Partners Salary and interest not disallowable when assessment u/s 143 is made in the manner laid down u/s 144 by rejecting books of account by invoking the provisions of section 145(3) of the Income Tax Act, 1961
ABCAUS Case Law Citation
ABCAUS 2371 (2018) 06 ITAT
The assessee has filed this appeal against the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) disallowing salary and interest paid to the partners.
During the course of the assessment proceedings, the assessee was asked to furnish purchase and sales bills , he was also asked to submit the purchase and sales registers. The assessee submitted that the purchase and sales bills were not traceable and as such he produced stock register to justify the closing stock.
The AO observed that as per Form No. 3CD of the audit report, the assessee maintained Ledger, Purchase Register, Sales Register, Cash Book through computerized system which were audited. The AO observed that no where it was mentioned that the stocks register was maintained either manually or through computerized system. Therefore, he held that in absence of Purchase invoices and sales memos, the figures mentioned in the alleged stock register produced was not believable. According to the AO, the quantitative information given in Form No. 3CD could not be verified due to non-production of bills and vouchers. He observed that in view of non-production of required details and purchase invoices and sales memos, the correctness and completeness of those books of account basing on which the accounts were prepared are not satisfactory.
Hence, the book result were rejected and assessment was made by invoking the provisions of section 145(3) r.w.s 144 of the Act. Hence, he estimated the income of the assessee by applying rate of 4% of the turnover. The AO thereafter observed that since assessment was made u/s 144, no salary and interest was allowable to the partners from the net profit from business as per provisions of section 184(5) of the Act.
On appeal, the CIT(A) held that as per provisions of section 184(5) of the Act, when the assessment is completed u/s 144 of the Act, salary and interest paid to the partners is not allowed as expenditure. He, therefore, confirmed the action of the Assessing Officer.
Before the Tribunal, the assessee contended that the Coordinate Bench of the Tribunal had allowed deduction for salary and interest paid to partners from the income estimated after rejecting the book results of the assessee and, therefore, following the same, salary and interest paid to the partners should be allowed as deduction to the assessee.
The Tribunal observed that Section 184(5) provides that where in respect of any assessment year, there is on the part of a firm any such failure as mentioned in section 144 of the Act, deduction by way of any payment of interest, salary, bonus, commission or remuneration etc. to any partner of such firm shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
It was observed that section 144 of the Act provides that if any person fails to make the return required under sub-section (1) of Section 139 and has not made a return or a revised return under sub-section(4) or sub-section (5) of that section, or fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section and having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer after taking into account all relevant material shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment.
However, it was noted that the instant appeal it was not a case where the assessee had not filed its return of income. It was also not a case where the assessee failed to comply with the notice u/s. 142(1) and also it was not a case where the assessee failed to comply with all the terms of a notice issued under section 143(2) of the Act.
The Tribunal observed that the AO mad the assessment by estimating the income of the assessee by rejecting the books of account by invoking the provisions of section 145(3) of the Act as he was not satisfied about the correctness of the book results of the assessee. Thus, it was not a case where the assessment was made by the Assessing Officer u/s 144 of the Act. It was a case where assessment u/s 143 of the Act was made in a manner laid down u/s 144 of the Act.
Following the decision of the Coordinate Bench of the Tribunal , the order was set aside with direction to the Assessing Officer to determine the income of the assessee after allowing deduction for payment of salary and interest to partners from the estimated income of the assessee.
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