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2016 (10) TMI 253 - MADRAS HIGH COURT

2016 (10) TMI 253 - MADRAS HIGH COURT - [2016] 388 ITR 16 - CIT(A) jurisdiction to consider the status of the appellant as an AOP - disallow of remuneration as interest to the partners - Held that:- As rightly pointed out by Ms.T.C.A.Sangeetha, learned counsel for the appellant, contradictions in the statement of the Commissioner of Income Tax, Appeals-4, Chennai from the above two paragraphs extracted supra, is apparent. Though at one stage, the Commissioner of Income Tax, Appeals-4, Chennai ma .....

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, the issue is yet to be decided. True that in the earlier years, the issue was not raised. Merely because, it was not raised, it cannot be said that the Commissioner, has no powers to decide, if the Assessing Officer, has failed to advert to the said aspect. On this aspect, we are of the considered view, that it is only a show cause notice and it is always open to the appellant to respond. - While considering the scope and powers of the appellate authority, under the Income Tax Act, 1961, c .....

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If the Assessing Officer, has erred in concluding the status of the assessee as a firm, it cannot be said the Commissioner of Appeals, has no jurisdiction to go into the issue. - In the light of the averments on oath, in the sur rejoinder, made before this court, and on the facts and circumstances of the case, we are of the considered view that the Commissioner of Income Tax, Appeals-4, Chenai, without being influenced by any of the observations made in the impugned show cause notice dated .....

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quently, the connected civil miscellaneous petition is closed. - Inasmuch as the matter pertains to adjudication, where the appellant is required to be heard in person and evidence, if any, to be recorded, an outer limit of six weeks time is fixed. Taking note of the above, appellant is directed to submit the reply/objections, within such time, to be fixed by the Commissioner of Income Tax, Appeals, and the respondent is directed to pass orders, at the earliest, notwithstanding the outer lim .....

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he Respondent : Mr. T. S. Ravikumar JUDGMENT ( Made by S. Manikumar, J.) Writ appeal is directed against the order of the writ court, dated 11.02.2016 made in W.P.No.37072 of 2015 by which, the writ court, declined to interfere with the show cause notice, issued for enhancement of assessment made by the Commissioner of Income Tax, Appeals-4, Chennai ITA No.85/2015-2016, for the Assessment Year 2012-2013. 2. Facts leading to the appeal are that the appellant, claimed that it is a partnership firm .....

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Section 143(3) of the Income Tax Act, 1961, was passed on 30.03.2015 by the Assistant Commissioner of Income Tax, Chennai, viz. respondent No.2. He has disallowed deductions, made under Section 35(1)(ii) of the Income Tax Act, 1961, to the tune of ₹ 2,62,50,000/-, and assessed the income of the assessee at ₹ 4,36,86,050/-. Aggrieved by the said order, the appellant/assessee preferred an appeal, on 05.05.2015, to the Commissioner of Income Tax, Appeals-4, Chennai/1st respondent. 3. O .....

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ip firm, cannot be a partner in a firm, and hence proposed the appellant, as an AOP (Associate of Person) and not a firm. 5. Being aggrieved by the same, appellant, has filed W.P.No.37072 of 2015 and sought for a writ of certiorari, to quash the show cause notice dated 6.11.2015, issued for enhancement of assessment made by the Assistant Commissioner of Income Tax, Appeals-4, Chennai/2nd respondent, for the Assessment Year 2012-2013. 6. Before the writ court, the appellant has contended that it .....

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of Partnership proved that constituent members of a smaller firm, entering into a larger partnership firm, and that the same is valid. Reliance has also been made on the decision of the Hon'ble Apex court in Dhulichand Laxminarayan [1956] 29 ITR 535, later on, clarified by the Hon'ble Apex Court in Kylasa Sarabhaiah vs. CIT reported in [1965] 56 ITR 219, and contentions have been that the said decision has been followed by this court, in A.Asha & Co vs. CIT reported in [1973] 87 ITR .....

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writ court, setting out the powers, under Section 251(1) of the Income Tax Act, 1961, the Commissioner of Income Tax, Appeals-4 / 1st respondent has submitted that an appeal proceedings is a continuation of the assessment proceedings and that therefore, the appellate authority can himself enter into the arena of assessment, either by pursuing further investigation or causing further investigation to be done. On the above proposition, reliance has been made to a Full Bench decision of this court .....

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ly when all the partners of both the firms, represent the smaller firms in the larger partnership and mere representation of one of the partners is not valid. It is also contended that a partner may have dual capacity qua the partnership in his personal capacity, and qua the third party in his representative capacity, and that the same does not confer status to the appellant, as firm, automatically, when the other conditions are omitted to be satisfied. 10. Before the writ court, on merits, cont .....

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e firms, and therefore, the appellant cannot be considered as a valid partnership firm, as per the law laid down by the Hon'ble Apex Court in Dulichand Laxminarayan v. Commissioner of Income Tax reported in [1956] 29 ITR 535 (SC). The respondents have contended that the decisions in Kylasa Sarabhaiah vs. CIT reported in (1965) 56 ITR 219 SC followed by this court in A.Asha & Co., vs. CIT reported in (1973) 87 ITR 57 are distinguishable. 11. On the competence of the Commissioner of Income .....

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decision of the Hon'ble Apex Court in Berger Paints India vs. CIT reported in (2004) 266 ITR 99 SC, rule of consistency has to be followed. For the assessment year 2011-2012, there was no such issue of this nature, raised by the respondents. The appellant has also relied on a decision of the Hon'ble Apex Court in Parshuram Pottery Works Co. Ltd. v. ITO reported in (1977) 106 ITR 01 (SC), wherein, it has been held that "we have to bear in mind that the policy of law is that there mu .....

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issioner of Income Tax (Appeals), Ranchi has also been relied on, supporting the contention of the appellant that is a partnership firm. 13. In the sur-rejoinder filed by the respondents, at paragraph 3 of the said affidavit, it has been contended by the respondents that contents of the show cause notice dated 6.11.2015, proposing to assess the appellant as an AOP cannot be termed, as pre-determination of the issue. Further contention has been made that since the impugned show cause notice itsel .....

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e has been made on the decision of this court in CIT vs. Lotte India Corporation Ltd. in T.C.A.No.2279 of 2006 dated 14.09.2006. Contention on the rule of consistency emphasized by the Hon'ble Apex Court in Berger Paints Ltd. vs. CIT reported in (2004) 266 ITR 99 SC has been distinguished, by the respondents on the ground that it relates to valuation of closing stock and that the same cannot be applied to the case on hand. 14. Adverting to the above submissions and to the issue, as to whethe .....

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ated 11.02.2016 in W.P.No.37072/2015, at paragraph Nos.11 to 14 ordered as hereunder: "11. Since the CIT (Appeals) has expressed the doubts that the petitioner is not a Company and is seeking to reopen assessment of the petitioner company over the years, the Division Bench were of the view that the impugned show cause notices are in excess of jurisdiction and are liable to be quashed. However, the Jharkhand High Court gave liberty to to the CIT (Appeals) to issue a fresh show cause notice i .....

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be disallowed as expenditure and added back to the petitioner's taxable income for the relevant year, which is under consideration. By the impugned show cause notice, the respondent had called upon the petitioner to submit his explanation on or before 18.11.2015. Since the petitioner have to explain as to why the said amount may not be disallowed as expenditure and added back to the taxable income of the petitioiner, they can very well submit their explanation and contest the same, on merit .....

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erits and in accordance with law." 15. Being aggrieved by the aforesaid order, made by the writ court, instant appeal has been filed. Vide judgment dated 23/4/2016, a Hon'ble Division Bench of this court, has allowed the writ appeal, by setting aside the order made in W.P.No.37072/2015 dated 11.02.2016. Subsequently, on 25.04.2016, the appeal has been listed under the caption "for being mentioned", and after hearing the learned counsel for the appellant, order dated 23.04.2016 .....

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has been permitted to be withdrawn, with liberty to approach the High Court for appropriate relief and accordingly, orders were passed on 29.07.2016 by the Hon'ble Apex Court. We perused the copy of the order of the Apex Court. Ms.T.C.A.Sangeetha, learned counsel for the appellant submitted that she would only address the issues raised in writ appeal No.276/2016 and would not make any submissions, with reference to the order dated 25.04.2016. 18. Assailing the correctness of the order made .....

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edetermined the status of the appellant. It is also her contention that earlier, in the assessment proceedings, the appellant had disclosed all the material facts. She further submitted that the writ court has failed to consider that the Commissioner of Income Tax, Appeals -4 has not applied his mind to the facts and circumstances of the case, and also the provisions of the Income Tax Act, 1961, that a person can be a partner, representing another firm. 19. Learned counsel for the appellant furt .....

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a decision of this court in Commissioner of Income Tax vs. Chaganlal Kailas & Co. reported in (1984) 148 ITR 7. 21. Per contra, Mr.T.S.Ravikumar, learned senior standing counsel for the Income Tax department submitted that, though rightly or wrongly, the Commissioner of Income Tax, Appeals-4, Chennai in the impugned show cause notice dated 6.11.2015 has referred the appellant as an AOP, the same is based on the perusal of the assessment records, information and facts available before the sai .....

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rs, namely, M/s.Krupa Trading Co. having six partners and M/s.DCP Trading Co., in all, totalling up to 15 shareholders. 22. Learned counsel for the Revenue also pointed that the Commissioner of Income Tax, Appeals-4, Chennai/1st respondent has considered that the last two share holders are firms, and thus prohibited to be partners, in another firm. Taking note of the decision of the Hon'ble Apex Court in Dulichand Lakshminarayanan vs. CIT-II reported in (1956) 29 ITR 535, and by arriving at .....

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Commissioner of Income Tax, viz. respondent No.2, there cannot be a parallel proceeding before this court. He submitted that as agaisnt the impugned notice dated 6.11.2015 issued under Section 251(1) of the Income Tax Act, 1961, it is always open to the appellant to respond and at this juncture, writ petition is not maintainable. Reliance has been made on the decision of this court in Commissioner of Income TAx vs. Express Newspapers Ltd. reported in (2003) 179 CTR 0550. 24. On the reliance to t .....

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r enhancement. 25. In this context, learned Senior Standing counsel for the Income Tax department referred to the provisions under Section 251(1) of the Income Tax Act and Section 31(3) of the Tamil Nadu General Sales Tax Act, 1959 and prayed that the latter decision of the Hon'ble Full Bench of this court, be applied to the instant case, and for the above said reasons, prayed for dismissal of the writ appeal. 26. Though on 8.8.2016, Ms.T.C.A.Sangeetha, learned counsel for the appellant made .....

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rding to her, the impugned show cause notice dated 6.11.2015, has to be set aside, as without jurisdiction. Heard the learned counsel for the parties and perused the material on record. 27. At the outset, we would like to address the question as to whether the Commissioner of Income Tax, Appeals-4, Chennai / 1st respondent, has jurisdiction to issue a show cause notice for enhancement and in this regard, have a cursory look at the statutory provision. 28. Section 251(1) of the Income Tax Act, 19 .....

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taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c) in any oth .....

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t raised before the Commissioner (Appeals) by the appellant. 29. A bare reading of the provision itself makes it clear that among other things stated supra in the Section, the Commissioner (Appeals) while disposing of an appeal has the power to enhance the assessment. There is no ambiguity in Section 251 of the Income Tax Act, 1961, and therefore, we are not inclined to burden this judgment, incorporating cases, on the intrepretation of statutes. However, it is useful to consider few decisions. .....

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443, held that since the assessee had not shown the receipts by way of charity in the return and the same not having been considered by the ITO during the assessment, it was not open to the AAC to bring the charity collections as a trading receipt and to include in the taxable income. 4. The decision of the Tribunal, in so far as it relates to the jurisdiction of the AAC to enhance the assessment, has been challenged in this reference by the Revenue. The Tribunal has not, however, gone into the .....

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ve with that of the ITO. It has been so held in CIT v. Kanpur Coal syndicate, (1964) 53 ITR 225 (SC). But, that is not conclusive on the question whether the AAC can bring in a new item or source of income which was not before the ITO, and not considered by him at the state of the assessment. On this question, it is seen that the cases have uniformly held that the power of the AAC to enhance an assessement can only relate to the items of income which were before the ITO, and considered by him or .....

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other reason given by the Supreme Court is that the limit of the power of the AAC to enhave the assessment has been prescribed by the Legislature in ss. 31 and 33B (of the 1922 Act), taking into account the interpretation placed on those sections by the courts, and that if really the Legislature wanted to make a departure, it would have amended s. 31 and specified its intention clearly. In the said case, the Supreme Court has clearly laid down that, in an appeal filed by the assessee, the AAC ha .....

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that the word "consideration" does not mean incidental or collateral examination of any matter by the ITO in the process of assessment, that the matter should be clear from the assessment order that the ITO considered the said item with a view to its taxability or its non-taxability. 29.2. In Goel Die cast Ltd., v. Commissioner of Income-Tax (Appeals), reported in 2008 (297) ITR 72 (P & H), after extracting Section 251 of the Income-Tax Act, 1961, a Hon'ble Division Bench of th .....

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Act that the information, which could form basis for enhancement of income, could not be sourced from the AO. The enough safeguard for exercising of such powers in the form of principle of natural justice has been provided. The Hon'ble Division Bench of Punjab and Haryana High Court also considered a case of the Kerla High Court in Popular Automobiles vs. CIT, (1990) 89 CTR (Ker) 248 : (1991) 187 ITR 86 (Ker) wherein, it has been held as under : "It was contended before us that it is op .....

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ourt , held as follows: 'Keeping in view the plain language of s. 251 of the Act and the interpretation given to it by Kerala High Court in Popular Automobiles case (supra), we are of the view that power to enhance income can be exercised by the CIT(A) even on an information furnished by the AO. For the reasons recorded above, we do not find any merit in the petition and accordingly dismiss the same.' 29.3. In Saheli Synthetics Pvt. Ltd., v. Commissioner of Income-Tax reported in 2008 (3 .....

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powers of enhancement, under Sub-section (2) of Section 251 of the Act such powers have to be exercised after giving a notice for enhancement providing for a reasonable opportunity of showing cause and not in absence of such a notice. This provision itself gives an indication that even if the Appellate Authority wants to process a new source of income which forms part of either return of income or the order of assessment, but was not in challenge in appeal before the Appellate Authority, the Ap .....

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the statutory obligation cast on the Appellate Authority by virtue of provisions of Section 251(2) of the Act. 15. Similarly even where an assessment is set aside simplicitor, without any enhancement proposal, it is always in context of the appeal against an order of assessment and cannot be read to mean that the Appellate Authority granted powers to the Assessing Officer in relation to items of assessment which were never forming part of Appeal before the Appellate Authority.' 30. Section 3 .....

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ns to be recorded in writing - (a) in the case of an order of assessment - (i) confirm, reduce, enhance or annul the assessment or the penalty or both; 251. Powers of the Commissioner (Appeals) (1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment. (aa) in an appeal against the order of assessment in respect of Section 31(3) of the Tamil Nadu General Sales .....

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Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it s .....

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n the facts and circumstances of the reported case, would not lend any support to the case of the appellant, on the power of the Commissioner to enhance. Section 251 of the Act, 1961 itself provides the power, and for enhancement, an opportunity should be provided to the assessee. In State of Tamil Nadu vs. Arulmurugan reported in (1994) 51 STC 391, a Hon'ble Full Bench of this court held as follows: " In one sense, an appeal may be different from an assessment. But the difference lies .....

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ng authority has, in the first instance. If this were not the position, no appellate authority can effectively function while hearing and determining an appeal from an assessment. Under the scheme of section 9 of the Central Sales Tax Act, appeals from Central sales tax assessments will have to be dealt with in the same manner and under the same procedure as provided for under the general sales tax law of the concerned State. The jurisdiction of an appellate authority under the Tamil Nadu Genera .....

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l Sales Tax Act, 1959. The provisions show clearly that the power of the appellate authority concerning an assessment under appeal is no different, and not less wide, than the power of the assessing authority to make the assessment in the first instance. Besides, such power as the appellate authority is empowered to exercise in relation to an assessment under appeal, has got to be exercised only in the same manner and subject to the same conditions, if any, which govern the exercise of the power .....

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fiscal statute as that of the assessing authority must also be possessed to like powers as those of the assessing authority. It is implicit in the very nature of the appellate jurisdiction, as well as the purposes for which that jurisdiction is created by the statute, that the appellate authority will have to function, in the very image of the assessing authority. Appellate proceedings are often truly described as an extension of the assessment proceedings, or as a continuation of the assessment .....

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rcised by the assessing authority named in the particular provision concerned. But, it does not mean that the appellate authority and any other fiscal authority who are in seisin of the assessment, either in appeal, or in revision or in any other proceeding, cannot exercise a like power. The fact that the appellate authority is not expressly mentioned in the provision conferring the enabling power, does not mean that the legislature intended to exclude that authority from the purview of the prov .....

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in 1987 (2) SCC 179, at Paragraph 9, held as follows: "When a show cause notice is issued to a government servant under a statutory provision calling upon him to show cause, ordinarily the government servant must place his case before the authority concerned by showing cause and the courts should be reluctant to interfere with the notice at that stage unless the notice is shown to have been issued palpably without any authority of law. The purpose of issuing show cause notice is to afford o .....

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) SCC 440, at paragraph 5, held as follows: "This Court in a large number of cases has deprecated the practice of the High Courts entertaining writ petitions questioning legality of the show-cause notices stalling enquiries as proposed and retarding investigative process to find actual facts with the participation and in the presence of the parties. Unless the High Court is satisfied that the show-cause notice was totally non est in the eye of the law for absolute want of jurisdiction of th .....

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ice initially, before the aggrieved could approach the court. Further, when the court passes an interim order it should be careful to see that the statutory functionaries specially and specifically constituted for the purpose are not denuded of powers and authority to initially decide the matter and ensure that ultimate relief which may or may not be finally granted in the writ petition is not accorded to the writ petitioner even at the threshold by the interim protection granted." 33.3 In .....

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al. However, ordinarily the High Court should not interfere in such a matter." 34. The issue to be considered is whether the Commissioner of Income Tax, Appeals-4, Chennai, has jurisdiction to consider the status of the appellant as an AOP, in the appeal by the assessee and consequently, to issue the impugned show cause notice, proposing to disallow ₹ 96,60,000/- paid, as remuneration, as interest to the partners, as not an allowable expenditure, and therefore, as to why the same shou .....

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d of an AOP, though the essential conditions to gain the status of the firm required u/s 184 of the IT Act, was absent for the year under consideration. On verification of the schedules 1 and 2 forming part of the Balance Sheet, it is seen that the assessee entity has 13 shareholders in the status of individuals belonging to the Patel family and 2 other shareholders namely, DCP Trading Company and Kripa Trading Company, in all totalling up to 15 shareholders. The last two shareholders are firms .....

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s and, therefore, a firm cannot be a partner. Since the shareholders DCP Trading Company & Kripa Trading Company, are not separate natural or legal entities, their continuance as shareholders in the assessee firm automatically devolves to treat the assessee as an AOP." 35. It is the submission of Mr.T.S.Ravikumar, learned senior standing counsel for the Income Tax department that rightly or wrongly, the Commissioner of Income Tax, Appeals-4, Chennai has proposed to treat the assessee as .....

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disallowed and added back to the income of the appellant, for the relevant year, under consideration. At this juncture, it is relevant to consider what the respondent in his counter affidavit and in the sur rejoinder, has contended, on the aspect of status. " It is submitted that on verification of the records, it was found that two firms namely Ms/.Krupa Trading Co., having six partners and M/s.DCP Trading Co., also having six partners, having office at No.67/3, Spur Tank Road, Chetpet, C .....

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ubmitted that later decision in Kylasa Sarabhaiah vs CIT (1965) 56 ITR 219 and which followed by the Madras High Court in A.Asha & Co., v CIT (1973) 87 ITR 57 has only distinguished the facts with that of the decision in Dhulichand Laxminarayanan (1956) 29 ITR 535 that a firm can be a partner in another firm, provided all the partners of the smaller firms are signatories to the deed of the larger firm and never disapproved it." "3. I submit that the petitioner has accepted that the .....

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isions of the Supreme Court for assessing the petitioner as an AOP cannot be termed as pre determination of the issue. Since the impugned notice itself notes "to show cause" and the petitioner has all the liberty to put forth its case objecting the basis and reasoning for the said show cause notice. In this connection the show cause notice has been issued in order to provide opportunity to the petitioner to file its reply/objections if any against the notice. Therefore the issue agains .....

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, as to whether it is a firm or an AOP. As rightly pointed out by Ms.T.C.A.Sangeetha, learned counsel for the appellant, contradictions in the statement of the Commissioner of Income Tax, Appeals-4, Chennai from the above two paragraphs extracted supra, is apparent. Though at one stage, the Commissioner of Income Tax, Appeals-4, Chennai makes a prima facie statement, regarding the status of the appellant as an AOP, in the sur rejoinder dated 15.01.2016, the appellate authority has stated that th .....

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aised, it cannot be said that the Commissioner, has no powers to decide, if the Assessing Officer, has failed to advert to the said aspect. On this aspect, we are of the considered view, that it is only a show cause notice and it is always open to the appellant to respond. 38. While considering the scope and powers of the appellate authority, under the Income Tax Act, 1961, courts have consistently held that the power of the first appellate authority are coteminous with that of the Assessing Off .....

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