CA Amresh Vashisht, Meerut

CA AMRESH VASHISHTAssessment under section 144 popularly known as best judgment assessment is an assessment carried out as per the best judgment of the Assessing Officer. Best judgment assessment can only be made at the instance of certain failures as specified under section 144​ on the part of the taxpayer. In the case of best judgment assessment for a partnership firm , it carries a serious implications because of section 184 & 185 as no deduction by way of payment of interest, salary, bonus, commission or remuneration, by whatever name called, made to the partner, shall be allowed in computing the income chargeable under the head “profits and gains of business or profession and further  such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax in the hands of the partner.

POSITION OF FIRM UNDER THE INCOME-TAX ACT:

1. Partnership Firm is not a legal entityPartnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per Section 4 of Indian Partnership Act, 1932, ‘partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being.

2. Firm Legal Entity For Purpose Of Taxation – For  income-tax law , partnership firm is a legal entity . Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm . A partnership firm can sue only if it is registered.

COMPUTATION OF TOTAL INCOME OF THE FIRM

The total income of the partnership firm will be determined as a separate entity and it will be computed under various heads of income. However, while computing taxable profits under the head ‘profits and gains of business or profession, a deduction is allowable to the firm on account of interest and remuneration payable to the partners. The deduction of interest to a partner is allowable u/S 36 and remuneration to a working partner will be allowed u/S 37.

Section 40(b) deals with the amounts which are not deductible in case of a firm assessable as such. Therefore, deductions on account of interest and remuneration to the partners can be claimed under Sections 36 or 37, as the case may be, but it will be subject to the conditions prescribed by Section 40(b), which are as under:

(1) Payment of salary, bonus, commission or remuneration by whatever name called, to a non-working partner shall not be allowed as deduction.

(2) Payment of remuneration to working partners and interest to any partner will be allowed as deduction only when it is authorised by and is in accordance with partnership deed.

(3) Payment of remuneration/interest, although authorised by the partnership deed but which relates to a period prior to the date of such partnership deed, shall not be allowed.

(4) Interest payable to a partner, although authorised by the partnership deed shall be allowable as a deduction subject to a maximum of 12% simple interest per annum. If the partnership deed provides for interest at less than 12% p.a., the deduction of interest shall be allowed to the extent provided by the partnership deed.

(5) The payment of remuneration to working partner, although relates to a period after the date of the partnership deed and authorised by the partnership deed, shall be allowed as a deduction only to the extent of the prescribed limits.

CIRCUMSTANCES FOR BEST JUDGMENT ASSESSMENT U/S 144:​

​ In the normal course of assessment, the computation of the firm is well regulated as described above, however if the assessment made under section 144 as best judgment assessment, it carries a series of disallowances as defined. The assessing officer should really base the assessment on his best judgment and he must not act dishonestly or vindictively or capriciously.  As per section 144, best judgment assessment is resorted due to following failures on the part of the taxpayer:

  • If the person fails to make a return or required under s. 139(1) and he has not made a return or a revised return under section 139  (4) or (5) of that section.
  • if any person fails to comply with all the terms and conditions stipulated under a notice u/s. 142 or fails to comply with the directions requiring him to get his accounts audited in terms of section 142(2A).
  • If the Assessing officer is not satisfied about the correctness and the completion of the accounts of the Assesseeand if no method of accounting has been regularly employed by the Assessee.

So the best judgment, order can classify into two categories. One such is compulsory best judgment assessment made by the assessing officer in cases of non-co-operation on the part of the Assessee or when the Assessee is in default as regards supplying information. Another category is discretionary best judgment assessment in cases where the assessing officer is not satisfied about the correctness or the completeness of the accounts of the Assessee or where no method of accounting has been regularly and consistently employed by the Assessee. Hence best judgment assessment is being initiated in cases where the return of income is not filed by the taxpayer or there is no co-operation by the taxpayer on various matters.

PROCEDURE TO BE ADOPTED FOR BEST JUDGMENT ASSESSMENT:

​ Best judgment assessment is an assessment carried out as per the best judgment of the Assessing Officer. An assessing officer has to adopt the following procedure.

  • The Assessing Officer will serve a notice on the taxpayer to show cause why the assessment should not be completed to the best of his judgment.
  • No notice as given above is required in a case where a notice under section 142(1)​ has been issued prior to the making of an assessment under section 144.
  • If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has reason to believe that the case demands a best judgment, then he will proceed to carry out the assessment as per best of his knowledge.
  • A refund cannot be granted under section 144.​

​ If the criteria of the best judgment assessment are satisfied, then after taking into account all relevant material which the Assessing Officer has gathered, and after giving the taxpayer an opportunity of being heard, the Assessing Officer shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the taxpayer on the basis of such assessment.

PARTNERSHIP FIRM MUST SATISFY CONDITIONS U/S 184:

The partnership firm will be taxed after allowing deduction for interest on capital and loan of the partners and remuneration to working partners in the normal course of assessment as narrated above. For the said assessment order firm must comply with the provided conditions mentioned under section 184. In case these conditions are not satisfied in a particular assessment year, and the assessing officer made the best judgment assessment order under section 144 although the firm will be assessed as firm, but no deduction by way of payment of interest, salary, bonus, commission or remuneration, by whatever name called, made to the partner, shall be allowed in computing the income chargeable under the head “profits and gains of business or profession” and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax in the hands of the partner.

Further share of profit which a partner receives from the firm (after deduction of remuneration and interest allowable) shall be fully exempt in the hands of the partner. However, only that part of the interest and remuneration which was allowed as a deduction to the firm shall be taxable in the hands of the partners in their individual assessment under the head ‘profits and gains of business or profession’.

TREATMENT OF SHARE OF PROFIT, INTEREST AND REMUNERATION RECEIVED BY A PARTNER FROM A FIRM ASSESSED U/S 144.

1. Share of profit in the hands of the partner shall be fully exempt under Section 10(2A).

2. Interest received/receivable by a partner shall not be included in the Total Income of the partner under the head ‘Profits and gains of business or profession being disallowed in firm assessment.

3. Remuneration to a working partner shall not be included in the Total Income of the partner under the head ‘profits and gains of business or profession being disallowed in firm assessment.

(About the Author– Author was Member of ICAI- Capacity Building Committee 2010-11 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email amresh_vashisht@yahoo.com or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA)

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