Gujarat High Court Quashes Income Reassessment Notice Issued To Partner Not Deriving Any Remuneration From Firm

The Assessee/Applicant challenged the notice issued by the Income Tax Department in March 2018 under Section 148 of the Income Tax Act 1961 for reopening the assessment under Section 147 of the Act with regard to AY 2011-12.

The Income Tax Officer (ITO) contended that the reopening is on the ground that the Assessee as one of the partners of the partnership firm and had failed to show the remuneration and interest she received from the partnership firm when the return of the writ applicant was processed under Section 143(1) of the Act in March 2012. It was the case of the ITO that the Assessee was a 'Working Partner' and each partner of the firm had a share of 50% in the firm. Therefore, according to the Department, the total remuneration plus interest would amount to INR 75,11,147.

The Assessee, meanwhile, contended that there was no question of showing remuneration as she had not received any income in this form from the firm. The Assessee also pointed out that the Department proceeded against the partnership firm and restricted the deduction of remuneration and interest under Section 10 A read with Sections 80-IA (8) and 80-IA (10) of the Act.

The partnership firm challenged the order by the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal which allowed the appeal and held "there was no good ground to tax the remuneration/interest on the capital in the hands of the partners and the CIT(Appeal) could be said to have exceeded its jurisdiction by issuing such directions to the AO for the dispute which was not arising from the order of the Assessment Officer ('AO')."

The ITAT observed that the AO drew support from the provisions of Section 80-IA(10) of the Act which provides that "where the affairs between the eligible business and any other persons is so arranged that more than ordinary profits arise to the assessee, the AO, shall in computing the profit and gains of such eligible profits for the purposes of deduction under this section, take the amount of profits as may be reasonably taken to have been derived therefrom."

The Tribunal pointed out that, in the instant case, this deduction of remuneration cannot be made since Section 80-IB (13) does not enable the AO to alter profits or income of the other person referred to in the subsection. The terms of partnership deed were not so worded, according to the Tribunal, that permitted the payment of interest or remuneration to partners as mandatory. The Tribunal also interpreted the partnership deed of the firm through which a firm comes into existence with mutual understanding between the parties. The Tribunal noted that there was no dispute between the partners for claiming the remuneration/interest on capital in the profit/loss account of the firm. Even the conduct of the parties suggested that the partners agreed not to claim any income on the capital account. Therefore, the income did not accrue to the Assessee.

Judgement

The Bench observed that the ITAT adjudicated the dispute as regards the deduction of remuneration/interest on the partners capital not claimed by the Assessee ie, the partnership firm in its profit and loss account. The Tribunal had also noted that the CIT(Appeals) had directed to tax the amount of remuneration/interest on the partners capital account in the hand of the partner but disagreed with this conclusion of CIT(Appeals).

Therefore, the Bench opined that there was no reason to reopen the assessment of the partner. The Assessee also pointed out that a Co-Ordinate Bench of the Gujarat High Court, by way of ad-interim relief, had held that the final order of assessment shall not be passed without the permission of the Court. However, the same was not complied with by the Department and the final order in September 2021 was passed. Subsequently, the Co-ordinate Bench also held that there would be no coercive action inclusive of penalty in connection with the order of the assessment.

The bench accordingly quashed the March 2018 Notice by the ITO and the final order of assessment of September 2021.

Case Title: MAMTA BHAVESH DAVE Versus INCOME TAX OFFICER, WARD 3, GANDHINAGAR

Citation: 2022 LiveLaw (Guj) 17

Case No.: C/SCA/17915/2018