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Price Waterhouse & Co () v. Assistant Commissioner Of Income Tax ().
Factual and Procedural Background
These are appeals filed by the assessee against orders passed by the Commissioner of Income Tax (Appeals)-4, Chennai for assessment years 2010-11, 2012-13 and 2013-14 (ITA Nos. 229, 230 & 734/2017). The assessee withdrew appeals for assessment years 2012-13 and 2013-14 (Nos. 230/Mds/2017 and 734/Mds/2017), leaving appeal No.229/Mds/2017 for assessment year 2010-11.
The assessee, a Chartered Accountant firm, filed its return for AY 2010-11 declaring income of D1,09,01,953. The original assessment under section 143(3) was completed on 30.03.2013 accepting the returned income. The Assessing Officer issued a notice under section 148 on 26.02.2014 reopening the assessment.
The Assessing Officer recorded that the assessee had claimed remuneration aggregating D1,24,80,000 to two partners. The principal partnership deed dated 15.05.2003 did not entitle partners to remuneration, whereas a supplementary partnership deed dated 23.09.2010 purported to authorize remuneration of D6,00,000 and D4,40,000 per month to two partners with effect from 01.04.2009. The Assessing Officer held that, under clause (iii) of section 40(b) of the Income Tax Act, remuneration could not be allowed retrospectively and therefore denied the remuneration claimed for the period prior to 23.09.2010, making an addition of D1,24,80,000 in reassessment.
The assessee appealed to the Commissioner of Income Tax (Appeals) contending that the reopening was invalid because it was based on material already available at the time of the original assessment and because rectification proceedings under section 154 had been initiated for the same issue. The CIT(A) upheld the reopening, noting among other things that rectification proceedings had been dropped by the Assessing Officer and that the Assessing Officer had not formed any opinion on the issue in the original assessment order. The assessee then appealed to the Income Tax Appellate Tribunal (the Tribunal).
Legal Issues Presented
- Whether reopening of assessment under section 147 read with section 148 (notice dated 26.02.2014) was valid when the documents relied upon (principal and supplementary partnership deeds and a computation of salary) were already on record during the original assessment completed under section 143(3).
- Whether the Assessing Officer's allowance (or apparent allowance) of partner remuneration that is contrary to clause (iii) of section 40(b) (i.e., retrospective remuneration not authorized by an earlier deed) can be treated as a bona fide opinion or is a patently untenable view susceptible to reopening.
- Whether initiation or dropping of rectification proceedings under section 154 on the same issue operates as a bar to reopening under section 147.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee submitted that it had furnished the supplementary partnership deed dated 23.09.2010 by a letter dated 22.03.2013 in response to a notice dated 13.09.2012, and had filed the principal partnership deed (15.05.2003) and a computation of salary allowable under section 40(b) on 28.03.2013 during the original assessment proceedings.
- It was contended that the Assessing Officer, having those documents, had formed an opinion allowing the salary; therefore reassessment based on the same documents was not permissible in the absence of any new tangible material showing escapement of income.
- The assessee relied on precedents (Hon'ble Delhi High Court in CIT vs. Usha International Ltd and Hon'ble Calcutta High Court in Berger Paints India Ltd vs. ACIT) to contend that reopening was impermissible where the case was based on existing material or where rectification had been pursued.
Departmental Representative's Arguments
- The Departmental Representative submitted that remuneration to partners is allowable only in accordance with the partnership deed and that clause (iii) of section 40(b) prevents allowance of remuneration for periods prior to the date of the deed authorizing it.
- He pointed out that the supplementary deed was executed on 23.09.2010; hence remuneration for the period 01.04.2009 to 23.09.2010 could not be allowed.
- It was argued that the Assessing Officer had not applied his mind to this issue in the original assessment (i.e., no opinion had been formed), so reassessment could not be treated as merely a change of opinion but was valid to correct the earlier error. Further, initiation/dropping of rectification proceedings under section 154 does not bar reopening under section 147.
CIT(A)'s Findings (as presented by the parties)
- The CIT(A) observed that rectification proceedings under section 154 had been dropped by the Assessing Officer by letter dated 24.02.2014.
- The CIT(A) noted that the original scrutiny selection was for verification of interest income shown in Form 26AS and that the Assessing Officer had not discussed the remuneration issue in the original assessment order.
- The CIT(A) held that furnishing of partnership deeds did not mean the Assessing Officer had verified them or reached a conclusion on the allowability of remuneration; information to reopen could be discerned from material on record and therefore upheld the reopening.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT vs. Usha International Ltd (Hon'ble Delhi High Court), 348 ITR 485 | Invoked for the proposition that a deemed formation of opinion (in that case, invoking presumption under section 114(e) of the Evidence Act) can support reassessment where such an opinion was lawfully possible. | The Tribunal distinguished Usha International on facts: in Usha a lawfully possible opinion was present, whereas in the present case the Assessing Officer could not have lawfully reached an opinion allowing retrospective remuneration contrary to clause (iii) of section 40(b); accordingly Usha was held not applicable. |
| Berger Paints India Ltd vs. ACIT (Hon'ble Calcutta High Court), 322 ITR 369 | Stands for the principle that where rectification under section 154 is taken for a mistake apparent on record and rectification proceedings conclude there is no apparent mistake, in the absence of other grounds, reassessment under section 147 cannot be initiated. | The Tribunal distinguished Berger Paints: in that case the Assessing Officer was satisfied there was no apparent error; in the present case rectification proceedings were dropped because the error was not amenable to rectification under section 154 and thus required reopening under section 147. Hence Berger Paints was not applicable. |
Court's Reasoning and Analysis
The Tribunal first recorded undisputed facts: reopening was within four years of the end of the impugned assessment year; the assessee had furnished both the principal partnership deed dated 15.05.2003 and the supplementary partnership deed dated 23.09.2010 during original assessment proceedings; and the assessee had filed a computation of salary allowable under section 40(b) on 28.03.2013.
The Tribunal examined clause (iii) of section 40(b) which precludes consideration of provisions in a partnership deed that purport to ratify retrospective entitlement to remuneration for periods prior to the date of the deed. The Tribunal concluded that, under law, the assessee was not entitled to claim remuneration prior to 23.09.2010 while it had claimed remuneration from 01.04.2009.
The Tribunal analyzed whether the Assessing Officer's treatment in the original assessment amounted to a bona fide opinion or an error. It found that the Assessing Officer, despite having both the original and supplementary partnership deeds, had allowed the claim while overlooking clause (iii) of section 40(b). The Tribunal characterized such a view as "patently untenable" and "patently unlawful" — that is, not a valid opinion at all. The reasoning was that if the Assessing Officer had applied his mind properly he could not have lawfully reached the view that allowed retrospective remuneration.
On the question of whether fresh tangible material was required for reopening, the Tribunal rejected a narrow interpretation that fresh material must come from external sources. It held that where material on record (here, the deeds) had not been verified in the manner required by law, fresh information may be taken to emerge from the existing material and can justify reopening.
The Tribunal considered and distinguished the precedents relied upon by the assessee. Berger Paints was distinguished because in that case the Assessing Officer had concluded there was no apparent error on the record; here the rectification proceedings were dropped on the basis that the matter was not correctable under section 154 and required reopening. Usha International was distinguished because it involved a lawfully possible opinion (a deemed formation of opinion) supported by presumptions under section 114(e) of the Evidence Act; by contrast, the Tribunal found no lawfully possible opinion could have been formed to justify allowing retrospective remuneration contrary to section 40(b)(iii).
Concluding its analysis, the Tribunal held that the reassessment was not merely a change of opinion but a corrective action to address a patently unlawful allowance; consequently the reopening under section 147/148 was upheld.
Holding and Implications
HOLDING: APPEALS DISMISSED.
Direct effect: The Tribunal upheld the reopening of the assessment for AY 2010-11 and dismissed the assessee's appeal against the reassessment (i.e., the appellate challenge to the reopening/addition did not succeed). The Tribunal did not decide the detailed merits of the disallowance because the assessee's counsel did not argue the merits of the disallowance before the Tribunal.
Broader implications: The Tribunal emphasized that an Assessing Officer's allowance that is "patently untenable" or contrary to an express statutory provision (here clause (iii) of section 40(b)) cannot be treated as a bona fide prior opinion preventing reopening. The Tribunal also reaffirmed that "new" information for the purposes of reopening may arise from existing records where those records had not been properly verified in the original assessment. The opinion expressly distinguished the precedents relied upon by the assessee and did not treat them as controlling on the facts of this case. The Tribunal's decision does not state that it establishes a new binding precedent beyond its application to the facts before it.
Order pronounced on 21st September, 2017 at Chennai. Members: Duvvuru R.L. Reddy (Judicial Member) and Abraham P. George (Accountant Member).
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER These are appeals filed by the assessee directed against orders dated 31.10.2016 for the assessment years 2010-11 and 2012- 2013 and order dated 20.01.2017 for assessment year 2013-14 passed by the ld. Commissioner of Income Tax (Appeals)-4, Chennai. ITA Nos.229, 230 & 734/2017 :- 2 -:
2. Ld. Counsel for the assessee at the outset submitted that he was withdrawing appeals for assessment years 2012-13 and 2013-
14 numbered 230/Mds/2017 and 734/Mds/2017. Letters were also filed in this regard. Accordingly, appeals 230/Mds/2017 for assessment year 2012-2013 and 734/Mds/2017 for assessment year 2013-14 are dismissed as withdrawn.
3. This leaves us with appeal No.229/Mds/2017 for assessment year 2010-2011. Assessee has altogether taken three grounds of which ground No.3 assails levy of interest u/s.234B of the Income Tax Act, 1961 (in short the Act). The said ground is consequential in nature needing no specific adjudication. Ld. Counsel for the assessee submitted that he was limiting his arguments only to the reopening issue assailed through ground No.1.
4. Facts apropos are that assessee a Chartered Accountant firm had filed its return of income for the impugned assessment year disclosing income of D1,09,01,953/-. The assessment was originally completed u/s. 143(3) of the Act on 30.03.2013 accepting the income returned by the assessee. Thereafter notice u/s. 148 of the Act for reopening the assessment was issued to the assessee on 26.02.2014. As per ld. Assessing Officer, assessee had arrived at a gross profit after deducting remuneration of D1,24,80,000/- to two of ITA Nos.229, 230 & 734/2017 :- 3 -: its partners. Ld. Assessing Officer noted that as per principal partnership deed dated 15.05.2003 none of the partners were entitled to any remuneration or salary. As per the ld. Assessing Officer there was a supplementary partnership deed dated 23.09.2010 through which two partners namely Mr. Sagar Datta and Mr. Amitesh Dutta became entitled to remuneration of D6,00,000/- and D4,40,000/- per month with effect from 01.04.2009. According to the ld. Assessing Officer such salary could be allowed only from the date of execution of supplementary deed which was 23.09.2010 and could not be given retrospective operation from 01.04.2009. Reassessment was thereafter completed by making an addition of D1,24,80,000/- denying remuneration claimed by the assessee u/s. 40(b) (v) of the Act.
5. Aggrieved, assessee moved in appeal before the ld. Commissioner of Income Tax (Appeals). Assessee questioned the reopening done for the impugned assessment year on the ground that such reopening was based on existing materials which were already available on record before the ld. Assessing Officer when the original assessment was completed u/s. 143(3) of the Act. As per the assessee there was no new material to show that any income had escaped assessment. Assessee also pointed out that there was a proceeding u/s. 154 of the Act initiated by the ld. Assessing Officer on the very ITA Nos.229, 230 & 734/2017 :- 4 -: same issue. Thus as per assessee reopening done was not according to law.
6. However, ld. Commissioner of Income Tax (Appeals) was not impressed by the above arguments of the assessee. According to him, rectification proceeding initiated against the assessee u/s. 154 of the Act for the very same issue stood dropped by the ld. Assessing Officer through his letter dated 24.02.2014. Further, as per ld. Commissioner of Income Tax (Appeals) return filed by the assessee for the impugned assessment year was selected for scrutiny only for examining taxability of interest income as appearing in form No.26AS. According to the ld. Commissioner of Income Tax (Appeals) in none of the replies given by the assessee during the original assessment proceedings, there was any mention on issues pertaining to payment of remuneration to partners. As per ld. Commissioner of Income Tax (Appeals) furnishing of the copies of partnership deed to the ld. Assessing Officer would not mean that ld. Assessing Officer had verified such partnership deeds or reached an opinion regarding allowability of the remuneration paid to partners. As per ld. Commissioner of Income Tax (Appeals), information for reopening the case could be discerned even from the material already available on record. Ld. Commissioner of Income Tax (Appeals) also observed that there was no question of any change of opinion since ld. Assessing ITA Nos.229, 230 & 734/2017 :- 5 -: Officer had never discussed this issue in the original assessment order. He thus held the reopening valid.
7. Now before us, ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that reopening though it was attempted within four years from the end of the relevant assessment years, was still invalid. According to him, assessee had vide letter filed on 22.03.2013 furnished a copy of supplementary partnership deed dated 23.09.2010 pursuant to a requirement specified in a notice received by it on 13.09.2012. Further, as per ld. Authorised Representative assessee had also filed the principal partnership deed dated 15.05.2003 as well as computation of salary payable to its partners allowable u/s. 40(b) of the Act, on 28.03.2013. Thus as per ld. Authorised Representative, assessee had furnished original as well as supplementary partnership deed and ld. Assessing Officer had come to a conclusion that the salary to partners claimed by the assessee was allowable. Further, as per ld. Authorised Representative, the rectification proceedings initiated u/s.154 of the Act for the very same reason stood dropped. It was urged by the ld. Authorised Representative that without any new tangible material, an assessment completed u/s. 143(3) of the Act could not be reopened. Reliance was placed on the judgment of Honble Delhi High Court in the case of CIT vs. Usha International Ltd, ITA Nos.229, 230 & 734/2017 :- 6 -:
348 ITR 485 and that of Honble Calcutta High Court in the case of Berger Paints India Ltd vs. ACIT, 322 ITR 369.
8. Per contra, ld. Departmental Representative submitted that remuneration to partners were allowable only as per the terms of the partnership deed and such terms in so for as it authorized any such remuneration prior to the date of its execution could not be allowed by virtue of Clause (iii) of Sec. 40(b) of the Act. According to him, the supplementary deed authorizing payment of remuneration to partners was executed only on 23.09.2010 and therefore such remuneration for the period from 1st April, 2009 to 23.09.2010 could not have been allowed by the ld. Assessing Officer. As per ld. Departmental Representative, Assessing Officer in the original assessment had not applied his mind to this issue at all. When no opinion was formed by the ld. Assessing Officer in the original assessment, as per ld. Departmental Representative there was no question of any change of opinion. Further, as per Departmental Representative, initiating a rectification proceedings u/s. 154 of the Act or dropping of such proceedings would not act as a bar against a reopening u/s.147 of the Act. Thus, according to him, the reopening was validly done.
9. We have considered the rival contentions and perused the orders of the authorities below. Facts which are not disputed are that ITA Nos.229, 230 & 734/2017 :- 7 -: reopening was attempted within four years from the end of the impugned assessment year and assessee had furnished copies of its principal partnership deed dated 15.05.2003 as well as supplementary partnership deed dated 23.09.2010, during the course of original assessment proceedings before ld. Assessing Officer. Assessee had on 28th March, 2013, also filed a computation of salary allowable u/s.40(b) of the Act. Said computation filed by the assessee as it appears at paper book page 77 is reproduced hereunder:- Profit before partners salary Less: Interest income Book Profit 23,381,953 23,381,953 On Ist D3,00,000 of book profit 60% on balance D 23,081,953 of book profit Partners salary to the extent allowable u/s. 40(b) (v) 270,000 13,849,172 14,119,172 Partners salary charged in the financials 12,480,000 Section 40(b)of the Act which enable a firm to claim payment of remuneration to partners is reproduced hereunder:- (b) in the case of any firm assessable as such,--
(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter ITA Nos.229, 230 & 734/2017 :- 8 -: referred to as remuneration) to any partner who is not a working partner; or
(ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of twelve per cent. simple interest per annum; or
(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:-- (a) on the first Rs. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90 per cent. of the book profit, whichever is more ; ITA Nos.229, 230 & 734/2017 :- 9 -: (b) on the balance of the book profit at the rate of
60 per cent. Sub clause (iii) of the above section is clear in that any provision contained in a partnership deed which ratified any retrospective entitlement of remuneration to the partners, cannot be considered while calculating such remuneration to the extent such claim relates to a period prior to the date of execution of such deed. Thus assessee under law was not entitled to claim remuneration to partners prior to 23.09.2010, whereas it had claimed such remuneration from 1st April, 2009.
10. Now the question before us, is whether the above error committed by the ld. Assessing Officer can be a reason for reopening an assessment. Ld. Assessing Officer was having before him both original partnership deed as well as supplementary partnership deed. Thus, we cannot say that ld. Assessing Officer was not aware of the partnership deeds and the claim of remuneration. However, obviously he allowed the claim overlooking clause (iii) of Sec. 40(b) of the Act. Or in other words, we have to presume that the remuneration was ITA Nos.229, 230 & 734/2017 :- 10 -: allowed despite a specific bar on restrospectivity in the Act. Such an opinion that claim of remuneration was allowable was a patently untenable view, which was not in accordance with clause (iii) to Section 40(b) of the Act. In our view, ld. Assessing Officer, if he had applied his mind, as is expected of him, would never have reached an opinion which was patently unlawful. An opinion which is patently against the provision of law, is in our view no opinion at all. In other words, we cannot say that there was any change of opinion when reassessment proceedings were initiated for allowing remuneration beyond what was allowed under law.
11. Coming to the question whether any new tangible material was available with the ld. Assessing Officer for attempting a reopening, new tangible material cannot be given, in our opinion a narrow definition so as to bring within its ambit only material from external sources. As long as original and supplementary partnership deed were not verified in the manner required by law, we can definitely say that there was fresh information coming out of the existing material.
12. Coming to the judgment of Honble Calcutta High Court in the case of Berger Paints India Ltd (supra) which was relied on by the ld. Authorised Representative, no doubt it was held that where recourse of Sec. 154 of the Act was taken for rectification of a mistake ITA Nos.229, 230 & 734/2017 :- 11 -: apparent on record, then in the absence of any other ground reassessment proceedings u/s. 147 of the Act could not be initiated after concluding that there was no apparent mistake. However, in the said case, ld. Assessing Officer was satisfied that there was no apparent error in the computation of income based on the existing record. This was why rectification proceedings were dropped. However, in the case before us, the rectification proceedings were dropped not because there was no error in computation but because such error was not exigible to a rectification proceedings, and could be addressed only by a reopening of assessment. Coming to the judgment of Honble Delhi High Court in the case of Usha International Ltd (supra) there was a deemed formation of opinion invoking presumption u/s. 114(e) of Evidence Act. Such opinion was a lawfully possible one. As against this, in the case before us, ld. Assessing Officer could not have reached a valid or lawful view to give a benefit to the assessee which was specifically mentioned as not allowable u/s. 40(b) (iii) of the Act. Thus, in our opinion both these cases are not applicable on facts here. We thus uphold the reopening done for the impugned assessment year.
13. Ld. Counsel of the assessee did not make any arguments on ITA Nos.229, 230 & 734/2017 :- 12 -: the merits of the disallowance done by the ld. Assessing Officer.
14. In the result, appeals of the assessee stand dismissed. Order pronounced on Thursday, the 21st day of September, 2017, at Chennai. Sd/- Sd/- (#$ . %) (DUVVURU RL REDDY) ( /JUDICIAL MEMBER ( . ) (ABRAHAM P. GEORGE) /ACCOUNTANT MEMBER #/Chennai $/Dated:21st September, 2017 '( )(/Copy to:
1. /Appellant 3. * ()/CIT(A) 5. ( //DR
2. /Respondent 4. */CIT 6. /GF
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