INCOME TAX ACT, 1961

Section 254

Appeal (Tribunal) - Rectification of mistake apparent in order - Omission on part of Tribunal to consider the disallowance of interest to partners -

Original assessment of assessee was subject to revision under section 263. In first appeal, the first appellate authority confirmed the same, save the revision in the estimation of the net profit of the assessee's contract business from 5% (of the gross receipt) to 8%, as there was no direction by the revisional authority for the same. On further appeal, Tribunal partly allowed the appeal. Assessee filed Miscellaneous Petition contenting that Tribunal, while concluding its' order omitted to consider the disallowance of interest to partners, which had, therefore, remained to be adjudicated, so that same be rectified accordingly. The same was in fact not the subject-matter of appeal before it, having been allowed in the original assessment itself. Held: Neither the assessee nor the revenue properly understood the Tribunal's order. The claim of interest to partners (on their capital), formed part of the sum directed to be examined afresh by the CIT, and indeed disallowed per assessment under section 143(3) read with section 263. No adjustment to the returned income on account of interest and remuneration to partners, was called for. As order accordingly clarified that the business income will remain the same, i.e., as originally assessed which was after deduction of both interest and remuneration to partners, so that the only adjustment that obtains, post its' order, was for income assessable under section 56. The reference to salary to partners is in view of section 40(b)(v), which limits the extent thereof with reference to book profit. In this context, inasmuch as the enhanced estimation of business income (by applying the rate of 5 per cent of the gross receipt, as against the returned 2.4%), would not impact the book profit (as defined in Explanation (v) to section 40(b)(v)), the remuneration to the partners allowable with reference to the assessee's book profit was not breached on the claimed sum. No rectification, even as clarified during hearing was called for the order passed, as would be apparent, being with a view to set at rest the controversy arising on account of the misreading of Tribunals' order, even as assured during hearing.