Ita/327/2002 Of M/S.mubarak Trading Company v. Commr.of Income Tax

PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR TUESDAY, THE 29TH JANUARY 2008 / 9TH MAGHA 1929 ITA.No. 327 of 2002() --------------------- AGAINST ORDER IN ITA.230/COCH/2002 DATED 24.7.2002 OF I.T.A.TRIBUNAL,COCHIN BENCH. .................... APPELLANT: --------------------------- M/S. MUBARAK TRADING COMPANY, P.T.ROAD, BADAGARA, REPRESENTED BY PARTNER, K.ABDUL AZEEZ, KALHATH HOUSE. BY ADV. SRI.T.M.SREEDHARAN SRI.A.V.MURALEEDHARAN SMT.JAYASREE MANOJ SRI.TONY CHACKO SMT.PREMLA O.T. RESPONDENTS: ------------- THE COMMISSIONER OF INCOME TAX, CALICUT. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT FOR R SRI.GEORGE K. GEORGE, SC FOR IT FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29/01/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: -------------------------------------------- I.T.A. No. 327 OF 2002 -------------------------------------------- Dated this the 29th day of January, 2008 C.R. JUDGMENT C.N. Ramachandran Nair,J. The appellant, a partnership firm, has filed this appeal underSection 260A of the Income Tax Act challenging the order of theIncome Tax Appellate Tribunal confirming denial of status to them as a"firm" in proceedings completed by the Commissioner of Income Taxunder Section 263 of the Act. Appellant did not file income tax returnfor the assessment year 1994-95 within the stipulated period, but filed abelated return on 19.11.1996. Even though the assessing officer issuedproceedings under Section 143(1)(a) of the Act, he simultaneouslyissued notice under Section 148 of the Act proposing to make incomeescaping assessment under Section 147 of the Act. On receipt of noticethe appellant requested the assessing officer to treat the belated returnalready filed as one filed against notice issued under Section 148 of theAct. The assessing officer thereafter completed the assessment underSection 147 read with Section 143(3), but assigned the status of firm to the appellant. The Commissioner of Income tax in suo motu revisionproceedings initiated under Section 263 of the Act, declared thatappellant is not entitled to be assessed in the status of a "firm" andshould be assessed as "Association of persons" on account ofappellant's failure to file return within the time which is a failure underSection 144(1) of the Act referred to in Section 184(5) of the Act. Theappeal filed by the appellant before the Tribunal against order underSection 263 was unsuccessful and hence this appeal is filed by theassessee. 2. Even though appellant has raised four questions of law fordecision by this Court, we find only one substantial question of lawarising from the order of the Tribunal for our decision and the saidquestion redrafted by us is given hereunder: Whether, on the facts and in the circumstances of thecase, and particularly in view of admitted failure ofthe appellant to file return under sub-section (1), or(4) or (5) of Section 139, the appellant is entitled tobe assessed in the status of a "firm" or has to beassessed in the status of "association of persons"under Section 184(5) of the Income Tax Act? 3. We have heard counsel appearing for the appellant and senior 2. Even though appellant has raised four questions of law fordecision by this Court, we find only one substantial question of lawarising from the order of the Tribunal for our decision and the saidquestion redrafted by us is given hereunder: Whether, on the facts and in the circumstances of thecase, and particularly in view of admitted failure ofthe appellant to file return under sub-section (1), or(4) or (5) of Section 139, the appellant is entitled tobe assessed in the status of a "firm" or has to beassessed in the status of "association of persons"under Section 184(5) of the Income Tax Act? 3. We have heard counsel appearing for the appellant and senior counsel appearing for the respondent-Department. Counsel appearingfor the appellant relied on the unreported decision of the KarnatakaHigh Court in I.T.A.No. 4 of 2004 dated 20.2.2004 and also paragraph66 of the Explanatory Note to the Finance Act, 2003, by which Section184(5) was amended with effect from 1.4.2004 and contended that inorder to deny the status of a "firm" best judgment assessment has to bemade under Section 144 of the Act. Counsel specifically referred tomandatory provision of Section 144 which states that the assessingofficer on being satisfied by the failure of any of the three conditionsreferred to therein shall after giving the assessee an opportunity ofbeing heard make an assessment to the best of his judgment. Referringto this provision, counsel contended that in the absence of bestjudgment assessment under Section 144(1), Section 184(5) of the Acthas no application. In this case, since assessment is specifically madeunder Section 147 read with Section 143(3), appellant was entitled toassessment in the status of a "firm" is the contention raised by counselfor the appellant. On the other hand, senior counsel appearing for therespondents contended that all what Section 184(5) says prior to theamendment is that when there is a failure on the part of the assessee of any of the conditions referred to in Section 144(1), such failure wouldlead to disentitlement of status as Firm and assessment in the status asAOP. In order to appreciate the rival contentions, we extracthereunder Section 184(5) prior to the amendment by Finance Act,2003 which is relevant for decision in this case: 184(5) Notwithstanding anything contained in theforegoing provisions of this section, where, in respectof any assessment year, there is on the part of a firmany such failure as is mentioned in Section 144, thefirm shall not be assessed as such for the saidassessment year and, thereupon the firm shall beassessed in the same manner as an association ofpersons, and all the provisions of this Act shall applyaccordingly. From the above it is clear that section is attracted if there is on the part of the assessee any such failure as is mentioned in Section 144 of theAct and failures referred to in Section 144 are the failures to makereturn required under clauses (a) to (c) which are extracted hereunderfor easy reference: Best judgment assessment. 144(1) If any person -- (a) fails to make the return required under sub-section (1) of section 139 and has not made areturn or a revised return under sub-section (4)or sub-section (5) of that section, or (b) fails to comply with all the terms of a noticeissued under sub-section (1) of section 142 orfails to comply with a direction issued undersub-section (2A) of that section, or (c) having made a return, fails to comply withall the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account allrelevant material which the Assessing Officer hasgathered, shall, after giving the assessee anopportunity of being heard, make the assessment ofthe total income or loss to thebest of his judgment anddetermine the sum payable by the assessee on thebasis of such assessment: Provided ........" (b) fails to comply with all the terms of a noticeissued under sub-section (1) of section 142 orfails to comply with a direction issued undersub-section (2A) of that section, or (c) having made a return, fails to comply withall the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account allrelevant material which the Assessing Officer hasgathered, shall, after giving the assessee anopportunity of being heard, make the assessment ofthe total income or loss to thebest of his judgment anddetermine the sum payable by the assessee on thebasis of such assessment: Provided ........" Admittedly the return filed by the appellant was beyond the periodprovided under sub-section (1) or subsection (4) of Section 139 andtherefore such return cannot be treated as a return referred to in clause(a) of Section 144(1). So much so, there is failure on the part of theappellant as contemplated under Section 144 and therefore Section 184(5) is attracted. 4. However, the question to be considered is whether in order todeny the status as Firm and to assess the assessee as AOP underSection 184(5) consequent upon the failure under Section 144(1), theassessment has to be best judgment assessment or not. Counsel for the;appellant has relied on the Notes on Clauses of Finance Bill 2003 bywhich Section 184(5) was amended and contended that status of Firmcannot be disallowed except when assessment is made under Section144 of the Act. We do not know how appellant can rely on anamendment of 2003 for the assessment for 1994-95. In any case, we donot think the observation in the Notes on Clauses can supersede mainprovision which is very clear. In fact what is stated in the Notes onClauses is that the amendment itself is to rationalise the provision,which pre-supposes that the provision that existed prior to theamendment was irrational. The provision existed prior to amendmentdisentitles a firm from retaining registration, if there was failure inregard to filing of return or complying with the notice issued by theOfficer. However, major violation of evasion of tax leading to incomeescaping assessment still entitles a firm for retaining registration, ifthere was technical compliance in filing returns or complying with notices. Probably it is to get over this irrational and discriminatoryconsequence that Section 184(5) and Section 185 are amendedspecifying the disability of firms for failures referred to in Section 144of the Act. So far as unreported judgment of the Karnataka High Courtis concerned, we do not find any application to the facts of this casebecause the case decided by the Karnataka High Court is the one wherethe assessee was disabled from filing the return in time on account ofseizure and detention of books of accounts by the Department. TheKarnataka High Court held that failure to file return can arise onlywhen it was possible for the assessee to file return in time. Thereforethe case decided by the Karnataka High Court applies to the facts ofthat case only and has no application here. 5. Another contention raised by the appellant is that unless thereis Section 144 assessment, the assessee cannot be said to havecommitted a failure referred to in clauses (a) to (c) of the said Section.We are unable to accept this position because failure of any of theconditions mentioned in clauses (a) to (c) need not always lead to bestjudgment assessment under Section 144. For example, if an assesseefails to file return in time, but he produces entire books of of accounts 5. Another contention raised by the appellant is that unless thereis Section 144 assessment, the assessee cannot be said to havecommitted a failure referred to in clauses (a) to (c) of the said Section.We are unable to accept this position because failure of any of theconditions mentioned in clauses (a) to (c) need not always lead to bestjudgment assessment under Section 144. For example, if an assesseefails to file return in time, but he produces entire books of of accounts against the notice issued by the assessing officer, still assessment canbe completed based on the book results and such assessment iscertainly not a best judgment assessment under Section 144 of the Act.A best judgment assessment, in our view, arises only when theassessing officer determines income based on materials gathered byhim and not when assessment is made based on books of accountssubmitted by the assessee. A best judgment assessment can arise evenin income escaping assessment under Section 147 because Section 148makes it clear that a return filed against notice issued under Section148 should be proceeded with as if it is a return under Section 139.This means that in a proceeding initiated under Section 147 theassessing officer can make a best judgment assessment if the books ofaccounts produced by the assessee are unacceptable. Therefore it is ourview that even though the word "or" is used in clauses (a) to (c) ofSection 144, a best judgment assessment is called for only when thereis cumulative failure of all the conditions including failure to furnishdetails of income and prove the same through his accounts anddocuments. Even though there is failure on the part of the appellant tofile return in time, which is a failure referred to in Section 144, still best judgment assessment was not made by the assessing officer , in asmuch as assessment completed is one under Section 147 read withSection 143(3) of the Act. However, since there is failure on the partof the appellant in filing the return referred to clause (a) of Section 144,Section 184(5) is attracted, and appellant is rightly declined the statusof a "firm" and assessment was ordered to be revised by theCommissioner under Section 263 in the status of "association ofpersons". We therefore agree with the view of the Tribunal inconfirming the Commissioner's order. Accordingly, appeal isdismissed. (C.N.RAMACHANDRAN NAIR)Judge.Judge. (T.R.RAMACHANDRAN NAIR) Judge. kk