Mamta Bhavesh Dave v. Income Tax Officer, Ward

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/SPECIAL CIVIL APPLICATION NO. 17915 of 2018 =============================================MAMTA BHAVESH DAVE VersusINCOME TAX OFFICER, WARD 3, GANDHINAGAR ============================================= Appearance: MR B S SOPARKAR(6851) for the Petitioner(s) No. 1M R BHATT & CO.(5953) for the Respondent(s) No. 1============================================= CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAandHONOURABLE MS. JUSTICE NISHA M. THAKORE Date : 18/01/2022 ORAL ORDER (PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA) 1.Draft amendment is allowed. Necessary incorporationshall be carried out by today itself. 2.By this writ application under Article 226 of theConstitution of India, the writ applicant/an assessee seeks tochallenge the Notice issued by the Income Tax Departmentdated 31.03.2018 under Section 148 of the Income Tax Act,1961 (for short ‘the Act, 1961) for reopening of the assessmentunder Section 147 of the Act with respect to A.Y. 2011-12. 3.It appears from the reasons recorded by the Income TaxOfficer that the department intends to reopen the assessmenton the ground that the writ applicant herein as one of thepartners of the partnership firm, failed to show theremuneration and interest received from the partnership firmwhen the return of the writ applicant was processed under Section 143(1) of the Act on 06.03.2012. The case of thedepartment is that the total remuneration and interest paid isto the tune of Rs.75,11,147/-. Each of the partners have ashare of 50% in the partnership firm. The writ applicant hereinhas been shown as a “Working Partner”. The writ applicantfiled her objections dated 28.10.2018 pointing out that she hadnot received any income in the form of remuneration andinterest from the partnership firm and therefore, there was noquestion of adding some income or showing such income inthe return of income. 4.The objections raised by the writ applicant came to bedisposed of vide the order dated 01.11.2018 on the groundthat the writ applicant/assessee had received share of profitfrom the firm and such share received by the writapplicant/assessee as per the partnership deed would includethe remuneration and interest which has not been debitedfrom the profit and loss account of the firm. 5.We have heard Mr. Bandish Soparkar, the learnedcounsel appearing for the writ applicant and Mr. M.R. Bhatt,the learned Senior Counsel appearing for the Revenue. 6.Mr. Soparkar, pointed out that the department alsothought fit to proceed against the partnership firm andrestricted the deduction under Section 10A by applying theprovisions of Section 10A read with Section 80-IA(8) and 80-IA(10) of the Act. 7.It appears that the partnership firm challenged the orderpassed by the CIT(A) by filing an appeal before the Income TaxAppellate Tribunal. The Income Tax Appellate Tribunal allowed the appeal holding as under: “8.We have heard the rival contentions and perused thematerials available on record. The controversy in the case before usrelates to the deduction of remuneration/interest on partner'scapital not claimed by the assessee in its profit and loss account.The fact is that there was a specific clause in the deed ofpartnership. Therefore, the deduction for the remuneration/ intereston capital was made by the AO which was subsequently confirmedby the ld. CIT(A) with the direction to allow the claim of deduction tothe firm for the remuneration/interest on capital but tax the same inthe hands of the partners of the firm. 8.1 It is an undisputed fact that the deed of partnership requires apartner to claim the deduction for the remuneration and the intereston capital. The dispute arises whether the clause mentioned in thedeed of partnership is compulsory/mandatory on the part of theassessee. 8.1 It is an undisputed fact that the deed of partnership requires apartner to claim the deduction for the remuneration and the intereston capital. The dispute arises whether the clause mentioned in thedeed of partnership is compulsory/mandatory on the part of theassessee. 8.2 The partnership firm comes into existence with mutualunderstanding between the persons. These understanding can bereduced in writing or without in writing the same. Thus, it is clearthat it is not necessary to execute the deed of partnership in writing.However, in the current scenario, it is not possible to work under themodule of the partnership without executing the same in writing. Itis because to run the business one needs to have a bank account,PAN, etc. which is not possible to obtain without having the deed ofpartnership in writing. Thus, the deed of the partnership will revealthe understanding on the basis of which partners agreed to workbetween them. From the above, it is clear that the clauses mentioned in thepartnership deed are not mandatory but made to avoid anyambiguity and misunderstanding. As such, there is no disputeamong the partners for not claiming the remuneration/interest of oncapital in the profit and loss account of the firm. Therefore, in ourconsidered view the conduct of the partners of the firm suggeststhat it was agreed not to claim any remuneration/interest on thecapital account. In holding so, we find support and guidance fromthe order of Amritsar Tribunal in the case of ITO vs. Mala Tondon inITA No.319/ASR/2010 vide order dated 14.06.2011 wherein it washeld as under: "6. We have heard both the parties and given our thoughtfulconsideration to the rival submissions, examined the facts ofthe case, evidence and material placed on record and alsogone through the orders of the authorities below. A carefulperusal of the impugned appellate order clearly reveals thatthe Ld. CIT(A), has considered and adjudicated the issue, inquestion, in greater detail. after appreciation of the evidencesand material on record, as also the legal and factual positionof the case. Needless to say that the impugned appellateorder is well reasoned and based on the cogent and crediblematerial and facts of the case. However, it would pertinent toreproduce the relevant part of the decision of the CIT(A), forthe purpose of proper appreciation of the same: "3.4. I have considered the rival submissions carefully. Anidentical issue has been decided in the case of Rohit Tandon, husband of the appellant, the other partner in M/s. Dynamechholding 50% share in the partnership firm for the assessmentyear 2006-07. In that case also, the AO had added theinterest payable on the capital of Sh. Rohit Tandon andremuneration payable to Sh. Rohit Tandon to the total incomeof the assessee, I have adjudicated that appeal vide orderdated 14.7.2009 in appeal No.591/08-09/CIT(AV/Jal and havedeleted similar additions as under: "9.5 I have considered the rival submissions carefully. Clause4 and 5 of the partnership deed providing for interest oncapital and salary are as under: "4. The capital of the partners is as per their respectiveaccounts in the books of the partnership. The partners shallbe entitled to interest on their capital 18% per annum or atsuch other rate or rates as the partners may at the end ofeach financial year mutually settled subject to the maximumamount admissible under the Income-tax Act, 1961. 5. Both the partners shall diligently attend to the business ofthe partnership and carry on the same for their greatestcommon advantage. Both the working partners shall beentitled to a remuneration of Rs.48,000/- per annum each orat such other rate or rates as the partners may at the end ofeach financial year, mutually settle subject to the maximumamount admissible under the Income-tax Act, 1961. "4. The capital of the partners is as per their respectiveaccounts in the books of the partnership. The partners shallbe entitled to interest on their capital 18% per annum or atsuch other rate or rates as the partners may at the end ofeach financial year mutually settled subject to the maximumamount admissible under the Income-tax Act, 1961. 5. Both the partners shall diligently attend to the business ofthe partnership and carry on the same for their greatestcommon advantage. Both the working partners shall beentitled to a remuneration of Rs.48,000/- per annum each orat such other rate or rates as the partners may at the end ofeach financial year, mutually settle subject to the maximumamount admissible under the Income-tax Act, 1961. ." 9.6. The aforesaid clauses of the partnership deed areclearly enabling clauses since the word used in both theclauses are "the partners shall be entitled...". This shows thatthe partners were entitled to get interest on the capital and todraw remuneration for their services without binding them todo so. This, in my opinion, is not a mandatory provision in thepartnership deed which would be worded like the partnersshall be provided/given... Further, it is also mentioned in boththese clauses, that the rate or rates of interest and theremuneration would be mutually settled by the partners atthe end of each financial year. Now, a partnership, by its veryname and as per the provisions of Partnership Act is by will ofthe partners. There are only two partners in this firm. bothhaving equal shares. The accounts drawn up at the end of theyear reveal that no interest on the capital or remuneration tothe partners has been provided in the accounts of thefirmM/s.Dynamech. This act by itself signifies that thepartners have agreed not to provide interest on their capitalor to charge remuneration for their services. In my opinion,the terms of the partnership deed do not signify that intereston capital and remuneration to partners had necessarily to beprovided in the account of M/s. Dynamech… 9.7. The AO has drawn support from the provisions of section801A(10) This sub-section provides that where the affairsbetween the eligible business and any other person is soarranged that more than ordinary profits arise to theassessee, the AO shall, in computing the profit and gains ofsuch an eligible profits for the purposes of deduction underthis section, take the amount of profits as may be reasonablytaken to have been derived therefrom. Thus sub-section hasbeen made applicable to section 801B by virtue of sub-section(13) of section 80IB. However, this sub-section only enables,the AO to effect the profit of the undertaking claimingdeduction u/s 801B, which is M/s. Dynamech in this case. This does not enable the AO to alter the profits or the income ofthe other person referred to in this sub-section. It is a factthat the assessee has not received interest and remunerationfrom M/s. Dynamech. As noted earlier, the terms ofpartnership deed are not so worded so as to make payment ofinterest on capital and remuneration to partners asmandatory. It is also not rebutted by the AO that no interestor remuneration has been received by the appellant in earlieryears also. This income has not accrued or arisen to theassessee. I therefore, hold that the AO was not justified inmaking the addition on account of interest on capital in M/s.Dynamech and remuneration receivable from M/s. Dynamech.This ground of appeal is allowed." 3.5. Following the decision in the case of Sh. Rohit Tandon(supra), ground No.3 of appeal is allowed." 6.1. In view of the above, we do not find any infirmity in thefindings of the CITIA), as the same are based on properappreciation of the legal and factual position of the case.Accordingly, this appeal of the revenue is dismissed." 3.5. Following the decision in the case of Sh. Rohit Tandon(supra), ground No.3 of appeal is allowed." 6.1. In view of the above, we do not find any infirmity in thefindings of the CITIA), as the same are based on properappreciation of the legal and factual position of the case.Accordingly, this appeal of the revenue is dismissed." From the above we note that it is not compulsory to claim theremuneration/interest on partner's capital account despite the factthere was a specific clause in the deed of partnership. 8.3 The next controversy arises in the case before us from thedirections given by the Id. CIT(A) to tax the amount of remuneration/interest on partner's capital account in the hands of the partners. Itis a fact that the AO allowed the claim of the deduction for theremuneration/interest on partner's capital account in hiscomputation of income. But the same was added back by the AO onthe ground that it was not claimed as a deduction in the profit andloss account. However. the ld. CIT(A) directed to delete the additionmade in the hands of the firm and further directed to tax the samein the hands of the partner of the firm. 8.4From the preceding discussion, we note that there was noissue to tax the remuneration/interest on the capital in the hands ofthe partners. Thus, in our considered view ld. CIT(A) has exceededhis jurisdiction by giving direction to the AO for the dispute which isnot arising from the order of the AO. In this regard, we find supportand guidance from the order of this Tribunal in the case of IncomeTax Officer vs. Biotech Ophthalmic Pvt. Ltd. reported in ITANo.443/Ahd/2011 vide order dated 31.08.2014 wherein it was heldas under: “9. The assessee has also moved a cross objection whichseeks to expunge CIT(A)'s directions to bring this deemeddividend to tax in the hands of Shri Mehul P Asnani, director inassessee's company. 10. Learned counsel submits that while deciding appeal of theassessee before him, it was not open to the CIT(A) to giveadjudication on taxability of this income in the hands of aperson other than this assessee. He has clearly exceeded hisjurisdiction in holding that the amount in question is taxablein the hands of Shri Mehul P Asnani. He urges us to expungethese observations. In support of his prayer. learned counselfor the assessee invites our attention to a decision ofcoordinate bench in the case of Jagat Minerals (P.) Ltd. v. Dy. CIT [IT Appeal Nos 2110, 2403 and 2750/Ahd/11: dated22.4.2015) whereby similar remarks made by the CIT(A) havebeen modified 11. Learned Departmental Representative, on the other hand,relies upon the stand taken by the CIT(A), He submits thatwhen the impugned addition was deleted solely on theground that it was required to be taxed in the hands of thedirector concerned, the CIT(A) was quite justified in directingthe Assessing Officer to bring it to tax in the hands of thatdirector. 12. We have heard the rival contentions, perused the materialon record and duly considered facts of the case in the light ofthe applicable legal position. CIT [IT Appeal Nos 2110, 2403 and 2750/Ahd/11: dated22.4.2015) whereby similar remarks made by the CIT(A) havebeen modified 11. Learned Departmental Representative, on the other hand,relies upon the stand taken by the CIT(A), He submits thatwhen the impugned addition was deleted solely on theground that it was required to be taxed in the hands of thedirector concerned, the CIT(A) was quite justified in directingthe Assessing Officer to bring it to tax in the hands of thatdirector. 12. We have heard the rival contentions, perused the materialon record and duly considered facts of the case in the light ofthe applicable legal position. 13. In our considered view, it is important to first understandthe role played by the findings or directions of this nature. Weare dealing with the assessment year 2006-07 and the orderof the CIT(A) was served on the Assessing Officer on 5thJanuary 2011. Obviously, the assessment must have attainedfinality, by the time the Assessing Officer came to know ofthese directions, since in terms of Section 153(1) "no order ofassessment shall be made under section 143 or section 144at any time after the expiry of (a) two years from the end ofthe assessment year in which the income was firstassessable; or (b) one year from the end of the financial yearin which a return or a revised return relating to theassessment year commencing on the 1st day of April, 1988,or any earlier assessment year, is filed under sub-section (4)or sub-section (5) of section 139, whichever is later". Nodoubt, under section 153(2A), when an assessment is setaside or cancelled under section 250, 254, 263 or 264 a freshassessment, as a result of such a cancellation, can be framedwithin one year from the end of the financial year in which theorder under section 250 or section 254 is received by theCommissioner or the order under section 263 or section 264is passed by the Commissioner. However, this provisioncomes into play only when the order passed under section250, 254, 263 or 264 in the case of the assessee himself. Thatis not the situation that we are dealing with at present. 14. Section 153(3), dealing with the impact of the findings ordirection given by the revisionary, appellate or judicialauthorities, prescribes that "the provisions of inter alia section151(1) "shall not apply to the ....... assessments,reassessments and recomputations which may, s bject to theprovisions of sub-section (2A) be completed at any timewhere the assessment, reassessment or recomputation ismade on the assessee or any person in consequence of or togive effect to any finding or direction contained in an order,under sections 250, 254, 260, 262, 263 or 264 1535 or in anorder of any court in a proceeding otherwise than by way ofappeal or reference under this Act". In other words, wheneffect of a finding or direction of an revisionary, appellate orjudicial authority is to be given, that exercise can be carriedout any point of time de hors the time limits specified insection 153(1). However, even this relaxation of time limits issubject to certain riders, including rider contained inExplanation 3 to Section 153(3) which provides that, where bya revisionary, appellate or judicial order of the above nature,an income is excluded from the income of one assessee andheld to be income of the other assessee, the assessment of such an income in the hands of another assessee "be deemedto be one made in consequence of or to give effect to anyfinding or direction contained in the said order, provided suchother person was given an opportunity of being heard beforethe said order was passed (Emphasis by underling supplied byus)." Clearly, therefore, unless the person in whose handincome is directed to be added has been heard before suchdirections are issued, the directions issued by the revisionary,appellate or judicial authority are an exercise in futility. Thisrider equally relevant in respect of reopening of anassessment under section 154, as a result of the findings ordirections of the revisionary, appellate or judicial authorities. 15. It is an position, on the facts of this case, that Shri Mehul PAsnani, in whose hands CIT(A) has directed this income to beadded, has not been granted an opportunity of hearing by theCIT(A) before these directions were issued. Such being theadmitted facts, it's beyond doubt that a completedassessment cannot be disturbed or reopened to give effect tosuch findings or directions. 16. There is, however, an even more fundamental issue, andthat issue is whether the direction that the deemed dividendincome being brought to tax in the hands of Shri Asnani is adirection necessary for the disposal of case. This issueassumes significance in view of the legal position that, as heldby Hon'ble Supreme Court in the case of Rajinder Nath v. CIT[1979] 120 ITR 14/2 Taxman 204, "As regards the expression"direction" in s. 153(3)(ii) of the Act, it is now well settled thatit must be an express direction necessary for the disposal ofthe case before the authority or Court. It must also be adirection which the authority or Court is empowered to givewhile deciding the case before it." Their Lordships then addedthat "The expressions "finding" and "direction" in s. 153(3)(ii)of the Act must be accordingly confined" and that "Sec 153(3)(ii) is not a provision enlarging the jurisdiction of the authorityor Court." 17. As to what constitutes "an express direction necessary fordisposal of a case", we find the following guidance from TheirLordships: "To be a necessary finding, it must be directlyinvolved in the disposal of the case. It is possible incertain cases that in order to render a finding inrespect of A, a finding in respect of B may be calledfor. For instance, where the facts show that theincome can belong either to A or B and no one else,a finding that it belongs to B or does not belong toB would be determinative of the issue whether itcan be taxed as A's income. A finding respecting Bis intimately involved as a step in the process ofreaching the ultimate finding respecting A. If,however, the finding as to A's liability can bedirectly arrived at without necessitating a finding inrespect of B, then a finding made in respect of B isan incidental finding only. It is not a findingnecessary for the disposal of the case pertaining toA. The same principles seem to apply when thequestion is whether the income under enquiry istaxable in the assessment year under considerationor any other assessment year. As regards theexpression "direction" in s. 153(3)(ii) of the Act, it is now well settled that it must be an expressdirection necessary for the disposal of the casebefore the authority or Court. It must also be adirection which the authority or Court is empoweredto give while deciding the case before it." now well settled that it must be an expressdirection necessary for the disposal of the casebefore the authority or Court. It must also be adirection which the authority or Court is empoweredto give while deciding the case before it." 18. Let us now, in the above light, revert to the facts of thecase before us. The authorities below were dealing with adeeming fiction, i.e. deemed dividend, about an income. Thecase of the assessee was that this deeming fiction of deemeddividend could not be invoked in the present case becausethe assessee did not hold the shareholdings in the companywhich had extended loan to the assessee. This plea has beenaccepted by the CIT(A), but, for accepting such a plea, it isnot a condition precedent that this deeming fiction mustcome into play in the hands of some other assessee otherthan this assessee. Whether the loan received by theassessee is held to be deemed dividend in the case of someother person or not is wholly irrelevant for deciding whetheror not this is deemed dividend in the hands of this assesseeor not. Learned CIT(A) holds that since Mehul P Asanai is ashareholder in the said company, the receipt can be added asdeemed dividend in the hands of Mehul P Asnani, but thenwhat he overlooks is that all the conditions precedent fortaxing a receipt as deemed dividend are to be satisfied quathe assessee in whose income is to be taxed, and being ashareholder is only one such precondition. Learned CIT(A)has, as noted earlier in this order, observed that "If therecipient of loan is not a shareholder and the transaction iscovered by this provision, the addition is to be made in thehands of the shareholder", but then it is difficult tocomprehend as to how one can come to a conclusion that atransaction is covered by this provision, i.e. deeming fiction ofthe deemed dividend, without examining the transactionbetween the shareholder of the company and the company inwhich such shares are held. Without even giving a findingabout satisfaction of all these conditions, learned CIT(A)proceeds to hold that it is an income to be taxed in the handsof the shareholder i.e. Mehul P Asnani. It is a classic case ofputting cart before the horse and is wholly based on fallaciouslogic. The direction is thus not only unnecessary but patentlyincorrect. Viewed thus, the direction given by the CIT(A), fortaxability of this deemed dividend in the hands of Shri Asnani,does not constitute "ant express direction necessary fordisposal of a case". Nothing really turns on his direction, assuch. Even if this direction was correct, learned CIT(A) had nobusiness to give such a direction without affording anopportunity of hearing to the affected party and that toowhen it was absolutely necessary to decide the issue inappeal before him. There is a certain degree of restraint thatis expected of the appellate authorities in discharge of theirjudicial functioning. 19. As we part with our adjudication on this issue, we mayalso take note of learned Departmental Representative'scontention that the assessee has no locus standi to raise anygrievance against these directions as he is not the aggrievedparty vis-à-vis these directions. We are unable to see anymerits in this plea either. The manner in which the appeal hasbeen decided by the CIT(A) gives an impression, which is awholly inappropriate impression and which has also beenreiterated before us by the learned DepartmentalRepresentative, that the impugned additions have been 19. As we part with our adjudication on this issue, we mayalso take note of learned Departmental Representative'scontention that the assessee has no locus standi to raise anygrievance against these directions as he is not the aggrievedparty vis-à-vis these directions. We are unable to see anymerits in this plea either. The manner in which the appeal hasbeen decided by the CIT(A) gives an impression, which is awholly inappropriate impression and which has also beenreiterated before us by the learned DepartmentalRepresentative, that the impugned additions have been deleted in the hands of the assessee as these additions arerequired to be made in the hands of someone else.. Thedeletion of the impugned addition in the hands of theassessee company has been thus projected to be, thoughperhaps at a somewhat subliminal level, dependent of theaddition being confirmed in the hands of the director. Thedirections given by the CIT(A) do prejudice. interests of theassessee inasmuch as these directions not beingimplemented may be viewed as detrimental to the interestsof the assessee but then the directions suffer from legalinfirmities, from glaring procedural flaws, and are incapable ofbeing implemented anyway. In any case, since thesedirections are given in the case of this assessee and theappellate order by the CIT(A) in the case of this assesseecannot be challenged, in appeal before us, by a third party,the only way to prevent these directions reaching the finalityis a challenge by this assessee himself, particularly because,as is the settled legal position, the statutory provisions are tobe construed ut res magis valeat quam pereat i.e., in such amanner as to make it workable rather than redundant. Theassessee before us, therefore, has, in our considered view,locus standi to challenge legality of these directions. 20. In view of the above discussions, and bearing in mindentirety of the case, we vacate the directions in questions.The cross objection is thas allowed." In view of above, we hold that the ld. CIT(A) erred in directing theAO to tax the amount of remuneration and interest in the hands ofthe partner of the firm. Thus, we set aside the order of ld. CIT(A) anddirect the AO to the addition in terms of the above. Thus, the groundof appeal of the assessee is allowed.” 8.Thus, the ITAT adjudicated the controversy as regardsthe deduction of remuneration/interest on the partners capitalnot claimed by the assessee i.e. the partnership firm in itsprofit and loss account. The Tribunal took notice of the factthat the CIT Appeals had directed to tax the amount ofremuneration/interest on the partners capital account in thehands of the partners. The AO had allowed the claim of thededuction for the remuneration/interest on the partners capitalaccount however, the same was added back by the AO on theground that it was not claimed as a deduction in the profit andloss account. The CIT Appeals directed to delete the additionmade in the hands of the firm and further directed to tax thesame in the hands of the partner of the firm. The aforesaid wasnot approved by the Tribunal taking the view that there was no good ground to tax the remuneration/interest on the capital inthe hands of the partners and the CIT(Appeal) could be said tohave exceeded its jurisdiction by issuing such directions to theAO for the dispute which was not arising from the order of theAO. 9.In view of such findings recorded by the AppellateTribunal, nothing survives in the present matter so far as thereopening of the assessment of the partner of the partnershipfirm is concerned. good ground to tax the remuneration/interest on the capital inthe hands of the partners and the CIT(Appeal) could be said tohave exceeded its jurisdiction by issuing such directions to theAO for the dispute which was not arising from the order of theAO. 9.In view of such findings recorded by the AppellateTribunal, nothing survives in the present matter so far as thereopening of the assessment of the partner of the partnershipfirm is concerned. 10.At this stage, Mr. Soparkar, pointed out that a Co-ordinate Bench of this Court while issuing Notice vide orderdated 28.11.2018, had directed by way of ad-interim relief thatthe final order shall not be passed without the permission ofthe Court. However, the final order of assessment ultimatelycame to be passed. In such circumstances, the Co-ordinateBench vide order dated 04.10.2021 directed that there shall beno coercive action inclusive of penalty in connection with theorder of the assessment. In view of the aforesaid, even thefinal order of assessment will have to be quashed and setaside. 11.In the result, this writ application succeed and is herebyallowed. The impugned Notice dated 31.03.2018, Annexure – Ato this writ application, is hereby quashed and set aside. Thefinal order of assessment dated 25.09.2021 is also herebyquashed and set aside. (J. B. PARDIWALA, J) (NISHA M. THAKORE,J)