2014 (8) TMI 1188 - AT - Income Tax

Disallowance of remuneration - disallowance by invoking section 184(5) of IT Act 1961 considering the firm as an Association of Persons (AOP) - HELD THAT - There is no dispute that the assessee had not filed any return voluntarily as prescribed u/s 139(1) of the IT Act 1961 or belatedly or prescribed u/s 139(4) of the IT Act 1961. The returns filed by the assessee were pursuant to notices issued u/s 148 of the IT Act 1961. Reading of sub-sec.1 of Sec.148 of the IT Act 1961 clearly show that a return filed in pursuance of notice u/s 148 of the IT Act 1961 is to be treated as a return required to be furnished u/s 139 of the It Act 1961. Failure of an assessee to file the return u/s 139(1) of the IT Act 1961 would give powers to the AO to issue a notice for filing return as set out in Sec.142(1) of the IT Act 1961. Once an AO chose not to issue such notice but to proceed u/s148 the consequence mentioned therein has to follow. Once a return has been filed by the assessee pursuant to a notice u/s 148 of the IT Act 1961 the clause that would apply to him is clause(c ) of sub-sec.(1) of Sec.144 of the IT Act 1961. He goes out of the ambit of clause(a). For applying clause(c ) it is necessary that assessee should have failed to comply with the terms of notice issued under sec.143(2) of the IT Act 1961 - Thus it is clear that there was no failure in complying with the notices issued u/s 143(2) of the IT Act 1961. The result is that assessee could not have been fastened with the consequences that arise out of a best judgment assessment u/s 144 of the IT Act 1961. It is not that section 184(5) come into operation whenever an assessment is made u/s 144. The claim for deduction by way of payment of interest salary bonus commission or remuneration to the partners could not have been disallowed. The disallowance of remuneration to partners for impugned assessment year therefore stands deleted - Appeal of the assessee allowed in part.

Summary

Issues:
1. Disallowance of remuneration by treating the firm as an Association of Persons (AOP) under Sec.184(5) of the IT Act, 1961.

Detailed Analysis:
The Appellate Tribunal ITAT Bangalore heard appeals filed by the assessee concerning the disallowance of remuneration. The AO observed that the assessee, a partnership firm running a marriage hall and deriving rental income, had not filed returns for the assessment years in question. Notices were issued under Sec. 148 of the IT Act, 1961, leading to the filing of returns showing losses for the respective years. The AO disallowed remuneration claimed by the assessee, treating the firm as an AOP under Sec.184(5) of the Act.

The assessee contended that returns were filed in response to the notices under Sec. 148, and therefore Sec.144 should not apply, as there was no failure under Sec. 139 of the IT Act, 1961. The CIT(A) upheld the AO's decision, stating that the returns contained false claims and could not be a basis for granting benefits to the assessee. The Appellate Tribunal heard arguments from both sides, with the AR emphasizing that the lower authorities erred in disallowing the remuneration paid to partners.

The DR argued that the AO was justified in invoking Sec.144(1)(a) for a best judgment assessment due to the assessee's failure to file returns under Sec. 139 of the IT Act, 1961. The DR contended that once a best judgment assessment was made, Sec.184(5) automatically applied, disallowing deductions for remuneration to partners. The Tribunal examined the orders of the lower authorities and the contentions of both parties, emphasizing the importance of compliance with notice requirements under the IT Act.

The Tribunal noted that returns filed in response to notices under Sec. 148 were deemed as returns required under Sec. 139 of the IT Act, 1961. As there was no failure to comply with notices under Sec. 143(2), the Tribunal concluded that the assessee did not fall under Sec.144(1)(a) and that Sec.184(5) applied only in cases of complete failure as mentioned in Sec.144. Therefore, the disallowance of remuneration to partners for the assessment years in question was deleted, and the appeals of the assessee were partly allowed.