Disallowance u/s 184(5) of interest, salary etc paid by a firm to partners cannot be made if the Best Judgement assessment u/s 144 is due to incompleteness of accounts & not due to failures referred to in s. 144

The Tribunal had to consider whether disallowances for payments in respect of remuneration and interest on capital paid to the partners, in computation of taxable income of the firm, can be made under section 184(5) when even though assessment is completed under section 144 but the assessee has not committed any such failure as is set out in section 144. HELD:

The disallowance under section 184(5) comes into play not as a result of the assessment under section 144 but as a result of the lapses as mentioned in section 144. In other words, the disallowance under section 184(5) does not have a cause and effect relationship with assessment being framed under section 144. Section 184(5) categorically states that when “there is, on the part of a firm, any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income”. This disabling provision comes into play only when the assessment is framed under section 144 only as a result of the assessee’s committing any such failure as is contemplated under section 144. However, in a situation in which the assessment is completed in the manner as prescribed in section 144 but such a course of action has been adopted because of “the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee”, referred to in section 145(3), clearly the disabling provisions of Section 184(5) do not come into play. On facts, the assessment under section 144 has been upheld on the basis of section 145(3) even as it is not disputed that the failures enumerated in section 144 itself were not committed. In these circumstances, section 184(5) cannot be invoked to make disallowances for interest and salaries paid to the partners.