ISSUE OF NOTICE UNDER SECTION 154

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 March 2010 An assessee firm filed it’s Return of income in electronic form for the assessment year 2007-08. The firm is contractors. The case was selected for scrutiny assessment in CASS.

In response to notice u/s.143(2), the representative of firm had appeared before the AO, and submitted a letter along with paper return (ITR-5), Audited balance sheet, profit and loss account, duly signed Form 3CB and 3CD and stated in that letter that due to the pressure of work of partners of firm, the partner are not able to produce the books of accounts called, and in order to early completion of assessment, we offer higher income at 8% on Gross contract receipts.

The AO accepted the offer of firm, and completed the assessment u/s.144. The AO allowed the interest and salary payments to partners from the income determined at 8% of Gross Contract receipts.

After four months, the AO issued a notice U/s.154 to the assessee firm, and stated that the assessment was completed u/s.144, the assessee was not entitled to deduction by way of any payment of interest and salary to partner in view of provisions of section 185(5) of IT Act. Hence it is proposed to rectify the said mistake which is apparent from the record by disallowing the assessee claim for payment towards partner’s interest and salary.

Please state whether the action of AO is correct with regards to Assessment completed u/s.144 and issue of notice u/s154?

Please state relevant case law if any.