S.K. Mal Lodha, J. -
(1.)THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as " the Tribunal "), has referred the following questions for our decision I
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that even though no addition was made by the Income-tax Officer to the trading results of the tilli account and alsi account while framing the original assessment order, he could have re-examined the issue de novo and made additions to them during the reassessment proceedings completed by him after the original assessment had been set aside by the Appellate Assistant Commissioner, vide his order dated November 11, 1968 ?
(2.)WHETHER, on the facts and in the circumstances of the case, the Tribunal is right in holding that the salaries said to Shri Ramgopal and Shri Omprakash by the firm were not allowable deduction under Section 37 of the Income-tax Act, 1961 ?
Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the firm had not been dissolved on the death of Shri Chandram on May 6, 1966, and that it was a case of change in the constitution of the firm in terms of the provisions of Section 187 of the Income-tax Act, 1961, and that, therefore, only one assessment should have been made on the assessee-firm in respect of the assessment year 1967-68 ?"
2. The petitioner-assessee is a firm which carries on business of crushing oil and running trucks. The ITO, Bhilwara, completed the assessment relating to the assessment year 1967-68 by order (annexure "A") dated November 6, 1967. Against that order, the assessee went in appeal to the AAC, who by his order (annexure "B") dated November 11, 1968, set aside the assessment with the direction that the ITO should make reassessment after giving proper opportunity of hearing to the assessee. In pursuance of the directions given by the Appellate Assistant Commissioner (AAC), the ITO by his order (annexure " C") dated November 27, 1971, passed a fresh assessment order. While doing so, the ITO made the following additions in the oil accounts :
3. It may be stated here that at the time of the original assessment, the ITO had made no addition to the results of the trading accounts pertaining to tilli and alsi. He made addition only with regard to the groundnut account. The ITO rejected the accounts of the assessee on the ground that there were some defects in the books of account of the assessee, that many of the expenses were unvouched or unsupported by proper vouchers ; that there was no log-book for recording the daily movement of the trucks and that there was no record for consumption of diesel, spare parts and tyre sets. He, therefore, applied the proviso to Sub-section (1) of Section 145 of the I.T. Act, 1961 (No. XLIII of 1961) (for short "the Act" herein) and estimated the hire receipts of the assessee at Rs. 60,000 on which a net profit of 25% subject to depreciation was applied. The firm had debited in its accounts salaries paid to Shri Ramgopal and Shri Omprakash. The partners of the assessee-firm were also partners in their individual capacity of another firm of Bhilwara bearing the same name. The assessee had made very considerable investment in the Bhilwara firm. As the partners of the assessee-firm did not find adequate time to look after the business of the Bhilwara firm, they appointed Shri Ramgopal and Shri Omprakash to look after their interests in that firm. The income of the Bhilwara firm did not come to the assessee-firm, instead it was received directly by the partners. The assessee claimed that the salary of Ramgopal and Omprakash should be allowed as deduction from the firm's income as they are looking after the capital of the assessee-firm, invested in the Bhilwara firm and that, therefore, the salaries paid to them were business expenditure. The ITO did not accept the aforesaid contention of the assessee and added back the salaries paid to Ramgopal and Omprakash amounting in all to Rs. 6,000 to the total income of the firm.
The accounting year of the assessee-firm in respect of the assessment year 1967-68 ended on Diwali Samvat 2023, i.e., on Diwali of the year 1966. The following were the partners of the firm at the beginning of the accounting year :
Shri Chandram expired on May 6, 1966. On the death of the partner, Chandram, accounts of the firm were not closed. The same books of account continued and the transactions of the firm after his death were recorded in the same books which were ultimately closed on Diwali 1966. A combined trading and profit and loss account for the entire period from Diwali 1965 to Diwali 1966 was drawn up. The balance-sheet was also prepared on that basis. On the death of Chandram, another partnership deed was executed on July 16, 1966. A contention was raised on behalf of the assessee that the firm stood dissolved on the death of the partner Chandram and, therefore, two separate assessments should be made on the firm as below :
(i) in the respect of the period beginning with the first day of the accounting period and ending on May 6, 1966 ; and
(ii) on the firm which was constituted afresh after the death of the partner, Chandram, from May 7, 1966 to Diwali 1966.
The ITO did not accept the above contention of the assessee and instead clubbed the income of both the periods and made a single assessment thereon.
(3.)THE assessee appealed against the aforesaid order of the ITO to the AAC, who after considering the submissions of the assessee in detail, deleted the following additions made by the ITO:
In the groundnut oil account, the addition was reduced by him from Rs. 5,075 to Rs. 3,100. He also allowed deduction of salary paid to Shri Om prakash, but sustained the addition of salary paid to Shri Ramgopal. He did not accept the assessee's contention that the ITO should have made two separate assessments on the firm (i) up to the date of death of Chandram, and (ii) after his death to the closing of accounts on Diwali, 1966.
Aggrieved by the order of the AAC, the assessee as well as the Department both filed separate appeals. The Tribunal in its order, annexure-F, dated June 27, 1974, found that the AAC had definitely erred in law in presuming that the ITO could not make any addition on account of tilli account and alsi account simply because he made no such addition at the time of framing the original assessment order. The AAC was directed to examine on merits the question of additions made to tilli and alsi accounts. The deduction of payment of salary to Ramgopal and Omprakash was disallowed. The Tribunal also held that the assessee's case squarely falls within the purview of Section 187(2) of the Act. On the basis of the aforesaid findings, the Tribunal has referred the aforesaid three questions for our opinion.