MUBARK TRANDING CO Vs. COMMISSIONER OF INCOM TAX

JUDGEMENT

(1.) The appellant, a partnership firm, has filed this appeal under Section 260A of the Income Tax Act challenging the order of the Income Tax Appellate Tribunal confirming denial of status to them as a "firm" in proceedings completed by the Commissioner of Income Tax under Section 263 of the Act. Appellant did not file income tax return for the assessment year 1994-95 within the stipulated period, but filed a belated return on 19-11-1996. Even though the assessing officer issued proceedings under Section 143(1)(a) of the Act, he simultaneously issued notice under Section 148 of the Act proposing to make income escaping assessment under Section 147 of the Act. On receipt of notice the appellant requested the assessing officer to treat the belated return already filed as one filed against notice issued under Section 148 of the Act. The assessing officer thereafter completed the assessment under Section 147 read with Section 143(3), but assigned the status of firm to the appellant. The Commissioner of Income Tax in suo motu revision proceedings initiated under Section 263 of the Act, declared that appellant is not entitled to be assessed in the status of a "firm" and should be assessed as "Association of persons" on account of appellant s failure to file return within the time which is a failure under Section 144(1) of the Act referred to in Section 184(5) of the Act. The appeal filed by the appellant before the Tribunal against order under Section 263 was unsuccessful and hence this appeal is filed by the assessee.

(2.) We have heard counsel appearing for the appellant and senior counsel appearing for the respondent-Department. Counsel appearing for the appellant relied on the unreported decision of the Karnataka High Court in I.T.A.No. 4 of 2004 dated 20-2-2004 and also paragraph 66 of the Explanatory Note to the Finance Act, 2003, by which Section 184(5) was amended with effect from 1-4-2004 and contended that in order to deny the status of a "firm" best judgment assessment has to be made under Section 144 of the Act. Counsel specifically referred to mandatory provision of Section 144 which states that the assessing officer on being satisfied by the failure of any of the three conditions referred to therein shall after giving the assessee an opportunity of being heard make an assessment to the best of his judgment. Referring to this provision, counsel contended that in the absence of best judgment assessment under Section 144(1), Section 184(5) of the Act has no application. In this case, since assessment is specifically made under Section 147 read with Section 143(3), appellant was entitled to assessment in the status of a "firm" is the contention raised by counsel for the appellant. On the other hand, senior counsel appearing for the respondents contended that all what Section 184(5) says prior to the amendment is that when there is a failure on the part of the assessee of any of the conditions referred to in Section 144(1), such failure would lead to disentitlement of status as Firm and assessment in the status as AOP. In order to appreciate the rival contentions, we extract hereunder Section 184(5) prior to the amendment by Finance Act, 2003 which is relevant for decision in this case:

(3.) However, the question to be considered is whether in order to deny the status as Firm and to assess the assessee as AOP under Section 184(5) consequent upon the failure under Section 144(1), the assessment has to be best judgment assessment or not. Counsel for the appellant has relied on the Notes on Clauses of Finance Bill 2003 by which Section 184(5) was amended and contended that status of Firm cannot be disallowed except when assessment is made under Section 144 of the Act. We do not know how appellant can rely on an amendment of 2003 for the assessment for 1994-95. In any case, we do not think the observation in the Notes on Clauses can supersede main provision which is very clear. In fact what is stated in the Notes on Clauses is that the amendment itself is to rationalise the provision, which pre-supposes that the provision that existed prior to the amendment was irrational. The provision existed prior to amendment disentitles a firm from retaining registration, if there was failure in regard to filing of return or complying with the notice issued by the Officer. However, major violation of evasion of tax leading to income escaping assessment still entitles a firm for retaining registration, if there was technical compliance in filing returns or complying with notices. Probably it is to get over this irrational and discriminatory consequence that Section 184(5) and Section 185 are amended specifying the disability of firms for failures referred to in Section 144 of the Act. So far as unreported judgment of the Karnataka High Court is concerned, we do not find any application to the facts of this case because the case decided by the Karnataka High Court is the one where the assessee was disabled from filing the return in time on account: of seizure and detention of books of accounts by the Department. The Karnataka High Court held that failure to file return can arise only when it was possible for the assessee to file return in time. Therefore the case decided by the Karnataka High Court applied to the facts of that case only and has no application here.