Herbert Smith, Singapore Firm Vs. Dy. Director of Income-tax, - Court Judgment

Excerpt:
1. this appeal emanates from the order of the cit(appeals)-xxix, new delhi, passed on 14.1.2004. the assessee has taken six substantive grounds in the appeal, which are reproduced below for the sake of ready reference: 1. based on the facts and circumstances of the case, herbert smith singapore firm (hereinafter referred to as "the appellant") respectfully submits that the learned commissioner of income-tax (appeals)-xxix, new delhi (hereinafter referred to as "learned cit(a)") has erred in dismissing the appeal filed by the appellant against the order, dated 20 october, 2003, passed by learned deputy director of income-tax, international taxation, circle 1(2). 2. based on the facts and circumstances of the case, the appellant respectfully submits that the learned cit(a) has erred, in law and in fact, in holding that the learned deputy director of income-tax, international taxation, circle 1(2) was justified in rejecting the appellant's application under section 154 of the income-tax act, 1961 ("act"). 3. based on the facts and circumstances of the case, the appellant respectfully submits that the learned cit(a) has erred, in law and in fact, in not accepting the appellant's contention that the appellant should be assessed as an "association of person". 4. based on the facts and circumstances of the case, the appellant respectfully submits that the learned cit(a) has erred, in law and in fact, in not accepting the appellant's contention that the tax rate applied to the appellant's income ought to have been 30% and not 35%. 5. based on the facts and circumstances of the case, the appellant respectfully submits that the learned deputy director of income-tax, international taxation, circle 1(2), erred in law and in fact, in levying interest under section 234b and 234c of the act. 6. each of the above grounds is independent and without prejudice to one another.2. the brief facts of the case are that the assessee filed return of income in the status code '04' on 1.10.2002, declaring total income of rs. 26,16,700/-. the tax payable, after taking into account tax deducted at source, advance-tax and self-assessment payments, was worked out at nil. the assessing officer processed the return under section 143(1) and levied tax @ 35%, applicable to '04' status against the tax rate of 30% applied by the assessee. the assessee filed an application under section 154 of the act requesting inter-alia to compute tax @ 30%. this application was rejected by the assessing officer by stating that the name of the assessee suggested that it was a firm, which also corresponds to '04' status shown in the return..aggrieved by the order, the assessee filed an appeal before the cit(a)-xxix, new delhi. he came to the conclusion that the assessing officer had not changed the status as shown by the assessee in the return. the assessing officer merely calculated the tax by applying the rate of 35%, applicable in the case of a firm. thus, there was no error apparent from record in the order of intimation. aggrieved by this order, the assessee is in appeal before us.3. the learned counsel for the assessee submitted that the assessee had filed the return in the status of an unregistered firm (urf), which was stated in audit report. on perusal of the report, it is seen that the status mentioned in column 4 of the report was "firm". it was mentioned in the return that herbert smith singapore firm was not evidenced by a written partnership deed and the shares of the partners were indeterminate. it was submitted that '04' status pertains to an urf.the provision of section 184 were not applicable and, therefore, the assessee should have been taxed as an association of persons (aop). it was also submitted that the scope of intimation order under section 143(1) is very limited and the a.o. has only to determine tax payable on the basis of the return of income. the scope does not extend to altering the status of the assessee.3.1 in order to support her case, the learned counsel relied on the decision of hon'ble rajasthan high court in the case of cit v. smt.premlata jalani . the question in that case was whether, the assessing officer could change the interest payable by the assessee under section 234c on the basis of different interpretation of law? this controversy arose as capital gains tax was also considered for the payment of advance-tax. in that case, the capital gains arose after the expiry of the date of payment of advance-tax. the hon'ble court held that the assessing officer could not change the interest as the liability arose after the expiry of the date of payment of advance-tax for the reason that his powers were confined to rectify arithmetical mistakes only.3.2 further, she relied on the order of itat, ahmedabad bench 'a', in the case of packers (india) ltd. (2006) 99 itd 383, in which it was held that while processing return under section 143(1), the a.o cannot change income on any ground including that of deduction of depreciation. she also relied on the order of itat, ahmedabad bench 'a', in the case of choice acquaculture (p) ltd. v. ito (2006) 100 itd 143, in which it was held that the assessing officer cannot change income under section 143(1) by adopting correct figure of the written down value (wdv) brought forward from the earlier year.4. in reply, the learned dr pointed out that the assessee is a firm of solicitors in singapore and it has carried out its professional activities in india also. in the return under verification, it had shown the status as '04', which is that of a urf. the assessee had paid advance tax by three challans. the first challan did not contain the status, the second showed the status as 'firm' and third as '07', being that of aop. the assessee's letter dated 25.10.2002 described itself a firm, being a branch office of herber smith, partnership firm based in london. the audit report described the assessee as 'firm' and annexure-1 of the report furnished the names of three partners. it was his case that the assessing officer merely fed the data, contained in the return, in the computer to produce a computer generated intimation.thus, there was no application of mind by the a.o. with a view to change the status of the assessee and the tax was computed on the basis of the return of income filed by the assessee. he relied on the cases cited by the learned counsel and pointed out that all those cases vindicated the stand of the revenue.5. in the rejoinder, the learned counsel stated that the structure at singapore and not london was relevant. '04' status is for urf and not firm. the assessee is an a.o.p as accepted in past. if there was any ambiguity in the return on the issue of its status, the view favourable to the assessee should have been adopted.6. we have considered the facts of the case and rival submissions. we are of the view that the processing under section 143(1) can be done on the basis of the return only. the ao is not empowered to make any alteration in the income or status without making inquiry from the assessee, which cannot be done in such processing. past record regarding status can also be not taken into account, as argued by the learned counsel. as pointed out by the ld. d.r., there were evidences in the return, including under verification, which lead to inference that the assessee was a 'firm', which did not comply with the provisions contained in section 184, thus, it could be assessed as firm under section 185. however, the fact also stays that the assessee computed its tax under section 167b and paid it accordingly. this was its manifest assertion that it was either an "aop" or a "boi" (body of individuals). the return as a whole was ambivalent about the status of the assessee as at other placed it was described as a "firm". this ambivalence could only be resolved by questioning the assessee failing which a favourable view to the assessee ought to have been adopted in applying the rate of tax. the cases cited by the learned counsel do not advance the case of the assessee as the assessing officer has not enhanced its income. he has merely adopted one view, which is discernible from the entries made in the return and the audit report accompanying it. however, another view was also a possible view, which was manifest from the return, from the calculation of tax made by the assessee. in such a situation, the assessing officer could not have varied the rate of tax without having recourse to the assessee. this discussion also shows that the cases cited by the learned counsel do not advance the case of the revenue, as asserted by the learned d.r.thus, we are of the view that the assessing officer and the learned cit(appeals) erred in holding that there was no mistake apparent from record in adopting tax rate at 35% for the reason that the assessing officer could not have changed the rate of tax on the peculiar facts of this case.7. the ground regarding charging of interest under sections 234b and 234c was not argued by the learned counsel. in absence thereof, it is taken as consequential in nature.

Judgment:
1. This appeal emanates from the order of the CIT(Appeals)-XXIX, New Delhi, passed on 14.1.2004. The assessee has taken six substantive grounds in the appeal, which are reproduced below for the sake of ready reference: 1. Based on the facts and circumstances of the case, Herbert Smith Singapore Firm (hereinafter referred to as "the Appellant") respectfully submits that the learned Commissioner of Income-tax (Appeals)-XXIX, New Delhi (hereinafter referred to as "Learned CIT(A)") has erred in dismissing the appeal filed by the Appellant against the order, dated 20 October, 2003, passed by Learned Deputy Director of Income-tax, International Taxation, Circle 1(2).

2. Based on the facts and circumstances of the case, the Appellant respectfully submits that the Learned CIT(A) has erred, in law and in fact, in holding that the learned Deputy Director of Income-tax, International Taxation, Circle 1(2) was justified in rejecting the Appellant's application under Section 154 of the Income-tax Act, 1961 ("Act").

3. Based on the facts and circumstances of the case, the Appellant respectfully submits that the Learned CIT(A) has erred, in law and in fact, in not accepting the Appellant's contention that the Appellant should be assessed as an "Association of Person".

4. Based on the facts and circumstances of the case, the Appellant respectfully submits that the Learned CIT(A) has erred, in law and in fact, in not accepting the Appellant's contention that the tax rate applied to the Appellant's income ought to have been 30% and not 35%.

5. Based on the facts and circumstances of the case, the Appellant respectfully submits that the Learned Deputy Director of Income-tax, International Taxation, Circle 1(2), erred in law and in fact, in levying interest under Section 234B and 234C of the Act.

6. Each of the above grounds is independent and without prejudice to one another.

2. The brief facts of the case are that the assessee filed return of income in the status code '04' on 1.10.2002, declaring total income of Rs. 26,16,700/-. The tax payable, after taking into account tax deducted at source, advance-tax and self-assessment payments, was worked out at NIL. The Assessing Officer processed the return Under Section 143(1) and levied tax @ 35%, applicable to '04' status against the tax rate of 30% applied by the assessee. The assessee filed an application Under Section 154 of the Act requesting inter-alia to compute tax @ 30%. This application was rejected by the Assessing Officer by stating that the name of the assessee suggested that it was a firm, which also corresponds to '04' status shown in the return..

Aggrieved by the order, the assessee filed an appeal before the CIT(A)-XXIX, New Delhi. He came to the conclusion that the Assessing Officer had not changed the status as shown by the assessee in the return. The Assessing Officer merely calculated the tax by applying the rate of 35%, applicable in the case of a firm. Thus, there was no error apparent from record in the order of intimation. Aggrieved by this order, the assessee is in appeal before us.

3. The learned Counsel for the assessee submitted that the assessee had filed the return in the status of an unregistered firm (URF), which was stated in audit report. On perusal of the report, it is seen that the status mentioned in column 4 of the report was "Firm". It was mentioned in the return that Herbert Smith Singapore firm was not evidenced by a written partnership deed and the shares of the partners were indeterminate. It was submitted that '04' status pertains to an URF.The provision of Section 184 were not applicable and, therefore, the assessee should have been taxed as an Association of Persons (AOP). It was also submitted that the scope of intimation order Under Section 143(1) is very limited and the A.O. has only to determine tax payable on the basis of the return of income. The scope does not extend to altering the status of the assessee.

3.1 In order to support her case, the learned Counsel relied on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Smt.

Premlata Jalani . The question in that case was whether, the Assessing Officer could change the interest payable by the assessee under Section 234C on the basis of different interpretation of law? This controversy arose as capital gains tax was also considered for the payment of advance-tax. In that case, the capital gains arose after the expiry of the date of payment of advance-tax. The Hon'ble Court held that the Assessing Officer could not change the interest as the liability arose after the expiry of the date of payment of advance-tax for the reason that his powers were confined to rectify arithmetical mistakes only.

3.2 Further, she relied on the order of ITAT, Ahmedabad Bench 'A', in the case of Packers (India) Ltd. (2006) 99 ITD 383, in which it was held that while processing return Under Section 143(1), the A.O cannot change income on any ground including that of deduction of depreciation. She also relied on the order of ITAT, Ahmedabad Bench 'A', in the case of Choice Acquaculture (P) Ltd. v. ITO (2006) 100 ITD 143, in which it was held that the Assessing Officer cannot change income Under Section 143(1) by adopting correct figure of the written down value (WDV) brought forward from the earlier year.

4. In reply, the learned DR pointed out that the assessee is a firm of solicitors in Singapore and it has carried out its professional activities in India also. In the return under verification, it had shown the status as '04', which is that of a URF. The assessee had paid advance tax by three challans. The first challan did not contain the status, the second showed the status as 'Firm' and third as '07', being that of AOP. The assessee's letter dated 25.10.2002 described itself a firm, being a branch office of Herber Smith, partnership firm based in London. The audit report described the assessee as 'Firm' and Annexure-1 of the report furnished the names of three partners. It was his case that the Assessing Officer merely fed the data, contained in the return, in the computer to produce a computer generated intimation.

Thus, there was no application of mind by the A.O. with a view to change the status of the assessee and the tax was computed on the basis of the return of income filed by the assessee. He relied on the cases cited by the learned Counsel and pointed out that all those cases vindicated the stand of the revenue.

5. In the rejoinder, the learned Counsel stated that the structure at Singapore and not London was relevant. '04' status is for URF and not firm. The assessee is an A.O.P as accepted in past. If there was any ambiguity in the return on the issue of its status, the view favourable to the assessee should have been adopted.

6. We have considered the facts of the case and rival submissions. We are of the view that the processing Under Section 143(1) can be done on the basis of the return only. The AO is not empowered to make any alteration in the income or status without making inquiry from the assessee, which cannot be done in such processing. Past record regarding status can also be not taken into account, as argued by the learned Counsel. As pointed out by the ld. D.R., there were evidences in the return, including under verification, which lead to inference that the assessee was a 'Firm', which did not comply with the provisions contained in Section 184, thus, it could be assessed as firm Under Section 185. However, the fact also stays that the assessee computed its tax Under Section 167B and paid it accordingly. This was its manifest assertion that it was either an "AOP" or a "BOI" (Body of Individuals). The return as a whole was ambivalent about the status of the assessee as at other placed it was described as a "Firm". This ambivalence could only be resolved by questioning the assessee failing which a favourable view to the assessee ought to have been adopted in applying the rate of tax. The cases cited by the learned Counsel do not advance the case of the assessee as the Assessing Officer has not enhanced its income. He has merely adopted one view, which is discernible from the entries made in the return and the audit report accompanying it. However, another view was also a possible view, which was manifest from the return, from the calculation of tax made by the assessee. In such a situation, the Assessing Officer could not have varied the rate of tax without having recourse to the assessee. This discussion also shows that the cases cited by the learned Counsel do not advance the case of the revenue, as asserted by the learned D.R.Thus, we are of the view that the Assessing Officer and the learned CIT(Appeals) erred in holding that there was no mistake apparent from record in adopting tax rate at 35% for the reason that the Assessing Officer could not have changed the rate of tax on the peculiar facts of this case.

7. The ground regarding charging of interest Under Sections 234B and 234C was not argued by the learned Counsel. In absence thereof, it is taken as consequential in nature.