Rajasthan High Court - Jaipur
Commissioner Of Income-Tax vs Faiz Mohd., Hasim Ali, Taj Mohd., Noor ... on 3 January, 1986
Equivalent citations: [1986]160ITR396(RAJ)
JUDGMENT S.K. Mal Lodha, J.
1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short "the Tribunal" hereinafter), has referred the following two questions for the opinion of this court which are said to arise out of its order dated February 23, 1979, passed in I. T. A. No. 75/ JP/1979 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Income-tax Officer having assessed the assessee-firm under Section 144 of the Act, for default attracting the provisions thereof, and while rejecting its application for registration under Section 185(5) of the Act for the said default, should have given a finding (i) that no genuine firm was in existence, or (ii) that no valid firm was in existence, or (iii) that the firm did not work in accordance with the partnership deed ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the order of the Appellate Assistant Commissioner through which he set aside the order of the Income-tax Officer and directed him to decide the assessee-firm's application for registration on merits ?"
2. The assessee, M/s. Faiz Mohd., Hasim Ali, Taj Mohd., Noor Mohd., Nagaur, submitted an application in Form No. 11 for grant of registration to it. The application was in order. The assessment year involved is 1973-74. The application in Form No. 11 was submitted for the previous year relevant to the assessment year under consideration. The Income-tax Officer by his order dated February 11, 1976, passed under Section 185 of the Income-tax Act, 1961 (No. XLIII of 1961) ("the Act" herein), refused to grant registration to the firm and took its status as that of an unregistered firm. The reason given by the Income-tax Officer in the aforesaid order was that the assessment has been completed under Section 144 of the Act and there is no proof whether the profits have been divided in the ratio specified in the deed. The assessee went in appeal. It was, inter alia, contended that on the basis of the material that was filed by the assessee, the Income-tax Officer could have ascertained as to whether the profits of the firm were divided or not according to the profit-sharing ratio as specified in the partnership deed and that the firm is genuine and the Income-tax Officer was not justified in refusing to grant registration. The Appellate Assistant Commissioner taking the aforesaid facts into consideration, opined that it was not a proper case for refusal to grant registration for the same reason that an ex parte order has been made. He, therefore, by his order dated November 8, 1978, directed the Income-tax Officer to consider the application and to decide the matter in accordance with law. The consequence of this was that the status of the assessee as found by the Income-tax Officer, namely, unregistered firm, was set aside. Being dissatisfied, the Income-tax Officer, "B" Ward, Hanumangarh, went in appeal. The order of the Appellate Assistant Commissioner was, inter alia, assailed on the ground that as the assessee failed to comply with the notice, the Income-tax Officer was within his rights to reject the application for registration under Section 185(5) of the Act. The Tribunal, while agreeing with the order of the Appellate Assistant Commissioner, observed as under :
"It is correct that if an assessment order is made under Section 144 of the Act, the learned Income-tax Officer is empowered to refuse the application for registration. The application for registration can be rejected provided the learned Income-tax Officer on the basis of the evidence on record comes to the conclusion that no genuine firm was in existence. In the present case, the learned Income-tax Officer did not give a finding in clear words that no genuine firm is in existence. The Appellate Assistant Commissioner pointed out that the assessee filed material along with the return from which it could be ascertained whether the profits and losses were divided or not according to the specified ratio detailed in the partnership deed. The Appellate Assistant Commissioner only directed the Income-tax Officer to decide the matter on merits and in accordance with law. Looking to the provisions of Section 185 of the Act, the evidence on record and the order of the learned Appellate Assistant Commissioner, it is correct that the Income-tax Officer did not decide the matter properly. The directions given by the learned Appellate Assistant Commissioner are quite justified."
3. According to the Tribunal, from the material that was filed before the Income-tax Officer, he could very well determine whether the profits were divided in accordance with the profit-sharing ratio as specified in the deed or not and that the Income-tax Officer did not record the finding that no valid firm was in existence. On an application under Section 256(1) of the Act, the Tribunal has referred the aforesaid two questions as, according to it, they are questions of law arising out of its order.
4. We have heard Mr. B.R. Arora, learned counsel for the Revenue, as well as Mr. D.K. Parihar, learned counsel for the assessee.
5. We propose to answer the questions ad seriatim.
6. Question No. 1.--It was not in dispute before the Tribunal as appears from its order as well as from the statement of the case and question No. 1 formulated for opinion that the application for registration of the firm was rejected by the Income-tax Officer under Section 185(5) of the Act as the Income-tax Officer had assessed the assessee under Section 144 of the Act. It will be relevant here to read Sections 144 and 185(5) of the Act:
"144. If any person-
(a) fails to make the return required by any notice given under Sub-section (2) of Section 139 and has not made a return or a revised return under Sub-section (4) or Sub-section (5) of that section, or
(b) fails to comply with all the terms of a notice issued under Sub-section (1) of Section 142 or fails to comply with a direction issued under Sub-section (2A) of that section, or
(c) having made a return, fails to comply with all the terms of a notice issued under Sub-section (2) of Section 143, the Income-tax Officer, after taking into account all relevant material which the Income-tax Officer has gathered, shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment.
185. (5) Notwithstanding anything contained in this section, where, in respect of any assessment year, there is, on the part of a firm, any such failure as is mentioned in Section 144, the Income-tax Officer may refuse to register the firm for the assessment year."
7. Section 184 provides for application for registration and the procedure on receipt of application has been provided in Section 185. The material part of Section 185 for the present purpose is as quoted above.
8. In order to appreciate the contention raised by the learned counsel for the Revenue, it may be stated that under Section 185(1), after the receipt of the application for registration, the Income-tax Officer has to hold an enquiry regarding the genuineness of the firm and its constitution as specified in the instrument of partnership and if he feels satisfied that there was during the previous year a genuine firm with the constitution so specified, was in existence, he may order registration of the firm for that assessment year. If he is not so satisfied as specified in Sub-section (1) of Section 185, he may refuse registration of the firm.
9. A perusal of Section 185(1)(b) and Section 185(5) shows that the Income-tax Officer has full powers to refuse registration of the firm. These two powers are distinct and independent. The scope of the two powers is also different and different conditions govern the exercise of the two powers. Under Section 185(1)(b) of the Act, the Income-tax Officer has been empowered to refuse registration to a firm if he forms an opinion that the application for registration has not been made in accordance with the provisions of law or that the applicant-firm is not a genuine firm. However, refusal under Section 185(5) follows only when there is one or more of the defaults specified in Section 144. Though the Income-tax Officer has power to refuse registration either under Section 185(1)(b) or under Section 185{5), he can refuse registration under Section 185(1)(b) or in the exercise of discretion under Section 185(5) or simultaneously under Section 185(1)(b) and under Section 185(5). Reference in this connection may be made to CIT v. Jekisondas Bhukandas [1967] 66 ITR 515 (Guj), CIT v. Krishnamma & Co. [1955] 28 ITR 273 (AP) and Meerasahib Tharaganar v. CIT [1963] 48 ITR 950 (Mad).
10. As stated above, there is no controversy in the case before us as is borne out from question No. 1 formulated by the Tribunal that registration of the firm may be refused on the application of the assessee under Section 185(5) of the Act. The words used in Section 185(5) are "may refuse to register". From these words, it is abundantly clear that Section 185(5) does not prescribe automatic refusal of registration in the event of any such failure as mentioned in Section 144 but confers a discretionary power on the Income-tax Officer to refuse registration in such a case. It follows that merely on the ground that the Income-tax Officer has proceeded to make a best judgment assessment, registration cannot be refused. For refusing registration, he has to give reasons for his order. The discretion which has been conferred on the Income-tax Officer under Section 185(5) of the Act is a judicial one and in an appeal, the appellate authority can examine the circumstances in which the discretion was exercised and may set aside the order in a proper case. But that discretion is not to be exercised arbitrarily or capriciously but in a lawful manner and on the basis of the material circumstances present in a given case. The Tribunal in its order has stated that the application for registration can be rejected by the Income-tax Officer if he comes to the conclusion that no genuine firm was in existence. Is this the requirement under Section 185(5) of the Act? A close reading of Section 185(1) and Section 185(5) and a comparison of the two provisions show that in the latter provision (under Section 185(5)), it is not incumbent on the Income-tax Officer before refusing registration of the firm to come to a conclusion that the firm is not genuine, for that is the requirement under Section 185(1)(b) of the Act. Section 23(4) and Section 26A of the Indian Income-tax Act, 1922 ("the old Act"), were considered in Askaran Kissenlal v. CIT [1969] 73 ITR 522 (Cal). It was held therein that the relevant considerations for deciding whether the action of the Income-tax Officer in refusing registration under Section 23(4) was justified were: (1) whether there had been a default on the part of the assessee as contemplated in that Section and (2) whether such default was of such a nature as to merit the penalty of denial of registration. It was observed as under (headnote);
"Whether the firm was genuine or not or whether it was otherwise entitled to registration under Section 26A would not be germane for testing the propriety of the Income-tax Officer's action in refusing registration under Section 23(4)? "
11. It may be stated that Sections 184 and 186 were previously Sections 26A and 23(4) of the old Act. Section 23(4) of the old Act was also examined by the Patna High Court in Durga Prasad Chandi Prasad v. CIT [1971] 79 ITR 553 (Pat). After referring to CIT v. Krishnamma & Co. [1955] 28 ITR 273 (AP), Narayana Chetty (Y.) v. ITO [1959] 35 ITR 388 (SC), Seth (J.M.) v. CIT [1965] 56 ITR 293 (Mad) and Trivandrum Tobacco Combines v. CIT [1967] 63 ITR 813 (Ker), it was held that the basis of an order for consideration of registration under Section 23(4) is not that the firm which had been registered is a fictitious one, but that, though the registered firm was genuine, by its failure to comply with the requirement of law, it had incurred the penalty of having its registration cancelled. In the facts and circumstances of that case, the learned judges came to the conclusion that the Income-tax Officer was justified in refusing the renewal of registration of the firm under Section 26A of the old Act while exercising the discretion vested in him under Section 23(4) of the old Act.
12. We respectfully follow the view taken by the Calcutta and the Patna High Courts in the aforesaid two decisions and in disagreement with the Tribunal hold that it is not necessary for the Income-tax Officer while taking action under Section 185(5) of the Act to record a finding on the application for registration of the firm that it is genuine. If the conditions, namely, that there has been a default on the part of the assessee as contemplated by Section 144 of the Act and that the default was of such a nature so as to merit the penalty of denial of registration, are satisfied, then the Income-tax Officer can refuse registration under Section 185(5) of the Act and it is not necessary for him to go into the question whether the firm was genuine or it was otherwise entitled to registration under Section 185 of the Act. Once defaults as stated in Section 144 have occurred, a discretion has been given to the Income-tax Officer to refuse registration by resorting to Section 185(5) of the Act.
13. For the reasons mentioned above, we hold that, on the facts and circumstances of this case, the Tribunal was not right in coming to the conclusion that the Income-tax Officer having assessed the assessee under Section 144 of the Act for default, attracting the provisions thereof while rejecting its application for registration under Section 185(5) of the Act on the ground of defaults under Section 184, it should have given a finding (1) that no genuine firm was in existence, or (2) that the firm did not come into existence in accordance with the partnership deed.
14. Question No. 2.--Now, we pass on to question No. 2. The Appellate Assistant Commissioner was impressed by the contention raised on behalf of the assessee that there was material on record for the Income-tax Officer to verify that the profits have been distributed in accordance with the ratio indicated in the partnership deed and so he should have granted registration. In that view of the matter, he directed the Income-tax Officer to consider the application for registration on merits and to decide the matter in accordance with law. On appeal, the Tribunal concurred with the view taken by the Appellate Assistant Commissioner and held that the Income-tax Officer could very well know that the profits were divided in accordance with the ratio as specified in the deed or not and as the Income-tax Officer had not given a finding that a valid firm had come into existence, the direction given by the Appellate Assistant Commissioner calls for no interference.
15. We have already observed while discussing question No. 1 that merely on the ground that the Income-tax Officer has proceeded to make a best judgment assessment, registration cannot be refused. In the present case, the Income-tax Officer, as is clear from the order dated February 11, 1976, rest contented by saying that the assessment has been completed ex parte under Section 144 of the Income-tax Act, 1961, and there is no proof whether the profits have been divided in the ratio specified in the deed. The Income-tax Officer did not specifically consider the condition laid down under Section 185(5) of the Act for refusing registration. In other words, he was required to specifically mention whether the defaults as envisaged by Section 144 of the Act have been committed by the assessee or not and that defaults were of such a nature that they warranted refusal of registration to the firm and on the fulfilment of those conditions, he could, in the exercise of his discretion, refuse registration. Even at the risk of repetition, it may be stated that it is not necessary for the Income-tax Officer while passing an order under Section 185(5) of the Act to record a finding that the firm is genuine or not. It is also well-settled that where the Income-tax Officer has refused registration in exercise of discretion under Section 185(5) of the Act, the Tribunal in appropriate cases can substitute its discretion for that of the Income-tax Officer. Here the refusal by the Income-tax Officer was not warranted, as he had not applied his mind judicially while passing an order under Section 185(5), particularly keeping in view the principles laid down in Askaran Kissenlal's case [1969] 73 ITR 522 (Cal), with which we respectfully agree. The Tribunal was right in maintaining the order of the Appellate Assistant Commissioner directing the Income-tax Officer to consider the application on merits and to decide the matter afresh in accordance with law.
16. The result is that question No. 1 is answered in the negative, i.e., in favour of the Revenue and against the assessee and question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. We leave the parties to bear their own costs of this reference.
17. Let the answers be returned to the Tribunal in accordance with the provisions of Section 260(1) of the Act.