 of the Act, as interpreted contextually, includes income which is exempt or deductible under various provisions of the Act. In particular attention was drawn to the following part of the Circular which reads as follows: "It is, therefore, further clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners' accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act." It was submitted that the above clarification in the Circular implies that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners. Even if the income of the firm chargeable to tax becomes NIL on account of exemption/deduction, it does not mean that the income before claiming exemption will be taxed in the hands of the partners. It was po....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the reason that the applicability or section 10(2A) with respect to the exemption or Rs. 48642696/- u/s 10(2A) claimed by the assessee which included share of profit of Rs. 48489051/- from Avantika Advisory Services LLP for AY 2013-14 was not examined by the AO at the time of assessment. Record reveals that M/s. Avantika Advisory Services, LLP filed its return of income for the AY 2013-14 on 25.07.2013 declaring total income of Rs. 388780/- and tax paid thereon is Rs. 131010/-. That means an income of Rs. 388780/- only of the said LLP has suffered tax and Asessees share (24%) on such tax suffered income is only Rs. 93307/-. Therefore the assessment made is lacking such examination/verification which is necessary to assess true income of the assessee and such omission to make necessary enquiry has made the order erroneous in so far as prejudicial to the interest of revenue, A revision proceedings can only be initiated if both the conditions specified in sec. 263 of the Act is satisfied. viz. the assessment order was erroneous and it was prejudicial to the interest of the revenue, Consequently. in exercise of the jurisdiction conferred by section 263 of the Act. the said ord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tention was drawn to the decision of the Hon'ble Karnataka High Court in the case of Vidya Investment & trading Co. (P.)Ltd.(supra) wherein it was held: "23. An explanation is appended to a section to bring out the true meaning of the words contained in the section. It is a part and parcel of the enactment. While construing an explanation, one has to see whether it is in line with the main section, so as to promote the object of that section. Sometimes, an explanation is added to include something within or to exclude something from the ambit of the main enactment or the connotation of some word occurring in it. An explanation, normally, should be read so as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. It is also possible that an explanation may have been added in a declaratory form to retrospectively clarify a doubtful point in law and by way of abundant caution." It was submitted that exemption can only be claimed on the profits of the firm, and since the assesses who were new partners were not to bear any responsibility on the losses so incurred by the Firm amounting to Rs. 20,17,79,738/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnot direct another inquiry by the Assessing Officer under section 263 of the Act. In this context, we may refer to the decision in Gabriel India Ltd. 's case (supra) wherein the Commissioner, after scrutiny of the order of the Income-tax Officer, found that the order did not disclose application of mind and despite examining the matter at length and hearing the assessee could not come to a definite conclusion that the expenditure was not revenue expenditure but expenditure of capital nature. He referred the matter back to the Income-tax Officer to examine the same and to decide afresh. The said action of the Commissioner was not approved by the Tribunal. In that background, the High Court of Bombay expressed the view as follows: "From a reading of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income- tax Officer is "erroneous insofar as it is prejudicial to the interests of the Revenue". It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecords." According to him the above observations in the order of Assessment cannot substitute a proper and valid enquiry by the AO. On the question of eligibility of the assessee to exempt u/s10(2A) of the Act a sum of Rs. 4,84,89,051/- the ld. Counsel submitted that the CBDT Circular No.8/2014 has been cited by the assessee totally out of context. In this regard he drew our attention to the fact that the said circular was issued in the context of deduction in Chapter-VIA to a partnership firm and exemption in Chapter-III to the income of a partnership firm. The Partnership firm could receive certain exempt income and these are not shown as part of total income in the return of income filed by the firm. However these incomes are distributed to the partners as their share of profits of the firm. Merely because such exempt income is not part of the total income declared by the firm, an exempt income cannot be cannot be taxed in the hands of the partners. This was the purport of the Circular No.8/2014. He also pointed out that the Hon'ble Karnataka High Court in the case of Vidya Investments (supra) also dealt with the case only of exempt u/s 10(34)of the Act and in that context the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is of Charge. Chapter-III of the Act, deals with income which do not form part of total income and are contained in Sect. 10 to 13-B of the Act. Chapter IV deals with the computation of total income. Firstly income is categorized under various heads of income. This is laid down in Section 14 of the Act, which charge of income-tax and computation of total income, be classified under the following heads of income - Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Section 66 reads as under:- "Total income - in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII." The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of "incomes on which tax is not payable" and similar wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sent case. The above clarification in the Circular implies that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners. Even if the income of the firm chargeable to tax becomes NIL on account of exemption/deduction, it does not mean that the income before claiming exemption will be taxed in the hands of the partners. 26. Therefore there are two views possible on the issue as to whether the Assessee would be entitled to exemption u/s.10(2A) of the Act on the share of profits credited in the partner's capital account with the firm or the share of total income of the firm declared in the return of income by the firm. It may be true that the CBDT Circular No.8/2014 was issued in the context of deduction in Chapter-VIA to a partnership firm and exemption in Chapter-III to the income of a partnership firm but the Circular is applicable to all profits credited in the books of the firm in the capital account of the partners, even though they are not declared by the firm in their return of income. 27. As pointed out by the Supreme Court in Malabar Industrial Co.'s case (supra), the prerequisite to the exer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. 29. The AO has adopted one course permissible in law and therefore jurisdiction u/s.263 of the Act cannot be exercised merely because the CIT does not agree with the view of the AO. 30. We however find that in the show cause notice issued by the CIT u/s.263 of the Act, he termed the order of the AO as erroneous for the reason that the assessee is entitled for exemption of Rs. 93,355/- being 24% of Rs. 3,88,982/- which is the total income declared by the firm Avantika Advisory Services LLP for A. Y. 2013-14. Therefore allow....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of inquiry and not conducting inadequate inquiry. We are of the view that where an enquiry is conducted by the AO and he is satisfied with a reply given on a query raised, then the CIT cannot intervene through revision for coming to a conclusion that the assessment order passed by the AO was erroneous and prejudicial to the interests of the Revenue for lack of or inadequate enquiry. The CIT in the impugned order has merely pointed out that the Assessee has claimed exemption u/s.10(2A) of the Act on a sum of Rs. 4,84,89,051 as his share of profits from the firm whereas the firm has declared total income of only Rs. 3,88,780/-. This aspect is clear from the records produced by the Assessee before the AO. The AO has mentioned in the order that all issues and documents were perused and discussed with the AR. The CIT on examination of the Assessment records has invoked his powers u/s.263 of the Act. He has not spelt out in the impugned order as to what was the kind of enquiry that the AO ought to have made and which he failed to make. In the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gabriel 203 ITR 108 (Bom) cited by the Learned Counsel for the Assessee, it has b....