Income Tax Appellate Tribunal - Lucknow
Surendra Prasad Misra vs Income Tax Officer on 16 September, 2005
Equivalent citations: (2006)104TTJ(LUCK)292
ORDER
Pradeep Parikh, Vice President
1. These cross-appeals are directed against the order of the learned CIT(A) dt. 18th June, 2004 for the asst. yr. 1999-2000. We find it convenient to dispose of both the appeals together by this combined order. The assessee's appeal is taken up first for consideration.
I. ITA No. 606/Luck/2004 (Assessee's appeal)
2. The only issue involved in the assessee's appeal relates to the registration of the assessee-firm.
3. The assessee filed its return of income in the status of a firm disclosing total income of Rs. 44,358. On the basis of the information received from the Cane Development Council, it was found that the assessee had not disclosed its income fully in the return and hence, notice under Section 148 was issued. Admittedly, no compliance was made to this notice. Subsequently, several notices under Section 142(1) of the Act were issued. On some occasions either there was total non-compliance or on some occasion adjournments were sought and on some occasions, either some details were furnished and on one occasion, written submissions were furnished. However, on the final date of hearing given by the AO, the assessee failed to avail of the opportunity and hence, the assessment was completed under Section 144 of the Act at a total income of Rs. 12,81,500. Since the assessment was completed under Section 144, the status of the assessee was taken as AOP in terms of Section 184(5) of the Act. Consequently, no deduction on account of remuneration and interest to partners was allowed. The learned CIT(A) confirmed the action of the AO.
4. The submission of the learned Counsel was that admittedly no books were maintained by the assessee and, in fact, a letter was sent in response to the notice under Section 148 of the Act requesting the AO to treat the original return as filed in consequence to notice under Section 148 of the Act. However, since the assessee could not substantiate this claim, it was held that the assessee had failed to respond to the notice under Section 148. With regard to the several notices issued under Section 142(1), it was submitted that it is true that certain earlier notices were not complied with, but subsequently there was sufficient compliance and the assessee did participate in the proceedings before the AO. The contention of the learned Counsel was that Section 144 was applicable, when:
(a) the assessee failed to make a return under Section 139, or
(b) failed to comply with all the terms of notice issued under Section 142(1); or
(c) when return is filed, the assessee fails to comply with all the terms of notice issued under Section 143(2) of the Act.
Thus, the argument was that what Section 144(1) envisaged was that a best judgment assessment can be done only in case of complete failure. The provisions did not envisage partial failure and, therefore, under such circumstances, the provisions of Section 184(5) could not have been made applicable. It was further argued that Section 184(5) was amended w.e.f. 1st April, 2004 to provide for the disallowance of salary, interest, etc. to the partners if there was a failure as mentioned in Section 144 of the Act. Thus, even if the assessee was held to be an AOP, such a disallowance cannot be made as the year under consideration is asst. yr. 1999-2000.
5. The submission of the learned Departmental Representative was that there was non-compliances on the part of the assessee throughout the assessment proceedings and except filing written submission, there was total non-cooperation on the part of the assessee and hence, Section 184(5) of the Act was rightly invoked by the AO. With regard to the amendment in Section 184(5), the submission was that the purpose of the amendment was different and was not relevant to the issue on hand.
6. We have duly considered the rival contentions and the material on record. The provisions of Sub-section (5) of Section 184 as they stood for the relevant year provided that if there was any failure on the part of the firm as mentioned in Section 144 of the Act, then it shall be assessed as an AOP and all the provisions of the Act shall apply accordingly. Therefore, the first thing, which needs consideration is whether there was any failure on the part of the assessee as mentioned in Section 144 of the Act. The failure, which attracts the provisions of Section 144 have already been noted above while taking note of the submission of the learned Counsel. The AO is required to make assessment to the best of his judgment when the failure on the part of the assessee is such, which would render the determination of the total income on the basis of the material on record very difficult.
7. In the present case, due to the non-co-operative attitude of the assessee, there may be justification on the part of the AO to make the assessment under Section 144 of the Act. However, Section 184(5) does not come into operation automatically when the assessment is made under Section 144 of the Act. Had that been the case, then the provisions would have been worded somewhat in this manner : "Where an assessment is made under Section 144 of the Act, the firm shall not be assessed as such for the said assessment year and, thereupon, the firm shall be assessed in the same manner as an AOP, and all the provisions of this Act shall apply accordingly."
However, this is not the situation. Section 184(5) comes into play only when there is a complete failure as mentioned in Section 144 of the Act. The situational difference has to be noted while applying the failures while making assessment under Section 144 and while applying them for the purposes of Section 184(5) of the Act. While making an assessment under Section 144, due to non-compliance, the AO may find it difficult to determine the exact income of the assessee and, therefore, may have to resort to best judgment. However, while applying those failures for the purpose of Section 184(5), the failure has to be complete, because that would give rise to the presumption that the firm is not genuine and, hence, cannot be treated and assessed as such. Mere non-co-operation on the part of the assessee, cannot render the firm to be non-genuine. In the present case, the several failures to comply with the notices may have rendered the determination of the correct income of the assessee, but that certainly does not lead to the conclusion that the firm is not genuine and, therefore, has to be assessed as an AOP. In the light of this discussion, we hold that the AO was not justified in treating the assessee as an AOP and direct the AO to treat it as a firm.
8. In the result, the appeal of the assessee is allowed.
II. ITA No. 599/Luck/2004 (Department's appeal):
9. First ground in the appeal is against the application of 8 per cent net profit rate by the CIT(A). The assessee is a contractor engaged in civil construction work. During the year under consideration, it had shown contract receipts amounting to Rs. 42,16,082. The AO applied the net profit rate of 10 per cent and worked out the income from construction business at Rs. 4,21,508.
10. Before the CIT(A), it was contended by the assessee that applying the provisions of Section 44AD of the Act, 8 per cent net profit rate may be applied. The CIT(A) accepted the contention of this assessee by observing that the AO has not brought anything on record to justify the estimation of net profit at 10 per cent.
11. We are also of the view that since the AO has arbitrarily applied the rate of 10 per cent without any basis and without any discussion, the rate of 8 per cent applied by the learned CIT(A) is reasonable and we uphold the same.
12. Second ground in the appeal is against the deletion of the addition of Rs. 8,60,000 made under Section 68 of the Act. It was observed by the AO that twelve partners, who constituted the firm had contributed in aggregate a sum of Rs. 8,60,000 towards the capital of the firm. On being asked to explain the source of investment, it was mentioned that all the partners except one had agricultural income derived from land owned either by each of them respectively or by their fathers. The remaining person had stated the source to be from private tuition. Since no confirmations were filed, nor the details of the bank accounts were furnished and also in absence of evidence regarding land holdings, the AO held the entire contribution to be unexplained and added the sum of Rs. 8,60,000 to the total income of the assessee-firm.
13. The learned CIT(A) referred to the judgment of the Allahabad High Court in the case of Surendra Mohan Seth v. CIT and following the same held that since this was the first year of the assessee's business and since the deposits were made on the first day, when the partnership was entered into, the AO was not justified in making the addition to the total income.
14. The submission of the learned Departmental Representative that the assessee never furnished any confirmation, details of the sources or evidence regarding the land holdings of the partners. It was submitted that the CIT(A) deleted the addition on the ground that Section 68 was not applicable in the absence of any books. However, as per the partnership deed, the partners had agreed to maintain the books of account and that they were to be maintained on mercantile system. Therefore, it could be presumed that the partners must have acted as per the terms of the partnership deed and hence, now they cannot turn back to say that no books were maintained. Moreover, in the course of assessment proceedings, the assessee was asked on several occasions to produce the books of account. No doubt, the assessee never produced the books, but never also said that no books were being maintained. Further, the capital accounts as placed on records showed withdrawals by the partners, credit of salaries and interest, etc., and, therefore, again, a presumption could be raised that somewhere some entries must have been recorded. It was also submitted that there was no evidence to support the assessee's claim that the entire capital was introduced before the commencement of business. The learned Departmental Representative placed reliance on certain judgments and pleaded for restoration of the addition.
15. The learned Counsel reiterated the fact that admittedly no books were maintained. The only record that was kept consisted of the certificates issued by the party on whose behalf work was carried out and also the purchase bills. It was contended that since it was the very first year of the business and since the capital was introduced on the very first day of constituting the partnership, it could not be presumed that the assessee had any undisclosed income.
16. On careful consideration of the matter, we uphold the order of the CIT(A) deleting the addition. The partnership deed may have provided for the maintenance of the books of account. That is one of the terms of the agreement, but whether that particular term of the agreement has been implemented or not is a different matter. It is not that the partners may have later agreed not to maintain books, but for whatever reason the books may not have been kept in a proper manner and the partners may have reconciled to that situation. Therefore, in the assessment proceedings, the firm may not have had any record worth the name to produce before the AO. So far as the entries appearing in the capital account are concerned, a rough record of such entry may have been maintained in some crude form, which cannot be properly described as books of account. Therefore, merely on the basis of the terms of partnership, it cannot be presumed that the assessee must have maintained any books of account. As a matter of fact, even the AO has accepted this position as fait accompli which drove him to determine the income on estimate basis. Therefore, now it does not lie in the mouth of the learned Departmental Representative to presume the existence of books of account.
17. We are also in agreement with the contention that this being the first year of the assessee's business and since the capital is stated to have been introduced right from the first day of the partnership, there is no basis to presume that the assessee must be having any undisclosed income. This was also the view expressed by the Supreme Court in the case of CIT v. Bharat Engg. & Construction Co. . Thus, considering all these aspects, we confirm the deletion of the addition of Rs. 8,60,000.
18. In the result, the appeal of the Department is dismissed.
19. Summarizing the result of this order, the appeal of the assessee (ITA No. 606/Luck/2004) is allowed and the appeal of the Department (ITA No. 599/Luck/2004) is dismissed.