Case Law Details
2. Facts apropos are that assessee, a firm of Chartered Accountants, filed its return for impugned assessment year on 30th September, 2008, declaring a total income of ~ 17,70,69,972/-. The assessment was completed on 31st December, 2010 under Section 143(3) of the Act, accepting the income returned. Thereafter, on 29.2.2012, CIT issued a show cause notice under Section 263 of the Act, inter alia, stating that the number of partners in the firm had gone above 20, during the relevant previous year. As per ld. CIT, there were some amendments in the partnership deed on 1st May, 2007, whereby one Shri Mukund Dharmadhikari, already a partner of the firm, was added once again as partner in a representative capacity, representing M/s Deloitte Haskins & Sells, Mumbai. Ld. CIT noted that Shri Mukund Dharmadhikari had right to share of profit, both in the representative capacity as well as in his individual capacity. Thus, according to him, the number of partners exceeded 20, maximum allowed under Indian Partnership Act, 1932. Assessee therefore had to be treated as an Association of Persons. Assessment order under Section 143(3), passed on 31 .12.201 0, as per CIT, did not consider this aspect, but had accepted the claim of the assessee that it was a firm and on account of this, assessee was allowed deduction under Section 40(b) of the Act on salaries paid to its partners.
3. To the above notice, reply of the assessee was that the number of partners did not exceed 20, but remained at 20. According to assessee, amendment dated 1.5.2007 clearly mentioned that the number of partners was 20 only. Relying on the decision of Hon’ble Apex Court in the case of CIT v. Bagyalakshmi & Co (55 ITR 660), assessee argued that an individual could represent group of persons as well as himself thereby occupying a dual position. Qua the partnership, he functioned in his individual capacity only. Qua the third parties, he functioned in a representative capacity also. As per assessee, the right of Shri Mukund Dharmadhikari was only to share the profits of the assessee-firm and nothing more. Reliance was also placed on the decision of Hon’ble Apex Court in the case of Rashik Lal and Co. v. CIT (229 ITR 458). As per assessee, through this decision, it was clarified by the Hon’ble Apex Court that only individuals could become partners of the firm and even if a person joined the firm in his capacity as representative of a body or association, vis-à-vis the firm, his position was still that of an individual only. Agreement which an individual had with a third party to divide the profits received from the firm did not bind the firm nor did it alter the position of the firm under the Partnership Act or Income-tax Act. Assessee argued that a ‘person’ mentioned in Section 4 of Indian Partnership Act, 1932 could only be a natural person or a juristic or legal person. A firm or Association of Persons was not a legal person. Thus, according to assessee, though Shri Mukund Dharmadhikari was acting in a dual capacity, the total number of partners never exceeded 20 during the relevant previous year. In any case, as per assessee, the view taken by Assessing Officer was a possible one and therefore, CIT did not have a jurisdiction to interfere by exercising power under Section 263 of the Act. For this, reliance was placed by the assessee on the decision of Hon’ble Punjab & Haryana High Court in the case of CIT v. Max (India) Ltd. (268 ITR 128).
4. However, the CIT was not impressed by any of the above contentions taken by the assessee. According to him, the amendment deed dated 1.5.2007 clearly showed that M/s Deloitte Haskins & Sells, Mumbai, participating in the firm became a partner through its representative Shri Mukund Dharmadhikari. Sharing of the profits among the parties, mentioned in the deed included M/s Deloitte Haskins & Sells, Mumbai. A sum of ~ 267 lakhs was to be paid to Shri Mukund Dharmadhikari in his representative position and after that he was entitled to a percentage share in the balance profits. Ld. CIT noted that the cases relied on by the assessee, namely, Bagyalakshmi & Co. (supra) and Rashik Lal & Co. (supra) were concerned with Hindu Undivided Family and rights of a karta, when a karta entered into a partnership. As per ld. CIT, these decisions only dealt with the position of a karta of a HUF and his right to share in the profits of a firm in which he was a partner. Whereas in assessee’s case, the partnership deed clearly mentioned that Shri Mukund Dharmadhikari was a partner, who was to account to M/s Deloitte Haskins & Sells, Mumbai, in his representative capacity. In addition, he also got a share of 20.0530% in the profits in his individual capacity. He was thus of the opinion that the amendment to the partnership deed on 1st May, 2007 resulted in the membership exceeding 20, the maximum limit prescribed under law. Since Assessing Officer had not considered this aspect, but allowed the claim of the assessee with regard to the salaries paid to its members under Section 40(b) of the Act, he directed the Assessing Officer to modify his assessment order and enhance the assessment by disallowing the claim made by the assessee under Section 40(b) of the Act.
10. One is that M/s Deloitte Haskins & Sells, Mumbai,which is a participating firm,is not a stranger to the assessee. Assessee can take policy decisions, which have a policy bearing on such firm, once there is an approval of the majority of the members of the “National Firm”. Shri Mukund Dharmadhikari was representing M/s Deloitte Haskins & Sells, Mumbai, which was a participating firm. What can easily be construed from the above is that endeavour of the assessee through the amendment deed, was to bring on board the participating firm, on which it had powers to make policy decision, so that they became entitled for a share of profit. In other words, the effort of the assessee was to bring indirectly into the partnership M/s Deloitte Haskins & Sells, Mumbai, which was already a participating firm. Assessee was a renowned partnership firm and was well aware that number of partners cannot exceed 20. It is a well settled principle of law that what is permissible is tax planning, but not evasion. When an attempt is made by a concern to evade tax using subtle camouflages, bounden duty of the authorities is to find out the real intention. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs, as held by Hon’ble jurisdictional High Court in the case of Indo Tech Electric Co. v. DCIT in TC(A) No.2209 & 2210 of 2006 dated 16.12.2010 at para 15.1 of its order. The Court has to go into substance and not to be satisfied with the form. No doubt, as pointed out by the learned A.R., Hon’ble Apex Court in the case of Rashik Lal & Co. (supra) has clearly held that a partner may be a trustee or may enter into a sub-partnership with others, or can be a representative of a group of persons. Qua the partnership, he functions in his personal capacity. But, in our opinion, the above decision as well as decision in the case of Bagyalakshmi & Co. of Hon’ble Apex Court (supra) will not have any applicability here, since assessee was indirectly trying to bring in M/s Deloitte Haskins & Sells, Mumbai, another firm, which was already a participating firm, as its partner, circumventing the limit of maximum 20 members. It is also obvious that Assessing Officer despite having the amendment deed with him, had not gone into these aspects. Assessment order is a crisp one accepting the income returned by the assessee. Assessee has not been able to place any record to show that Assessing Officer had called for any details regarding the number of partners during the course of assessment. A crisp order by itself might not show that Assessing Officer had not applied his mind. But, when the circumstances show that despite availability of materials,aspects vital to the assessment were missed out, then the normal inference that can be drawn is that Assessing Officer had not looked into such aspects nor applied his mind. Assessee had claimed substantial amount as remuneration to its partners under Section 40(b) of the Act and this was allowed as such without considering the crucial aspect of the legality of its claim of status as a firm. In our opinion the circumstances would show that Assessing Officer had not applied his mind and such assessment order by virtue of this, became an erroneous one which was prejudicial to the interests of Revenue.
11. No doubt, the CIT went over board when he directed the Assessing Officer to modify the assessment order by treating the assessee as an AOP and disallow the claim of remuneration to its partners. The CIT ought have simply set aside the order of A.O. for consideration of issue afresh, since it was erroneous insofar as it was prejudicial to the interests of Revenue and to this extent, order of ld. CIT required modification.
12. Thus, while confirming the order of CIT(Appeals) insofar as invocation of his powers under Section 263 of the Act is concerned, we find it necessary to modify his order. Assessing Officer shall be free to consider the claim of the assessee afresh and will not be constrained by the direction of the CIT that assessment has to be done disallowing the claim of remuneration to partners. Assessing Officer shall be free to proceed in accordance with law. Ordered accordingly.
13. In the result, appeal filed by the assessee is partly allowed.
