TaxTMI 
TaxTMI 
2015 (2) TMI 1333
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....d notice, the assessee filed a return. Subsequently, it was found that the assessee has not filed the certified copy of the partnership deed along with the return of income filed. The assessing authority proposed to invoke the provisions of Section 184 (5) to treat the status of the assessee as AOP as against its claim as firm. The assessee by his letter dated 4.12.2006 objected to the proposal and also filed a copy of the partnership deed duly certified by all the partners. Thereafter, the assessment was concluded on 15.12.2006 under Section 143(3) read with Section 147 of the Act. The assessing authority declined to accept the explanation of the assessee and held the assessee in the status of AOP and concluded the assessment. While doing so, the assessee's claim towards payment of interest on capital debited into the profit and loss account to the tune of Rs. 2,61,127/- and salary to the partners as claimed by the assessee to the extent of Rs. 65,661/- were disallowed. In addition, there were other disallowances like disallowance of 25% of HSD oil, machinery and vehicle maintenance, telephone expenses and bonus payment to the tune of Rs. 18,376/-. Consequently, an income of R....
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.... is, the provisions of the Act shall so far as may be, apply accordingly as if such return or a return required to be furnished under Section 139 of the Act and, therefore, the default contemplated under Section 144(1)(a) is wiped out. Secondly, on the ground of failure to comply with the requirement of Section 144 of the Act, the assessee may not be continued the benefit of deduction under Section 28 in so far as a partnership firm is concerned and, therefore, he submits a case for interference is made out. 7. Per contra, Sri K.V. Aravind, learned counsel appearing for the revenue supporting the impugned order contended that, though on filing of a return in pursuance of a notice under Section 148, the said return is treated as a return furnished under Section 139. It is not for all purposes. The word used is 'so far as may be'. Therefore, when admittedly Section 144 of the Act is not complied with, the consequences which are enumerated in Sections 184 (5) and 185 automatically applies and, therefore, denial of deductions under Section 28 of the Act is valid and cannot be found fault with. Therefore, he submits that a case for interference is not made out. 8. Section 139 ....
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....that instrument. In proof of the assessee being a firm, subsection (2) provides that, a certified copy of the instrument of partnership shall accompany the return of income of the firm. Sub-section (5) of Section 184 prior to amendment, i.e., prior to 1.4.2004 provides that, if such a firm has failed to comply with the requirement of Section 144, then the firm shall not be assessed as a firm but it shall be assessed in the same manner as an Association of Persons. Similarly, Section 185 prior to its amendment with effect from 1.4.2004 provided that, if the assessee firm does not comply with the provisions of Section 184, then the firm shall be assessed for that assessment year in the same manner as an Association of Persons. By Finance Act, 2003 which came into effect from 1.4.2004, sub-section (5) is substituted. The substituted provision now provides that, if the assessee firm fails to comply with the requirement mentioned in Section 184, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargea....
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....ssion or remuneration shall not be chargeable to income-tax under clause (v) of section 28." 14. A reading of the said provision makes it clear that, if there is a failure on the part of the firm, as is mentioned in Section 144, then the firm shall be so assessed that no deduction as contemplated in the said provision read with clause (v) of Section 28 is allowable to the said firm. That is the plain meaning of the said Section. Similarly, Section 185 provides that, if a firm does not comply with the provisions of Section 184, same consequences would follow. Sub-section (5) of Section 184 deals with non-compliance of Section 144 and Section 185 deals with non-compliance of Section 184. In fact, the Kerala High Court in case of RADHA PICTURE PALACE v. DEPUTY COMMISSIONER OF INCOME TAX [344 ITR 274] has categorically held as under:-- "The object of Section 184(5) is such that only assessees, who comply with the statutory provisions which include filing of regular returns in time and co-operating with the Department by complying with the terms of notices issued under ss. 142, 143(2) are entitled to the benefit of deductions. All what s. 148 conveys is that reassessment under s. 147....
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....ssessment year, the firm shall be assessed for that assessment year in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly. 66.3 With a view to rationalize the provisions relating to assessment of firms, the Act has substituted Sub-section (5) of Section 184 and Section 185 so as to provide that in case a firm does not comply with the other provisions of Section 184 or a best judgment assessment is made in the case of the firm as referred to in Section 144, no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the business income of the firm. Such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of Section 28 of the Income-Tax Act. 66.4 These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-05 and subsequent years." 17. Paragraph 66.3 makes it clear that, the substituted Sub-section (5) of Section 184 and Section 185 intends to provide that in case a firm does not ....
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....ction 116(a). The CBDT under this section is empowered to issue such orders, instructions and directions to other income-tax authorities "as it may deem fit for proper administration of this Act". Such authorities and all other persons employed in the execution of this Act are bound to observe and follow such orders, instructions and directions of the CBDT. The proviso to sub-section (1) of section 119 recognises two exceptions to this power. First, that the CBDT cannot require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner. Second, is with regard to interference with the discretion of the Commissioner (Appeals) in exercise of his appellate functions. Subsection(2) of Section 119 provides for the exercise of power in certain special cases and enables the CBDT, if it considers it necessary or expedient so to do for the purpose of proper and efficient management of the work of assessment and collection of revenue, to issue general or special orders in respect of any class of incomes of class of cases, setting forth directions or instructions as to the guidelines, principles or procedures to be followed by other incom....
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....ey depart or deviate from such construction." Navnit Lal C. Javeri v. K.K. Sen, AAC [1965 56 ITR 198](SC) and Ellerman Lines Ltd. v. CIT {1971 82 ITR 193] (SC) clearly establish the principle that circulars issued by the CBDT under section 119 of the Act are binding on all officers and employees employed in the execution of the Act, even if they deviate from the provisions of the Act. In UCO Bank v. Commissioner of Income-Tax [1999 237 ITR 889, 896], dealing with the legal status of such circulars, this Court observed: "Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2) however, the circulars as contemplated therein cannot be adverse to the assessee. Thus the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner ....
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....d entered into an area which is earmarked for the legislature/executive. In our view, the said circular grants administrative relief to the business. It was entitled to do so. Therefore, it cannot be said that the Board had acted beyond its authority in issuing the said circular. One more reason needs to be stated. Whenever such binding circulars are issued by the Board granting administrative relief(s) business arranges its affairs relying on such circulars. Therefore, as long as the circular remains in force, it is not open to the subordinate officers to contend that the circular is erroneous and not binding on them." 20. From the aforesaid judgments referred to by the Apex Court it is clear that, the CBDT under this section is empowered to issue such orders, instructions and directions to other income-tax authorities "as it may deem fit for proper administration of this Act". Such authorities and all other persons employed in the execution of this Act are bound to observe and follow such orders, instructions and directions of the CBDT. The powers of the CBDT are wide enough to enable it to grant relaxation from the provisions of several sections enumerated in clause (a). The on....
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....proper administration of the Act and the same is binding on all of them and they shall follow and observe such orders. It is by way of explanation while rationalizing the provisions relating to assessment of firms it is made clear that, only in the event of a best judgment assessment is made for failure to comply with Section 144 of the Act, the benefit which is available to a firm under Section 28 of the Act can be denied. If a best judgment assessment under Section 144 of the Act is not made, no disallowance under Section 184(5) of the Act, can be made. No doubt this explanatory note is not in conformity with Section 184(5) of the Act. But, when the CBDT issued the said explanatory note, it is giving relaxation and benefit to the assessee which the statute has not provided. Such a power is vested in the CBDT by virtue of Section 119. Once such a benefit is conferred by way of a circular, the authorities are bound by the same. They cannot sit in judgment over the said explanation and deny the benefit to the assessee. Even though this Court can interpret the said provision and note that there is inconsistency between the provision and the explanation offered, but when the CBDT issu....