Megatrends Inc Represnetedby Its v. The Commissioner Of Income Tax, Appeals-4

DELIVERED ON: 11.02.2016 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.02.2016 CORAM THE Hon'ble Mr.JUSTICE M. DURAISWAMY W.P.NO.37072 of 2015andM.P.No.1 of 2015 Megatrends Inc represnetedby its Partner Mrs. Mita Kalpesh Patel66, Flat No.12, Alsuha Flats, Spur Tank Road,Chetpet,Chennai-600 031 .... Petitioner vs 1. The Commissioner of Income Tax, Appeals-4 121, Mahatma Gandhi Road, Chennai – 600 034 2. The Assistant Commissoner of Income Tax, Non Corporate Circle 3, 121, Mahatma Gandhi Road, Chennai-600 034 ...Respondents Writ Petition filed under Article 226 of the Constitution ofIndia to issue a Writ of Certiorari to call for the records andquash the impugned show case notice for enhancement ofassessment issued by the first respondent in ITA No.83/2015-16(wrongly mentioined as ITA No.85/2015-16) dated 6.11.2015 forthe assessment year 2012-13. For petitioner : Ms.T.C.A. SangeethaFor respondents : Mr.T. Pramod Kumar Chopda https://hcservices.ecourts.gov.in/hcservices/ The petitioner has filed the above writ petition to issue aWrit of Certiorari to call for the records and quash theimpugned show cause notice for enhancement of assessment issuedby the first respondent in ITA No.83/2015-16 (wrongly mentioinedas ITA No.85/2015-16) dated 6.11.2015 for the assessment year2012-13. 2.According to the petitioner, it is a Partnership Firmtrading in stocks, shares, debentures, manufacturing, buying,selling and transporting of various consumer and industrialcommodities. The petitioner filed its Return for Assessment Year2012-2013 on 29.09.2012, admitting a total income ofRs.1,74,36,050. The Reutrn of Income was processed under Sec.143(1) of the Income Tax Act, 1961 and selected for scrutiny. Manydetails were called for and after considering the details,submitted and explanations given, the Assessment Order underSec.143(3) of the Income Tax Act, 1961, was passed on 30.03.2015by the second respondent. The second respondent disalloweddonations made under Section 35(1)(ii) of the Income Tax Act,1961 to the tune of Rs.2,62,50,000/- and asessed the income ofthe assessee at Rs.4,36,86,050/-. Aggrieved over the Orderpassed by the second respondent, they preferred an appealagainst the Order passed by the second respondent before thefirst respondent on 5.5.2015. 3.On 26.10.2015, the first respondent issued a Noticeposting the appeal for hearing on 29.10.2015. This Notice wasreceived by the petitioner on 28.10.2015. The petitioner soughttime till the fourth week of November 2015 for submitting thereply and other submissions. However, the first respondentrejected the request on 3.11.2015 and posted the hearinig againon 6.11.2015. Again, this Notice was received by the petitioneronly on 5.11.2015. The petitioner again submitted that theappeal be posted for hearing in the fourth week of November 2015. 4.The first respondent again rejected the request of thepetitioner and issued the impugned Notice on 6.11.2015, postingthe appeal for hearing on 18.11.2015. The Notice was received bythe petitioner only on 14.11.2015. In the impugned notice, thefirst respondent has also required the petitioiner to show causewhy the assessment of the petitioner should not be enhanced,pointing out that a partnership firm could not be a partner in afirm, as indicated in the case of the petitioner and hence thepetitioner was to be assessed as an AOP and not a firm. 5.According to the petitioner, in the parptnership deed,the two individuals are partners on behalf of the smaller firms,which is an accepted practice in law. The petitionier has https://hcservices.ecourts.gov.in/hcservices/ 4.The first respondent again rejected the request of thepetitioner and issued the impugned Notice on 6.11.2015, postingthe appeal for hearing on 18.11.2015. The Notice was received bythe petitioner only on 14.11.2015. In the impugned notice, thefirst respondent has also required the petitioiner to show causewhy the assessment of the petitioner should not be enhanced,pointing out that a partnership firm could not be a partner in afirm, as indicated in the case of the petitioner and hence thepetitioner was to be assessed as an AOP and not a firm. 5.According to the petitioner, in the parptnership deed,the two individuals are partners on behalf of the smaller firms,which is an accepted practice in law. The petitionier has https://hcservices.ecourts.gov.in/hcservices/ quantified the investment and the remuneration, to be receivedby each of the partners in the Annexure to the Partnership Deeddated 1.4.2011. Further, according to the petitioner, theperusal of the assessment orders of the petitioner in theprevious years will show that the respondents have accepted theconstitution of the firm. 6.According to the first respondent, under Sec.11(2) ofthe Companies Act, 1956, no Company, Association or Partnershipconsisting of more than twenty persons shall be formed for thepurpose of carrying on any other business that has for itsobject the acquisition of gain by the company, assocaition orpartnership or by the individual members thereof, unless it isregistered as a company under this Act, or is formed inpursuance of some other Indian law. Further, the firstrespondent contended that on verification of the records, it wasfound that two firms viz., M/s Krupa Trading Co, having sixpartners and M/s DCP Trading Co., also having six partners werethe 14[th] and 15[th] partners in the petitioner firm, consisting of16 partners. The first respondent further submitted that sinceall the partners in both the above firms were not representingin the petitioner firm and only one of the partners eachrepresented their respective firm, and therefore, the petitionercannot be considered to be a valid partnership firm, as per thelaw laid down by the Hon'ble Supreme Court of India in the caseof Dulichand Laxminarayan vs Commissioner of Income-Tax (1956)29 ITR 535 (SC). Therefore, according to the first respondent,the partnership deed of the two firms shows that they are havingsix partners each and therefore, as per the law, the totalnumber of partners in the present case exceeds twenty, which isbeyond the maximum number of partners presecribed and therefore,the petitioner firm is not a valid partnership firm under theeyes of law. 7.The first respondent also contended that the impugnedshow cause notices were issued under Sec.251(1)(a) and Sec.251(1)(a) sets out various powers, which can be exercised by theappellate authority in appeal against different orders. Underthe said section, the appellate authority while deciding anappeal, is clothed with very wide power so as to do justice tothe assessee and also in the interest of the Revenue. Further,according to the first respondent, the impugned notices are wellwithin the four corners of law and therefore are valid. 8.Ms. T.C.A. Sangeetha, learned counsel appearing for thepetitioner, in support of her contention, relied upon anunreported judgment of the Jharkhand High Court in W.P.(T)No.1293 of 2013 etc batch (M/s Central Coalfields Limited vsCommissioner of Income Tax (Appeals), Ranchi, wherein theDivision Bench of Jharkhand High Court held as follows: 8.Ms. T.C.A. Sangeetha, learned counsel appearing for thepetitioner, in support of her contention, relied upon anunreported judgment of the Jharkhand High Court in W.P.(T)No.1293 of 2013 etc batch (M/s Central Coalfields Limited vsCommissioner of Income Tax (Appeals), Ranchi, wherein theDivision Bench of Jharkhand High Court held as follows: "13. By perusal of the above, it appearsthat the CIT (Appeals) has not onlyexpressed the doubt regarding the statusof the petitioner-company but alsoexpressed the view that the petitioner isnot a company and the petitioner has beenincorrectly and unlawfully assessed inthe status of a company. We are of theview that the CIT (Appeals), byexpressing the reasoning, indicates thatCIT (Appeals) has predetermined thematter that the petitioner-CCL is not acompany, had committed a serious errorand exceeded jurisdiction in upsettingthe settled status of the petitioner-company." 9.Mr.T. Pramod Kumar Chopda, learned counsel appearingfor the first respondent, in support of his contention reliedupon a judgment of the Full Bench of this Court reported in 51STC 381 (State of Tamil Nadu vs Arulmurugan and Company),wherein, the Full Bench of this Court held as follows: We accept the contention of the learnedGovernment Pleader that the assessingauthority, as the prescribed authority, hasthe power to allow further time to file Cforms under the proviso to section 8(4) of theCentral Sales Tax Act. Likewise, we accept theposition that under the proviso to rule 12(7)of the Central Sales Tax (Registration andTurnover) Rules, 1957, the first assessingauthority is invested with the power to allowfurther time for filing C forms. We do not,however, accept the implication in theGovernment Pleader's further contention thatan appellate authority cannot be broughtwithin the meaning of the expression"assessing authority". In one sense, an appealmay be different from an assessment. But thedifference lies only in the particular stageof the proceeding and in the particularauthority having jurisdiction in the twostages. Basically, an appeal does not differfrom an assessment. Just as is the case withany other appeal under our legal system, anappeal from a sales tax assessment is only arehearing or a retrial. In the absence of anystatutory inhibitions or restrictions, an appellate authority has precisely the samepowers, exercisable or in the same manner andto the same extent, as the assessing authorityhas, in the first instance. If this were notthe position, no appellate authority caneffectively function while hearing anddetermining an appeal from an assessment.Under the scheme of section 9 of the CentralSales Tax Act, appeals from Central sales taxassessments will have to be dealt with in thesame manner and under the same procedure asprovided for under the general sales tax lawof the concerned State. The jurisdiction of anappellate authority under the Tamil NaduGeneral Sales Tax Act, 1959, includes thepower to confirm, reduce, enhance, or annual,the assessment. It also includes the power toset aside the assessment with a direction tothe assessing authority to make a freshassessment, and also to pass any other orderwhich the appellate authority may think fit.These powers, which are of the widestamplitude, are expressly conferred both on theAppellate Assistant Commissioner and on theAppellate Tribunal, vide sections 31 and 36 ofthe Tamil Nadu General Sales Tax Act, 1959.The provisions show clearly that the power ofthe appellate authority concerning anassessment under appeal is no different, andnot less wide, than the power of the assessingauthority to make the assessment in the firstinstance. Besides, such power as the appellateauthority is empowered to exercise in relationto an assessment under appeal, has got to beexercised only in the same manner and subjectto the same conditions, if any, which governthe exercise of the power of assessment by theassessing authority in the first instance. Itfollows, therefore, that whatever discretionis conferred on the assessing authority forpurposes of assessment must so be regarded, asa matter of statutory construction, to havebeen conferred on the appellate authority evenwithout the concerned statutory provisionexpressly naming the appellate authority inthat behalf. It goes without saying that anappellate authority, engaged as it is inprecisely the same task under the fiscalstatute as that of the assessing authoritymust also be possessed to like powers as those of the assessing authority. It is implicit inthe very nature of the appellate jurisdiction,as well as the purposes for which thatjurisdiction is created by the statute, thatthe appellate authority will have to function,in the very image of the assessing authority.Appellate proceedings are often trulydescribed as an extension of the assessmentproceedings, or as a continuation of theassessment proceedings. In this context,therefore, it does not matter that a power isconferred, by any provision in the taxingstatute or in the statutory rules, eo nomineon the assessing authority, and is silentabout the appellate authority or any otherauthority under the Act. Since the enablingsection, or the rule, as the case may be,expressly refers to the assessing authority,as the repository of the power, it iselementary construction to hold that suchpower can be, and is intended to be, exercisedby the assessing authority named in theparticular provision concerned. But, it doesnot mean that the appellate authority and anyother fiscal authority who are in seisin ofthe assessment, either in appeal, or inrevision or in any other proceeding, cannotexercise a like power. The fact that theappellate authority is not expressly mentionedin the provision conferring the enablingpower, does not mean that the legislatureintended to exclude that authority from thepurview of the provision. 10.In the judgment relied upon by the learned counsel forthe petitioner, the Commissioner of Income Tax (Appeals)directed the petitioner Company therein to show cause as to whythe provisions of Sec.251(1)(a) of the Income Tax Act should notbe invoked for the Assessment Years 2002-03, 2003-04, 2004-05,2005-06, 2006-07, 2007-08, 2008-09, 2009-10 and the incomeliable to tax should not be enhanced and why the books ofaccounts of the petitioner Company should not be rejected andalso directed the petitioner Company to show the status of thepetitioner as a Company. When the petitioner Company thereinwere enjoying the status of the Company over several decades, onsuch circumstances, the Jharkhand High Court held that the CIT(Appeals) is not justified in raising doubt about the status ofthe petitioner Company and the respondent therein cannot contendthat the show cause notice has been issued as only for verification exercise. 11.Since the CIT (Appeals) has expressed the doubts thatthe petitioner is not a Company and is seeking to reopenassessment of the petitioner company over the years, theDivision Bench were of the view that the impugned show causenotices are in excess of jurisdiction and are liable to bequashed. However, the Jharkhand High Court gave liberty to tothe CIT (Appeals) to issue a fresh show cause notice inaccordance with law. 12.In the case on hand, the Notice under Sec.2561(1) ofthe Income Tax Act, issued to the petitioner on 6.11.2015 is inrespect of the pending appellate proceedings for the AssessmentYear 2012-13 and therefore, the judgment, relied upon by thelearned counsel for the petitioner is not applicable to thepresent case. 13.In the show cause notice dated 6.11.2015, therespondent had called upon the petitioner to show cause as towhy the amount of Rs.96,60,000/- may not be disallowed asexpenditure and added back to the petitioner's taxable incomefor the relevant year, which is under consideration. By theimpugned show cause notice, the respondent had called upon thepetitioner to submit his explanation on or before 18.11.2015.Since the petitioner have to explain as to why the said amountmay not be disallowed as expenditure and added back to thetaxable income of the petitioiner, they can very well submittheir explanation and contest the same, on merits and inaccordance with law befoer the CIT (Appeals). 14.In these circumstances, I do not find merits in thewrit petition, which is liable to be dismised. However, I giveliberty to the petitioner to submit their explanation before CIT(Appeals) and make their submissions with regard to the query,raised in the impugned show cause notice dated 06.11.2015.After receiving the explanation and hearing the submissions onbehalf of the petitioner, the CIT (Appeals) is directed to passorders, on merits and in accordance with law. 15.With these observations, the writ petition isdismissed. No costs. Consequently, connected MP is closed.-s/d-Assistant Registrar True Copy Sub-Assistant Registrar To 1. The Commissioner of Income Tax, Appeals-4 121, Mahatma Gandhi Road, Chennai – 600 034 121, Mahatma Gandhi Road, Chennai – 600 034 2. The Assistant Commissoner of Income Tax, Non Corporate Circle 3, 121, Mahatma Gandhi Road, Chennai-600 034 Non Corporate Circle 3, 121, Mahatma Gandhi Road, Chennai-600 034 +1 cc to Mr.TCA.Ramanujam Advocate sr.8726+1 cc to Mr.T.Pramodkumar Chopda Advocate sr.8883+1 cc to Mr.T.Pramodkumar Chopda Advocate sr.8883 WP.No.37072 of 2015aa17/02/2016