REQUIREMENTS TO BE COMPLIED WITH FOR THE ASSESSMENT AS A FIRM UNDER THE PROVISIONS OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

  Chapter XVI of the Income Tax, 1961 ('Act' for short) provides for special provisions applicable to firms. Section 184 of the Act provides that a firm shall be assessed as a firm for the purposes of this Act, if the partnership is evidenced by an instrument and the details of individual shares of the partners are specified in the said instrument. Sub section of Section 184 requires that it is necessary to be assessed as a firm a certified copy of the instrument of partnership shall accompany the return of income of the firm of the previous year relevant to the assessment year in respect of the firm of which assessment as a firm is first sought.

  If there is no change in the constitution or share of profit of the partners, the status of the firm shall be granted for the assessment years in subsequent years as well. If any change has taken place in a particular previous year, the firm shall, according to Section 184(4) furnish a certified copy of the revised instrument of partnership along with the return of the come for the assessment year relevant to such previous year and all the provisions of Section 184 shall apply accordingly.

  Section 185 of the Act provides where a firm does not comply with the provisions of Section 184 dealing with furnishing of certified copies of partnership deed etc., the assessee shall be assessed in the same manner as association of persons.

  Thus the mandatory conditions to be satisfied by the assessee for the assessment of the firm are-

An assessee seeking the status of 'firm' is to establish that the partnership is evidenced by an instrument and individual shares of partners are specified in that instrument;

The assessee shall file a certified copy of instrument of partnership deed before the assessing authority.

When there is a change in the partnership the assessee shall furnish a certified copy of the reconstituted instrument of partnership deed along with the return. Then the provisions of Section 184 as discussed in the earlier para shall applicable. If no such instrument is filed the same shall be construed as non satisfaction of Section 184. The result is that the assessee shall go out of the purview of Section 184 as far as the status of the assessment is concerned. In such circumstances the law provides that Section 185 shall operate and the assessee shall be assessed in the status of an association of persons.

  In 'Dawood Sons V. Assistant Commissioner of Income Tax' - (2009) 317 ITR 405 (Chennai) an appeal is filed by the assessee for the assessment year 2003-04 against the order of the Commissioner of Income Tax (Appeals)- IX at Chennai. The assessee was assessed to tax in the status of 'firm'. But for the previous year relevant to the assessment year under appeal there was reconstitution effected in the firm. The assessee has not filed a copy of the revised deed along with the return of income as required under Section 184 (4) of the Act. The Assessing Officer was of the opinion that non filing of the revised partnership deed will not mandatorily result in assessing the assessee in the status of an association of persons. The Assessing Officer further held that the revised partnership deed was deliberately not filed by the assessee so as to take the benefit of less tax applicable to an association of person.

  The Commissioner of Income Tax (Appeals) confirmed the findings of the Assessing Officer on the appeal of the assessee. The stand of the assessee in the present appeal is that the Assessing Officer has erred in assessing the assessee as a 'firm' when the provisions of Section 184 relating to filing of a certified copy of the revised instrument of partnership had not been complied with. The assessee further contended that the assessing authority has erred in not applying the provisions of Section 185.

  The tribunal held as follows:

It is clear from the law that the status of a firm is a privilege to be sought by the assessee on fulfilling certain mandatory conditions;

If the assess has not satisfied the mandatory conditions provided in Section 184 the assessee shall not be assessed as a firm and provisions of law contained in Section 184 shall not apply thereto;

There is an automatic substitution of Section 184 with Section 185 whereupon the assessee shall be assessed as an associate of persons;

It is, therefore, clear that the assessment of an assessee under Section 185 in the status of an association of person is an inevitable consequence of the failure to comply with the provisions of law contained in Section 184;

It is for the assessee to choose whether to be assessed as a 'firm' or to be assessed as an association of persons on the constitution of a firm or on the reconstitution of a firm, as the case may be;

The intention of the party whether the instrument of partnership was not deliberately filed etc., is not relevant in deciding the issue;

If the assessee has satisfied the provisions of Section 184, it shall be assessed as a 'firm' and if not, it shall be assessed as an association of persons;

Neither the assessing authority nor the assessee has to go beyond this.

Therefore the reason pointed by the assessing authority that the assessee has deliberately not filed the certified copy of the return is not a valid reason to impose the status of 'firm' on the assessee. Likewise the finding of the Commissioner of Income Tax (Appeals) that the return was filed in the status of a firm is also not a valid ground to assess the assessee in the status of a firm. The tribunal allowed the appeal.