TMI Blog2010 (10) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... was required to book the expenditure in such a manner, which would normally be only on the basis of bills or vouchers raised by the parties who had rendered the corresponding services for which, and in whose favour, the expenditure is incurred - Appeal is allowed by way of remand - ITA Nos. 363 & 364/Coch/2007 - - - Dated:- 14-10-2010 - S/SHRI N.VIJAYAKUMARAN, JM and SANJAY ARORA, AM JJ. Revenue by Shri T.J.Vincent, DR Assessee by Shri Thomas Joseph, CA-AR Order Per Sanjay Arora, AM These are two Appeals by the Revenue, arising out of the Order by the Commissioner of Income-tax (Appeals)-II, Kochi ( CIT(A) for short) dated 5.2.2007, and the assessment years (AYs) involved are 2003-04 and 2004-05. 2. Both the appeals raising common issue/s, were heard together and are being disposed of vide a common order, even as done by the first appellate authority. 3. The first and the principal issue arising for adjudication, per the Revenue s Ground No. 2 (for both the years), with Ground # 1 being general in nature warranting no adjudication, is the assessment of the assessee-firm as an Association of Persons (AOP), rather than as a firm , under the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of liquor or intoxicating drugs without licence granted by the Commissioner. Section 24 of the Act, inter alia, provides that every licence or permit granted under the Act shall be subject to such restrictions and on such conditions as the Government may direct either generally or in any particular instance in that behalf. `Such conditions and such restrictions means, the conditions imposed under the rules framed under the Act. The Kerala Abkari Shops (Disposal in Auction) Rules, 1974, among other rules, lays down in rule 6(22) that the licensee shall not sell or otherwise transfer his contract or licence without the written consent of the Assistant Excise Commissioner concerned. When the rule-making authority uses the words or otherwise transfer , it intended to cover other cases which may not come within the strict meaning of the word sell . If the rule-making authority intended to cover all possible cases of transfer, courts must give full import to that intention The contentions 6. The assessee in the instant case has sought to distinguish the said case law relied upon by the Revenue. The provision for the registration of the partnership firm under the Act, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been obtained, the partnership agreement in the instant case, which is only a contract between the partners, is illegal in view of s. 23 of the Indian Contract Act, 1872 and the assessee hit by the decision in the case of CIT v. Rangila Ram Ors. (supra) and Narayanan Co. v. Dy. CIT (supra). Toward this, it was submitted by the ld. AR that even though the contract (of partnership) may not be strictly legal, impinging on the legality of the resulting partnership, i.e., with reference to the said laws, it would in law still only be a `firm and, thus, only so for the purposes of the Act, and consequently, entitled to be assessed as such there-under. So long as the provisions of section 184 stand complied with, the adverse consequences of non-compliance thereof, as listed in s.185, cannot visit it. The action of the AO in assessing it as an AOP, and disallowing the remuneration allowed by the firm to its partners, is, thus, contrary to the extant provisions of the Act, particularly considering that it stands assessed as a partnership firm in the preceding years. Reliance was placed by him on the decision by the Tribunal, Cochin Bench, in the case of Thodupuzha Wines v. Dy. CIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the computation of its business or professional income qua payment of interest, salary, remuneration, etc. to its partners, who shall also likewise not be assessed for the same in their individual hands. In short, from A.Y. 2004-05 onwards, the assessee, though assessed as a firm, would stand to be assessed qua interest, remuneration, etc. if any, allowed by it to its partners. It may also be clarified that the question decided by the hon ble apex court as well as the hon ble jurisdictional high court pertained to the registration of the firm under the Act, the requirement for which is no longer extant, and whether or not it complies with the provision of s. 184, it shall, w.e.f. 1.4.2004, be assessed as such, i.e., as a firm. Prior thereto, i.e., for AY 2003-04, the distinction continues, and the assessment of a firm as a firm is conditional on its compliance with the provisions of s. 184. In the present case, the AO has assessed the assessee as an AOP and also not allowed deduction towards salary, remuneration to its partners, so that in either case the compliance or otherwise with the provision/s of s. 184 becomes relevant. 7.4 However, before we consider whether the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th, the purpose of the same, or of the Act, thus, is only to provide the condition/s subject to which the firm would stand to be assessed as such thereunder, and which continues to obtain. Further, the argument of it being assessable as firm in view of section 184(3) of the Act, i.e., as of the assessee having been assessed as such in the preceding year/s, so that it would, in the absence of any change in its constitution, stand to be assessed as such for the current year as well, would also not help as the provision of section 184, as afore-stated, would be applicable only to a partnership firm, i.e., one which is so under the partnership law, and which the assessee is not. There is no estoppel against the law, and neither is the principle of res judicata applicable to the proceedings under the Act. It is not the case that the matter stood examined and a finding as to the assessee being a firm under the partnership law issued for a preceding year, and which stands not challenged by the Department. The AO has given a definite finding, with reference to binding decision, that the assessee is not a valid partnership, and which the ld. CIT(A) has not met. 7.6 The appellant has relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd holding the same. As such, the apex court per its decision in the case of Grand Enterprises vs. CIT (supra), by taking a different view in the matter, has effectively reviewed the decision in the case of CIT v. Rangila Ram Ors. (supra), and which, being by a three-member constitution, could only be a larger bench. The same thus stands neither considered nor can be taken as reversed, but only distinguished on facts by the apex court per its later decision, and as far as the law in the matter is concerned, being later in time to that in the case of Jer Co. vs. CIT (supra), would hold the field. Reference in this context is also drawn to the decision in the case of Union of India v. Raghubir Singh (1989) 178 ITR 548 (SC). Furthermore, the decision in the case of Jer Co. vs. CIT (supra) stood duly noticed and distinguished in the case of Narayanan Co. v. Dy. CIT (supra). 7.7.2 We shall also examine the issue factually to see if the licence in question forms part of the partnership property or not; there being no factual transfer of the licence in favour of the firm, i.e., by way of endorsement of its name on the licence, and, rather, could not be, given the terms of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible to say, as the assessee does with reference to Clause 12 of the partnership agreement, that there is no transfer of licence by allowing the firm to use the same during its subsistence, and which further arises only due to the holder-partner being not in a position to exploit the same (licence) herself. As would be apparent from the reading of Clause 12, the user rights stand granted to the firm in the absence of adequate capital with the licence holder, i.e., as a part of her capital contribution to the firm. The apex court in Sunil Siddharthbhai vs. CIT (1983) 156 ITR 509 (SC), another three-members bench decision, was concerned with the issue of transfer of a capital asset by a partner joining the firm and the capital gains arising as a result. The following extracts therefrom are relevant and on the point: In its general sense, the expression `transfer of property connotes the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital contribution of the licence-holder to the partnership; it not having individually the means and resources to exploit the same, which is to be, and stands, contributed by the other partners. That is the consideration, the very premise, on which the contract of partnership is founded in the instant case. This, thus, explains the law in the matter. The licencee-partner had thus transferred not the whole but a part of her total property in the licence, which would qualify to be a `transfer nevertheless and, as such, to that extent, part of the partnership property. Further on, the only manner in which the subject clause of the deed of partnership could be read harmoniously and in consistence with the law in the matter, is that on the dissolution of the firm or on her retirement there-from, she would be entitled to, as part of her share in the partnership property, claim, by way of right, the said property in the licence; having transferred only a limited estate therein to the assessee-firm. We are unable to read anything more in the said clause. It may appear that our findings bear an inconsistency inasmuch as per the foregoing part of the order we have found the partnership as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given a factual finding that the impugned expenditure is not fully supported by proper bills. The same has not been rebutted in any manner by the assessee, whose only explanation is that its claims, nevertheless, are genuine. It has not explained the circumstances under which it was required to book the expenditure in such a manner, which would normally be only on the basis of bills or vouchers raised by the parties who had rendered the corresponding services for which, and in whose favour, the expenditure is incurred. Even in the case of self-made vouchers, the same would bear the complete details of the expenditure including the payee s name with reference, and would be receipted by him. The ld. CIT(A) has not appreciated the factual basis on which the disallowance by the AO is founded; the assesse itself making a disallowance for Rs. 25,000/- in respect of the said claims. So however, though in agreement in principle with the assessing authority, i.e., that some disallowance is merited, we find merit in the ld. CIT(A) s observations to the extent that the quantum of disallowance has not been considered by the AO; the assessment order being bereft of any discussion in the matter. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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