Patna High Court
Commissioner Of Income-Tax vs Standard Mercantile Co. on 1 April, 1985
Equivalent citations: [1986]157ITR139(PATNA)
JUDGMENT Uday Sinha, J.
1. The following question of law has been referred to us for our opinion under Section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of this case, the Tribunal was correct in law in allowing continuation of registration to the firm ?"
2. The matters relate to the assessment years 1962-63 to 1965-66.
3. The assessee is a firm at Patna. Prior to the years in question, it had been assessed in the status of a registered firm. In the years in question, the Income-tax Officer called upon the assessee by a notice under Section 142(1) of the Income-tax Act (hereinafter referred to as "the Act"), to produce certain books of account. These books of account had been seized by the sales tax authorities who had made assessment under the Sales Tax Act on the basis of entries in those books. From the books seized, the sales tax authorities formed the conclusion that the assessee had done substantial clandestine business which had not been disclosed in the regular books of account. The assessee did not produce the required books of account. The, stand of the assessee was that those books of account were not available, as they had been lost by theft. The plea of the assessee was that he received the books of account from the Sales Tax Department and was bringing them to his residence in a taxi on June 28, 1965, and in transit they got lost. The plea of the assessee was put forth by Basudeo Agrawal, a partner of the firm. The cause shown by him was disbelieved. The story of loss of the books of account was rejected by the Income-tax Officer. Having rejected the plea of non-availability of the books of account, the taxing officer refused continuance of registration to the firm for the assessment year 1962-63. The finding of the Income-tax Officer in this behalf was as follows :
"After considering the whole facts, I hold that the books of account have deliberately not been furnished. Keeping in view the facts discussed above, I feel that the contention of the assessee that he lost the books of account is not credible. The facts do bring to light that the assessee did not want to reveal all the particulars of his complete trading activity and so he did not comply with the terms of the notice under Section 142(1) of the Income-tax Act, 1961."
4. Upon those findings, the assessment was made for the assessment year 1962-63 as unregistered firm. (See annexure "A"). The registration for the succeeding years also was cancelled on similar findings while passing assessment orders for the subsequent years. (See annexures "A/1, A/2 and A/3").
5. The Appellate Assistant Commissioner in appeal also rejected the plea of the assessee and confirmed the findings of fact of the Income-tax Officer.
6. The matter was thereafter agitated before the Appellate Tribunal. The assessee tried to show that there was no wilful default on his part and that he had not failed to produce the books of account called for out of any ulterior purpose. The Appellate Tribunal recorded its finding in the following terms :
"We have considered the fact and the arguments of the learned representatives of both the sides. The fact that there was default on the part of the assessee in so far as he did not produce the books as required by the Income-tax Officer cannot be denied."
7. The above was a categorical finding, explicit in terms, that there was default on the part of the assessee.
8. Having recorded the above finding, the Tribunal considered the question whether the case was one where action was called for in terms of Section 186(2) of the Income-tax Act, 1961. The Tribunal observed that merely because the assessment had been completed under Section 144, it did not follow that registration of the firm should be automatically refused. It observed that the question of refusal of registration must be determined on the degree of contumaciousness of the assessee. The Tribunal conceded that registration is a privilege and must be denied to an assessee who makes deliberate attempts to withhold materials from the scrutiny of the Department. And yet it observed that in the instant case, although the assessee had tried to withhold materials, it was not a fit case for exercise of discretion under Section 186(2) of the Act. In the view of the Tribunal, it was not a fit case for denying the benefit of registration because best judgment assessment had been done and that the Revenue had not suffered on account of the withholding of the account books. This conclusion of the Tribunal was based upon the reason that assessment had been done on the basis of the orders passed by the sales tax authorities where the volume of total transactions had been recorded and taxed. The observation of the Tribunal in the concluding part of paragraph 16 is rather interesting. It observed :
"Thus in the assessments, though they had to be completed under Section 144, as technically there was a default and the assessee had not been able to establish the loss of the books, the assessments on the whole have been confined to the materials which were either available to the Department or made available by the assessee."
9. I regret, the entire approach of the Tribunal to the vital question was entirely wrong. The fact that the assessments had been done more or less on the materials supplied by the assessee is entirely irrelevant. The fact that assessments had been done on the basis of the assessment orders passed by the sales tax authorities also was hardly relevant. And lastly, the fact that a best judgment assessment had been done was also hardly relevant for deciding whether the benefit of registration should be denied to the assessee or not. Since the books and documents called for had not been produced by the assessee, the Revenue had no option but to resort to a best judgment assessment. Since best judgment assessment could not be a wild assessment, the authorities had no option but to proceed substantially on the materials supplied by the assessee. It had to act under a handicap. The handicap of the Department cannot be used in favour of the assessee. In my view, therefore, the Tribunal was entirely wrong in holding that it was not a fit case for exercise of discretion under Section 186(2) of the Act. Once it is conceded that registration confers a benefit upon the assessee, it must follow that where the assessee had defaulted the benefit must be denied. Section 186(1) provides that where a firm has been registered, and where the Income-tax Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may cancel the registration of the firm. It has not been disputed that despite the use of the expression "may", the registration must be cancelled. Learned counsel for the assessee conceded that "may" has to be read as "must" in terms of Section 186(1). The word "may" has been used in Section 186(2) as well. This section has provided that where there has been any failure on the part of a registered firm in regard to matters stated in Section 144, the Income-tax Officer may cancel the registration of the firm. I would not like to contend that the expression "may" in Section 186(2) also must be held to be mandatory. That must be so because Section 186(2) refers to Section 144 of the Act. Section 144 contemplates several situations. The first clause lays down that a best judgment assessment may be done if an assessee failed to make the return by any notice given under Section 139(2) or under Sub-section (4) or (5) of Section 139. The second situation where a best judgment assessment may be resorted to is where the assessee fails to comply with the terms of a notice issued under Section 142(1), i.e., where the assessee fails to produce such accounts or documents as the Income-tax Officer may require. The third situation falling for best judgment assessment is where the assessee fails to comply with the terms of a notice issued under Section 143(2). It will be observed that in terms of all the three clauses of Section 144, it is possible to take a view that there has been no wilful default by the assessee. If he can satisfy the authority in that behalf, the benefit of Section 185 may not be denied. But once a conclusion is reached that the default is wilful, it must follow that the benefit conferred by Section 185 must be denied. If the default is not wilful, it would be discretionary for the authorities to refuse or not to refuse the benefit conferred by Section 185. But once it is held that the default was wilful, the expression "may" in Section 186(2) can be fulfilled only by giving a mandatory complexion to that expression. It must be conceded that mere failure to comply with the notices issued under Sections 139, 142 and 143 will not invite the wrath of the penal provisions, but where the non-compliance of those provisions is wilful, the assessee must be visited with the wrath of Section 186(2). The expression "may" in Section 186(2) must, therefore, be read as discretionary where the default is not wilful and must be held to be mandatory where the default was wilful. Discretion has to be exercised on well established judicial norms. Dircretion is not a licence to follow a fancy or flight of imagination. Even in matters of exercise of discretion, judicial norms cannot be thrown to the winds. If this view is not taken in regard to the content of Section 186(2), the assessee will succeed in his wilful default.
10. In the instant case, the unambiguous finding of the Tribunal recorded in paragraph 12 was that there was default on the part of the assessee. The further finding was that there was no substance in the plea put forth by the assessee that books of account have been lost by theft. From these two findings, the conclusion is inescapable that there was wilful default on the part of the assessee. Those being the findings, in the instant case, the authorities were bound to cancel the registration of the assessee-firm for the assessment years in question. The observation of the Tribunal in paragraph 15 of its order gives an inkling that the Tribunal was conscious of the fact that this was an apt case where benefit of registration should be denied and, therefore, to water down its clear finding in paragraph 12, observed that the question of signature and handwriting had to be left out for the purpose of deciding the question of cancellation of registration. With respect, this was a swashbuckling effort. The Tribunal was absolutely unjustified in holding that this was not an apt case for taking action under Section 186(2) of the Income-tax Act.
11. There is yet another aspect of the matter, conceding, as it has to be, that the provisions of Section 186(2) are discretionary, the discretion has been vested in the Income-tax Officer and the Appellate Assistant Commissioner. The discretion had been exercised by cancelling the registration. The discretion having been exercised, the Tribunal should have been slow in reversing their exercise of discretion. In the instant case, the Tribunal relied on irrelevant considerations in holding that this was an apt case for exercising the discretion conferred by Section 186(2) in favour of the asses-see. The Revenue was right in exercising the discretion against the asses-see and the Appellate Tribunal did not act in accordance with law in reversing that exercise of discretion.
12. In my concluded opinion, therefore, upon the findings of the Appellate Tribunal itself, there was no case for allowing continuation of registration to the firm. The Tribunal was not correct in law in allowing continuation of registration to the firm. The question referred to this court for our opinion must, therefore, be answered in favour of the Department and against the assessee. There shall, however, be no order as to costs.
Nazir Ahmad, J.
I agree.