Is disallowance of interest on capital and working partner salary automatic in best judgment assessments under section 144?

CA V.K. Subramani

Section 184(5) says that where there is failure on the part of a firm as is mentioned in section 144, the firm shall be assessed without deduction of interest, salary, bonus, commission or remuneration in computing the income chargeable under the head 'Profits and gains of business or profession'. The sum so not allowed in the assessment of firm shall not be taxed in the hands of partners under clause (v) of section 28.

Section 144(1) has 3 clauses viz;

(i) failure to make return under section 139(1) or section 139(4) or section 139(5);

(ii) failure to comply with all the terms of a notice issued under section 142(1) or fails to comply with a direction issued under section 142(2A); and

(iii) failure to comply with all terms of a notice issued under section 143(2).

Any one of the failures listed above would expose the taxpayer to best judgment assessment under section 144 made by the Assessing Officer (AO).

Whether, the Assessing Officer can invoke section 144 read with section 145(3) so as to disallow partners salary and interest on capital by applying section 184(5) was discussed in Vijay Veer Singh (2014) 153 ITD 506 (Agra) : 2015 TaxPub(DT) 0377 (Agra-Trib) and Surendra Prasad Misra v. ITO (2006) 104 TTJ 292 (Luck.) : 2006 TaxPub(DT) 0729 (Luck-Trib).

In Vijay Veer Singh's case (supra) the AO invoked section 144 for the reason that he was not satisfied with the correctness or completeness of the accounts of the assessee. The AO was entitled to invoke section 144 as per section 145(3) of the Act. The tribunal held that a plain look at these two legislative provisions viz 144 and section 184(5) shows that the disallowance of salary and interest come into play not as a result of the assessment under section 144 but as a result of any of the lapses as mentioned in section 144. In other words, the disallowance under section 184(5) does not have a cause-and-effect relationship with section 144.

Section 184(5) categorically states that when 'there is, on the part of a firm, any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income'. This disabling provision comes into play only when the assessment is framed under section 144 as a result of the assessee committing any such failure as is contemplated under section 144. However, in a situation in which the assessment is completed in the manner as prescribed in section 144 because of the reason that the Assessing Officer was not satisfied about the correctness or completeness of the accounts of the assessee, referred to in section 145(3), the disabling provisions of Section 184(5) would not apply.