R-9000 Textiles And Garments, ... vs Assessee

This appeal filed by the assessee is directed against the Order dated 17.02.2014 passed by the Ld. CIT-IV, Hyderabad under section 263 revising the assessment made by the A.O. under section 143(3) of the Act.

2. The assessee in the present case is a partnership firm which is engaged in the business of dealing in textiles and garments. The return of income for the year under consideration was filed by it on 26.09.2009 declaring total income of Rs.13,81,310 after claiming deduction of Rs.50 lakhs on account of remuneration paid to its partners. In the assessment completed under section 143(3) vide order dated 29.07.2011, the income as returned by the assessee was accepted by the A.O. 2 ITA.No.1467/Hyd/2014 R-9000, Textiles & Garments, Hyderabad.

2.1. Records of the assessment made by the A.O. under section 143(3) was subsequently came to be examined by the Ld. CIT-IV and on such examination, he found that the claim of the assessee for deduction on account of partners remuneration amounting to Rs.50 lakhs was wrongly allowed by the A.O. as against the maximum permissible deduction allowable on account of such remuneration to the extent of Rs.20,29,024 as per the specific provisions contained in section 40(b) of the Act. He, therefore, issued a notice under section 263 requiring the assessee to show cause as to why the order passed by the A.O. under section 143(3) allowing excess claim on account of partners remuneration should not be revised being erroneous and prejudicial to the interests of the Revenue.

2.2. In reply, the following submissions were made by the assessee in writing :

"It is submitted that the order is not prejudicial to the interests of revenue. This is because the expenditure disallowed is to be adjusted in the income of remuneration of the partners u/s.28(v) of the I.T. Act. Further, the rate of tax applicable in the hands of the assessee firm on the amount of Rs.29,70,976/- when disallowed and the rate of tax applicable the income of the partners when correspondingly adjusted is same, that is 30%. Whatever is proposed to be disallowed in the hands of the assessee firm will have to be reduced from the income of the partner's u/s.28(v) of the I.T. Act. This is so even u/s.155(1A) r.w.s. 154(7) of the I.T. Act. According to sec. 155(1A) of the I.T. Act, the assessment order of the partners will have to be amended on the basis of the final orders in the case of the firm. In case a revision is made u/s.263 of the I.T. Act as proposed the date from which the period of four years u/s. 154(7) runs will be the date of giving effect to the order of the proposed revision. Thus, there is no prejudice to the interests of revenue in this particular case because of the rate of tax being the same 3 ITA.No.1467/Hyd/2014 R-9000, Textiles & Garments, Hyderabad.

in the hands of the firm and the partners either before or after revision.

In order to show that there is no change in rate of tax between the firm and the partners, the copies of the assessment orders of the partners namely are enclosed.

1. Sri P. Venkateswarlu

2. Sri S. Raja Mouli

3. Sri P. Satyanarayana

4. Sri T. Prasada Rao

We further bring to your kind attention that there is discrepancy in the amount considered as maximum permissible u/s. 40(b) in the show cause notice as Rs.20,29,024/-.

Taking into consideration the above facts and circumstances, it is prayed that the revision proceedings be dropped since there is no prejudice to the interest of the revenue."

3. The Ld. CIT did not find merit in the above submissions made by the assessee. According to him, the stand of the assessee that the partners having paid tax on the remuneration at the same rate of 30% as applicable to the assessee firm, there was no prejudice caused to the interest of the Revenue, required verification of facts from the relevant record and since the same was not done by the A.O., the order passed by the A.O. under section 143(3) was erroneous as well as prejudicial to the interests of the Revenue. He, therefore, set aside the said assessment order with a direction to A.O. to do the same afresh, after examining the claim of the assessee for deduction on account of partners remuneration. Aggrieved by the order of Ld. CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

4 ITA.No.1467/Hyd/2014 R-9000, Textiles & Garments, Hyderabad.

4. We have heard the arguments of both sides and also perused relevant material on record. It is a well settled position of law that the two conditions which must be satisfied before the Commissioner can exercise powers under section 263 of the Act are that - order of assessing authority must be found to be erroneous and further, it must also be found to be prejudicial to the interests of the Revenue. Unless both these conditions are satisfied, the Commissioner does not get jurisdiction to pass an order under section 263 revising the assessment order. It is also well settled that it is not necessary that every order which is found erroneous is also prejudicial to the interests of the Revenue. The ordinary meaning of the expression "prejudicial to the interests of Revenue" used in section 263 is that the order under consideration is such as is not in accordance with law and in consequence thereof, the lawful Revenue due to the State has not been realized or cannot be realized. The well settled principle in considering the question as to whether an order is prejudicial to the interests of the Revenue or not is to address oneself to the question whether the legitimate revenue due to the exchequer has been realized or not or can be realized or not if the order under consideration is allowed to stand. For arriving at this conclusion, it is necessary and relevant to consider whether the income in respect of which, tax is to be realized has been subjected to tax or not or if it is subjected to tax, whether it has been subjected to tax at the rate at which it could yield the maximum revenue in accordance with law or not. If the income in question has been taxed and legitimate revenue due in respect of that income has been realized, though as a result of erroneous order having been made in that respect, the Commissioner cannot exercise powers for revising the order 5 ITA.No.1467/Hyd/2014 R-9000, Textiles & Garments, Hyderabad.

under section 263 merely on the basis that the order under consideration is erroneous.

5. In the present case, the remuneration of Rs.50 lakhs was paid by the assessee-firm to four of its partners viz., Mr. P. Venkateswarlu, Mr. S. Raja Mouli, Mr. P. Satyanarayana and Mr. T. Prasada Rao. As demonstrated by the Ld. Counsel for the assessee at the time of hearing before us on the basis of relevant documentary evidence, all these four partners of the assessee-firm were regularly assessed to tax and the remuneration received by all of them from the assessee-firm was entirely taxed at the maximum marginal rate as applicable to the assessee-firm. Even the learned D.R. has not been able to dispute this position clearly manifest from the relevant documentary evidence placed by the Ld. Counsel for the assessee on record. It is thus clear that although the order passed by A.O. under section 143(3) allowing the claim of the assessee for deduction on account of partners remuneration of Rs.50 lakhs was not in accordance with the provisions of section 40(b) of the Act and there was an error in the order of the A.O. allowing excess claim on account of partners remuneration, the same, in the facts and circumstances of the case, was not prejudicial to the interests of the Revenue since the excess amount of partners remuneration allowed as deduction by the A.O. had been taxed in the hands of the said partners at maximum marginal rate and the legitimate revenue due in respect of that amount had already been realized. In our opinion, one of the conditions to exercise powers conferred upon the learned Commissioner of Income Tax under section 263 thus was not satisfied in the present case inasmuch as the order passed by the A.O. under section 143(3) was not 6 ITA.No.1467/Hyd/2014 R-9000, Textiles & Garments, Hyderabad.

prejudicial to the interests of the Revenue and the Ld. Commissioner of Income Tax therefore, was not justified in revising the assessment order passed by the A.O. by exercising his powers under section 263. In that view of the matter, we set aside the impugned order passed by the Ld. Commissioner of Income Tax under section 263 and restore that of the Assessing Officer.

6. In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 23.01.2015.

Sd/- Sd/- (SAKTIJIT DEY) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 23rd January, 2015

VBP/-

Copy to

1. R-9000, Textiles & Garments, C/o. R.S. Brothers, 7-2- 1740, House No. 14 & 15, Opp. Fire Station, Sanath Nagar, Hyderabad - 18.

2. Addl. CIT, Range-5, Hyderabad.

3. Commissioner of Income Tax-IV, 3rd Floor, Aayakar Bhavan, Basheerbagh, Hyderabad - 500 004.

4. The ACIT, Circle 5(1), Hyderabad

5. D.R. I.T.A.T. "A" Bench, Hyderabad.