Facts of the Case

The assessee, an individual and partner in a firm (M/s. Samar Brick Field), did not file a return of income as her income from the firm was below the taxable limit. Information received by the Assessing Officer indicated large cash deposits during the demonetization period in bank accounts presumed to belong to the assessee.

Based on this information and absence of timely response, the Assessing Officer completed a best judgment assessment under Section 144, treating total credits in the bank accounts as business turnover and applying presumptive taxation under Section 44AD, resulting in addition of ₹4,04,374. The CIT(A) confirmed the addition.

Issues Involved

  1. Whether bank accounts belonging to a partnership firm can be treated as those of an individual partner.
  2. Whether presumptive taxation under Section 44AD can be applied on such mistaken facts.
  3. Whether income already taxed in the hands of the firm can again be taxed in the hands of a partner.

Petitioner’s Arguments (Assessee)

  • The bank accounts relied upon by the Assessing Officer belonged to the partnership firm and not to the assessee individually.
  • The confusion arose due to incorrect quoting of PAN by the bank.
  • The assessee had uploaded relevant documents clarifying the position.
  • The firm had already disclosed and paid tax on its income.
  • Taxing the same amount in the hands of the partner would amount to double taxation.

Respondent’s Arguments (Revenue)

  • The assessee failed to file return within time and did not respond within the deadline specified in notices.
  • Therefore, the Assessing Officer was justified in invoking best judgment assessment.
  • Additions were made based on available information from the system.

Court Order / Findings (ITAT Allahabad)

The Tribunal found that the bank accounts considered by the Assessing Officer actually belonged to the partnership firm and not to the assessee. The confusion arose due to incorrect PAN details furnished by the bank, which triggered automated information in the tax system.

It was observed that the Assessing Officer ignored documents uploaded by the assessee clarifying the ownership of the bank accounts. Applying presumptive taxation on firm accounts in the hands of an individual partner was erroneous.

Relying on the principle laid down by the Supreme Court in ITO v. Ch. Atchaiah that income must be taxed in the hands of the right person, the Tribunal set aside the orders of the lower authorities.

The matter was restored to the Assessing Officer for verification of facts and fresh assessment after granting proper opportunity to the assessee. The appeal was allowed for statistical purposes.

Important Clarification

  • Income can be taxed only in the hands of the person to whom it legally belongs.
  • Bank account ownership must be correctly verified before making additions.
  • Presumptive taxation provisions cannot be applied on mistaken assumptions.
  • Double taxation of the same income in the hands of firm and partner is impermissible.
  • The Tribunal did not decide the final tax liability but remanded the matter for verification.

Link to download the order -  https://itat.gov.in/public/files/upload/1694424779-27%20of%202023%20Manju%20Singh%20(Assessee%20Appeal)%20uder%20section%20143(3)%20of%20the%20Act%20SMC%20(Corrected).pdf

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