Case Law Details

Case Name : Kachhi Heritage Vs ACIT (ITAT Pune)
Appeal Number : / ITA No. 1591/PUN/2017
Date of Judgement/Order : 16/10/2020
Related Assessment Year : 2012-13

Kachhi Heritage Vs ACIT (ITAT Pune)

Grounds of Appeal

1. On the facts and in the circumstances of the case and in law the Learned Assessing Officer erred in treating the status of the partnership firm as AOP for the reason that partnership deed is executed on an inadequate stamp paper. Your appellant submits that such condition is no where spelt out in provisions of section 184 or 185 of the Income Tax Act, 1961 and therefore the stand taken by the Learned Assessing Officer is incorrect.

2. On the facts and in the circumstances of the case and in law the Learned Assessing Officer erred in consequently disallowing entire partner’s salary for the reason that it is treated as AOP and assessed as AOP.

Held by ITAT

The crux of the grievance is whether in determining the partnership firm for the purpose of taxation is it important to only look in to the technical aspect, procedural aspect or whether it is actually important to go into the sum and substance of the matter to analyze each and every transaction, correspondence and dealing of the partners vis-à-vis third parties etc. In our considered view, it is always a substantive law that prevails over the procedural law. What would be the amount of stamp paper in which deed has to be executed is only the matter of procedure whereas, the factors like contribution of each partner in the partnership firm, distribution of profits among the partners, remuneration paid to the partners, all these various terms and conditions constitutes the substantive law. These areas have to be analyzed in order to decide the status of the assessee for the purpose of taxation. In this case, the Revenue Authorities have rejected the deed of partnership firm and assessed the assessee as AOP only on the ground that the deed of partnership firm was executed not on requisite stamp paper. They have not analyzed or commented on any terms and conditions of the partnership deed and has never stated that any of the provisions in such partnership deed of the assessee is contrary to the provisions of law. In section 184 of the Act, the key word is “evidenced”, what has to be evidenced? The existence of partnership firm has to be evidenced and the procedural part is that it has to be evidenced by an instrument. Now the term “instrument” is not defined in the Income Tax Act. Therefore, the intention of the legislature is clear that for the purpose of Income Tax Act, there has to be substantive evidences of existence of partnership firm and that substantive evidence is supported by the procedural fact of an instrument being executed in this regard.

The assessee is also registered as partnership firm in the records of the Assistant Registrar of firm, Pune and while granting registration, the Assistant Registrar of firm did not object to any of the clause of the partnership deed and only query was raised regarding the registration fees of Rs.1500/- which was deposited and the assessee was asked to send the money order for that purpose. Even the stamp duty on the partnership deed was accepted by the Assistant Registrar of Firms, Pune. These submissions made by the Ld. AR was not contested by the Ld. DR at the time of hearing.

In our considered view, therefore, the substantive law is concerned with the ends which the administration of justice seeks, whereas the procedural law deals with the means and instruments by which these ends are to be attained. Substantive laws establishing rights and liabilities of persons natural or otherwise in this case it is of the partnership firm and such status of the assessee is accepted by the Revenue. In such scenario, the procedural laws merely prescribing the manner in which such rights and responsibilities may be exercised, in this case the stamp paper on which the partnership deed has been executed cannot alter the status already determined substantively. The decision of the Hon’ble Supreme Court referred by the Ld. CIT(Appeals) (supra.) in respect there to, we also agree that while deciding an issue under the Income Tax Act, other legislations allied laws has to be considered. But in this case of the assessee, substantively nothing has been brought against the assessee by the Revenue Authorities.

That further in the decision of the Hon’ble Apex Court, it concerns about the registration of a partnership firm whereas, in this case, firm is already registered under the Assistant Registrar of Firm, Pune, Maharashtra, PAN has also been allotted as firm and even in the assessment order, the status of the firm is mentioned as that of the partnership firm. Therefore, the Department is accepting all the genuineness of existence of the partnership firm and only for this technical aspect of deed executed in the lessor denomination stamp paper has framed the assessment treating the assessee as AOP. The Revenue Authorities may call upon the assessee in due course for rectification of this technical defect. In the totality of facts and circumstances and on examination of this issue as afore-stated, we are of the considered view that the assessee is duly constituted partnership firm. Hence, we set aside the order of the Ld. CIT(Appeals) on this issue and direct the Assessing Officer to provide appeal effect accordingly. Thus, Ground Nos.1 and 2 raised in the appeal are allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal preferred by the assessee emanates from the order of the Ld. CIT(Appeals)-8, Pune order dated 28.04.2017 for the assessment year 2012-13 as per the following grounds of appeal on record:

“1. On the facts and in the circumstances of the case and in law the Learned Assessing Officer erred in treating the status of the partnership firm as AOP for the reason that partnership deed is executed on an inadequate stamp paper. Your appellant submits that such condition is no where spelt out in provisions of section 184 or 185 of the Income Tax Act, 1961 and therefore the stand taken by the Learned Assessing Officer is incorrect.

2. On the facts and in the circumstances of the case and in law the Learned Assessing Officer erred in consequently disallowing entire partner’s salary for the reason that it is treated as AOP and assessed as AOP.

3. On the facts and in the circumstances of the case and in law the Learned Assessing Officer erred in disallowing a sum of Rs. 6,40,459/-by invoking the provisions of section 40(a)(ia) of the Income Tax Act, 1961 by disregarding appellants contention in this regards.

4. On the facts and in the circumstances of the case and in law the Learned CIT(A) erred in enhancing the income by Rs.3,76,000/- by rejecting appellant submission made in this regard.

5. On the facts and in the circumstances of the case and in law the Learned CIT(A) erred in proposing an enhancement of income by Rs.3,76,000/-, the action is beyond the power of Learned CIT(A) as no addition can be made for new source of income by the CIT(A) therefore the entire action of enhancement needs to be quashed.

The appellant craves for to leave, add, alter, modify, delete above ground of appeal before or at the time hearing, in the interest of natural justice.”

2. In respect of Ground Nos. 1 and 2, the facts are that during the assessment proceedings, it was noted by the Assessing Officer that in the P & L account, the assessee has debited a sum of Rs.25,00,000/- as “partners salary”. The assessee furnished copy of partnership deed as directed by the Assessing officer and on perusal of the said partnership deed, it was noticed that partnership deed was executed on a stamp paper of Rs.200/-. Thereafter, the Assessing Officer observed that for the purpose of Section 184 of the Income Tax Act, 1961 ( hereinafter referred to as the Act‟), the partnership firm assessed must be evidenced by the an instrument. If it is not evidenced by an instrument, it would be assessed as Association of Persons (AOP). The term “instrument” has not been defined in the Income Tax Act.

The constitution and validity of a partnership firm is governed by the Indian Partnership Act, 1932 and the Assessing Officer further opined that as per the Partnership Act, the instrument must be executed on a stamp paper of not less than Rs.500/-. In this case, the deed has been executed on a stamp paper of Rs.200/- and therefore, the Assessing Officer considered it as not valid instrument constituting partnership firm.

3. That before the Assessing Officer, the assessee referring Section 184 of the Act submitted that since the definition of instrument is not there in the Income Tax Act, the partnership deed has to be evidenced from various terms and conditions contained in the said deed and other documents relating to the correspondence between partners. It is the sum and substance of the partnership deed that has to be looked into and not merely technical aspect of stamp paper in which the deed has been executed. That for the matter of fact, the Department has accepted the status of the assessee as partnership firm and has issued PAN specifically upholding the status of partnership firm. The assessee relied on the decision in the cases of (i) CIT Vs. East India Lamp, 129 ITR 43 (ii) Haridas Vs. CIT, 4 ITC 475 (iii) Chhotalal Vs. CIT, 34 ITR 351 (iv) CIT Vs. New Life Construction, 107 ITR 361 and contended that the existence of partnership firm does not merely depend on the technical aspect of how the partnership firm has come into existence bur rather sum and substance on various other documents corresponding concerning partners. The Assessing Officer did not agree with the submissions of the assessee and assessed the assessee as AOP instead of partnership firm and remuneration of Rs.25,00,000/- was disallowed and added to the total income of the assessee.

4. The Ld. CIT(Appeals) on analyzing this issue agreed with the findings of the Assessing Officer and read Section 184 of the Act along with provisions of Indian Partnership Act, 1932 and the Bombay Stamp Act, 1958 observed that the partnership deed had to be executed on stamp paper not less than Rs.500/-. That further, the Ld. CIT(Appeals) also referred to Section 35 of the Indian Stamp Act which specified that the authorized person to receive evidence in form of an instrument will only be admitted by such authorities as evidence if the said instrument is duly stamped. The Ld. CIT(Appeals) at Para 6.5 of her order held that since the partnership deed is executed on stamp paper of Rs.200/- as against Rs.500/- required under the Bombay Stamp Act, 1958 such evidence is therefore, liable to be rejected u/s.35 of the Indian Stamp Act as requirement of law is not fulfilled. The Ld. CIT(Appeals) placed reliance on the decision of the Hon‟ble Apex Court in the case of Biharilal Jaiswal Etc. Vs. Commissioner of Income Tax (1996) 217 ITR 746 wherein it has been held that “…… One arm of law cannot be utilized to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the IT Act, the ITO need not look to the law governing the partnership which is seeking registration.” On these observations, the Ld. CIT(Appeals) upheld the addition made by the Assessing Officer.

5. We have perused the case records and heard the rival contentions. We have also considered the judicial pronouncements placed before us. The crux of the grievance is whether in determining the partnership firm for the purpose of taxation is it important to only look in to the technical aspect, procedural aspect or whether it is actually important to go into the sum and substance of the matter to analyze each and every transaction, correspondence and dealing of the partners vis-à-vis third parties etc. In our considered view, it is always a substantive law that prevails over the procedural law. What would be the amount of stamp paper in which deed has to be executed is only the matter of procedure whereas, the factors like contribution of each partner in the partnership firm, distribution of profits among the partners, remuneration paid to the partners, all these various terms and conditions constitutes the substantive law. These areas have to be analyzed in order to decide the status of the assessee for the purpose of taxation. In this case, the Revenue Authorities have rejected the deed of partnership firm and assessed the assessee as AOP only on the ground that the deed of partnership firm was executed not on requisite stamp paper. They have not analyzed or commented on any terms and conditions of the partnership deed and has never stated that any of the provisions in such partnership deed of the assessee is contrary to the provisions of law. In section 184 of the Act, the key word is “evidenced”, what has to be evidenced? The existence of partnership firm has to be evidenced and the procedural part is that it has to be evidenced by an instrument. Now the term “instrument” is not defined in the Income Tax Act. Therefore, the intention of the legislature is clear that for the purpose of Income Tax Act, there has to be substantive evidences of existence of partnership firm and that substantive evidence is supported by the procedural fact of an instrument being executed in this regard.

6. The assessee is also registered as partnership firm in the records of the Assistant Registrar of firm, Pune and while granting registration, the Assistant Registrar of firm did not object to any of the clause of the partnership deed and only query was raised regarding the registration fees of Rs.1500/- which was deposited and the assessee was asked to send the money order for that purpose. Even the stamp duty on the partnership deed was accepted by the Assistant Registrar of Firms, Pune. These submissions made by the Ld. AR was not contested by the Ld. DR at the time of hearing.

7. The Hon’ble Bombay High Court in the case of Chhotalal Devchand Vs. CIT, 34 ITR 351, in respect of Income Tax Act, 1922 dealing with the same issue of determining validity of partnership firm had observed that “so long as the terms specified in any document which goes to constitute the instrument of partnership, the condition of the Income Tax Act, 1922 is satisfied.” This decision of the Hon’ble Bombay High Court was later on referred in the case CIT Vs. New Life Construction Co., 107 ITR 361 wherein again the Hon’ble Bombay High Court has upheld the validity of partnership firm by going into the depth of the matter and analyzing the factual and circumstantial aspect of such partnership deed.

Therefore, in these decisions and there are plethora of other judgments, where the courts of law have held that the substantive right has to be looked into and if that is satisfied in terms of particular legislation then criteria for that issue is complied with. The technical or procedural aspect cannot take away or override the substantive rights. In the cases of Kailash Vs. Nanhku and Ors. (2005) 4 SCC 480 and Thirumalai Chemicals Limited Vs. Union of India & Ors. (2011) 6 SCC 739, the Hon’ble Apex Court has held that procedural law cannot override the substantive right. In the case of the assessee the substantive right is established by the following propositions:

  • It is registered partnership firm with Assistant Registrar of Firms, Pune.
  • They have accepted all terms and clauses in the partnership deed.
  • The word “evidence” in Section 184 of the Act talks of both substantive and procedural rights. However, the Revenue Authorities have not found fault with any clauses in that Deed or any transaction etc, therefore, confirming the substantive right of the assessee as partnership firm.
  • The Assessing Officer and the Ld. CIT(Appeals) has simply harped on the word “instrument” and analyzed it with allied legislations thereby in a way attempting to override substantive rights by procedural laws which is not permitted within the realm of legal jurisprudence.

In our considered view, therefore, the substantive law is concerned with the ends which the administration of justice seeks, whereas the procedural law deals with the means and instruments by which these ends are to be attained. Substantive laws establishing rights and liabilities of persons natural or otherwise in this case it is of the partnership firm and such status of the assessee is accepted by the Revenue. In such scenario, the procedural laws merely prescribing the manner in which such rights and responsibilities may be exercised, in this case the stamp paper on which the partnership deed has been executed cannot alter the status already determined substantively. The decision of the Hon’ble Supreme Court referred by the Ld. CIT(Appeals) (supra.) in respect there to, we also agree that while deciding an issue under the Income Tax Act, other legislations allied laws has to be considered. But in this case of the assessee, substantively nothing has been brought against the assessee by the Revenue Authorities.

8. That further in the decision of the Hon’ble Apex Court, it concerns about the registration of a partnership firm whereas, in this case, firm is already registered under the Assistant Registrar of Firm, Pune, Maharashtra, PAN has also been allotted as firm and even in the assessment order, the status of the firm is mentioned as that of the partnership firm. Therefore, the Department is accepting all the genuineness of existence of the partnership firm and only for this technical aspect of deed executed in the lessor denomination stamp paper has framed the assessment treating the assessee as AOP. The Revenue Authorities may call upon the assessee in due course for rectification of this technical defect. In the totality of facts and circumstances and on examination of this issue as afore-stated, we are of the considered view that the assessee is duly constituted partnership firm. Hence, we set aside the order of the Ld. CIT(Appeals) on this issue and direct the Assessing Officer to provide appeal effect accordingly. Thus, Ground Nos.1 and 2 raised in the appeal are allowed.

9. Ground No.3 pertains to the disallowance to sum of Rs.6,40,459/-invoking provisions of Section 40(a)(ia) of the Act by the Assessing Officer and as confirmed by the Ld. CIT(Appeals).

10. The Assessing Officer at Para 6 of his order observed that the assessee has debited a sum of Rs.65,459/- and Rs.5,75,000/- as architect fees and labour charges paid respectively. The Assessing Officer further observed that TDS has been deducted on the same but was not paid till 31.03.2012. He accordingly, required the assessee to produce evidences to show that the tax had been deposited in the Govt. account before the date of filing of return. As per the assessment order, the assessee’s Counsel stated that the said amount had not been deposited in the Government’s account. The Assessing Officer therefore, disallowed the expense and added back Rs.6,40,459/- to the income of the assessee.

11. The Ld. CIT(Appeals) first observed that the amended provisions of Section 40(a)(ia) of the Act wherein proviso vide Finance Act, 2012 is w.e.f. 01.04.2013 and held on this aspect that this proviso was brought into effect from 01.04.2013 and is therefore clearly not applicable to the assessee in the assessment year 2012-13. That further, the Ld. CIT(Appeals) stated in her order that in respect of proceedings under Chapter-XVII of the Act and deals with tax deducted at source and vide amendment of the Finance Act, 2012 w.e.f.01.07.2012, the proviso was inserted which specifies that if the said party on whose behalf the tax was deductable, has furnished the return of income and has considered the receipts on which tax was liable to be deducted while computing its income and has also paid the taxes and furnished certificate to this effect from an accountant in a prescribed format then the deductor shall not be deemed to be an assessee in default in respect of the tax not deducted or deducted but not paid. The assessee however, has not provided any evidence to show that under the TDS proceedings it has been deemed to be an assessee not in default. The assessee also has not brought on record any evidence to show that the conditions required under the amended provisions of section 201 of the Act have been fulfilled. The Ld. CIT(Appeals) therefore, confirmed the disallowance made by the Assessing Officer.

12. At the time of hearing through video conference, the Ld. AR at the very outset submitted one final opportunity may be given and that the assessee has got evidences in this regard and the matter may be remanded to the file of the Assessing Officer for adjudication and the assessee would submit all the details/evidences in this regard before him.

13. The Ld. DR raised no objection on the submissions put forth by the Ld. AR of the assessee.

14. We have perused the case records and heard the rival contentions. We have also analyzed the facts and circumstances on this issue. After hearing the parties herein, we are of the considered view that one final opportunity should be provided to the assessee for proper verification of facts whether TDS were deducted or whether the same were deposited in the Government account and also for the fact that the Ld. DR did not raise any objection, we restore this matter to the file of the Assessing Officer for verification as directed above and adjudicating the matter while complying with the principles of natural justice. Thus, Ground No.3 raised in appeal by the assessee is allowed for statistical purposes.

15. Ground No.4 and 5 pertains to the enhancement of income by Rs.3,76,000/- by the Ld. CIT(Appeals).

16. The facts in this regards are that the assessee had constructed 7 flats and 2 shops under its project Kachhi Heritage. That in answer to Question No.4 of the statement recorded on oath, the assessee has admitted that all the 9 properties have been sold by it and thereafter, Question No.8 of the statement recorded during the course of survey, the assessee was confronted with the impounded register in which at Page No.11, the assessee was found to have sold a shop for Rs.9,76,000/- as against Rs.6,00,000/- reflected in the sale agreement. The difference of Rs.3,76,000/- was admitted to have been received in cash by the assessee. The Ld. CIT(Appeals) observed that from answer to Question No.4, the assessee had admitted to have sold all the 7 flats and 2 shops under the project Kachhi Heritage and from answer to Question No.8, it is evident that the sale proceeds of one of the properties, actually sold for Rs.9,76,000/- were suppressed by Rs.3,76,000/- which was also admitted by the assessee. Thereafter, as per reasoning given by the Ld. CIT(Appeals) at Para 9.6 of her order, enhanced the addition by Rs.3,76,000/-which is additional sales declared and admitted by the assessee.

17. We have perused the case records and heard the rival contentions. We have also considered the statement on oath recorded during the course of survey annexed in the paper book and therein at answer to Question No.8 it appears that on the sale of shop, the noting appearing in the impounded register at Page No.11 indicates the said shop was sold for Rs.9,76,000/- and agreement to sale was made at Rs.6,00,000/-. To this question, the assessee had specifically answered that the actual sale consideration received was Rs.9,76,000/- though the agreement was made only for Rs.6,00,000/-. The balance amount of Rs.3,76,000/- is received in cash which was not recorded in the books of account to the assessee firm i.e. M/s. Kachhi Heritage.

18. The Ld. AR at the time of hearing taking us further in such statement recorded on oath in continuation of the answer to Question No.8 submitted that the assessee in the same declaration voluntarily offered an amount of Rs.47,30,459/- as additional income of M/s. Kachhi Heritage of FY 2011-12 i.e. A.Y.2012-13. The Ld. AR submitted that the additional amount of Rs.3,76,000/- declared to have been received in cash by the assessee is formed part and parcel of such additional income offered for taxation by the assessee. However, none of the parties herein could provide any evidence to show the veracity of the statement made by the Ld. AR.

19. The Ld. DR submitted that this issue may also be remanded to the file of Assessing Officer for verification on these aspects.

20. We have perused the case records and heard the rival contentions. It is clear that if in the additional income offered for taxation, the said amount of Rs.3,76,000/- is not found to be included then that would be taxed separately. But on the other hand, if the contention of the Ld.AR is found correct then already the said amount has faced taxation. The Assessing Officer shall verify accordingly. This issue is therefore restored to the file of the Assessing Officer for verification and adjudication while complying with the principles of natural justice as directed hereinabove. Thus, Ground Nos. 4 and 5 raised in appeal by the assessee are allowed for statistical purposes.

21. In the result, appeal of the assessee is partly allowed for statistical purposes.

Order pronounced on 16th day of October, 2020.

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