Case Law Details
Paradise Rubber Industries Vs PCIT (ITAT Amritsar)
Admittedly the present case before us is a case of Limited scrutiny selected for particular points reproduced hereinabove confined to 4 issues. The issue for which the PCIT issued the show cause notice was entirely different than the four issues examined under limited scrutiny by the assessing officer. The Board in its circular mentioned the procedure for converting the limited scrutiny case into full-fledged scrutiny. The said circular was reproduced by the PCIT in the impugned order before us. From the perusal of the above said circular, it is abundantly clear that the conditions, which are sine qua non were non-existence. Therefore, the assessing officer did not have to convert or make a request for a limited scrutiny case to full-fledged scrutiny.
Since the assessing officer was only required to decide the issues specifically selected under Limited scrutiny and was not required to examine or sufficiently enquire the matters which are not referred to him as alleged by the PCIT. Once the assessing officer was required to apply his mind to the specific issues, which were duly dealt by the assessing officer in the order passed by him, it cannot be said that the order passed by the assessing officer was erroneous or prejudicial to the interest of the revenue. The revenue in its wisdom has directed the assessing Officer to decide the specific issues and laid down the condition of deviation from the specific issues after fulfilling the requirement of the circular issued by the Board in this regard. Once the AO had scrupulously discharged the duty assigned to him, it cannot be said by PCIT that the order passed by the assessing officer was erroneous and prejudicial to the interests of the revenue. In light of the above, we fully agree with the submission made by the assessee before us. We respectfully rely upon the decision referred hereinabove by the AR of the assessee and did not find the judgments referred by the Ld. PCIT in order in support of order are applicable.
As a result, the appeal filed by the assessee is allowed on ground No. 1 alone.
FULL TEXT OF THE ORDER OF ITAT AMRITSAR
The present appeal filed by the assessee feeling aggrieved by the order of Ld. Pr. CIT-1, Jalandhar dated 20.02.2020 for A.Y. 2015-16.
2. The assessee has raised the following grounds of appeal:
“1. The Learned Pr. Commissioner of Income Tax-1, Jalandhar, has erred in holding that the Assessment order u/s 143(3) dated 11/12/2017 is erroneous in so far as it is prejudicial to the interest of revenue and thereby setting aside the order by invoking the revisionary power u/s 263. The facts as well as the legal position have not been properly appreciated.”
Brief Facts
1. Facts of the case are that the return of income for the assessment year 2015-16 was filed on 22/9/2015. Thereafter notice u/s 143(2) dated 29/7/2016 was issued selecting the case for scrutiny for limited purposes. Copy of the notice received u/s 143(2) is enclosed at page no. 1.
2. A perusal of the notice u/s 143(2) will show that the case was selected for scrutiny for limited purposes for four specific reasons which stand mentioned in the notice itself in the following manner ;-
a) Custom duty payment mismatch
b) payment to related persons mismatch
c) unsecured loans
d) duty drawback received/receivable
3. Thereafter assessment was completed u/s 143(3) through order dated 11/12/2017.
4. Notice u/s 263 dated 18/1/2019 reads as under :-
“On perusal of the order u/s 143(3) of the Income tax Act, 1961 dated 11.12.2017, in your case and on the examination of record for the Assessment Year 2015-16, the following discrepancies were noticed.
(i) Perusal of the partnership deed filed during the course of assessment proceedings shows that in para 9 of the deed, it has been mentioned that the remuneration payable to the working partners shall be equal to the limits laid down in Explanation 3 to section 40(b) of the Income Tax Act, 1961 i.e. 90% of the book profits upto Rs.3 lacs and 60% of the balance book profits with a minimum of Rs. 1.50 lacs. Since, the remuneration/salary to the partners has not been quantified in the deed as required u/s 40(b) (ii), the Assessing Officer, while framing assessment, was required to disallow the salary/remuneration amounting to Rs.24,00,000/- debited by the assessee firm in its P&L Account but the Assessing Officer failed to do so.
2. Accordingly, in view of above discrepancies, I propose to hold the said order to be erroneous, in so far as it is prejudicial to the interest of revenue and take suitable remedial action, as per section 263 of the Income Tax Act, 1961. Your reply/objections, if any, to the proposed action can be filed before the undersigned by 28.01.2019 on which date your case stands fixed for hearing at 11.30 P. M. in the office of the undersigned.”
5. On the basis of this issue, order u/s 263 was passed setting aside assessment order to the file of the assessing officer holding the assessment order passed on 11/12/2017 was erroneous in so far as prejudicial to the interest of revenue.
6. Feeling aggrieved by the order passed by the CIT(A), the assessee is in appeal before us on the ground mentioned hereinabove.
7. At the outset the Ld.AR had submitted that the assessment was framed by the assessing officer for a limited scrutiny and the principal CIT had invoke the revisionary power under section 263, four and issue which was not part of the reasons for which the case was selected for scrutiny assessment. It was the contention of the Ld.AR that the order of the assessing officer cannot be said to prejudicial and erroneous to the interest of the revenue as it was not necessary for the assessing officer to examine the issue beyond the scope of limited scrutiny for which the matter was selected. In support of this contention attention is drawn to the following decisions:
a) Su-Raj Diamond Dealers Pvt. Ltd. vs. Pr CIT reported at 203 TTJ 137 (ITAT Mumbai): It was held the assessing officer having confined himself to the issues for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order, for the reason, that he had failed to dwell upon certain other issues which did not form part of the reasons for which the case was selected for limited scrutiny under CASS. The order u/s 263 was consequently quashed. Copy of the order is enclosed at page no. 6 to 11 [please see para no. 8 at page no. 11].
b) Sonali Hemant Bhavsar vs. Pr. CIT (ITAT Mumbai): It was held that a limited scrutiny case cannot be expanded unless the AO converted into complete scrutiny with the approval of the Pr. CIT and if the AO after considering the submissions of the assessee does not come to the conclusion of potential escapement the Ld. Cannot hold the order to be erroneous on the ground that AO ought to have reached to such conclusion. The order u/s 263 was accordingly quashed. Copy of the order is enclosed at page no. 12 to 25 [please see para no. 6 and para no. 7 at page no. 18 to 25].
c) Storewell Construction & Engineers vs. Pr. CIT [ITA T Pune]: In this case the revisionary jurisdiction had been invoked by the Pr. CIT to look into the issues which were not within the purview of limited scrutiny. In view of the circular issued by CBDT and judicial decisions, the order u/s 263 was quashed. Copy of the order is enclosed at page no. 26 to 30 [please see para no. 4, 5 & 6 at page no. 27 & 28].
d) Akash Ganga Promotors & Developers vs. Pr. CIT [ITAT Cuttack]: It was held that where the case was selected for scrutiny for limited scrutiny and there was no allegation by the ld. Pr. CIT that the AO has not made inquiry on any of the issues for which the case was selected for limited scrutiny, the assessment cannot be held to be erroneous and prejudicial to the interest of revenue. Copy of the order is enclosed at page no. 31 to 40 [please see para no. 15 & 17 at page no. 37].
e) Mahendra Singh Dhankhar HUF vs. ACIT reported at 62 CCH 271 (ITAT Jaipur): It was held that the assessing officer was duty bound to follow the instruction and procedure for converting the limited scrutiny into complete scrutiny and without following such procedure and approval an inquiry on the issue which is outside the purview of limited scrutiny would be outside the jurisdiction of AO. As a necessary corollary, the Pr. CIT cannot be permitted to travel beyond the jurisdiction which was vested with the assessing officer as what cannot be done directly cannot be done indirectly. Consequently revisional jurisdiction cannot be exercised for broadening the scope of jurisdiction originally vested with the AO while making assessment. Copy of the decision is enclosed at page no. 41 to 51 [please see para at page no. 42].
7. In view of the submissions and decisions cited above, it is clear that the present case was taken up for limited scrutiny and the issue taken up in for invoking the jurisdiction u/s 263 was not one of the issues for which limited scrutiny was taken up. The order u/s 263 is thus bad in law and deserves to be quashed on this score itself.
8. Another fatal legal mistake in the order u/s 263 dated 20/2/2020 is that the order does no bear any Document Identification Number i.e. DIN which was made mandatory by Circular no. 19 of 2019 issued by CBDT. Copy of the circular is enclosed at page no. 52 & 53. A plain reading of para no. 2 of the circular makes it abundantly clear that no communication including orders shall be issued by any income tax authority on or after 1st day of October, 2019 unless a computer generated Document Identification Number (DIN) had been allotted and was duly quoted in the body of such communication. In para no. 3 of the above circular certain exceptions have been provided but it has been stated that in such cases where communication is issued without a DIN this fact along with approval taken from Chief Commissioner / Director General this shall stand mentioned on the communication itself. In para no. 4 of the above circular it has been stated that any communication which is not in conformity with para-2 and para-3 shall be treated as invalid and shall be deemed to have never been issued. In fact realizing that the order had been passed without DIN, an intimation letter dated 2 1/2/2020 was issued where in it was mentioned that the order/notice/letter dated 20/2/2020 is having DIN: ITBA/COM/M/17/2019- 20/1025539552(1). Copy of the intimation letter is enclosed at page no. 54. In the impugned order u/s 263 neither DIN has been mentioned nor has the fact that the communication was being issued without a DIN after taking approval of appropriate authority been mentioned. The order u/s 263 has thus to be treated as invalid and never to have been issued. Necessary relief may please be allowed as the impugned order is being treated as the basis of framing fresh assessment.
9. As far as merits of allowability of salary/ remuneration to partners is concerned, it is submitted that the relevant clause in the partnership deed which was filed with the assessing officer has been incorporated in para no. 8.2 at page no. 11 of the impugned order. A perusal of this clause will show that the said clause not only refers to section 40(b) of the Income Tax Act but also mentions the exact formula for quantifying the remuneration i.e. 90 % up to book profits up to Rs. 300,000 and 60 % of the balance book profits with a minimum of Rs. 1.50 lacs. It has also been provided that the remuneration shall be credited to the working partners in equal ratio.
10. The reason for invoking jurisdiction u/s 263 is evident from the notice itself which has been incorporated at point no. (i) at page no. 1 of the impugned order. It has been mentioned in the notice u/s 263 dated 18/1/2019 that:
” . . . since the remuneration/ salary to partners has not been quantified as required u/s 40(b) (ii), the Assessing Officer was required to disallow the salary/remuneration amounting to Rs. 24,00,000 debited by the assessee firm in its P&L account but the Assessing Officer failed to do so.”
11. In response to the above notice, a detailed reply dated 11/2/2019 was filed on 12/2/2019 which has been incorporated at para no. 2 of the order u/s 263 wherein attention of the ld. Pr. CIT was also drawn to Circular no. 739 dated 25/3/1996 issued by CBDT wherein it had been clarified in para no. 4 that for all the assessment years subsequent to the assessment year 1996-97 onwards, no deduction u/s 40(b)(v) would be admissible unless the partnership deed either specifies the amount of remuneration payable to each working partner or lays down the manner of quantifying such remuneration [please see 2nd para at page no. 3 of the order u/s 263].Copy of the circular no. 739 is enclosed at page no. 55. Since in the present case, the method of quantification of remuneration had been provided in the relevant clause of the partnership deed, no adverse inference was called for as far as allowability of remuneration was concerned. Certain judicial decisions on the issue were also cited before the ld. Pr. CIT [4th& 5th para at page no. 4 of the impugned order and 5th& 6th para at page no. 7 of the impugned order]. These decisions are discussed below:
a) CIT vs. Anil Hardware Store reported at 233 CTR 595 (Himachal High Court): In this case it was held that where the method of computation of remuneration was laid down by the partnership deed, deduction of remuneration was allowable u/s 40(b). Copy of the order is enclosed at page no. 56 to 60.
b) Durga Dass Devki Nandan vs. CIT reported at 342 ITR 17 (Himachal High court): The view expressed in the case of Anil Hardware Store was reiterated and salary held to be allowable even though not fixed in the partnership deed. Copy of the decision is enclosed at page no. 61 to 65.
c) Rubber Wings vs. ITO (ITAT Amritsar): It was held that the claim of salary was allowable if the manner of quantification of salary was specified. Copy of the decision is enclosed at page no. 66 to 70 [please see para no. 6 at page no. 69 & 70]. This decision which was in favour of the assessee was delivered after considering the decision of the Punjab & Haryana High Court in the case of Sood Bhandari & Co. vs. CBDT reported at 246 CTR 90 which was been wrongly relied upon by the ld. Pr. CIT to decide the issue against the assessee.
d) CIT vs. Asian Marketing reported at 254 CTR 453 (Rajasthan High Court): It was held that even where it was provided that where the relevant clause of the partnership deed provided for salary as per the standard and norms fixed by the relevant provisions of the Income Tax Act, the same was allowable. Copy of the decision is enclosed at page no. 71 to 73.
e) ACIT vs. Ravi Bros reported at 3 SOT 533 (ITAT Gauhati): It was held that were the partnership deed contained the formula for computing the salary, the CIT(A) was justified in deleting the addition made by the assessing officer. Copy of the decision is enclosed at page no. 74 to 76 [please see para no. 5 at page 75 & 76].
f) ITO vs. Pulimoottil Silk House reported at 19 SOT 4 (ITAT Cochin): It was held that even where the salary was not quantified in the partnership deed and the deed provided for payment of salary as per the provision of Income Tax Act, the same was allowable. Copy of the decision is enclosed at page no. 77 to 83 [please see page no. 78].
g) ACIT vs. DCS International Trading reported at 37 CCH 312 (ITAT Delhi): It was held that where the salary to partners was provided in the partnership deed to be allowed as per the provision of section 40(b) of the Income Tax Act, the same was The relevant clause of salary is incorporated below para no. 3.1 at page no. 86. The decision of Delhi High Court in the case of Sood Brij & Associates relied upon by the ld. Pr CIT was distinguished [para no. 5.3 at page no. 88]. This case law has been relied upon by the Pr. CIT in the impugned order to decide against the assessee. Copy of the decision is enclosed at page no. 84 to 89.
h) Unitec Marketing Services vs. ACIT reported at 175 ITD 90 (ITAT Mumbai): It was held that where the clause in the partnership deed stated that salary was to be computed in accordance with the provisions of section 40(b) and distributed in profit sharing ratio the same was allowable. The relevant clause of salary is incorporated below para no. 8 at page no. 109. Copy of the decision is enclosed at page no. 90 to 95.
12. It was further contended by the Ld.AR that in para no. 6 of the order passed by the CIT(A) it has been stated that with regard to the difference in the opinion between the Assessing Officer and the Commissioner Of income Tax, the position stands substantially altered with the insertion of
Explanaition-2 in section 263, by Finance Act, 2015. Since the deeming provision has been invoked, the decision relied upon by the assessee pertaining to the pre-amended provisions of section 263 would not hold good. For the sake of convenience in reference Explanation-2 to section 263 is reproduced below:
“Explanation-2.- For the purpose of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner—
(a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
13. The ld Pr. CIT has not mentioned which specific clause of Explanation-2 is deemed to have been invoked in this case. Assuming that clause (a) or (b) have been invoked, it is submitted that this was a case where case was taken up for limited scrutiny and the scope of the assessment was thus confined to the limited issues. The assessing officer was not expected to go beyond these issues as clearly mentioned in instructions of No. 20 of 2015 dated 29/12/2015 [mention in the case law cited – please see page no. 9]. Since remuneration to partners was not one of the reasons for which the case was selected for limited scrutiny, neither clause (a) nor clause (b) of Explanation-2 to section 263 could be invoked. The ld. Pr. CIT has not appreciated the concept of limited scrutiny while expressing her view in para no. 6 of the impugned order. The case laws cited above dealing with revision where the case is selected for limited scrutiny may please be considered here.
14. In para no. 7 the ld. Pr. CIT has stated that even though the case was selected for limited scrutiny under CASS on four reasons, it should have been converted into full scrutiny. She has also referred to instructions of No. 20 of 2015 dated 29/12/2015 and No. 5 of 2016 dated 14/7/2016 and incorporated para 3d of instruction no. 20 of 2015. In this regard it is submitted that this reasoning cannot be used for invoking the provisions of section 263. Attention is again drawn to the various six decisions of various Tribunals on this issue mentioned at page no. 3 & 4 of this submission wherein the above instructions have been discussed [please see page no. 9, 34 & 48] and thereafter the matter was decided in favour of the assessee. In any case, the specific clause relating to remuneration of partners in the partnership deed contained a formula to quantify the salary and for that reason also, the assessing officer could not have disallowed remuneration to partners even if the case had been selected for complete scrutiny. Case laws in this regard have been mentioned at page no. 6 to 8 of this submission. Moreover even if it is accepted for the sake of argument that another view was also possible, the assessing officer having taken one of the possible views which has legal backing also, the issue would be outside the purview of section 263 as held by the Supreme Court in the case of CIT vs. Malabar Industrial Co reported at 159 CTR 1 and CIT vs. Munjal Casting reported at 303 ITR 23 (Punjab & Haryana High Court) as discussed above.
15. In para no. 8 the ld. Pr. CIT has again stated that the assessing officer should have moved proposal to convert the case into a complete scrutiny as per instructions of CBDT. No. 20 of 2015 dated 29/12/2015 and No. 5 of 2016 dated 14/7/2016. This aspect has already been discussed Further circular no. 739 has also been referred and section 40 which has been incorporated at page no. 9 & 10 of the impugned order. She concluded by stating that section 40(b) relates to firm and the clauses (i) to (v) are interconnected and have to be read harmoniously. As per these clauses, one of the prescribed condition is that payment of remuneration should be authorized by and in accordance with the terms of the partnership deed and salary should relate to a period falling after the date of such partnership deed. In this regard it is submitted that the clause in the partnership deed dealing with remuneration to partners is in accordance with law and also supported by the circular no. 739 and well as various judicial decisions.
16. In para no. 8.1 of the impugned order the ld. Pr. CIT had drawn support from two high court decisions and these are discussed below:
a) Sood Bhandari & Co. vs. CBDT reported at 246 CTR 89 (Punjab & Haryana High Court): This is a case deals with entirely different facts and is not applicable to the present appeal. Copy of the decision is enclosed at page no. 106 to 111. The salary clause in this case which was under adjudication is reproduced below [para no. 9 at page no. 110]:
“That all the partners of the firm attending to the business of the firm shall be entitled to salary from time to time at the rate mutually decided by all the parties in this agreement.”
b) Sood Brij & Associates vs. CIT reported at 203 Taxman 188 (Delhi High Court): This was a case where neither the salary had been quantified nor the method of quantification had been provided in the partnership deed. Copy of the decision is enclosed at page no. 112 to 117 [please see para no. 8 at page no. 120 and para no. 14 at page no. 117]. The facts of this case are different from the present one and thus this case is not relevant to the issue at hand. As stated above, this decision has also been distinguished by the ITAT Delhi Bench in the case of DCS International Trading (supra) while allowing relief to the assessee.
17. On the basis of the above contention it was submitted that the order passed by by the PCIT, is VOID and is required to be quashed.
18. Per contra DR for the revenue had vehemently relied upon the order passed by the assessing officer as well as by the CIT (A).
19. We have considered the rival contention of the parties and perused the material available on record, including the judgments cited at bar during the hearing by both parties. During the argument, the Ld.AR had only restricted his submission on the first ground alone, as it was the submission of the Ld. AR that if the first ground is decided in favour of the assessee then remaining grounds became academic and the order of PCIT can be quashed solely. However, in case the bench comes to the conclusion that the matter is required to be heard then the written submissions reproduced hereinabove can be considered for the purpose of deciding the issues on merit.
20. In the light of the above, we have considered ground No. 1. Admittedly the present case before us is a case of Limited scrutiny selected for particular points reproduced hereinabove confined to 4 issues. The issue for which the PCIT issued the show cause notice was entirely different than the four issues examined under limited scrutiny by the assessing officer. The Board in its circular mentioned the procedure for converting the limited scrutiny case into full-fledged scrutiny. The said circular was reproduced by the PCIT in the impugned order before us. From the perusal of the above said circular, it is abundantly clear that the conditions, which are sine qua non were non-existence. Therefore, the assessing officer did not have to convert or make a request for a limited scrutiny case to full-fledged scrutiny.
21. Since the assessing officer was only required to decide the issues specifically selected under Limited scrutiny and was not required to examine or sufficiently enquire the matters which are not referred to him as alleged by the PCIT. Once the assessing officer was required to apply his mind to the specific issues, which were duly dealt by the assessing officer in the order passed by him, it cannot be said that the order passed by the assessing officer was erroneous or prejudicial to the interest of the revenue. The revenue in its wisdom has directed the assessing Officer to decide the specific issues and laid down the condition of deviation from the specific issues after fulfilling the requirement of the circular issued by the Board in this regard. Once the AO had scrupulously discharged the duty assigned to him, it cannot be said by PCIT that the order passed by the assessing officer was erroneous and prejudicial to the interests of the revenue. In light of the above, we fully agree with the submission made by the assessee before us. We respectfully rely upon the decision referred hereinabove by the AR of the assessee and did not find the judgments referred by the Ld. PCIT in order in support of order are applicable.
22. As a result, the appeal filed by the assessee is allowed on ground No. 1 alone. We have not discussed any other grounds referred by the AR in the written submission.
23. As a result, the appeal of the assessee is allowed.
Order pronounced in the open court on 24/09/2021.