TMI Blog2018 (1) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... iry that the AO ought to have made and which he failed to make. In the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel (1993 (4) TMI 55 - BOMBAY High Court) has been laid down that the consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. The above decision is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 21.03.2017 was an appealable order before the Tribunal and an appeal should be filed. In the meantime there occurred a delay of 93 days in filing the appeals before the Tribunal. The assessees have stated in the affidavit that they were not aware of the intricacies in the income tax matter and relied on the suggestions and advice from Shri Mukesh Khaitan, ACA. Since he did not give proper advice at the right time and since the assessees filed the present appeals on taking an opinion from a senior lawyer, the delay in filing the appeals is not deliberate and was due to unavoidable reasons. It has been mentioned that there is no malafide intention behind not filing the appeals within the prescribed time. It has also been mentioned that the assessees will be put to serious stress if the delay is not condoned. 4. The ld. Counsel for the assessee reiterated the facts as contained in the affidavit filed by the assessee and further placed reliance on the decision of the Hon ble Supreme Court in the case of Collector, Land Acquisition, Anantnag and Anr. Vs Mst. Katiji Ors.in CA No.460 of 1987 judgment dated 19.02.1987. In the aforesaid decision the Hon ble Court took the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. The explanation for the delay in filing the appeal as to the act of the Chartered Accountant misplacing the appeal papers was held to be a sufficient cause for the delay in filing the appeal. 6. The ld. DR opposed the prayer of the assesee for condonation of delay. It was submitted by him that the reasons given in the affidavit for condonation of delay will not constitute a reasonable and sufficient cause for the delay in filing the appeal belatedly. 7. We have given a very careful consideration to the rival submissions. In our view the reasons given in the affidavit for condonation of delay are convincing and these reasons would constitute reasonable and sufficient cause for the delay in filing these appeals. The appeals have been filed by the assessees on 24.08.2017. The orders u/s 263 of the Act were passed on 21.03.2017 and received by the assessee on 28.03.2017. On 30.03.2017 a notice u/s 142 (1) of the Act was issued by the AO pursuant to the directions contained in the impugned orders passed u/s 263 of the Act to do a denovo assessments. The assessments pursuant to the directions u/s 263 of the Act were concluded by the AO on 07.08.2017. On 14.08.2017 the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 was issued by the AO with reference to A.Y.2013-14 in which the AO specifically called from the Assessee the following information :- In case of any short of income/receipt from a partnership firm please furnish a copy of set of accounts of the said firm, its PAN, evidence of filing its return of income for the relevant year and a certified copy of partnership deed. 11. In reply to the aforesaid notice the assessee gave several details. The facts with regard to the assessee becoming a partner of the partnership firm M/s. Avantika Advisory Services LLP was also given by the Assessee. M/s. Avantika Advisory Services LLP was a limited liability partnership(LLP). It had four partners namely Active Nirman Pvt. Ltd, Finestar Consultancy Pvt. Ltd., Sumangal Vintrade Pvt. Ltd and Timely Commercial Pvt. Ltd. The partnership carried on the business of consultancy services dealing in shares, securities, commodities, currencies etc. and also dealing in property and real estate. By a supplementary LLP agreement dated 01.01.2013 the 4 assessees in these appeals were inducted as incoming or new partners in M/s. Avantika Advisory Services LLP. Prior to the aforesaid partnership de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the period between 01.01.2013 to 31.03.2013 there was a profit of ₹ 20,20,37,712/-. The same was distributed as per clause-3 of the partnership agreement in the ratio of 24% each in favour of the new partners .i.e. Assessees in thee appeals and 1% each in the account of the existing partners. 14. As far as the partnership firm M/s. Avantika Advisory Services LLP is concerned for the previous year relevant to A.Y.2013-14 it filed the return of income declaring the total income of ₹ 3,88,780/-. As we have already seen that the firm incurred a loss of ₹ 20,17,79,738/- between 01.04.2012 and 31.12.2013 and earned a profit of ₹ 20,20,37,712/-. The gross income as per the profit Loss Account for the whole period (previous year) from 1.4.2012 to 31.3.2013 was ₹ 3,88,982/- and this was declared in the return of income filed by M/S.Avantika Advisory Services LLP. As far as the partner s capital account is concerned the loss of ₹ 20,17.79,738/- was debited in the capital account of the existing partners because as per clause-5 of the supplementary LLP agreement dated 01.01.2013 they alone are responsible for this loss. As far as the profit from 01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and assessee's share of Profit and Loss was 24%. As per the terms of the supplemental LLP agreement it was clearly provided that new partners will not be responsible for any loss and liability upto 31.12.2012. Thereafter for the period 01.01.2013 to 31.03.2013, Avantika Advisory Services LLP reported a profit of ₹ 20,20,37,712/- which was distributed among all the partners in the ratio defined in the supplemental LLP agreement whereby the assessee's share of profit was ₹ 4,84,89,051/-. The assessee claimed exemption of ₹ 4,86,42,696/ - u/s 10(2A) which includes share of profit of ₹ 4,84,89,051/- from Avantika Advisory Services LLP for A.Y. 2013-14 and it was subsequently allowed at the time of assessment. But as per the provisions of section 10(2A) of the Act, the assessee is entitled for exemption of ₹ 93,355/- being 24% of ₹ 3,88,982/- ₹ 3,88,982/- is profit before tax of Avantika Advisory Services LLP for A. Y. 2013-14. Therefore allowing exemption of ₹ 4,84,89,051/- resulted in underassessment of income by ₹ 4,83,95,696/- IRs. 4.84,89,051/- - ₹ 93.355/-. In view of the above, the assessment comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act. It was submitted that the above clarification in the Circular implies that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners. Even if the income of the firm chargeable to tax becomes NIL on account of exemption/deduction, it does not mean that the income before claiming exemption will be taxed in the hands of the partners. It was pointed out that the income of the Avantika Advisory Services LLP before Tax was ₹ 3,88,982/- and after proving for tax expense of Rs.l,3l,006/-, the Profit after Tax comes to ₹ 2,57,976/- which was apportioned among the partners as per the predetermined sharing ratio. The profit for the period amounting to ₹ 2,57,976/- consists of two components viz a. Losses for the period 01-04-2012 to 31-12-2012 amounting to ₹ 20,17,79,738/-, and b. Profits for the period 01-01-2013 to 31-03-2013 amounting to ₹ 20,20,37,712/- Rs, 2,57,976/- It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80/- only of the said LLP has suffered tax and Asessees share (24%) on such tax suffered income is only ₹ 93307/-. Therefore the assessment made is lacking such examination/verification which is necessary to assess true income of the assessee and such omission to make necessary enquiry has made the order erroneous in so far as prejudicial to the interest of revenue, A revision proceedings can only be initiated if both the conditions specified in sec. 263 of the Act is satisfied. viz. the assessment order was erroneous and it was prejudicial to the interest of the revenue, Consequently. in exercise of the jurisdiction conferred by section 263 of the Act. the said order of assessment dated 30.03.2015 for A. Y, 2013-14 is set aside on the above mentioned specific point with a direction to the A.O. to make necessary examination on the above issues and directed to pass a fresh assessment order and re-compute the assessee's income after making proper enquiries on the foregoing issues, after offering reasonable opportunity to the assessee of being heard. 20. Aggrieved by the aforesaid order of the Pr.CIT, the Assessee is in appeal before the Tribunal. 21. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de something within or to exclude something from the ambit of the main enactment or the connotation of some word occurring in it. An explanation, normally, should be read so as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. It is also possible that an explanation may have been added in a declaratory form to retrospectively clarify a doubtful point in law and by way of abundant caution. It was submitted that exemption can only be claimed on the profits of the firm, and since the assesses who were new partners were not to bear any responsibility on the losses so incurred by the Firm amounting to ₹ 20,17,79,738/- (that was solely borne by existing partners), while claiming exemption under Sec. 10(2A), as shown from the Explanation, it is the positive profit of the firm i.e. 24% of ₹ 20,20,377,12 (being of ₹ 48489051/-) that shall rightly be eligible for exemption - as against computing profit sharing percentage from the gross profit shown at the end of the F.Y. (that comprises of both profit and loss). It was submitted that the claim of the Assessees is in accordance with law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but expenditure of capital nature. He referred the matter back to the Income-tax Officer to examine the same and to decide afresh. The said action of the Commissioner was not approved by the Tribunal. In that background, the High Court of Bombay expressed the view as follows: From a reading of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income- tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue . It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (l). The consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued in the context of deduction in Chapter-VIA to a partnership firm and exemption in Chapter-III to the income of a partnership firm. The Partnership firm could receive certain exempt income and these are not shown as part of total income in the return of income filed by the firm. However these incomes are distributed to the partners as their share of profits of the firm. Merely because such exempt income is not part of the total income declared by the firm, an exempt income cannot be cannot be taxed in the hands of the partners. This was the purport of the Circular No.8/2014. He also pointed out that the Hon ble Karnataka High Court in the case of Vidya Investments (supra) also dealt with the case only of exempt u/s 10(34)of the Act and in that context the Hon ble Karnataka High Court held that exempt income cannot be taxed in the hands of the partners. He laid emphasis on the fact that section 10(2A) of the Act clearly makes a reference only to total income of the firm (in the main section as well as Explanation to section 10(2A) of the Act). He also submitted that the purpose of section 10(2A) of the Act is that the same income should not be taxed twice. It was submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heads of income Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Section 66 reads as under:- Total income in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII. The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of incomes on which tax is not payable and similar words are used in Chapter VII only thus leaving out by implication incomes which do not form part of total income at all as per Chapter III from the scope of s. 66. From the charging provisions of the Act, it is clear that both profit as well as loss which is negative profit must enter into computation, wherever it becomes material. The charge is on total income of the Assessee. Sec. 2 (45) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the partners. 26. Therefore there are two views possible on the issue as to whether the Assessee would be entitled to exemption u/s.10(2A) of the Act on the share of profits credited in the partner s capital account with the firm or the share of total income of the firm declared in the return of income by the firm. It may be true that the CBDT Circular No.8/2014 was issued in the context of deduction in Chapter-VIA to a partnership firm and exemption in Chapter-III to the income of a partnership firm but the Circular is applicable to all profits credited in the books of the firm in the capital account of the partners, even though they are not declared by the firm in their return of income. 27. As pointed out by the Supreme Court in Malabar Industrial Co. s case (supra), the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax 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) it is prejudicial to the interests of the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. 29. The AO has adopted one course permissible in law and therefore jurisdiction u/s.263 of the Act cannot be exercised merely because the CIT does not agree with the view of the AO. 30. We however find that in the show cause notice issued by the CIT u/s.263 of the Act, he termed the order of the AO as erroneous for the reason that the assessee is entitled for exemption of ₹ 93,355/- being 24% of ₹ 3,88,982/- which is the total income declared by the firm Avantika Advisory Services LLP for A. Y. 2013-14. Therefore allowing exemption of ₹ 4,84,89,051/- which is the share of profits of the partner credited in his capital account resulted in underassessment of income by ₹ 4,83,95,696/- (Rs. 4.84,89,051/- - ₹ 93.355/-). In the impugned order the CIT did not consider the correctness or otherwise of the above issue but proceeded to exercise jurisdiction u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue for lack of or inadequate enquiry. The CIT in the impugned order has merely pointed out that the Assessee has claimed exemption u/s.10(2A) of the Act on a sum of ₹ 4,84,89,051 as his share of profits from the firm whereas the firm has declared total income of only ₹ 3,88,780/-. This aspect is clear from the records produced by the Assessee before the AO. The AO has mentioned in the order that all issues and documents were perused and discussed with the AR. The CIT on examination of the Assessment records has invoked his powers u/s.263 of the Act. He has not spelt out in the impugned order as to what was the kind of enquiry that the AO ought to have made and which he failed to make. In the decision of the Hon ble Bombay High Court in the case of CIT Vs. Gabriel 203 ITR 108 (Bom) cited by the Learned Counsel for the Assessee, it has been laid down that the consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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