1. These appeals by the revenue are directed against the orders of the AAC for the assessment years 1978-79, 1979-80, 1981-82 and 1982-83 all dated 19-12-1985. For each year, a solitary ground taken up by the revenue projects the following grievance : On the facts and in the circumstances of the case, the AAC was not justified in deleting the addition rightly made by the ITO on account of salary and interest paid to the partners of the firm treated as URF.These appeals were fixed for hearing after due notice to the parties.
We find that the AD card is on record. However, when these appeals were called on for hearing, there was no representation either through the authorised representative or in person by any of the partners of the firm. The appeals, therefore, have been heard ex parte on merits, qua, the respondent and are being disposed of in accordance with law.
2. We find that for the assessment year 1978-79 the original return was filed on 31-3-1979 and an ex parte assessment was made u/s 144 on 31-3-1981. However, that assessment was cancelled by invoking provisions of Section 146 of the Act. Another assessment was made u/s 144 on 30-12-1981 and that assessment was set aside by the Commissioner under Section 264 of the Act. Thereafter, the impugned assessment was made on 26-12-1984. We find in this order the ITO adopted the status of the assessee as URF on the ground that no evidence had been furnished for filing Form No. 11/12. However, for the assessment year 1979-80, Form No. 11A was filed on 15-6-1979 but it was not accompanied by copy of the instrument evidencing the partnership and in spite of the opportunity given neither the original partnership deed nor copy thereof was furnished to the ITO. He, therefore, made an order under Section 185(1) refusing to grant registration to the firm. Accordingly, the status was taken as URF for this year as well.
3. For the assessment "years 1981-82 and 1982-83 in the impugned orders made under Section 143(3) respectively on 12-3-1984 and 26-12-1984, the ITO has mentioned that he asked the assessee to furnish, inter alia, evidence for having filed Form No. 11, 11A or 12 for these years. Since that was not produced and according to him, Form No. 11 or 12 had not been filed, the status of the assessee was taken as URF.4. By adopting the status of the assessee as URF for each of the asst.
years under appeal mentioned supra, the ITO completed the assessments.
For all the asst. years, we find that, as per profit & loss account, there was loss declared. In computing the total income for the first two assessment years under appeal, the ITO reduced the loss by disallowing the salary and interest paid to partners which amounted to Rs. 3,884 & Rs. 31,562 and Rs. 35,761 & Rs. 30,742 respectively for the asst. years 1978-79 and 1979-80. The position regarding the assessment year 1981-82 is not clear though the salary and interest were disallowed similarly. For the asst. year 1982-83 interest paid to partner and disallowed amounted to Rs. 19,412. These assessments were challenged in appeal before the AAC.5. Before the AAC in appeal a ground was projected that the ITO had erred in adding the amount of interest and salary paid to partners as inadmissible because once the status was taken as unregistered firm, then the expenses by way of interest and salary to the partners should have been allowed in full. The ground projected in this manner related to assessment years 1978-79 and 1979-80. However, in the asst. year 1981-82 it appears that there were two periods for the assessment as the income was worked for two different periods. In the appellate order, for this year, the AAC has projected that it was contended before him that the ITO had treated the firm as URF, and, had also added the amount of interest and salary paid to partners. However, it is well settled that, "you cannot tax the subject twice over to the same tax". It was pointed out to the ld. AAC that if unregistered firm had been taxed in respect of its income, the same income cannot be charged again in the hands of the partners individually. The ld. AAC in his impugned order of the asst. years 1981-82 and 1982-83 has projected this argument on behalf of the assessee and has for all the years accepted this claim of the assessee and directed the ITO to delete from the total income amounts added by way of salary and interest to partners. Hence, the present appeals.
6. We have heard the revenue and carefully considered the rival submissions. Since, the respondent assessee did not put in appearance, we have ourselves considered the relevant provisions of law on the issue in appeal for determination before us.
7. We find that in the definitions Section 2 of the Income-tax Act, 1961, Sub-section (23) defines a firm as under : (23) "firm", "partner" and "partnership", have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression "partnership" shall also include any person who, being a minor, has been admitted to the benefits of partnership.
8. We also find that in the Indian Partnership Act, 1932 partnership is defined in Section 4. As per Section 4 partnership is the relation between persons, who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons, who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name". The Partnership Act does not appear to make any distinction between a registered firm and an unregistered firm in general.
9. However, Section 69 of the Partnership Act requires registration of a firm with the Registrar of Firms for specific purposes. For example, no suit to enforce a right arising from contract or conferred by the Partnership Act shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of firms as a partner in the firm. Otherwise than what is provided for specified purposes u/s 69 there is no distinction between a firm or a registered firm under the Partnership Act.
10. Now, when we come to the Income-tax Aot, 1961 we find that there is a special Chapter XVI with special provisions applicable to firms.
Section 182 provides for the method of assessment of registered firms and Section 183 provides for the method of assessment of unregistered firms. Section 182 provides that in the case of a registered firm, after assessing the total income of the firm: (ii) the share of each partner in the income of the firm shall be included in his total income assessed to tax accordingly.
However, Section 183 provides that in the case of an unregistered firm, the ITO : (a) may determine the tax payable by the firm itself on the basis of the total income of the firm ; or (b) if, in his opinion, the aggregate amount of the tax payable by the firm, if it were assessed as a registered firm and the tax payable by the partners individually, if the firm were so assessed would be greater than the aggregate amount of the tax payable by the firm, under Clause (a) and the tax which would be payable by the partners individually may proceed to make the assessment under Sub-section (1) of Section 182 as if the firm were a registered firm. It is also provided that where the procedure specified in this clause i.e. (b) is applied to any unregistered firm, the provisions of Sub-sections (2), (3) and (4) of Section 182 shall apply thereto as they applied in relation to a registered firm.
The Legislature having so provided a method for the assessment of firms has than proceeded to lay down the prerequisites for registration of a firm and these are incorporated in Sections 184, 185, 186, 187 and 189.
Thus, it would appear that though there is no distinction in the general law between a firm or a registered firm yet for the purposes of income-tax, the Income-tax Act makes special provisions for method of assessment of firms which are registered and the firms which are unregistered. Not only this after providing for a method for computation of income of firms, the Act provides for the conditions after the satisfaction of which registration enures to a firm.
11. We also notice that after providing for Heads of Income in Section 14 of the Act under Chapter IV, dealing with the computation of total income, the Income-tax Act proceeds to lay down the method of computation of such income under each head. Thus, income from salaries is to be computed as per provisions of Sections 15 to 17 of the Act.
Income on "Interest on securities" is to be computed in accordance with the provisions of Sections 18 to 21 and "Income from house property" is to be computed as provided in Sections 22 to 27 ibid. It is income from profits and gains of business or profession that has to be computed in accordance with the law laid down in Sections 28 to 44 of the Act.
Thus, in this fascicle of sections, it is Section 40 that enumerates amounts, which shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". These are exceptions carved out to the rules prescribed in computing the income from profits and gains of business or profession, in Sections 28 to 39.
Clause (b) of Section 40 provides that in the case of any firm, any payment of interest, salary, bonus, commission or remuneration paid by the firm to any partner of the firm shall not be deducted in computing the income chargeable to tax under the head profits and gains of business or profession. Clause (6) does not refer to a registered or an unregistered firm but refers only to the "case of any firm".
12. From what is stated above, it becomes clear that there is no distinction, whatsoever, between a firm and a registered firm in so far as computation of the firm's total income is concerned. It is only after the computation of total income of the firm or it is only after the total income of the firm is arrived at that for the purpose of assessment of tax, the Legislature in its wisdom laid down certain conditions under which the firm can be treated a,s registered and the incidence of tax then varies. This distinction of computation of total income and determination of quantum of tax was noticed by the Hon'ble Delhi High Court in the case of S. Narain Singh v. CIT [1967] 66 ITR 341, 344. The Court in that case by way of obiter observed that there is a distinction between the assessment of a registered firm and an unregistered firm. The three distinct steps constitute the assessment proceedings, i.e.: It has been further observed by the Court that registration of a firm is immaterial for the purpose of first step but brings out a material difference in so far as the second and third steps are concerned. As pointed out by us supra, we do not find any provision either under the general law of partnership or under the Income-tax Act, 1961, whereby in the computation of the total income of the firm a distinction is made between a registered firm and an unregistered firm. Therefore, when we read Section 40(6) in the context, we find that the Legislature has in its legislative wisdom referred only to the "case of any firm" in disallowing any payment of interest, salary, bonus, commission or remuneration made by the firm, to any partner of the firm. It is also pertinent to note that registration is not part of the process of assessment itself. Registration is granted under different sections on specific requirements being fulfilled and continues only for a year.
Therefore, in the process of determination of the total income of a firm there is no distinction in law between a registered firm, and an unregistered firm. It, therefore, follows that while determining the total income of any firm payment of any interest, salary, bonus, commission or remuneration made by the firm to any partner has to be disallowed by virtue of the provisions of Section 40(6) of the Act.
This is a special provision made by the Legislature and, therefore, on the principle of generalia specialibus non derogant, it must be accordingly applied to the "case of any firm".
13. In this process of computation of total income of the firm, the question of assessment of partners and the manner and method in which the income is to be computed in their hands is not relevant. That is one reason, we have not adverted to various provisions under the statute in relation thereto. The ld. AAC, therefore, erroneously took that aspect into consideration to hold that the claim of the assessee that the said process amounts to double taxation and as such was not warranted by law, was acceptable. As such, the AAC erred in reversing the orders of the ITO. The impugned orders of the AAC are, therefore, set aside and the order of the ITO restored for each year.