TaxTMI 
TaxTMI 
2025 (6) TMI 1228
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....se, the Hon'ble Income Tax Appellate Tribunal was right in law in holding that the Commissioner of Income Tax had gone overboard by directing the Assessing Officer to modify the assessment order treating the status of assessee as AOP instead of setting-aside the order of the Assessing Officer, when the provisions of Sec 263(1) gives the power to enhance or modify the assessment or cancelling the assessment and directing a fresh assessment." T.C.A.No.750 of 2013: "1. Whether on the facts and circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-Tax passed u/s. 263 without appreciating that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to interest of revenue? 2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that applying the ratio of the decision of the Apex Court cited when a person is a partner in a firm in his individual capacity as well as a representative of another firm, he should be counted as a single partner qua the firm and hence the Appellant was a validly constituted firm? 3. Whether on the fac....
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....ividual assessment under the head "Profits and gains of business or profession" and have been assessed to tax on the said income at the maximum marginal rate of 33.99%, which is the same rate at which the firm is being taxed. 6. The return of income was processed under Section 143(1) of the Act and later was selected for scrutiny and notice under Section 143(2) of the Act was issued. Notice under Section 142(1) was also issued calling for details, which were furnished by assessee. In the course of assessment proceedings, assessee had filed various details before the Assessing Officer, including the partnership deed and the amendment deed. The Assessing Officer passed the assessment order under Section 143(3) of the Act on 31.12.2010 determining assessee's total income at Rs. 17,70,69,972/-. The Assessing Officer accepted assessee's status as a partnership firm after verifying the partnership deeds. 7. Assessee, thereafter, received a notice dated 29.02.2012 from the Commissioner of Income Tax-IV (CIT), Chennai, issued under Section 263 of the Act. In the notice it is alleged that by amending the partnership deed to include one more partner (Mr.Mukund Dharmadhikari), t....
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....rejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including,- (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under section 92CA; or (iii) an order cancelling the order under section 92CA and directing a fresh order under the said section. Explanation 1 .-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Asse....
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....r in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and the period commencing on the date on which stay on any proceeding under this section was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by the jurisdictional Principal Commissioner or Commissioner shall be excluded." 11. Under Section 263 of the Act, the Commissioner is empowered to call for and examine the record of any proceeding under the Act and if he considers that any order passed therein by the Income Tax Officer (ITO) is erroneous in so far as it is prejudicial to the interests of the revenue, he may, a....
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....Such a power cannot, in any manner, be equated to or regarded as approaching in any way the appellate jurisdiction or even the ordinary revisional power conferred on the Commissioner under Section 264 of the Act. 15. In Venkata Krishna Rice Company (supra), the Co-ordinate Bench of this Court held as under: "11. Section 263 of the Act empowers the Commissioner to call for and examine the record of any proceeding under the Act and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. The Commissioner of Income-tax, in the present case, had purported to act in exercise of this power on the ground that the order of the Income-tax Officer, although in accordance with the law, was, in his view, prejudicial to the interests of the Revenue. This view of the Commis....
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....be of such a kind that it can be said of it that it is prejudicial to the interests of the Revenue. In other words, merely because the officer's order is erroneous, the Commissioner cannot interfere. Again, merely because the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on the Commissioner to interfere in revision. These two elements must co-exist. This construction of the section has been stated and evolved from the statutory language by a decision of the Karnataka High Court in CIT v. T. Narayana Pai, [1975] 98 ITR 422. 14. The learned counsel for the Department submitted that the order of the Income-tax Officer in the present case was prejudicial to the interests of the Revenue since by taxing first the share income of the assessee who was a member of the association, the officer thereby disabled the Department from getting at the total income of the association of persons as such for being taxed at the higher rate appropriate thereto, resulting thereby in loss of revenue. We find it hard to accept this argument for more than one reason. In the first place, there are no materials stated in....
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....s of the Revenue. We think it is axiomatic that any assessment, which is in accordance with the law cannot, at the same breath, be regarded as erroneous, and if the assessment is not erroneous, it cannot be prejudicial to the interests of the Revenue or for that matter to the interests of the assessee as well. This is on the principle that nothing can be prejudicial either to the Department or to the assessee if it is in accordance with the law, unless it be that the law itself is being questioned on some ground or other, which objection is available under some provision or other of the Constitution. In this case, when the Commissioner had accepted the position that the Income-tax Officer was at liberty to tax the share income from the joint venture in the hands of the assessee as a member of the association, then it follows that that can be regarded as prejudicial to the interests of the Revenue. 16. In our judgment, the expression "prejudicial to the interests of the Revenue" is not to be construed in a petty-fogging manner, but must be given a dignified construction. It may be noted that the use of the expression "Revenue", in our opinion, is significant It denotes some....
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..../or the members thereof. Since the Income-tax Officer's order makes it difficult for the Department to get at the total income of the association of persons, it had to be removed out of the way. If it is removed out of the way, the resulting position would be as though there had been no such order even in the first instance, and the field may be clear for the exercise of option once more, as though the Department can begin from the very beginning. This intention to circumvent the clear consequence of the law, as laid down by the courts, is not definitely a purpose which could actuate the Commissioner of Income-tax under section 263 of the Act. This is because, far from the Income-tax Officer's order being prejudicial to the interests of the Revenue, the present action of the Commissioner in seeking to set aside that order is really prejudicial to the Revenue since it is prejudicial to the law laid down by the courts. ........ 20. The principle laid down in this judgment of the Supreme Court cannot, however, be adopted for the purpose of clothing the Commissioner of Income-tax with a power of interference with the exercise of the option made by the Income-t....
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....estion of law is in the negative and in favour of the assessee. The assessee will have its costs. Counsel's fee Rs. 500." [emphasis supplied] 16. It is quite clear from Section 263 of the Act that two things must co-exist in order to give jurisdiction to the Commissioner to interfere, the order of the ITO in question must not only be erroneous, but the error in the ITO's order must be of such a kind that it can be said of it that it is prejudicial to the interests of the revenue. 17. In the instant case, there is nothing stated in the notice issued under Section 263 of the Act to suggest in what way there is any prejudice to the interests of the revenue. No figures have been given in the notice to suggest that the average rate of income tax on the total income of the AOP would be far higher than the average rate of income tax applied to the partnership firm. We agree with Shri Mistri's submission that even assuming for the moment it is accepted that the Assessing Officer could not have assessed assessee as a partnership firm, still he has not caused any prejudice to the interests of the revenue in passing the assessment order. 18. Two statements tendered by ....
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.... Suryanarayan 10,96,000 K. Sairam 21,50,000 K. Rajasekhar 16,80,000 K.R. Sekar 11,30,000 M.Lakshminarayan 26,03,000 M.K. Ananthanarayan 22,95,000 M. Ramachandran 13,78,000 Mukund Dharmadhikari 64,88,000 P.R. Ramesh - S. Thirumalai - Srikumar 21,50,000 S. Ravi Veeraraghavan 12,67,000 Sundaresan - V. Balaji 8,57,000 Total 3,23,50,000 The tax rate for partners would be maximum marginal rate i.e. 33.99% since income of all partners exceed Rs. 2.50 lakhs. [3,23,50,000 * 33.99%] [B] Rs.1,09,95,765 3. Total tax paid by the Appellant and the partners [A + B] = Rs. 7,11,81,848/-." Therefore, if revenue's stand of disallowing remuneration paid by assessee to its partners is upheld, then the total tax that would be paid by assessee and its partners would amount to Rs. 7,11,81,848/-. If the stand of assessee is accepted, still the tax paid collectively by the firm and the partners in their individual assessment would amount to Rs. 7,11,81,848/-. Therefore, there is absolutely no prejudice that could be stated to have been caused to the revenue, because, if it was so, the CIT i....
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.... paid to Rashiklal could not be included in the income of the firm. On further appeal by the revenue, the Tribunal held that Section 40(b) clearly applied in this case. Payment to Rashiklal will be payment to a partner. The partnership firm could not claim any deduction for this payment from its income. The High Court on reference held that there was clear material that Rashiklal had invested his joint family funds to enter into the partnership. Payment was made to Rashiklal who was a partner. Accordingly, the Tribunal was correct in coming to the conclusion that Section 40(b) will be applicable in this case. The firm was not entitled to claim any deduction on account of payment of commission to one of its partners. Assessee took the stand that remuneration was paid of Rs. 28,579/- as commission to Rashiklal in his individual capacity and not while representing the HUF and the real partner of the firm was the HUF. Therefore, the payment to Rashiklal did not amount to payment of commission to the HUF which was the real partner and, therefore, will not fall within the mischief of Section 40(b) of the Act, which at the material time provided that in the case of any firm, any paymen....
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....cordingly, the Tribunal was correct in coming to the conclusion that Section 40(b) will be applicable in this case. The firm was not entitled to claim any deduction on account of payment of commission to one of its partners. 3. The firm has come up in appeal against the judgment of the High Court. Section 40(b) of the Income Tax Act, at the material time, stood as under: "Amounts not deductible.- Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession',- (a)*** (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm." In our view the answer to the question raised in this case is self-evident. There is no dispute that Rashiklal was a partner of the assessee-firm. For assessment of the firm under the head profits and gains of business and profession any payment of commission by the firm to any partner of the firm will not be allowed as deduction. The firm has paid a commission of Rs 28,579 to Rashiklal and has cla....
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....bserved: "This section clearly requires the presence of three elements, namely, (1) that there must be an agreement entered into by two or more persons; (2) that the agreement must be to share the profits of a business; and (3) that the business must be carried on by all or any of those persons acting for all. According to this definition 'persons' who have entered into partnership with one another are collectively called a 'firm' and the name under which their business is carried on is called the 'firm name'. The first question that arises is as to whether a firm as such can enter into an agreement with another firm or individual. The answer to the question would depend on whether a firm can be called a 'person'." Das, C.J., thereafter, went on to examine the meaning of the word "person" in the Partnership Act. It noted that "person" had not been defined in the Partnership Act. However, the General Clauses Act, 1897, had defined 'person' in Section 3(42) as under: "(42) person' shall include any company or association or body of individuals, whether incorporated or not;" After referring to the definition of 'person' in the General Clauses Act, D....