Failure of AO to apply/examine applicability of section 184(5) makes the assessment order erroneous and prejudicial to the interests of Revenue
ABCAUS Case Law Citation:
ABCAUS 3198 (2019) (12) ITAT
Important case law relied upon by the parties:
Mubarak Trading Co. v/s CIT, [2008] 174 Taxman 339
Mas Properties & Developers v/s ITO, [2014] 52 taxmann.com 22
Vijay Vir Singh v/s ITO, [2014] 52 taxmann.com 462
Bhagwat Prasad Sharma v/s JCIT, [2013] 38 taxmann.com 102
Malabar Industrial Co. Ltd. V/s CIT [2000] 243 ITR 83(SC)
In the instant case, the appeal had been filed by the assessee assailing the order passed u/s 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT).
The assessee was a partnership firm. On the basis of information received from the DGIT (Inv.), and the State Sales Tax Department that the assessee was a beneficiary of accommodation entries provided by some entities identified as hawala operators by the Sales Tax Department, the Assessing Officer re–opened the assessment under section 147 of the Act.
In the course of assessment proceedings, the Assessing Officer called upon the assessee to prove the genuineness of purchases. In spite of the statutory notice issued under section 143(2) of the Act, the assessee neither appeared nor made any compliance. In view of non–compliance by the assessee, the Assessing Officer issued a notice under section 142(1) r/w section 144 of the Act. However, due to failure on the part of the assessee in furnishing all the required details, the Assessing Officer completed the assessment under section 144 r/w section 147 of the Act, to the best of his judgment.
Subsequently, the Principal Commission, in exercise of power conferred under section 263 of the Act, called for the assessment records for examination. After examining the assessment records, he found that, though, the Assessing Officer completed the assessment under section 144 of the Act to the best of his judgment, however, he has wrongly allowed deduction towards interest and remuneration paid to partners completely overlooking the provisions of section 184(5) of the Act.
Therefore, he issued a show cause notice to the assessee requiring it to explain as to why the assessment should not be revised under section 263 of the Act. After considering the submissions of the assessee in the context of facts and material on record, Principal Commission observed that when the Assessing Officer had completed the assessment under section 144 of the Act, he was required to disallow the interest and remuneration paid to partners as per section 184(5) of the Act.
The Assessing Officer having failed to do so, the Principal Commission held the assessment order to be erroneous in as much as prejudicial to the interests of Revenue. Accordingly, he set aside the assessment order with a direction to the Assessing Officer to assessee the income of the assessee afresh after following due procedure and affording reasonable opportunity of being heard to the assessee.
Before the Tribunal, the assessee contended that as per section 144(1) of the Act, there should be complete failure on the part of the assessee in complying to the notices issued under section 142(1) and 143(2) of the Act.
The assessee submitted that he had furnished certain details. Therefore, it was not a case of complete non–compliance to the statutory notices issued by the Assessing Officer. He submitted, the provision of section 184(5) of the Act can be brought into play only if there is complete non–compliance by the assessee in terms of section 144(1) of the Act. He submitted, since the assessee had complied to the statutory notices issued by the Assessing Officer, though, it may not be to the satisfaction of the Assessing Officer, however, the assessee’s case did not come within the purview of section 184(5) of the Act.
Further, he submitted, the Assessing Officer had completed the assessment erroneously under section 144 r/w section 147 of the Act against which the assessee had preferred appeal before the first appellate authority. Thus, he submitted, exercise of power under section 263 of the Act for applying the provision of section 184(5) of the Act was invalid.
The Tribunal clarified that it was not concerned with the validity of the assessment order passed under section 144 of the Act but concerned with the validity of exercise of power under section 263 of the Act to make good the error and prejudice caused to the Revenue by virtue of the assessment order passed under section 144 of the Act.
The Tribunal observed that the Assessing Officer had completed the assessment under section 144 of the Act to the best of his judgment alleging non–compliance to the statutory notices issued under section 142(1) and 143(2) of the Act. Provisions of section 184 of the Act lay down the procedure for the assessment in case of a partnership firm. Sub–section (5) of section 184 of the Act, which begins with a non–obstante clause, makes it clear that in a case where the assessment is completed under section 144 of the Act for any such failure on the part of the firm as mentioned in the said provision, assessment has to be made without allowing any deduction by way of payment of interest, salary, bonus, commission or remuneration, etc., to any partner.
The Tribunal opined that once the assessment is completed under section 144 of the Act, the provision of section 184(5) of the Act gets triggered automatically and it will override all other provisions of the Act.
Failure to apply section 184(5) makes assessment order erroneous & prejudicial
The Tribunal noted that in the instant case, the Assessing Officer had completed the assessment under section 144 of the Act, the provision of section 184(5) would automatically come into play. However, while completing the assessment, the Assessing Officer completely overlooking the provisions of section 184(5) of the Act had allowed deduction on account of interest / remuneration paid to partners. In fact, the Assessing Officer had never examined the aspect of applicability of section 184(5) of the Act.
Thus, according to the Tribunal there was a complete failure on the part of the Assessing Officer in making necessary enquiry with regard to the deduction claimed by the assessee qua the statutory provisions.
The Tribunal stated that the Hon’ble Supreme Court had held that an order can be erroneous due to incorrect assumption of fact or incorrect application of law. Therefore, the failure on the part of the Assessing Officer to apply or at least even examine the applicability of section 184(5) of the Act, certainly makes the assessment order erroneous and prejudicial to the interests of Revenue.
The Tribunal held that the exercise of power under section 263 of the Act to revise the assessment order was valid. Accordingly, it upheld that the impugned order of Principal Commission and dismissed the appeal.
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