Delhi High Court

Income Tax Officer vs D. M. Enterprises on 26 February, 1998

Equivalent citations: (1998) 61 TTJ Del 423

ORDER

B. M. Kothari, A. M.

The revenue has raised the following ground in this appeal :

"On the facts and in the circumstances of the case, the learned Deputy Commissioner (Appeals) has erred in law in allowing the status of a firm where certified copy of partnership deed as required under the provision of section 184(2) of the Income Tax Act has not been filed."

2. The assessee furnished a return of income declaring loss of Rs. 12,930. The assessing officer processed the said return under section 143(1)(a) on 18-2-1995, in which he determined the status of the firm as an (Association of person). He also disallowed the salary paid to partner amounting to Rs. 18,000 and thereby determined the assessee's income at Rs. 5,070. He levied tax at maximum marginal rates @ 40 per cent under section 167B(2) of Income Tax Act, 1961 (hereinafter referred to as `the Act) and further levied additional tax. The assessing officer had also simultaneously passed an order under section 185 on 28-2-1995 in which he observed that the assessee has not filed the certified copy of instrument of partnership along with return of income. The assessee has failed to comply with the provisions of section 184 of the Act, and therefore, the status to the firm is assigned as that of PEAOP under section 185 of the Act.

3. The assessee filed an appeal against the said intimation issued under section 143(1)(a) and a separate appeal was also filed against the order under section 185. The Deputy Commissioner (Appeals) vide his order dated 31-7-1995, relating to intimation under section 143(1)(a) held that the requirement to furnish certified copy of partnership deed along with return of income was a curable fact. He placed reliance on judgment of Hon'ble Calcutta High Court in CIT v. Rai Bahadur Bissesswar Lal Moti Lal Malwashi Trust (1992) 195 ITR 825 (Cal) in which it was held that the requirement of furnishing audit report by a charitable institution in the prescribed form No. 10B as required under section 12A of Act was a procedural requirement and such defect or omission could be cured under section 139(9). In the present case, the assessee, in fact, had cured the said defect by filing the certified copy of the partnership deed along with revised return of income furnished on 24-3-1995. He, therefore, held that the requirement of section 184 has been fully complied with and the assessee, is, therefore, entitled to be assessed in the status of "Firm" as claimed in the return. He also held that the Income Tax Officer was not justified in changing the status while processing the return of income under section 143(1)(a). Such variation in the status is beyond the ambit of section 143(1)(a). He placed reliance on Circular No. 689, dated 24-8-1994 to support such a conclusion arrived at by him. The Deputy Commissioner (Appeals) accordingly directed the assessing officer to adopt the status of the firm.

4. As regards disallowance of Rs. 18,000 on account of salary paid to working partner, the assessing officer restored the matter back to the assessing officer to consider the assessee's claim after examining the clauses of the partnership deed in accordance with the provisions contained in section 40(b)(ii) of the Act. The present appeal by the revenue is directed against the said order of the Deputy Commissioner (Appeals). It may be relevant to state here that the Deputy Commissioner (Appeals) had rejected the assessee's appeal against the order under section 185 in view of the findings given by him in the impugned order holding that the assessing officer could not alter the status from `Firm' `AOP' while processing the return under section 143(1)(a). It was also observed that no appeal is maintainable against the order under section 185 in accordance with the amended provisions of section 246 of the Act.

5. The learned Departmental Representative submitted that the provisions of section 184(1) as inserted by the Finance Act, 1992 with effective from 1-4-1993, clearly provide that a firm shall be assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. Sub section (2) further provides that a certified copy of the instrument of partnership referred to in sub section (1) shall accompany the return of income of the firm relevant to the assessment year commencing on or after the first day of April 1993, in respect of which assessment as a firm is first sought. Section 185 provides that where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an AOPs, and all the provisions of this Act shall apply accordingly.

5.1 The learned Departmental Representative submitted that the assessee did not comply of the provisions of section 184(1)(ii) by not submitting the instrument of partnership along with return of income furnished on 27-12-1993. Therefore, the assessing officer was bound to adopt the status of `AOP in view of clear provisions contained in section 185 of the Act. He submitted that the provisions of section 143(1)(a) clearly provide that if any tax or interest is found due on the basis of such return, an intimation shall be sent to the assessee specifying the sum so payable and such intimation shall be deemed to be a notice of demand issued under section 156 of Income Tax Act, 1961. Since the return of income was not accompanied by the certified copy of the partnership deed, the tax was payable by the assessee as AOP and deduction in respect of remuneration to working partner was also not allowable. Hence, the assessing officer was justified in adopting the status as AOP and charging tax at maximum marginal rate as per section 167B(2). He contended that the aforesaid action of the assessing officer of adopting the status of AOP is not only covered by the permissible prima facie adjustments enumerated in the proviso to section 143(1)(a) but is also covered under the main clause contained in section 143(1)(a)(i) of the Act. He, therefore, strongly submitted that the order of the Deputy Commissioner (Appeals) should be cancelled and that of the assessing officer should be restored.

6. The learned counsel for the assessee submitted that the requirement of furnishing the certified copy of the partnership deep as per section 184 is a procedural requirement, which could be cured by furnishing a revised return along with instrument of partnership deep, which, in fact, was complied with in the present case by filing a revised return along with a certified copy of partnership deed on 24-3-1995. The provision of section 184 does not provide that such certified copy of the instrument of partnership should be submitted along with the return of income under section 139(1). It can be validly furnished even along with a belated return of income under section 139(4) or along with a revised return under section 139(5).

6.1 The learned counsel further submitted that similar requirement of furnishing the audit report in the prescribed form is contained in various other provisions, such as a section 80HHC, section 12A, etc. of the Act. The various Benches of the Tribunal and the High Courts have held that such a requirement is procedural and not a mandatory requirement. The omission to file the audit report along with return of income could be rectified at any time during the course of assessment proceedings. He placed reliance on decisions reported in (Mrs.) Sudha Sharma v. ITO (1993) 44 ITD 351 (Del-Trib) and Dhanoo Lal & Sons v. Dy. CIT (1996) 57 ITD 426 (Cal-Trib). The learned counsel further contended that the principle of purposive interpretation has received judicial recognition in several decisions, such as the one reported in 45 ITD 254.

6.2 The learned counsel further contended that the Tribunal in the decision in New United Motors v. Asstt. CIT (1993) 46 TTJ (Del-Trib) 186 has held that the mere omission to furnish the required evidence along with return cannot lead to the conclusion that the contrary fact should be assumed to have existed. He further submitted that the proviso to section 143(1)(a) permits adjustments only in respect of the income or loss declared in the return and does not permit alteration or change of status claimed in the return. The variation in the income or loss declared in the return can also be made only in relation to any arithmetical error or in relation to any loss carried forward, deduction, allowance or relief which is either prima facie admissible but not claimed in the return or which is prima facie inadmissible, which has been wrongly claimed in the return. The scope of prima facie adjustments permissible under the proviso to section 143(1)(a) is confined to only such adjustments which are specifically enumerated in proviso (i), (ii) and (iii). The change of status from firm to AOP is not covered within the ambit of prima facie adjustments permissible under section 143(1)(a).

6.3 The learned counsel further contended that the CBDT vide Circular No. 549, dated 31-10-1989, has given an illustrative list of such permissible adjustments, which can be made while processing the return of income under section 143(1)(a). The change of status is not covered in the said circular issued by the Board. He further invited my attention towards Circular No. 669, dated 25-10-1993, in which it has been clarified that evidence for payment of tax or duty, etc., covered by section 43B, even though not enclosed with the return of income, can be submitted along with an application for rectification, which will justify deletion of addition made in respect of such amount under section 43B.

6.4 The learned counsel submitted that in any case, the issue relating to change of status from firm to AOP while processing the return under section 143(1)(a) is a highly debatable issue, which is clearly outside the scope of section 143(1)(a).

6.5 The learned counsel for the assessee also invited my attention towards the judgment of Hon'ble Rajasthan High Court in JK Employees Welfare Fund v. ITO (1993) 199 ITR 765 (Raj) which supports the assessee's contention that no such variation can be validly made in the status shown by the assessee in the return of income.

6.6 The learned counsel further contended that in the present case the assessing officer did not give any notice to the assessee before changing the status from the firm to AOP. The action of the assessing officer is, therefore, contrary to the principles of natural justice as also the specific provisions of section 139(9).

6.7 The learned counsel further submitted an alternative prayer stating that there is no basis for invoking section 167B(2) and applying maximum marginal rate of 40 per cent. He contended that provisions of section 167B are not at all applicable on the facts of the present case as the shares of the partners in the income of the firm is not indeterminate or unknown and also the total income of all the partners did not exceed the taxable limit. It is, therefore, a case where maximum marginal rate cannot be applied and the provisions of section 167B are not at all applicable.

6.8 The learned counsel also submitted that no appeal was filed by the assessee against the order of Deputy Commissioner (Appeals) relating to a separate order passed by the assessing officer under section 185 as the Deputy Commissioner (Appeals) has already granted the relief in the impugned order whereby he has specifically directed the assessing officer to take status of the assessee as firm.

6.9 The learned counsel thus strongly supported the order of the Deputy Commissioner (Appeals).

7. I have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities.

7.1 The relevant provisions are reproduced hereunder :

(a) Section 143(1)(a) :

"143(1)(a).Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142,

(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly; and

(ii) if any refund is due on the basis of such return, it shall be granted to the assessee:

Provided that in computing the tax or interest payable by, or refundable to, the assessee the following adjustments shall be made in the income or loss declared in the return, namely :

(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;

(ii) any loss carried forward, deduction, allowance or relief, which on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;

(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed:

Provided further that where adjustments are made under the first proviso, an intimation shall be sent to the assessee, notwithstanding that no tax or interest is found due from him after making the said adjustments."

(b) Section 184(1):

"184.(1).A firm shall be assessed as a firm for the purposes of this Act, if

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in the instrument.

"184(2).A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 into the assessment year commencing on or after the 1st day of April, 1993, in respect of which assessment as a firm is first sought.

Explanation.For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased."

"Section 185.Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an AOP, and all the provisions of this Act shall apply accordingly."

7.2 The provision of section 185 provides that where a firm does not comply with the provision of section 104 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an AOP. The provisions of section 184(1) and (2) provide that a firm shall be assessed as a firm if the partnership is evidenced by an instrument specifying the individual shares of the partners and a certified copy of the instrument of partnership accompany the return of income of the firm of relevant previous year. The provisions of section 139(1) requires assessee to voluntarily furnish the return of income before the due dates prescribed in sub-section (1). Sub-section (4) of section 139 provides that any person who has not furnished a return within the time allowed under sub-section (1) or within the time allowed under a notice issued under section 142(1) calling for the return, may furnish a return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. Section 139(5) also enables the assessee to file a revised return before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. It is, therefore, clear that the assessee could file a successive return under section 139(4) on or before 31-3-1995.

7.3 The provision of section 184(2) does not provide that the instrument of partnership should be furnished along with the return of income of the firm before the date specified in section 139(1) or along with the return of income under section 139(1). It does not place any restriction for submission of the certified copy of the instrument of partnership along with a return of income under section 139(4) or under section 139(5). The assessee could, therefore, validly file the certified copy of the instrument of partnership along with a return of income under section 139(4) on or before 31-3-1995. This, in fact, was furnished by the assessee on 24-3-1995. It cannot, therefore, be validly contended that the firm has not complied with the provisions of section 184 so as to attract the consequences for such failure contemplated in section 185 of the Act.

7.4 The learned Departmental Representative contended that the assessing officer has to look at only the return of income along with the Annexures furnished with such return while processing the same under section 143(1)(a). Therefore, he was justified in taking the status of as AOP while processing the return filed on 27-12-1993, as that return was not accompanied with the certified copy of the instrument of partnership. This return did not comply with the provisions of section 184 and hence, the assessing officer had to invoke section 185 and adopt the status of AOP as per that provision. According to him such a recourse was permissible in view of section 143(1)(a)(i). Such submissions made by the learned Departmental Representative cannot be accepted as the tax due on the basis of the return furnished by the firm on 27-12-1993, declaring a loss of Rs. 12,930 was nil. The assessing officer while processing the return under section 143(1)(a) can make variations or adjustments only in relation to income or loss declared in the return. This is clear from the proviso to section 143(1)(a). The right of the assessing officer to make such prima facie adjustments are confined only in relation to the items mentioned in clause (i), (ii) and (iii) of the said proviso. The change of status from firm to AOP is obviously not covered within the ambit of such permissible prima facie adjustments enumerated in three clauses of the proviso to section 143(1)(a).

7.5 It is well settled law that an intimation under section 143(1)(a) does not mean to an order of assessment. Such an intimation is deemed to be an order only for the limited purposes of sub-section 246 and 264 as per explanation inserted below section 143(5) of the Act. Section 185 provides that where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that year in the same manner as an AOP. Therefore, the assessing officer can validly invoke section 185 when he proceeds to make an assessment of the firm. The said provision could, therefore, be invoked only if the assessing officer chooses to assess the firm in accordance with the provisions of section 143(3) or 144, etc., after granting a specific opportunity to the assessee in this regard. It is an admitted fact that the assessing officer did not give any opportunity to the assessee in the present case before changing the status from firm to AOP. The grant of opportunity to the assessee before changing the status from firm to AOP is also necessary in view of the fact that before determining the tax payable by the assessee, the assessing officer will have to ascertain the basis facts as to whether the AOP in such a situation will be liable to tax at normal rates or it will be taxable at maximum marginal rates as contemplated in section 167B. The assessing officer will have to find out as to whether the individual shares of the members/partners are indeterminate or unknown. He will have to further ascertain whether the total income of any member/partner exceeds the maximum amount which is not chargeable to tax in the case of that member a per the Finance Act of the relevant year. Unless the assessing officer ascertains all these necessary and relevant facts, he cannot validly charge tax at maximum marginal rate by invoking section 167B. All these facts clearly indicate that the provisions of section 185 can be invoked only after providing an opportunity to the assessee and this can be done only where the assessing officer proceeds to make an assessment in the said case. This is clearly indicated by the use of words "the firm shall be assessed for that year in the same manner as an AOP used in section 185. The use of word "assessed" in section 185 clearly indicates that the status of the firm cannot be converted from firm to AOP while processing the return under section 143(1)(a), which does not constitute an assessment made under the Act.

7.6 In view of the aforesaid facts and discussion, I am of the considered opinion that the Deputy Commissioner (Appeals) has rightly directed the assessing officer to adopt the status of the assessee as "firm". I do not find any justification for interfering with the view taken by the Deputy Commissioner (Appeals). In may view, the revenue's appeal has no merit.

8. In the result, the appeal is dismissed.