The Commissioner Of Income Tax,Bathinda v. M/S Kartar Singh & Co. Govt. Contractors, Ferozepur Cantt

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.128 of 2007Date of decision: 29.1.2008 The Commissioner of Income tax,Bathinda ......Appellant Versus M/s Kartar Singh & Co. Govt. Contractors, Ferozepur Cantt. ......Respondent CORAM:-HON'BLE MR.JUSTICE SATISH KUMAR MITTALHON'BLE MR.JUSTICE RAKESH KUMAR GARG * * * Present:Mr. Yogesh Putney, Advocate for the appellant-revenue. Mr. Akshay Bhan, Advocate for the respondent-assessee. * * * Rakesh Kumar Garg, J . The revenue has filed the present appeal under Section 260Aof the Income-tax Act, 1961 challenging the order of the Income-taxAppellate Tribunal, Amritsar Bench, Amritsar passed in ITA No.54(ASR)2004 dated 19.9.2006 (Annexure P-6) which has allowed the appeal ofthe assessee for the assessment year 1996-97. It has raised the followingsubstantial questions of law:- “1.Whether on the facts and circumstances of thecase, the Ld. ITAT was right in law in implying thatsection 154(1A) of the Income Tax Act, 1961, whichrefers to an order passed u/s 154(1), also covers anorder passed u/s 144 of the Income Tax Act, 1961?2.Whether on the facts and circumstances of thecase, the Ld. ITAT was right in law in implying thatinterest and salary to members of an Association ofPersons (AOP) were admissible, keeping in view theprovisions of section 184(5) of the Income Tax Act, 1961 even as they stood prior to amendment by the FinanceAct, 2003, with effect from 1.4.2004? 3.Whether on the facts and circumstances of thecase, the Ld. ITAT was right in law in implying that themistake in making assessment as a firm and not as anAssociation of Persons (AOP) while resorting to theprovisions of section 144 is not a mistake of lawapparent from the record, keeping in view the specificprovisions of section 184(5) of the Income Tax Act,1961.” Brief facts giving rise to this appeal are as under:- The facts of the case are that the assessee filed the originalreturn of income on 31.10.1996 in the status of Registered firm. However,while completing the assessment u/s 144, the AO did not allow deductionof interest and salary paid to partners. The assessee filed an appealbefore the CIT(A) where the action of the AO for not allowing deduction inrespect of interest and salary paid to partners was inter-alia challenged. Itwas argued before the CIT(A) that the assessee was entitled to deductionof interest and salary paid to partners even though income was computedby applying net profit rate. Accepting the contention of the assessee, the Ld.CIT(A) partlyallowed the claim of the assessee for deduction of interest and salary paidto partners. The revenue challenged the order of CIT(A) in appeal beforethe Tribunal. The ITAT vide its order dated 13.11.2003 (Annexure A-3) inITA No.135/ASR/2000 for the assessment year 1996-97 upheld the orderof the CIT(A) by relying on the judgement of Rajasthan High Court in thecase of CIT Vs. Jain Construction Co. & others(2002) 245 ITR 527(Rajasthan) held that the assessee was entitled to deduction in salary and interest to the partners upto the limit specified in section 40(b) of the Act. Accepting the contention of the assessee, the Ld.CIT(A) partlyallowed the claim of the assessee for deduction of interest and salary paidto partners. The revenue challenged the order of CIT(A) in appeal beforethe Tribunal. The ITAT vide its order dated 13.11.2003 (Annexure A-3) inITA No.135/ASR/2000 for the assessment year 1996-97 upheld the orderof the CIT(A) by relying on the judgement of Rajasthan High Court in thecase of CIT Vs. Jain Construction Co. & others(2002) 245 ITR 527(Rajasthan) held that the assessee was entitled to deduction in salary and interest to the partners upto the limit specified in section 40(b) of the Act. Subsequently, the AO noted that since the assessment wascompleted under Section 144 of the Act, the status of the firm wasrequired to be taken as an AOP within the meaning of sub-section (5)Section 184 of the Act. The AO observed that since this was a mistakeapparent from record, the same required to be rectified. Accordingly, theAO issued a notice under Section 154 on 17.10.2002 proposing to rectifiythe order under Section 154 and to treat the status of the assessee as anAOP, in consequence thereof to disallow interest and salary paid topartners. The AO issued show cause notice on 17.10.2002. In responseto the notice, the assessee submitted a reply that the issue beingdebatable, the same fell outside the scope of provision of section 154.However, the AO rejected the objection and rectified the order underSection 154 and again disallowed the claim for deduction of interest andsalary paid to partners. Being aggrieved, the assessee filed an appeal before the CIT(A). It was submitted before the CIT(A) that once the Tribunal had alreadydecided the matter in favour of the assessee and against the revenue, theorder passed by the AO under Section 154 was illegal and bad in law. Itwas further submitted that the issue involved in the case being debatable,the same fell outside the scope of provisions of Section 154 of the Act.However, the Ld. CIT(A) rejected the submissions of the assessee andheld that since the assessment was completed u/s 144, the status of theassessee was required to be taken as an AOP. This being a mistake oflaw apparent from record, the AO was held to be justified in rectifying thesame under Section 154 of the Act. Feeling aggrieved against the said order of the Commissionerof Income-tax (Appeals), the assesssee filed appeal before the Tribunalwhich was allowed by the Tribunal vide order dated 19.9.2006. The relevant part of the order of the Tribunal is as under:- Feeling aggrieved against the said order of the Commissionerof Income-tax (Appeals), the assesssee filed appeal before the Tribunalwhich was allowed by the Tribunal vide order dated 19.9.2006. The relevant part of the order of the Tribunal is as under:- “We have heard both the parties at some length andgiven our thoughtful consideration to the rivalcontentions, examined the facts, evidence and materialplaced on record. The undisputed facts of the case arethat the assessment in this case was completed u/s 144in the status of Registered firm. However, the assesseewas not allowed deduction of interest and salary paid topartners because the income was computed by net profitrate of 12.5%. Admittedly, the AO did not take intoaccount the provisions of sub-section (5) of Section 184of the Act then in existence as per which the firm was tobe assessed in the manner as an A.O.P. It is also a factthat the issue for deduciton of interest and salary paid topartner was subject matter of dispute both before theCIT(A) and the ITAT and the Tribunal vide its orderdated 13.11.2003(supra) allowed the claim of theassessee for deduction of interest and salary paid topartners and upheld the order of the CIT(A). Thus, itcan not be said that claim of the assessee for deductionof interest and salary paid to partners was notconsidered by the CIT(A) and the ITAT. As perprovisions of sub-section (1A) of Sec.154 where anymatter has been considered and decided in anyproceeding by way of appeal or revision, the authoritypassing such order can rectify such mistake only inrespect of an issue which has not been considered bythe Appellate Authority. It is true that the Tribunal didnot consider the claim of the assessee for deduction of salary and interest paid to partners in the light ofprovisions of section 184(5) of the Act in a case whereassessment was made u/s 144. Nevertheless the effectof finding of the Tribunal is that the assessee wasallowed deduction of interest and salary paid to partners.Now the AO was not competent to rectify theassessment order which had the effect ofnullifying/negating the order of the Tribunal. Thus, weare of the considered opinion that the order passed bythe AO u/s 154 was illegal, bad in law and withoutjurisdiction and is liable to be quashed on this pointitself. At the time of completing the assessment u/s 144the AO did not take into account the provisions ofSection 184(5) in a case where the assessment wasmade u/s 144 perhaps for the reason that even onmerits, he did not allow deduction of interest and salarypaid to partners. Nevertheless he completed theassessment in the status of Registered Firm. Evenotherwise, we find that as per provisions of sub-section(5) of Section 184, then existing in the statute for therelevant asstt. year, the AO could assess the firm in thesame manner as an AOP. However, there was nospecific provision for disallowing salary and interest paidto partners. The specific provision for disallowing salaryand interest paid to partner in a case where assessmenthas been completed u/s 144 has been made applicableonly w.e.f. 1.4.2004 by way of an amendment. Nowwhether the deduction of interest and salary paid to partners could be disallowed or not in a case whereassessment was completed u/s 144 and moreparticularly where such claim of deduction hasspecifically been allowed by the Tribunal or not washighly debatable issue. As per provisions of Sec.154,the authority concerned is competent to rectify onlysuch mistake of law or facts which are apparent fromrecord and all those issues which are debatable andinvolve prolonged arguments, debate where twoconceivable views are possible fall outside the scope ofprovisions of section 154 of the Act. Reliance in thsregard on the judgement of Supreme Court in the caseof T.S. Balaram, ITO vs. Volkart Brothers,82 ITR 50.Therefore, even on this ground, the order passed by theAO is liable to be quashed.” We have heard learned counsel for the parties and perused the record. The undisputed facts of the case are that the assessment inthis case was completed u/s 144 in the status of Registered firm. However,the assessee was not allowed deduction of interest and salary paid topartners because the income was computed by net profit rate of 12.5%.Admittedly, the AO did not take into account the provisions of sub-section(5) of Section 184 of the Act then in existence as per which the firm was tobe assessed in the manner as an A.O.P. It is also a fact that the issue fordeduction of interest and salary paid to partner was subject matter ofdispute both before the CIT(A) and the ITAT and the Tribunal vide its orderdated 13.11.2003(supra) allowed the claim of the assessee for deduction ofinterest and salary paid to partners and upheld the order of the CIT(A).Thus, it can not be said that claim of the assessee for deduction of interest and salary paid to partners was not considered by the CIT(A) and the ITAT.No doubt, the Tribunal while passing the order dated13.11.2003 did not consider the claim of the assessee for deduction ofsalary and interest paid to the partners in the light of provisions underSection 184(5) of the Act in a case where assessment was made underSection 144 yet the effect of finding of the Tribunal in the order dated13.11.2003 is that the assessee was allowed deduction of interest andsalary paid to the partners. As per provisions of Section 154, the authorityconcerned is competent to rectify only such mistake of law or facts whichare apparent from record and all those issues which are debatable andinvolve prolonged arguments and from the debate where two conceivableviews are possible and fall outside the scope of provisions of section 154of the Act. In the present case, the AO was not competent to rectify theassessment order which had the effect of nullifying the order dated13.11.2004. At the time of completing the assessment under Section 144the AO did not take into account the provisions of Section 184(5) in acase where the assessment was made under Section 144 may be for thereason that even on merits, he did not allow deduction of interest andsalary paid to partners. Nevertheless, he completed the assessment in thestatus of Registered Firm. Even otherwise, as per provisions of sub-section (5) of Section 184, then existing in the statute for the relevantassessment year, the AO could assess the firm in the same manner as anAOP as there was no specific provision for disallowing salary and interestpaid to partners. The specific provision for disallowing salary and interestpaid to the partners in a case where assessment has been completed u/s144 has been made applicable only w.e.f. 1.4.2004 by way of anamendment. Thus, the issue whether the deduction of interest and salarypaid to the partners could be disallowed or not in a case where assessmentwas completed u/s 144 and more particularly where such claim of deduction has specifically been allowed by the Tribunal is highly debatableissue which falls outside the scope of provisions of section 154 of the Act. Thus, in the light of the facts and circumstances of the caseand the legal position discussed above, we are of the opinion that thisappeal has no merit and no substantial question of law arises for thedetermination of this Court. Hence, the present appeal is dismissed beingdevoid of any merit. (RAKESH KUMAR GARG) JUDGE January 29, 2008ps (SATISH KUMAR MITTAL) JUDGE