The Commissioner of Income Tax cannot revise an assessment order without demonstrating it is both erroneous and prejudicial to revenue; a firm cannot include another firm as a partner under the existing law.

JUDGMENT :

K.R. SHRIRAM, CJ.

1. The appeals, one by department and the other by assesee, impugn the order dated 04.07.2013 passed by the Income Tax Appellate Tribunal (ITAT) “D” Bench, Chennai.

2. Appeals were admitted on 13.12.2024 on the following substantial questions of law:

T.C.A.No.987 of 2013:

“Whether on the facts and in the circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was right in law in holding that the Commissioner of Income Tax had gone overboard by directing the Assessing Officer to modify the assessment order treating the status of assessee as AOP instead of setting-aside the order of the Assessing Officer, when the provisions of Sec 263(1) gives the power to enhance or modify the assessment or cancelling the assessment and directing a fresh assessment.”

T.C.A.No.750 of 2013:

“1. Whether on the facts and circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-Tax passed u/s.263 without appreciating that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to interest of revenue?

2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that applying the ratio of the decision of the Apex Court cited when a person is a partner in a firm in his individual capacity as well as a representative of another firm, he should be counted as a single partner qua the firm and hence the Appellant was a validly constituted firm?

3. Whether on the facts and circumstances of the case, the Tribunal ought to have appreciated that when neither the firm of Deloitte Mumbai nor its partners were partner in the Appellant firm as per the decisions of the Supreme Court and when the partners who were chargeable to tax at the maximum marginal rate had been assessed on the remuneration received by them from the Appellant firm, the order passed by the Assessing Officer cannot be considered as prejudicial to the interest of the revenue?

4. Whether on the facts and circumstances of the case, the Tribunal was right in law in observing that the effort of the Appellant was to indirectly bring in Deloitte Mumbai as a Partner, which in effect concludes the issue against the Appellant and will effectively bind the hands of the Assessing Officer while doing the assessment afresh?”

3. Assessee is a firm of Chartered Accountants in Chennai formed under the partnership deed dated 22.02.1998. The firm was reconstituted vide a partnership deed dated 01.04.2007 with a total number of 20 partners. So far as it is relevant for the present purpose, one Mr.Mukund Dharmadhikari, a partner, was entitled to a share of 20.0530% of the profits of the firm. The reconstituted firm continued to carry on the business, inter alia, of Accountants, Auditors, Tax Practitioners, etc.

4. Assessee as well as one M/s.Deloittee Haskins and Sells at Mumbai (Deloitte Mumbai) are participating firms of the network of Deloitte Haskins and Sells which is referred to as the National firm. All policy decisions affecting the participating firms needed the approval of the partners of the National firm. This was only to ensure consistency and uniformity of operations of all the participating firms. It did not alter the status or the number of partners or their inter-se agreement under the partnership deed of the individual participating firms.

5. Assessee filed its return of income for assessment year 2008-2009 on 30.09.2008 declaring a total income of Rs.17,70,69,972/- after deducting paymen