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  • Mr. Rajesh Balia
  • Mr. Raghvendra S. Chauhan
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Smart Summary

Summary of Opinion: D.B. Income-tax Appeal No. 10 of 2004 (Decided August 4, 2005)

Factual and Procedural Background

The respondent was a registered partnership firm assessed for the assessment year 1997-98. An assessment order under section 143(3) of the Income-tax Act was passed on June 16, 1998, after a hearing recorded in the Assessment Order noting that the assessee's authorised representative attended and the returned income was accepted. During an audit, it was noticed that the firm had claimed a deduction of Rs. 1,27,650 as salary paid to partners under section 40(b)(v) of the Income-tax Act, but no partnership deed containing the requisite agreement for such remuneration was found on the assessment record.

The Commissioner of Income-tax issued a notice under section 263, being prima facie of the opinion that the assessment was erroneous and prejudicial to the Revenue, because (the Commissioner said) the supplementary partnership deed dated April 26, 1996 was not on the assessing officer's record and appeared to be ante-dated. The assessee submitted a written response (including a copy of the deed) asserting that the deed had been produced before the Assessing Officer on June 16, 1998 and that partner remuneration complied with section 40(b)(v).

The Commissioner did not accept the assessee's claim of production; examined the deed and concluded it was ante-dated and that the deduction was not allowable. The Commissioner therefore held the assessment to be erroneous and prejudicial to revenue. The Tribunal reversed the Commissioner, finding the deed genuine and holding that the Commissioner could not treat it as ante-dated without enquiry and giving the assessee an opportunity. The present appeal challenges the Tribunal's order and raises three substantial questions of law under section 260A of the Income-tax Act.

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, there was any material on the basis of which the Tribunal could assume that the partnership deed, on the basis of which claim to deduction on account of salary paid to the partners was made, was produced before the Assessing Officer?
  2. Whether, on the facts and circumstances of the case, in the absence of any reference to the partnership deed in the order of assessment and there being no entry in the record of production of the documents and in the absence of document being on record, the presumption of regularity of official act would extend to presumption about the production of document in question before the Assessing Officer?
  3. Whether the Tribunal was justified in law in interfering with the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961?

Arguments of the Parties

Assessee's Arguments

  • The assessee claimed the partnership deed (executed April 26, 1996) had been produced before the Assessing Officer on June 16, 1998; a copy was enclosed with the response to the section 263 notice.
  • The partnership deed expressly specified partners' remuneration and quantified amounts, thereby satisfying the condition in section 40(b)(v) for allowing deduction for partners' salaries.
  • The deed (and the stamps on which it was executed) were genuine; the presumption ordinarily is that a document is executed on the date it bears, and the burden to prove otherwise lay on the person asserting it was not executed on that date.
  • The Commissioner erred in treating the deed as ante-dated without holding any enquiry or giving the assessee an opportunity to establish genuineness or date of execution.

Commissioner of Income-tax's Arguments

  • The Commissioner contended that the supplementary partnership deed was not on the assessment record, was not referred to in the assessment order and there was no entry showing production of the document before the Assessing Officer.
  • Reliance was placed on the fact that the only enclosure submitted with the assessee's earlier letter was a power of attorney; therefore the Commissioner rejected the contention that the deed had been produced before the Assessing Officer.
  • Upon examining the deed, the Commissioner observed similarity between the maximum limit of allowable salary under section 40(b) and the amount payable under the agreement and concluded the document appeared to be ante-dated and manufactured to claim a deduction; accordingly he found the assessment to be erroneous and prejudicial to the Revenue.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court addressed the three framed questions by reviewing the assessment record, the audit observations, the response of the assessee, the Commissioner's reasoning, and the Tribunal's findings. The Court's analysis proceeded in logical steps:

  1. Examination of the assessment order (June 16, 1998) and office note: The assessment order recorded attendance of the authorised representative and that after discussion the returned income was accepted. The office note explained the procedural background (case taken up on scrutiny on random basis, earlier check records sent to DCIT Ajmer) and recorded that the only contention raised before the AO related to exclusion from scrutiny because the returned income exceeded the prior year by over 40%. The assessment record did not refer to production or examination of the supplementary deed.
  2. On Questions 1 and 2 (production of the deed before the AO and presumption of regularity): The Court held that the Tribunal erred in assuming and finding that the deed had been produced before the Assessing Officer. The Court found no documentary entry or reference in the assessment proceedings to support production; intrinsic evidence (assessment order and office note) pointed to no material being placed before the AO for examination. The Court stated that in the absence of relevant documents on record, no presumption can be raised that a document was presented and considered by the authority.
  3. On the Commissioner's finding of ante-dating and the Tribunal's interference (third question): The Commissioner had rejected the assessee's production claim and, after examining the deed, concluded it was ante-dated and not in existence during the relevant previous year; he therefore held the assessment erroneous under section 263. The Tribunal, however, found the stamps were purchased on April 26, 1996, the genuineness of stamp purchase and execution by signatories was not in dispute, and no enquiry had been conducted by the Commissioner into the date of execution before holding it to be ante-dated. The Tribunal concluded that, having produced the partnership deed with quantified terms for remuneration, the assessee had discharged the primary burden required by section 40(b)(v).
  4. The Court recognized that whether a document is bogus or ante-dated is primarily a question of fact. It criticized the Commissioner for arriving at the conclusion of ante-dating without conducting any enquiry, giving notice or opportunity to the assessee, or permitting partners to establish the date of execution. The Court reiterated the general legal principle that ordinarily a document is presumed to be executed on the date it bears, and the burden lies on the person asserting otherwise; mere suspicion cannot substitute for proof.
  5. The Court also considered a consequential argument: even if the supplementary deed dated April 26, 1996 did not exist in the previous year, the existing deed (dated August 10, 1987) read with an earlier supplementary document (April 1992) did contain terms relating to payment of salary to certain partners. Thus the absence of the 1996 supplementary deed would not necessarily negate an entitlement to remuneration under the partnership's existing arrangements.
  6. The Court noted the administrative context: a Central Board of Direct Taxes circular of March 25, 1996 acknowledged confusion about the impact of the Finance Act, 1991 amendment introducing a ceiling (effective April 1, 1992) and directed that permissible deductions may be allowed until assessment year 1996-97 on the basis of amended deeds. The Court observed that any ambiguity in the provision prior to AY 1996-97 favours the assessee and that this influence could not be cut off by later proceedings.
  7. Weighing these factors, the Court concluded that the Tribunal's factual finding — that the document could not be declared bogus or ante-dated without enquiry and opportunity to the assessee — was not perverse, and that the Commissioner ought not to have made the adverse factual inference without affording the assessee a chance to respond.

Holding and Implications

APPEAL DISMISSED

Holding (core ruling): The High Court dismissed the appeal. It held that:

  • The Tribunal was in error insofar as it assumed the partnership deed had been produced before the Assessing Officer (Questions 1 and 2): there was no material on the assessment record to support that assumption.
  • However, the Tribunal's ultimate conclusion — that the Commissioner of Income-tax could not treat the supplementary deed as ante-dated without conducting any enquiry or giving the assessee an opportunity — was not perverse. The Commissioner had no basis to reject the deed as ante-dated without notice or enquiry, and therefore the Tribunal was justified in interfering with the Commissioner's order under section 263 on that ground.
  • Accordingly, the assessment was not held to be erroneous and prejudicial to the Revenue on the basis relied upon by the Commissioner, and the Tribunal's decision was upheld in substance.

Implications and consequences:

  • The direct effect on the parties is that the Tribunal's order (which had negated the Commissioner's invocation of section 263) stands: the Commissioner's order treating the assessment as erroneous and prejudicial to the Revenue, on the ground that the deed was ante-dated and not in existence, could not be sustained without enquiry and opportunity to the assessee.
  • The Court did not establish a new principle of law beyond applying established factual and procedural safeguards (i.e., the requirement of enquiry and opportunity before drawing adverse inferences as to genuineness/ante-dating). The opinion treats the question of genuineness/ante-dating as factual and emphasizes procedural fairness; it does not announce a novel legal doctrine or broader precedent beyond the facts and reasoning in this case.

No order as to costs was made by the Court.

Show full summary ...

    Commissioner Of Income-Tax v. Paras Cotton Co.

    D.B Income-tax Appeal No. 10 of 2004

    Decided on August 4, 2005

    The Judgment of the Court was delivered by

    Rajesh Balia, J.:— This appeal is directed against the order of the Income-tax Appellate Tribunal, Jodhpur Range, Jodhpur, dated August 29, 2003. The following substantial questions of law arise for consideration in this appeal under section 260A of the Income-tax Act, 1961:

    “(I) Whether, on the facts and circumstances of the case, there was any material on the basis of which the Tribunal could assume that the partnership deed, on the basis of which claim to deduction on account of salary paid to the partners was made, was produced before the Assessing Officer?

    (II) Whether, on the facts and circumstances of the case, in the absence of any reference to the partnership deed in the order of assessment and there being no entry in the record of production of the documents and in the absence of document being on record, the presumption of regularity of official act would extend to presumption about the production of document in question before the Assessing Officer?

    (III) Whether the Tribunal was justified in law in interfering with the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 ?”

    2. The above three questions were framed at the time of admission of the appeal. As a matter of fact, questions Nos. 1 and 2 are about the same point but question No. 3 is on the merits arising out of the facts. The respondent-assessee is a partnership firm and was assessed in the status of registered firm for the assessment year 1997-98. The assessment order was passed on June 16, 1998, under section 143(3) of the Income-tax Act. The short order passed by the Income-tax Officer, Ward I, Bhilwara, reads as under:

    “Assessment Order

    Return of income has been filed on October 8, 1997, vide R. No. 3183 declaring total income of Rs. 60,250 in the status of PFAS. This case has been selected for scrutiny on random sample basis by issue of notice under section 143(2) of the Income-tax Act.

    In response to notice under section 143(2) of the Income-tax Act, Shri S.C Agarwal, advocate, and authorised representative of the assessee attended with whom case has been discussed. After discussion, returned income is accepted.

    Assessed under section 143(3) of the Income-tax Act. Issue necessary forms. Give credit for prepaid taxes. Bhilwara sd/. R.S Kedawal, dated June 16, 1998, Income-tax Officer, Ward I, Bhilwara.

    Office Note : In this case proposed for taking this case for check scrutiny along with assessment records was sent to the DCIT, Ajmer, vide this office letter No. 1355, dated March 10, 1998, up to May 25, 1998, check approval from the DCIT, Ajmer, and assessment records not recd, and in the meantime this case has been selected for scrutiny on random basis as per number allotted by the DCIT Ajmer. Since the asst. records was check in DCIT, Ajmer. The notice under section 143(2) was issued without going through the case fixing the hearing for June 12, 1998. The asstt. records check on June 9, 1998. This case was taken up for hearing on June 16, 1998. On this date Shri S.C Agarwal, advocate and authorised representative of the ‘A’ attended, stated that the returned income for the assessment year 1997-98 excess more than 40 per cent, of the income declared in the assessment year 1996-97 as such this case should have excluded from the purview of scrutiny, the contention of the authorised representative of the A appears to be in order. Since notice under section 143(2) stands issued therefore the asstt. is completed under section 143(2).

    Income-tax Officer.”

    3. It came to the notice while going through the audit by the audit party that assessee has claimed deduction of Rs. 1,27,650 from the profit of the firm was salary paid to the partners of the firm under section 40(b)(v), such deduction can be allowed if there is an agreement to that effect in the partnership deed. As per the report, there was no partnership deed on the record of assessment proceedings. It was apprehended that this deduction is contrary to section 40(b).

    4. This lead to the issuance of notice under section 263 of the Income-tax Act by the Commissioner of Income-tax, Udaipur, who was prima facie of the opinion that the assessment of income vide order dated June 16, 1998, is erroneous and prejudicial to the interests of the Revenue.

    5. In response to it, a written submission was submitted on March 1, 2001, in which it was stated:

    “The assessee filed his income-tax return as per the provisions of the Income-tax Act. Payment of remuneration to partners had been specified in the agreement deed which was executed on April 26, 1996. Copy of this deed was also submitted before the Assessing Officer on June 16, 1998. However, we are enclosing a copy or the agreement deed herewith. Partners remuneration was given according to this agreement. Partners' remuneration is as per the provision of section 40(b)(v) of the Income-tax Act, and the income declared before partners salary Rs. 1,67,902.

    Partners salary (Rs.) Income (Rs.) Income (Rs.) 75,000 90% 67,500 7,500 75,000 60% 45,000 30,000 37,902 40% 15,160 22,740 (rest) Total 1,87,902 1,27,660 60,240

    That as far the remuneration paid to a partner Madan Lal Tater of Rs. 13,650 is concerned, it had been specified in the agreement deed. Therefore, the order passed by the assessing authority is not erroneous and not against the interests of the Revenue hence proceedings under section 263 of the Income-tax Act, may kindly be dropped.”

    6. However, the Commissioner of Income-tax did not agree with the contention of the assessee that he has produced any partnership deed before the Assessing Officer or that he has applied his mind on this issue.

    7. The Commissioner of Income-tax was of the opinion that the aforesaid document cannot be said to have been produced before the assessing authority as such document is not on record, nor reference has been made in the order, nor any proceedings of the assessment order showing the production of the document has been noticed. He also relied on letter dated June 16, 1998, submitted by the assessee with only one enclosure which was the power of attorney in favour of Shri S.C Agarwal, advocate. Having thus rejected the contention that the document was available with the assessing authority, the Commissioner of Income-tax examined the document to find whether the order passed by the Assessing Officer was erroneous in this regard. Noticing similarity between the maximum limit of allowable salary to the partners under section 40(b) and the amount payable under the agreement held the document dated April 16, 1996, to be ante-dated prepared only to claim deduction in accordance with the profits shown at the end of the year.

    8. On the merits of the case the Commissioner of Income-tax also found after taking into account the supplementary agreement specifying the terms for partners' remuneration, the assessee was not entitled to claim deduction under section 40(b) of the Act.

    9. In appeal against this order of the Commissioner of Income-tax relying on the document, affidavit was submitted by the assessee and drawing support from the presumption of regularity found in favour of the assessee that the document was produced before the Assessing Officer and that the Commissioner of Income-tax was not justified in assuming the document dated April 26, 1996, to be ante-dated without holding any enquiry into this fact by giving an opportunity to the assessee in this regard, when the stamp paper on which document was executed was of particular date then the date of execution, and that no presumption can be drawn about a document having been executed not on the date on which it purports to be. Presumption is otherwise.

    10. So far as the answer to the first two questions is concerned, we are of the opinion that the Tribunal was in error in assuming and finding that the document in question was produced before the Assessing Officer. Apparently there was no denial that this document was not on the record of the Assessing Officer nor was it referred to in the proceedings. The order of assessment which we have quoted above is eloquent discussion that took place between the Assessing Officer and the representative of the assessee on August 16, 1996, when the case was first taken up for hearing. In fact it does not refer to the fact that any material was placed before the Assessing Officer for his examination.

    11. The assessment order only records that Shri S.C Agarwal and the authorised representative attended with whom the case has been discussed. After discussion the returned income is accepted. There is intrinsic evidence available on record which shows conclusively that agreement dated April 26, 1996, was not produced before the Assessing Officer. The note annexed to the assessment order goes to show what has been discussed on the date the assessment order was passed. The office note in the first instance narrated in what circumstance the matter was taken up as a scrutiny case and was taken up on April 16, 1996. Notice under section 143(2) of the Income-tax Act was issued as the case relates to regular assessment. It came before sample selected for scrutiny on random sample basis. The only contention raised before the assessing authority and accepted by him was that Shri S.C Agarwal, advocate and authorised representative stated that since the assessed returned income for the assessment year 1997-98 is in excess by more than 40 per cent, of the income declared in the assessment year 1996-97, the case should have been excluded from the purview of scrutiny. The contention of the authorised representative was found in order by the assessing authority. That is why the returned income was accepted.

    12. In the absence of very relevant documents on the record, no presumption can be raised that the document was presented and considered by the authority de hors the proceedings and the officer to provide a complete answer to this question.

    13. In the absence of any material on record and the clear discussion between the authorised representative and the Assessing Officer, there was no room for drawing presumption and reaching the conclusion that such a document was produced before the Assessing Officer. The Tribunal was in error in finding that the assessee has produced the document dated April 26, 1996, before the Assessing Officer on June 16, 1996 or before.

    14. So far as the third question is concerned, the Commissioner of Income-tax after considering the partnership deed which was produced before him, did not find that the terms of the deed dated April 26, 1996, did not fulfil the condition of allowability of deduction on account of remuneration paid to the partners of the firm. But he has based his finding on the basis that the deed was ante-dated, not in existence during the previous year.

    15. On appeal the Tribunal was of the opinion that the stamps on which the supplementary deed was executed were purchased on April 26, 1996. The genuineness of the purchase of stamps on that date was not in dispute and doubt. It was also not in dispute that it was executed by the signatories of the document. No presumption could have been drawn that it was a manufactured document with a back date. By producing the partnership deed containing the terms and conditions for payment of remuneration to partners and quantifying the amount to be paid to each partner in the deed itself, fulfils the condition under section 40(b)(v) for allowing the deduction claimed. Primarily the burden which lay on assessee was discharged. No enquiry having been further conducted about the date on which the document was suspected to be executed and no opportunity having been allowed to the assessee before holding otherwise, the document could not have been assumed to be bogus. Hence, it found that the order of the Assessing Officer cannot be held to be erroneous and prejudicial to the interests of the Revenue.

    16. Apparently, whether the document is bogus or not bogus or is antedated or not are primarily questions of fact. The order of the Commissioner of Income-tax for arriving at this conclusion that the document is ante-dated, no enquiry was conducted, no notice was given to the assessee before rejecting the genuineness of document and no opportunity was given to the partners of the firm to establish that the document was of the date on which stamps were purchased. Normally a document mentions the date of its execution. Ordinarily, the presumption is that it was executed on that date. The burden lies on the person who asserts that it is not executed on the date on which it purports to have been executed. The Commissioner of Income-tax could not have acted upon mere assumption. Mere suspicion cannot take the place of proof. The finding of the Tribunal about existence of the document during the previous year cannot be said to be perverse.

    17. Even assuming that the document dated April 26, 1996 was not in existence during the previous year relevant to the assessment year in question, the situation will be that the existing deed of partnership continued and remained in force without the supplementary agreement. The Commissioner of Income-tax himself has found that as per the partnership deed dated August 10, 1987, read with the supplementary document dated April 1992, did contain a term relating to payment of salary to partners Nos. 1, 4 and 5 from the firm as per rules.

    18. It was for the first time that a ceiling on allowability of salary paid to partners, was introduced with effect from April 1, 1992, vide the Finance Act, 1991, with the condition that allowability of deduction on account of salary from the income of the firm shall be subject to the terms of the deed of partnership providing for such payment. Reference to the rules referred to the limit of remuneration to be paid as per limit allowable as deduction under section 40(b)(v).

    19. The Central Board of Direct Taxes in its circular dated March 25, 1996 (see [1996] 218 ITR (St.) 131), has accepted the position that there was some confusion about the impact of the aforesaid provision and that most asses-sees have amended their deeds by incorporating the term like above and directed that on the basis of the said term the permissible deductions on account of salary paid to partners may be allowed from the income of the firm until the assessment year 1996-97. The benefit of ambiguity in the provision of the statute, if it existed prior to the assessment year 1996-97, did not cease to exist after 1996-97. The benefit of such ambiguity from construction of the statute ordinarily goes to the assessee. In that view of the matter the order of the Commissioner of Income-tax could not be sustained.

    20. In view of the aforesaid discussion, we do not find any infirmity in the finding of fact reached by the Tribunal that the document could not have been assumed to be not genuine or ante-dated in the absence of any enquiry having been conducted in this regard, or without giving any opportunity to the assessee on this aspect of the matter. No interference is called for on the merits of the finding of the Tribunal that the assessee claimed deduction as per the terms of section 40(b) of the Act regarding remuneration paid to its partners under the supplementary deed dated April 16, 1998.

    21. The appeal, therefore, fails and it is hereby dismissed. No order as to costs.

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    Commissioner Of Income-Tax v. Paras Cotton Co.
    (Aug 4, 2005)