Madras High Court
M/S.Deloitte Haskins & Sells vs The Assistant Commissioner Of Income ... on 10 June, 2025
TCA Nos.750 and 987 of 2013
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 10.06.2025
CORAM :
THE HON'BLE MR.K.R.SHRIRAM, CHIEF JUSTICE
AND
THE HON'BLE MR.JUSTICE SUNDER MOHAN
TCA Nos.750 and 987 of 2013
and M.P.No.1 of 2013
TCA No.750 of 2013:
M/s.Deloitte Haskins & Sells,
ASVN Ramana Towers, 7 th Floor,
No.52, Venkanarayana Road,
T. Nagar, Chennai-600 017. .. Appellant
Vs.
The Assistant Commissioner of Income tax,
Cirvle-XV,
Chennai-600 034. .. Respondent
TCA No.987 of 2013:
Commissioner of Income Tax,
Chennai. .. Appellant
Vs.
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M/s.Deloitte Haskins & Sells,
ASVN Ramana Towers,
7 th Floor, N.52, Venkatanarayana Road,
T.Nagar, Chennai-600 017. .. Respondent
Prayer: Appeals filed under Section 260A of the Income Tax Act, 1961
against the order of Income Tax Appellate Tribunal, “D” Bench, Chennai,
dated 04.07.2023 passed in I.T.A No.1164/MDS/2012.
For Appellant Mr.J.D.Mistri
in TCA Senior Counsel
No.750/2013 and assisted by
Respondent in Mr.Niraj Sheth
TCA No.987/2013: Mr.R.Venkatanarayanan
and Mr.S.P.Chidambaram
for M/s.Subbaraya Aiyar
For Respondent Mr.T.Ravikumar
in TCA Sr. Standing Counsel
No.750/2013 and
Appellant in
TCA No.987/2013
COMMON JUDGMENT
(Delivered by the Hon'ble Chief Justice)
The appeals, one by department and the other by assesee, impugn
the order dated 04.07.2013 passed by the Income Tax Appellate Tribunal
(ITAT) “D”Bench, Chennai.
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2. Appeals were admitted on 13.12.2024 on the following substantial
questions of law:
T.C.A.No.987 of 2013:
“Whether on the facts and in the circumstances of the case, 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
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TCA Nos.750 and 987 of 2013
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 facts and circumstances of the case, the
Tribunal ought to have appreciated that when neither the firm
of Deloitte Mumbai nor its partners were partner in the
Appellant firm as per the decisions of the Supreme Court and
when the partners who were chargeable to tax at the maximum
marginal rate had been assessed on the remuneration received
by them from the Appellant firm, the order passed by the
Assessing Officer cannot be considered as prejudicial to the
interest of the revenue?
4. Whether on the facts and circumstances of the case, the
Tribunal was right in law in observing that the effort of the
Appellant was to indirectly bring in Deloitte Mumbai as a
Partner, which in effect concludes the issue against the
Appellant and will effectively bind the hands of the Assessing
Officer while doing the assessment afresh?”
3. Assessee is a firm of Chartered Accountants in Chennai formed
under the partnership deed dated 22.02.1998. The firm was reconstituted
vide a partnership deed dated 01.04.2007 with a total number of 20
partners. So far as it is relevant for the present purpose, one Mr.Mukund
Dharmadhikari, a partner, was entitled to a share of 20.0530% of the
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profits of the firm. The reconstituted firm continued to carry on the
business, inter alia, of Accountants, Auditors, Tax Practitioners, etc.
4. Assessee as well as one M/s.Deloittee Haskins and Sells at Mumbai
(Deloitte Mumbai) are participating firms of the network of Deloitte
Haskins and Sells which is referred to as the National firm. All policy
decisions affecting the participating firms needed the approval of the
partners of the National firm. This was only to ensure consistency and
uniformity of operations of all the participating firms. It did not alter the
status or the number of partners or their inter-se agreement under the
partnership deed of the individual participating firms.
5. Assessee filed its return of income for assessment year 2008-2009
on 30.09.2008 declaring a total income of Rs.17,70,69,972/- after
deducting payment of salary to some of the partners totalling to
Rs.3,23,50,000/-. While computing its total income, assessee claimed
deduction of a sum of Rs.3,23,50,000/-, being salary paid to its partners,
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under Section 40(b) of the Income Tax Act, 1961 (the Act).
Correspondingly, the partners, who received salary from assessee, had
offered the same to tax in their individual 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
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TCA Nos.750 and 987 of 2013
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), the number of
partners was beyond the prescribed limit of 20 partners and, therefore, the
status of appellant had changed from a partnership firm to an Association
of Persons (AOP). Therefore, salary paid to the partners amounting to
Rs.3,23,50,000/- was not allowable as a deduction under Section 40(b) of
the Act. Thereafter, the CIT, after considering the detailed submissions
dated 19.03.2012 filed by assessee, passed an order dated 26.03.2012, in
which, the CIT held that in view of the amendment of the partnership deed
on 01.05.2007, Deloittee Mumbai has become a partner in the assessee firm
through its representative Mr.Mukund Dharmadhikari; sharing of profits to
the extent of Rs.267 lakhs with Deloitte Mumbai meant that the
membership of assessee firm exceeded 20, which is the maximum limit
under the settled law. He, therefore, directed the Assessing Officer to
assess appellant in the status of AOP and disallow the salary paid to the
partners of Rs.3,23,50,000/- as the same cannot be allowed as deduction
under Section 40(b) of the Act.
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8. Assessee carried this order in appeal before the ITAT. The ITAT,
vide its order dated 04.07.2013 which is impugned in these appeals, made
various observations and remanded the matter to the Assessing Officer to
pass fresh assessment order.
9. Various submissions were made by learned Senior Counsel Shri
Mistri and Shri Ravikumar on the stand taken by the CIT as well as the
ITAT. In our view, we need not deal with all those submissions in detail
because the whole case hinges on whether notice issued under Section 263
of the Act by the CIT was a valid notice. The point that requires to be
considered is whether the CIT could have exercised its jurisdiction under
Section 263 of the Act. That is the fulcrum. If our answer is that he could
not have, we do not need to look into the subsequent developments and the
orders, and even for that matter deal with the substantial questions of law
which were framed by this court on 13.12.2024.
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10. Section 263 of the Act reads as under:
“263. (1) The Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner may call for and examine
the record of any proceeding under this Act, and if he considers that
any order passed therein by the Assessing Officer or the Transfer
Pricing Officer, as the case may be, 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 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
Assessing Officer or the Transfer Pricing Officer, as the case
may be, conferred on, or assigned to, him under the orders
or directions issued by the Board or by the Principal Chief
Commissioner or Chief Commissioner or Principal Director
General or Director General or Principal Commissioner or
Commissioner authorised by the Board in this behalf under
section 120;
(iii) an order under section 92CA by the Transfer Pricing
Officer;
(b) "record" shall include and shall be deemed always to have
included all records relating to any proceeding under this
Act available at the time of examination by the Principal
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Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed
by the Assessing Officer or the Transfer Pricing Officer, as
the case may be, had been the subject matter of any appeal
filed on or before or after the 1st day of June, 1988, the
powers of the Principal Commissioner or Commissioner
under this sub-section shall extend and shall be deemed
always to have extended to such matters as had not been
considered and decided in such appeal.
Explanation 2.— For the purposes of this section, it is hereby declared
that an order passed by the Assessing Officer or the Transfer Pricing
Officer, as the case may be, shall be deemed to be erroneous in so far
as it is prejudicial to the interests of the revenue, if, in the opinion of
the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner,—
(a) the order is passed without making inquiries or verification
which should have been made;
(b) the order is passed allowing any relief without inquiring
into the claim;
(c) the order has not been made in accordance with any order,
direction or instruction issued by the Board under section
119 ; or
(d) the order has not been passed in accordance with any
decision which is prejudicial to the assessee, rendered by
the jurisdictional High Court or Supreme Court in the case
of the assessee or any other person.
Explanation 3.—For the purposes of this section, "Transfer Pricing
Officer" shall have the same meaning as assigned to it in the
Explanation to section 92CA.
(2) No order shall be made under sub-section (1) after the expiry of
two years from the end of the financial year 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
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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, after giving 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 an order
enhancing or modifying the assessment or cancelling the assessment and
directing a fresh assessment. The Commissioner, in the present case, has
purported to act in exercise of this power on the ground that the order of
the Assessing Officer was in his view erroneous and prejudicial to the
interests of the revenue.
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12. Paragraph 5 of the notice dated 29.02.2012 issued under Section
263 of the Act reads as under:
“5. Since the scrutiny assessment order dated 31/12/2010 has been
passed without treating you as the AOP and consequently disallowing
the salary paid to partners of Rs.3,23,50,000/-, I am of the prima
facie view that the said assessment is erroneous and prejudicial to the
interest of revenue. .....”
13. We agree with Shri Mistri that in the notice there is no
explanation as to why the order of the Assessing Officer was prejudicial to
the interests of the revenue. It does not suggest in what way there is any
prejudice to the interests of the Revenue. Even if prejudice to the Revenue
is to be reckoned in terms of the actual loss to the exchequer, no figures
have been given. This is an indication that, as on that date, the CIT had no
clear idea as to what the difference in tax effect would have been if instead
of taxing the assessee as partnership firm, the assessee was taxed as AOP.
14. As held by a Co-ordinate Bench of this Court in Venkata Krishna
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Rice Company v. Commissioner of Income-tax1 , Section 263 is a special
power which has no parallel in any other statute or legal system. It is an
extraordinary revisional power. It is also sui generis in its nature and in the
occasion for its exercise, it is to be employed not as a jurisdictional
corrective or as a review of a subordinate's order in exercise of supervisory
power. It is, on the contrary, to be invoked and employed only for the
purpose of setting right distortions and prejudices to the revenue, which is
a unique conception which has got to be understood in the context of and
in the interests of the revenue administration. The power is intended to
maintain the tone of the revenue administration and the morale of the
officers manning it. 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
1 [1987] 30 Taxman 528 (Madras)
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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
Commissioner of Income-tax that the order passed by the Income-tax
Officer was erroneous and prejudicial to the interests of the Revenue,
was endorsed by the Tribunal in their order. The question is whether
the view expressed by the Commissioner of Income-tax and the
Tribunal are based on a correct understanding of the enabling
provisions of section 263 of the Income-tax Act and of the nature of
the order of assessment passed by the Income-tax Officer.
12. Section 263 of the Income-tax Act is a provision in sub-chapter E
of Chapter XX of the Income-tax Act. This Chapter deals with appeals
and revision. Section 246 provides a right of appeal to an assessee,
against orders passed by the Income-tax Officer, to the Appellate
Assistant Commissioner. Section 252 provides a further appeal to the
Tribunal against the orders passed by the Appellate Assistant
Commissioner in appeal. In the sub-chapter of Chapter XX relating to
revision by the Commissioner apart from section 263, there is yet
another provision under section 264 which confers revisional power
on the Commissioner of Income-tax. This latter revisional power
under section 264 enables the Commissioner, either suo motu or on
application by assessee, to interfere in revision with the orders passed
by the authorities subordinate to him. The expression “authorities
subordinate to him” would include not only the Income-tax Officer,
but also the Appellate Assistant Commissioner and the Inspecting
Assistant Commissioner. It is, however, specifically stated in section
264 that this power of revision under section 264 is available only
against an order other than an order which is subject to revision
under section 263.
13. In the context of the above provisions, the power of the
Commissioner of Income-tax under section 263 has to be judged on
the words employed therein. The language used by the Legislature in
section 263 is to the effect that the Commissioner may interfere in
revision if he considers that the order passed by the Income-tax
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Officer is erroneous in so far as it is prejudicial to the interests of the
Revenue. It is quite clear from the above phrasing that two things
must co-exist in order to give jurisdiction to the Commissioner, to
interfere in revision. The order of the Income-tax Officer in question
must not only be erroneous but also the error in the Income-tax
Officer'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. 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 the order of the Commissioner
of Income-tax to suggest in what way there is any prejudice to the
interests of the Revenue. Even if prejudice to the Revenue is to be
reckoned in terms of the actual loss to the exchequer, no figures have
been given in the order of the Commissioner of Income-tax to suggest
that the average rate of income-tax on the total income of the
association of persons would be far higher than the average rate of
income-tax applied to the share income from the joint venture in this
assessment year in so far as the present assessee is concerned and in
so far as the other members of the association are concerned. Indeed,
in one portion of the order, the Commissioner had dealt with the
argument advanced on behalf of the assessee to the effect that even if
the joint venture is to be assessed as such, the tax effect may not
necessarily be more, While noticing this contention of the assessee,
the Commissioner had observed that this question as to whether the
tax effect would be more or less may be raised when the assessment
of the association of persons is taken up. This is an indication that the
Commissioner had not, as on that date, any clear idea as to what the
difference in tax effect would have been if, instead of taxing the share
income of all the members in their respective hands, the Department
had first made an assessment on the total income of the association,
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as such, in respect of the joint venture business. We cannot, therefore,
readily accept the thesis that the Income-tax Officer's order has been
shown to be prejudicial to the interests of the Revenue, by reference
to any acceptable materials.
15. Even otherwise, the argument of the Department's learned
counsel is unsound as a matter of construction of section 263. As we
earlier observed, it is essential for the Commissioner to find not only
that the order of the Income-tax Officer in question proposed to be
revised is prejudicial to the interests of the Revenue but also that it is
erroneous, and, therefore, prejudicial in that sense. We have earlier
pointed out how the Commissioner himself had clearly conceded the
position that the order of assessment made by the Income-tax Officer
is in accordance with the law. We fail to understand how an
assessment, which is in accordance with the law, can at all be
regarded as erroneous, let alone prejudicial to the interests 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
kind of abstraction or symbol in the same sense in which the
expression “crown” is used to distinguish it from any person
enthroned. The interests of the Revenue is not to be equated to
rupees and paise, merely. There is a biblical saying that we do not live
by bread alone. Varying this saying, it may be said that the Revenue
does not live by tax alone. In this sense, therefore, the interests of the
Revenue are not tied up merely with realising as much Revenue as
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possible, willy nilly, merely looking to the productivity aspect of
taxation. The jurisdiction of the Commissioner under section 263 is
undoubtedly a supervisory jurisdiction. It is intended for interference
in special cases to counteract orders which are erroneous as well as
prejudicial to the interests of the Revenue. In this context, therefore,
the expression “prejudicial to the interests of the Revenue” must be
regarded as involving a conception of acts or orders which are
subversive of the administration of revenue. There must be some
grievous error in the order passed by the Income-tax Officer, which
might set a bad trend or pattern for similar assessments, which on a
broad reckoning, the Commissioner might think to be prejudicial to
the interests of Revenue administration. There might be cases where
the Commissioner might wish to interfere with an order of the
Income-tax Officer in order to safeguard the fair name and reputation
of the Income-tax Department without any thought of going into the
particular aspects of the assessment Assessments which are mala fide,
politically and communally motivated may be, however, set aside as
being prejudicial to the interests of the Revenue. It is unnecessary, for
us to illustrate the point any further. All that we wish to observe is
that the scope of the interference under this section is not to set aside
merely unfavourable orders and bring to tax some more money to the
treasury. Nor is the section meant to get at sheer escapement of
revenue which, as is well known, is taken care of by provisions
elsewhere, in the Act such, for instance, as section 147 of the Act. The
prejudice must be prejudice to the revenue administration.
17. The mainspring of action for the Commissioner of Income-tax in
the present case would seem to be really to circumvent the position of
law which has become well-settled in the matter of assessment of an
association and/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.
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........
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-tax Officer in the matter of
assessment of the members of an association in preference to an
assessment to be made on the association itself. In the first place, the
basis of the Supreme Court's ruling was that an appeal was but a
rehearing and the powers of the appellate authority are so equal with
those of the assessing authority, in the first instance. In coming to this
conclusion, the Supreme Court were only adopting the general law
relating to the powers of the appellate authorities under the Civil
Procedure Code, and other enactments dealing with the powers of
appellate courts. The Commissioner of Income-tax acting under
section 263 is not, however, an appellate authority, by any means. As
we had earlier observed, the power conferred on him by this section
is in the nature of a supervisory power. We have referred to another
revisional power under section 264 which might be regarded as a
regular revision. Section 263, however, is a special power, which, so
far as we know, has no parallel in any other statute or legal system. It
is an extraordinary revisional power. It is also sui generis, in its
nature, and in the occasion for its exercise, it is to be employed not as
a jurisdictional corrective or as a review of a subordinate's order in
exercise of supervisory power. It is, on the contrary, to be invoked
and employed only for the purpose of setting right distortions and
prejudices to the Revenue, which, as we have endeavoured to point
out earlier, is a unique conception which has got to be understood in
the context of and in the interests of revenue administration. The
power, as we conceive it, is intended to maintain the tone of the
revenue administration and the morale of the Officers manning it.
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.
21. For all the above reasons, we hold that the Commissioner of
Income-tax, in this case, was not justified in interfering with the order
of the Income-tax Officer, under section 263 of the Act. The Tribunal's
order, confirming the Commissioner's decision, was based on a
misconception of the provisions of section 263 and the nature and
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TCA Nos.750 and 987 of 2013
finality of the order passed by the Income-tax Officer. On this basis,
our answer to the question 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.
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TCA Nos.750 and 987 of 2013
18. Two statements tendered by Shri Mistri, learned Senior Counsel
appearing for assessee, which were not contradicted by Revenue, are
reproduced below:
“If the Revenue's stand of disallowing remuneration paid by
M/s.Deloitte Haskins & Sells, Chennai (Appellant) to its partners is
upheld:
1. Tax payable by the Appellant if remuneration paid by it to its
partners is disallowed:
Particulars Amount (in Amount (in Rs.)
Rs.)
Income as assessed for tax 17,70,69,972
purposes
Add: Disallowance of 3,23,50,000
remuneration to partners
u/s.40(b)
Total income 20,94,19,972
Tax on Rs.20,94,19,972 at 7,11,81,848
33.99% [A]
2.Tax on individual partners on the remuneration disallowed in
computing the income of the Appellant:
Partner Remuneration (in Rs.)
A.C. Gupta 29,99,000
B. Mala 19,86,000
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Partner Remuneration (in Rs.)
Ramaratnam 9,50,000
Bhavani Balasubramanian 14,38,000
C.R.Rajagopal 9,93,000
Ganesh Swaminathan 8,90,000
Geetha 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
No tax is payable by the partners on the Nil
remuneration disallowed in computing the income
of the Appellant [B]
3. Total tax paid by the Appellant and the partners [A+B] =
Rs.7,11,81,848/-.”
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TCA Nos.750 and 987 of 2013
“I. Stand as per M/s.Deloitte Haskins & Sells, Chennai
1. Income offered to tax, rate of tax and total tax paid by the
Appellant.
Particulars Amount (in Rs.)
Income assessed for tax purposes 17,70,69,972
(after being allowed deduction of
remuneration to partners
u/s.40(b) of Rs.3,23,50,000/-
Rate of tax 33.99%
Total tax paid by the Firm [A] 6,01,86,083
2. Consequential tax paid by individual partners of the Appellant on
remuneration paid to the partners.
Partner Remuneration (in Rs.)
A.C. Gupta 29,99,000
B. Mala 19,86,000
Ramaratnam 9,50,000
Bhavani Balasubramanian 14,38,000
C.R.Rajagopal 9,93,000
Ganesh Swaminathan 8,90,000
Geetha 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
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TCA Nos.750 and 987 of 2013
Partner Remuneration (in Rs.)
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. Rs.1,09,95,765
[3,23,50,000 * 33.99%] [B]
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 in the notice issued under Section
263 of the Act would have articulated the figures.
19. The CIT stated that by amending the partnership deed to include
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TCA Nos.750 and 987 of 2013
one more partner (Mr.Mukund Dharmadhikari) would take the number of
partners beyond 20 partners and the status of appellant would change from
a partnership firm to an AOP. According to CIT, Mr.Mukund
Dharmadhikari was acting in two capacities, i.e., on his own behalf and as a
partner in a representative capacity of Deloitte Mumbai and, therefore,
should be counted as two in numbers thereby adding one more partner to
the existing strength of 20 partners. The said stand taken by the CIT is
erroneous.
20. As held by the Apex Court in Rashik Lal and Company v.
Commissioner of Income-tax2, a firm is a compendious way of describing
the individuals constituting the firm. The Court held that Section 4 of the
Indian Partnership Act spoke of persons who had entered into partnership
with one another and it could only be individuals and not a body of persons
and a body of persons like a firm could not enter into partnership with
other individuals.
21. In Rashik Lal and Company (supra), assessee was a partnership
2 [1998] 96 Taxman 16 (SC)
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firm carrying on a number of businesses, including sale and purchase of
various commodities as well as mining. The partners of the firm were (1)
Popatlal Devram; (2) Jayantilal Jagmal; (3) Pragji Devram; (4) Ratilal
Odhavji; (5) Rashiklal P. Rahor. Popatlal is Rashiklal's father. On
01.04.1967, there was an oral partition of the share of Popatlal in the firm
amongst Popatlal, his wife and his two sons, including Rashiklal. The
assets of Rashiklal continued to be invested in the partnership firm.
Rashiklal was karta of a small Hindu Undivided Family (HUF). On
17.10.1978, there was an agreement between Rashiklal and the firm Rashik
Lal and Company that Rashiklal will receive 37 paise per tonne of mineral
sold by the firm. In the assessment year 1980-81 Rashiklal received a sum
of Rs.28,579/- as commission. The firm claimed deduction of this amount
from its income. The claim was negatived by the ITO. The AAC allowed
the appeal holding that commission was paid to Rashiklal in his individual
capacity and not as karta of the smaller HUF, which is the partner of the
firm. Since payment was not made to the partner, Section 40(b) of the Act
was not attracted. The amount of commission 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
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TCA Nos.750 and 987 of 2013
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 payment of interest, salary,
bonus, commission or remuneration made by the firm to any partner of the
firm shall not be deducted in computing the income chargeable under the
profits and gains of business or profession. The Apex Court dismissed the
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TCA Nos.750 and 987 of 2013
stand of assessee and held that the firm is a compendious way of
describing the individuals constituting the firm and an HUF directly or
indirectly cannot become a partner of a firm, because the firm is an
association of individuals.
22. Paragraphs 2 to 6 of Rashik Lal and Company (supra) read as
under:
“2. The assessee is a partnership firm carrying on a number of
businesses including sale and purchase of various commodities as
well as mining. The partners of the firm were:
(1) Popatlal Devram
(2) Jayantilal Jagmal
(3) Pragji Devram
(4) Ratilal Odhavji
(5) Rashiklal P. Rathor
Popatlal is Rashiklal's father. On 1-4-1967, there was an oral partition
of the share of Popatlal in the firm amongst Popatlal, his wife and his
two sons including Rashiklal. The assets of Rashiklal continued to be
invested in the partnership firm. Rashiklal was the Karta of a smaller
HUF. On 17-10-1978, there was an agreement between Rashiklal and
the firm Rashiklal and Company that Rashiklal will receive 37 paise
per tonne of mineral sold by the firm. In the Assessment Year 1980-81
Rashiklal received a sum of Rs 28,579 as commission. The firm
claimed deduction of this amount from its income. The claim was
negatived by the Income Tax Officer. The Appellate Assistant
Commissioner allowed the appeal holding that the commission was
paid to Rashiklal in his individual capacity and not as Karta of the
smaller HUF which is the partner of the firm. Since the payment was
not made to the partner, Section 40(b) of the Income Tax Act was not
attracted. The amount of commission 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) of the Income Tax Act clearly
applied in this case. Payment to Rashiklal will be payment to a
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TCA Nos.750 and 987 of 2013
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.
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 claimed
that amount as deduction. Such deduction is not permissible in clear
terms of Section 40(b).
The language of the section is simple and clear. But to complicate the
matter an argument was sought to be made that Rashiklal had not
joined the firm as an individual but was really representing an HUF.
The real partner of the firm was the HUF. The payment of Rashiklal
did not amount to payment of commission to the HUF which was the
real partner. Therefore, the amount of commission paid by the firm to
a non-partner or a partner who had joined the firm in a
representative capacity, will not fall within the mischief of Section
40(b).
4. We are unable to uphold this contention for a number of reasons. A
firm is a compendious way of describing the individuals constituting
the firm. An HUF directly or indirectly cannot become a partner of a
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TCA Nos.750 and 987 of 2013
firm because the firm is an association of individuals.
5. In the case of Dulichand Laxminarayan v. CIT [(1956) 29 ITR 535 :
AIR 1956 SC 354] it was held by a Bench of three Judges of this
Court that a firm is not a “person” and as such was not entitled to
enter into a partnership with another firm or an HUF or an individual.
In that case, an individual, a joint family and three firms purported to
enter into a partnership. The agreement of partnership was signed by
the individual partner, the Karta of the joint family and one partner
each of the three firms. The firm applied for registration under
Section 26-A of the Income Tax Act. The application was signed by
the aforesaid five individuals. This Court held that there could be no
question of granting registration to a partnership purporting to be one
between three firms, an HUF and an individual. In coming to this
conclusion, this Court relied on the provisions of the Indian
Partnership Act wherein, “partnership”, “partner”, “firm” and “firm
name” were defined in the following manner:
“4. Definition of ‘partnership’, ‘partner’, ‘firm’ and ‘firm name’.—
‘Partnership’ is the relation between persons who have agreed
to share the profits of a business carried on by all or any of
them acting for all.
Persons who have entered into partnership with one another are
called individually ‘partners’ and collectively ‘a firm’, and the name
under which their business is carried on is called the ‘firm name’.”
S.R. Das, C.J. speaking for the Court observed:
“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’.”
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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,
Das, C.J. observed that the firm was not a company but was certainly
an association or body of individuals.
6. The Court, however, after examining the scheme of the Partnership
Act and the corresponding provisions of the English law on the
subject, held that the definition given to “person” by the General
Clauses Act could not be extended to the Partnership Act having
regard to the various provisions of that Act. The Court concluded:
“It is clear from the foregoing discussion that the law, English
as well as Indian, has, for some specific purposes, some of
which are referred to above, relaxed its rigid notions and
extended a limited personality to a firm. Nevertheless, the
general concept of partnership, firmly established in both
systems of law, still is that a firm is not an entity or ‘person’ in
law but is merely an association of individuals and a firm name
is only a collective name of those individuals who constitute the
firm.”
(emphasis supplied)
The view of this Court was that when Section 4 of the Partnership Act
spoke of “persons” who had entered into partnership with one
another it could only be individuals and not a body of persons. A
body of persons like a firm could not enter into partnership with other
individuals.”
23. In the circumstances, by no stretch of imagination can Deloitte
Mumbai be added as a partner of assessee firm.
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TCA Nos.750 and 987 of 2013
24. In such view of the matter, the questions of law, as framed in
both the appeals, are answered accordingly.
Appeal of revenue (TCA No.987 of 2013) is dismissed and the appeal
of assessee (TCA No.750 of 2013) is allowed. There shall be no order as to
costs. Consequently, interim application stands closed.
(K.R.SHRIRAM, CJ.) (SUNDER MOHAN, J.)
10.06.2025
Index : Yes
Neutral Citation : Yes
bbr
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TCA Nos.750 and 987 of 2013
To:
1. The Assistant Registrar
Income Tax Appellate Tribunal
“D” Bench, Chennai.
2. The Commissioner of Income Tax-IV,
Chennai.
3. The Deputy Commissioner of Income Tax,
Circle-I, Chennai-600 034.
4. The Assistant Commissioner of Income Tax,
Circle-XV,
Chennai-600 034.
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TCA Nos.750 and 987 of 2013
THE HON'BLE CHIEF JUSTICE
AND
SUNDER MOHAN,J.
bbr
TCA Nos.750 and 987 of 2013
10.06.2025
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