TMI Blog2010 (1) TMI 951X X X X Extracts X X X X X X X X Extracts X X X X ..... es on which dividend income was earned and the same was transferred to the assessee firm by way of book entries in the partner s capital account represented by credits otherwise than credit of money, i.e., by transfer of shares held in the name of partners by book entry without the shares having been transferred in the name of the firm. From which it was inferred by CIT that interest allowed to the partners on the capital in respect of such credits is not admissible as a deduction within the meaning of section 36(1)( iii ) of the Act. According to CIT (Admn.) this income being exempt under section 10(33) in the hands of any holder, nevertheless it amounts to sharing the profits otherwise than in accordance with the partnership deed and accordingly, the firm should have been assessed in the status of A.O.P. with the maximum marginal rate of tax after disallowing both salary and interest amounting to ₹ 1,22,646 and ₹ 3,285 ( sic ) respectively. From the above, CIT (Admn.) held that the order passed by the Assessing Officer on 29-8-2003 is erroneous and prejudicial to the interests of the revenue. Against this notice, the assessee filed a reply in the form of written sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Bheruram Ratan Lal v. CIT [2002] 257 ITR 795 in which it has been held that the partners must have acted as per the terms of the partnership deed to arrive at the conclusion that the firm is genuine. According to CIT (Admn.), in the present case the dividend derived from the shares has not appeared in the books of account of the assessee firm and there is no evidence to show that the same is distributed amongst the partners as per the provisions of the partnership deed and the ld. Assessing Officer has failed to investigate this issue. Finally, the ld. CIT (Admn.) concluded that the assessment order passed by the Assessing Officer on 28-8-2003 was erroneous insofar as it was prejudicial to the interests of the revenue. Therefore, he set aside the assessment order with the direction that the Assessing Officer shall make enquiries about the genuineness of the provisions contained in sections 184 and 185 of the Act. If profit of the firm has not been distributed according to the partnership deed, firm has to be assessed as per the provisions of section 185. Moreover, that the Assessing Officer has to see carefully that expenses including interest against exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-1, Aligarh on 29-8-2003 was erroneous insofar as it was prejudicial to the interest of revenue. Therefore, the same is set aside with the direction that the Assessing Officer will make inquiries about the genuineness of the existence of the firm in view of the provisions contained under sections 184 and 185. If profit of the firm has not been distributed according to the partnership deed, the firm has to be assessed as per the provisions of section 185. Moreover, the Assessing Officer has to see carefully that expenses, including interest against exempt income are not allowed. After giving proper opportunity of being heard to the assessee, he will pass afresh order under section 143(3). 5. That Assessing Officer has to see that expenses including interest against exempt income are not allowed and that to make enquiries about the genuineness of the existence of the firm in view of the provisions contained in sections 184 and 185 of the Act. From the above, it is clearly found that the ground of revision in section 263 order are entirely different from the grounds taken in the notice issued under section 263. The revisional order based on grounds different from that stated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new scheme, as per amended provisions of sections 184 and 185 there is no need for registration of the firm and only the following three conditions have to be satisfied:- ( i )The partnership is evidenced by an instrument; ( ii )The individual shares of partners are specified in that instrument; and ( iii )Certified copy of the partnership deed is filed. 6. The Assessing Officer had inquired into all the above three conditions even earlier and after and has satisfied himself and CIT also could not dispute the above factual situation in this case. The Hon ble Allahabad High Court in the case of CIT v. Nityanand Deokinandan [1981] 5 Taxman 262 has clearly held that the continuation of registration of the firm for subsequent years, based on a declaration that the firm in question has not undergone any change in its constitution of the shares of the partners, as evidenced by the instrument partnership, on the basis of which it was registered, does not require passing of an order and that the firm continues to be registered, if actually there has been no such change in its constitution and it has filed declaration to that effect. The above decision is applicable e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on presumption. The ld. CIT has himself admitted that provisions of section 14A are not being invoked at all. When the provisions of section 14A are not invoked, decision of Hon ble Apex Court in the case of Raghunandan Prasad Moody ( supra ) would apply and the interest paid on purchase of shares is allowable even if no dividend is received. In view of the above discussions, we are of the considered opinion that the ld. CIT has not been able to make out any ground for revising the assessment order in question. Hence, the revisional order is set aside and the assessment order is restored. 10. In the result, appeal of the assessee is allowed. Sanjay Arora, Accountant Member. - I have carefully perused the proposed order by my ld. brother in this case. However, being unable to persuade myself to be in agreement therewith, I proceed to write my separate order, as under:- 2. The only issue that arises for adjudication in the present appeal is the maintainability in law of the invocation of section 263 of the Income-tax Act, 1961 ( the Act hereinafter) by the ld. Commissioner of Income-tax, Aligarh ( CIT for short) in the facts and circumstances of the case. An inci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w caused by the ld. CIT on these grounds vide notice dated 9-3-2006, and to which the assessee replied in detail per its communications dated 27-3-2006 and 29-3-2006. 4.1 The undisputed factual position that emerges, including the perusal of the replies aforesaid (by the assessee), which are on the merits of its case, is that no enquiry in the matter stood made by the Assessing Officer, so that his order suffers from an inherent lack of application of mind in framing the assessment, i.e., insofar as these aspects thereof are concerned. His order, therefore, qualifies to be considered as erroneous insofar as it is prejudicial to the interest of the revenue, in terms of section 263 of the Act. This is the clear and settled position of law in the matter as explained by the Apex Court per its decisions, inter alia, in the case of : Rampyari Devi Sarogi v. CIT [1968] 67 ITR 84 (SC). Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). 4.2 This is for the reason, as lucidly explained by the Hon ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 , that an order passed without due inquiry is per se erroneous insofar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. [Emphasis supplied] 4.3 As explained, thus, it is even not decisive, whether what the assessee states in the revision proceedings, i.e., on merits, is correct; the raison de tre of the revision being the non-application of the mind in the matter by the Assessing Officer, which thus vitiates his order to that extent. The merits of the assessee s case would, in any case, be considered by the Assessing Officer in the set aside proceedings; it being even otherwise the province of the Assessing Officer to verify the assessee s claims [refer: Tin Box Co. v. CIT [2001] 249 ITR 216 (SC)]. The only exception to this rule I can think of is where the enquiry as pointed out by the ld. CIT is either not relevant or stands completely addressed by the assessee in the proceedings under section 263 itself, i.e., not requiring any verification or examination of facts or material. This is as in any case the Assessing Officer cannot travel outside the scope of the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer, so that in effect it would be of no moment in the context of the present case, being revi-sionary proceedings and, rather, endorse the findings of the ld. CIT of the applicability of section 263, as well as his decision in restoring the matter back to the Assessing Officer s file for a decision on merits after due examination. 5.3 Further still, it may also be pertinent to state that the parameters of what constitutes business is well defined under law. Apparently, the assessee has not engaged in any trading in shares. Also, the investment in shares in question would not per se amount to a business , until it is exhibited to be a part of the firm s investment program or portfolio, chosen independently, on the basis of some defined or guiding criterion, so that the partner(s) only incidentally happen to be holding the same at the relevant time and, as such, become the transferors by default. Besides, the firm s investment program would have to be adequately funded, so that it has to be backed by proper financial arrangement or an appropriate line of credit, apart from a knowledge resource base, so as to fuel its investment engine with adequate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the task of determining whether a transaction is a sham or an illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth. 6. The second matter or issue on which the assessment stands impugned and set aside by the ld. CIT, is the non-compliance of the provision of section 184 of the Act and, consequently, application of section 185. The relevance of this is, again, un-arguable. If, and to the extent, the dividend stands received or receivable on the said shares, the firm s property, directly by the partner(s) without being routed through the firm s accounts, the allocation of the firm s profit would not be in accordance with the express provisions of the partnership deed (refer clause 11 thereof). The question has two aspects to it : ( a )whether the assessee-firm could, given that the dealing in shares is not a part of its business, hold shares and, concomitantly, increase the partner s capital to that extent. ( b )whether, even if so, the dividend income on the said shares being received or receivable (the firm follows mercantile method of accounting) by the partner s directly, there has been a violation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership deed is a sine qua non that cannot be bypassed or overlooked in any view of the matter. The registration of the assessee as a firm is not the question, which provisions (sections 182 and 183), stand dispensed with by Finance Act, 1992, and reference thereto or discussions thereon would only have the effect of obfuscating the issue involved, which is only one of the status of the assessee as a firm in view of the provisions of sections 184 and 185 read with section 187 of the Act in the facts and circumstances of its case. 6.2 Qua the second aspect too, i.e., the question ( b ) above, which stands responded to by the assessee, the invocation of revisionary power by the ld. CIT cannot, in view of the foregoing, be assailed, with the assessee not addressing one facet of the query, while misdirecting itself on the other. That, no dividend, in fact, stands received by the partners, i.e., even if so, is purely incidental, and besides the issue which is purely a legal one. No doubt, it is open to the assessee to show, with reference to the distribution of dividend, that no dividend either in the year or in the past, stood in fact actually received or was receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y ld. brother vide his proposed order. 8.2 The assessee has, in arguing its case, placed reliance on the decision in the case of Laxmipat Singhania v. CIT [1969] 72 ITR 291 (SC), even as the ld. A.R. did not take us through the contents thereof or in any manner argued in respect of the applicability of the ratio of the said decision in the facts and circumstances of the present case. The same concerns the time of accrual of dividend, which the Hon ble Apex Court held to be the date of the relevant annual general meeting of the company (in which the relevant shares stand held), i.e., whereat the resolution regarding declaration of dividend stands passed. How, and to what extent, the said decision is relevant, and thus of assistance to the assessee, is difficult to say. These are, it must be kept in mind, section 263 proceedings, and the ld. CIT has only set aside the matter for proper adjudication in accordance with the law. The assessee, therefore, shall have proper opportunity to plead its case before the Assessing Officer, including from any other angle or on the basis of any material it wishes to rely upon. In fact, the said reliance itself endorses the impugned set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 685 respectively. 4. Against this notice, the assessee submitted reply to the CIT vide his submissions dated 27-3-2006 and 29-3-2006. The main contentions of the assessee was that the order passed by the Assessing Officer on 29-8-2003 under section 143(3) is not erroneous because the provisions of section 185 can be applied only when the assessee does not fulfil the provisions of section 184 of the Act which are as under :- ( i )The partnership deed is evidenced by an instrument; ( ii )The individual shares of the partners are specified in that instrument; ( iii )Certified copy of the partnership deed is filed. 5. Since the assessee complied with all the conditions, the assessee has to be assessed as a firm and not as AOP under section 185 of the Act. As per section 184(3), once the firm is assessed as a firm for any assessment year, it shall be assessed in the same capacity for every subsequent year, if there is no change in the constitution of the firm or the shares of the partners. The firm is assessed to tax as partnership firm since 1-4-1998. Therefore, the question of assessing the assessee as AOP does not arise. It was also submitted that there is no ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessing Officer should see that the expenses including interest against exempt income are not allowed. The assessee came in appeal against the order of CIT before the Tribunal. The ld. Judicial Member (J.M.) set aside the order passed under section 263 by the CIT. His reasoning as given are as under :- ( i )There is no evidence that the dividends were actually received on shares and the same were distributed amongst the partners otherwise than as per the provisions of the partnership deed. ( ii )Revisional powers under section 263 of the Act cannot be enlarged for reopening of the assessment proceedings which were concluded earlier only on flimsy grounds. ( iii )CIT has to have in his possession material on record to arrive at satisfaction. The Assessing Officer has to exercise the quasi-judicial power vested in him and if he exercises the said power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. Thus, the order of the Assessing Officer was held not to be termed as erroneous as far as the facts qua , grounds of dividend shares is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st thereon which stands allowed to the partners does not qualify for deduction under section 36(1)( iii ) subject to the conditions specified in section 40( b ). Non-application of section 14A is not the issue, the same were otherwise applicable being precluded for invocation by proviso to section itself. The assessee nowhere claims that the shares were acquired for the purpose of business. Even if this contention was raised, this should have been supported by material and the explanation subject to the verification by the Assessing Officer. What constitutes business, as the assessee has not been engaged in trading of the shares, is investment in shares cannot be regarded to be a business unless it is exhibited to be part of the firm s investment programme. ( v )The second issue on which the assessment was set aside by the CIT is the non-compliance of the provisions of section 184, and consequently, application of section 185. This is also un-arguable as to the extent the dividend stands received on the shares that the firm s property directly by the partners without being routed through the firm s accounts, the allocation of the firm s profit would not be in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e part of the Assessing Officer or the Assessing Officer has committed glaring mistake of law or fact. The jurisdiction under section 263 of the Act cannot be utilized as an instrument for reopening the concluded proceedings on flimsy grounds or on assumption. Reliance was placed in this regard on the decision of Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173 (Mum.). Section 36(1)( iii ) of the Act pertains to allowability of interest on borrowed capital, while the allowability of the interest on capital of partners is further subject to the provisions of section 40( b ) read with section 184 of the Act. As far as the issue that dividend income from shares so transferred has been enjoyed by the partners, which amounts to sharing of profit otherwise than in accordance with partnership deed and accordingly, the firm should have been assessed in the status of AOP, is concerned, it is most respectfully stated that according to section 184, a firm shall be assessed as a firm for the purpose of Income-tax Act if the partnership is evidenced by an instrument; the individual shares of the partners are specific in that instrument; and certified copies of the partnership deed is fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the firm and they have withdrawn the capital by taking off the shares. Referring to page 59 of the Paper Book, it was pointed out that the shares were duly shown in the balance sheet of the partnership firm under Schedule-VI. There is no embargo in partnership deed for the purchase and sale of the shares. Referring to assessment order, which was set aside by the CIT, appearing at pages 23 to 27 of the Paper Book, it was pointed out that the assessee has duly produced all the books of account including the balance sheet which were duly examined by the Assessing Officer. Even the capital account was also duly looked into by the Assessing Officer. It was pointed out that the subsequent order passed after the impugned order under section 263 is available at pages 104 to 106 of the Paper Book. He also referred, during the course of the arguments, the following decisions:- CIT v. Max India Ltd. [2007] 295 ITR 282 (SC). Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). CIT v. Arvind Jewellers [2003] 259 ITR 502 (Guj.). 11. Ld. D.R., on the other hand, pointed out that for the issue as has been pointed out by the CIT in the order framed under section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout the shares having been transferred in the name of the firm. The implication is that interest allowed to the partners on the capital in respect of such credits is not admissible as a deduction within the meaning of section 36(1)( iii ). The assessee deals in the business of automobiles and does not deal in shares. Moreover, the dividend income from shares so transferred to the firm by way of book entry has been enjoyed by the partners. Even though the said income is exempt under section 10(33) in the hands of any holder, nevertheless it amounts to sharing the profits otherwise than in accordance with the partnership deed and accordingly, the firm should have been assessed in the status of AOP with the maximum marginal rate of tax after disallowing both salary and interest amounting to ₹ 1,22,646 and ₹ 32,685 respectively. 14. Thus, the CIT was of the view that there is the failure on the part of the Assessing Officer to make the enquiry and accordingly, he set aside the assessment as per the conclusion given under para 6 of his order. Section 263 of the Act lays down as under : 263. (1) The Commissioner may call for and examine the record of any proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded. 15. From the perusal of the aforesaid section, it is apparent that there are four main features of the power of revision to be exercised under section 263 by the Commissioner of Income-tax. Firstly, the Commissioner may call for and examine the records of any proceedings under the Act and for this purpose he need not to show any reason or record any reason to believe. It is a part of his administrative power to call for the record and examine them relating to any assessee. Secondly, he may consider any order passed by the Assessing Officer as erroneous as well as prejudicial to the interest of the revenue. This consideration having regard to the language of section 263 apparently is a consideration which he exercises by calling for and examining the record available at this stage. There is no question of the assessee to appear and make submission. Thirdly, if after calling for and examining the records the Commissioner considers that the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn was filed. The Assessing Officer transferred the case to the other Assessing Officer on the request of the assessee. The Assessing Officer completed the assessment. Subsequently, the CIT reopened the assessment when it was found that the assessment was made on the basis that the income had been earned by the assessee while the assessee was not earning the income and the income would have been assessed in the hands of the other persons at larger amount. It was held that the assessment was erroneous and prejudicial to the interest of the revenue. The Assessing Officer while remarking that the source of the income of the assessee during the year was income from speculation business and interest on investment stated that neither the assessee was able to produce the details and vouchers of the speculation business made during the year nor there was any evidence regarding the interest received by her from different parties on her investment. Notwithstanding the facts the Assessing Officer did not investigate into the various sources to assess the assessee on a total income of ₹ 9,037. The action of the CIT under section 33(B) of the Act is held to be justified cancelling the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the Housing Society and the assessee. Assessee is the confirming party thereto. 21. While in the instant case, the proceedings under section 263 of the Act has been initiated by the CIT not on the basis that the assessee had made entries in the partners capital account represented by creditors otherwise than credit of money, i.e., transfer of shares held in the name of partners by book entry without the shares having been transferred in the name of the firm. He was of the view that the interest allowed by the Assessing Officer to the partners on the capital in respect of such credits is not admissible as deduction within the meaning of section 36(1)( iii ) read with section 14A. This is a fact that the assessee was not dealing in shares. The dividend income from the shares so transferred to the firm by book entries has been enjoyed by the partners. Even if this income is exempt but it amounts to sharing the profits of the firm otherwise than in accordance with the partnership deed. Ultimately CIT held the assessment order dated 29-8-2003 to be erroneous as well as prejudicial to the interest of the revenue on two grounds one being that the dividends from shares is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm or not. This case clearly lays down, if there is lack of enquiry on the part of the Assessing Officer, provisions of section 263 of the Act can be applied. 22. The decision of Hon ble Rajasthan High Court in the case of Bheruram Ratan Lal ( supra ), in my opinion, is not applicable to the facts of the case. This decision relate to the provisions of section 184 as stood prior to these provisions being amended by the Finance Act, 1992 with effect from 1-4-1993. In that case, the question relates to the registration of the partnership firm. Now there is no such provision which requires the registration of the partnership firm being granted by the Assessing Officer. 23. I have specifically asked the Ld. AR whether there is any evidence on record which may prove that the Assessing Officer has conducted the enquiry on the points as has been raised by the CIT while issuing notice under section 263. No enquiry letter or the reply of the assessee being filed during the original assessment proceeding was brought to our knowledge. This clearly prove that in this case, the Assessing Officer failed to carry out the necessary enquiries which he ought to have made before allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent amendment in the Act even though with retrospective effect would not make an order to be erroneous and prejudicial to the interest of the revenue. Thus, this decision would have assisted the assessee if CIT had invoked the provisions of section 263 of the Act had there been section 14A being inducted subsequently by retrospective amendment. The CIT did not invoke the provisions of section 263 of the Act due to the retrospective amendment but has invoked the provisions of section 263 of the Act due to lack of enquiries being carried out by the Assessing Officer while granting deduction to the assessee under section 40( b ) of the Act. I have also gone through the decision of the Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. ( supra ). In this case it was held as under :- The prerequisite to the exercise of jurisdiction by the Commissioner under section 263 is that the order of the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, ( i ) the order of the Assessing Officer sought to be revised is erroneous; and ( ii ) is prejudicial to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
