Disallowance u/s 184(5) not have cause and effect relationship with assessment being framed under section 144 – ITAT upheld additions
ABCAUS Case Law Citation:
ABCAUS 2930 (2019) (05) ITAT
Important Case Laws Cited/relied upon by the parties
M/s. Jai Hanuman Enterprises vs ITO
The appellant assessee was a partnership firm. Initially, the assessment was framed u/s 144 of the Income Tax Act, 1961 (the Act). Later on, the Assessing Officer (AO) noticed that there was a difference in the amount of gross contract receipt as declared in the return of income and as appearing on 26AS Statement.
Therefore, the AO was of the view that income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Thereafter, he issued notice u/s.148 of the Act. No return of income was furnished in response to notice u/s.148 of the Act but the reopening was challenged by the assessee.
Subsequently, notices u/s 142(1) of the Act were issued on various dates. It is observed that in some dates there was partial compliance and in some cases, there was no compliance by the assessee. Therefore, the Assessing Officer passed order u/s 147 r.w.s 144 of the Act by making disallowance towards interest on partner’s capital & remuneration paid to partners u/s 184(5).
Before the CIT(A), it was the contention of the assessee that the AO should have allowed salary and interest paid to partners for determining the income of the assessee. However the CIT(A) was of the view that inder the provisions of section 184(5) of the Act, if the assessment order is passed as a result of failure of the assessee as mentioned in section 144 of the Act, the assessee was not entitled for deduction by way of any payment of interest, salary, bonus, commission or remuneration by whatever name called made by the firm to the partner, Hence, he confirmed the action of the Assessing Officer.
The Tribunal observed that there was no dispute that the assessment was done under section 144 i.e. best judgment assessment as the assessee had not complied to the hearing notices served upon the assessee. Later on the Assessing Officer had reason to believe that income had escaped assessment. Therefore, he issued notice u/s 148 of the Act and also issued notices u/s 142(1). There were some partial compliances and in some cases, no compliance was made. Hence, the AO framed assessment u/s 147/144 of the Act.
The Tribunal further observed that a plain reading of the provisions shows that the disallowance under section 184(5) comes into play not as a result of the assessment under section 144 but as a result of the lapses as mentioned in section 144. In other words, the disallowance under section 184(5) does not have a cause and effect relationship with assessment being framed under section 144.
The Tribunal noted that Section 184(5) categorically states that when “there is, on the part of a firm, any such failure as is mentioned in section 144, 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”. This provision comes into play only when the assessment is framed under section 144 only as a result of the assessee’s committing any such failure as is contemplated under section 144.
The Tribunal clarified that in a situation in which the assessment is completed in the manner as prescribed in section 144 but such a course of action has been adopted because of “the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee”, referred to in section 145(3), clearly the disabling provisions of Section 184(5) do not come into play.
The Tribunal noted that the assessee had only partly complied with the notices. In fact the AO had categorically noted that after several notices u/s.142(1) of the Act a show cause notice alongwith another notice u/s 142(1) of the Act was intimated/served on the assessee informing that failure to produce audit report and books of account, the case shall be disposed of by invoking the provisions of section 145(3) of the Act. The assessee eben failed to comply with it.
In view of above, the Tribunal held that in the instant case, there was a part non-compliance regarding a notice and complete non-compliance regarding another notice. Therefore, the Assessing Officer was right in framing assessment order u/s 144 of the Act and in denying allowance of interest and salary paid to the partners by taking support of provisions of section 184(5) of the Act.