Income Tax Appellate Tribunal - Hyderabad
Toco Engg. Co. vs Income-Tax Officer on 14 April, 1986
Equivalent citations: [1986]18ITD267(HYD)
ORDER
K.S. Viswanathan, Accountant Member
1. We find it convenient to dispose of these five matters together. All these appeals are against the orders of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act') in which he had directed the ITO not to treat the assessee as a registered firm and further he has set aside the assessment orders with a direction to the ITO to inquire into the low net profit declared and consider the applicability of the provisions of Section 145(1) of the Act and to redo the assessments according to law. The assessment years covered are 1981-82 to 1983-84. In three of the appeals, the assessee is objecting to the directions to redo the assessments and in two other appeals, the assessee is objecting to the benefit of registration being denied.
2. We will take up first the matter connecting with the registration. It is only for the two assessment years 1982-83 and 1983-84. The accounting year of the assessee is the financial year. The assessee had been granted registration for the earlier years. The law, therefore, requires the assessee only to file a declaration in Form No. 12. Now the declaration in Form No. 12 was filed on 29-3-1982 for the assessment year 1982-83. For the assessment year 1983-84, the form was signed by the partners on 31-3-1983. On the basis of these declarations, the ITO had granted the benefits of registration.
3. The Commissioner in his order under Section 263, first pointed out that there was certain blanks in the declaration for both the years. For the assessment year 1982-83, the averment in the first paragraph that the firm was granted registration in respect of an earlier year has been left blank. So also the assessment year concerned has been left blank in the second paragraph of the declarations. So the declarations were defective according to him. Further, insofar as the declarations were signed before the end of the previous years, i.e., two days before the assessment year 1982-83 and on the last day for the assessment year 1983-84, the declarations themselves were not valid. In support of his finding, he had referred to a decision of the Gujarat High Court in the case of CIT v. Trinity Traders [1974] 97 ITR 81, wherein the High Court has held that the declaration in Form No. 12 requires the firm to state that there was no change in the constitution of the firm or in the shares of the partners up to the last date of the previous year and if a declaration is given on an earlier date, than the last date of the previous year, it cannot be valid.
4. We may mention here that when the proceedings under Section 263 were taken up, the assessee filed fresh forms on 10-4-1985 for both the assessment years with a request to the ITO to condone the delay.
5. Shri Ratnakar for the assessee submitted that the Commissioner is not questioning the genuineness of the firm. This firm has been accepted t6 be genuine and registration has been granted for all the earlier assessment years. As far as the assessment year 1983-84 is concerned, the Form No. 12 had been filed on the last day of the accounting year. For the assessment year 1982-83, it had been filed just two days before the close of the accounting year. He then submitted that Section 184(7) of the Act does not give any time limit before which the Form No. 12 cannot be filed. The Act only states the date by which the forms have to be filed. Filing of the forms on a date earlier to it is not fatal. Referring to the decision of the Gujarat High Court relied on by the Commissioner, he submitted that the same High Court had considered in detail the issue in another decision in the case of Billimora Engg. Mart v. CIT [1985] 156 ITR 153. In that case, the assessee had not even complied with the rules and the instrument of partnership was not filed along with the application for registration. The High Court had held that it would not render the application invalid. He then submitted that once registration has been granted, the continuation of registration is based on a declaration being given and it was part of procedural law. He submitted that in interpreting procedural law, certain liberties are allowed to the assessee, as will be evident in the section itself. Section 185(2) of the Act which gives the assessee an opportunity to rectify certain defects in the application for registration and Section 185(3) which gives certain principle in the declaration for continuation of registration are recognition of this principle. He submitted that if the Commissioner has found that the declarations were defective, he should have given the assessee an opportunity to regularise it under Section 185(3). He then submitted that the order of the Commissioner directing the ITO to treat the assessee as an unregistered firm has the effect of truly lying the benefit granted by the law. He submitted that such an action cannot be permitted as per the ruling given by the Madras High Court in the case of CGT v. T.S. Krishna [1984] 149 ITR 99. He then referred to the decision of the Supreme Court in the case of Badri Prasad Jagan Prasad v. CIT [1985] 156 ITR 430 and submitted that in such matters one should not get enmeshed in technicalities and take a pragmatic approach. Finally he referred to the decision relied on by the Commissioner and pointed out that in that case the declaration in Form No. 12 was given in the month of June when the accounting year ended in November. Further, the facts of the case show that the assessee had not approached the Court with clean hands. They were actually trying to palm of a declaration given for different year as the declaration given for the assessment year.
6. Shri Santhanam for the department submitted that the assessee had left many blanks in the forms which is fatal to their for registration. The firm had come into existence from 1979-80. When they filed their declarations in Form No. 12, they had already been granted registration for the earlier years. So they have no excuse for leaving the forms blank. He then submitted that the law requires declaration in Form No. 12 to be furnished only after the accounting year is over. The form requires a declaration that there was no change at all throughout the entire period of the accounting year and such a declaration can be given only after the accounting year is ended. It is impossible on any date earlier for anyone to predicate whether there would be such a change or not. He then compared Form Nos. 11 and 11A with Form No. 12. Form Nos. 11 and 11A could be filed in the middle of the accounting year itself and, therefore, it contains a provision that the declaration would be only up to the date of application. There is no such alternative given in Form No. 12.
7. With regard to the submission that the defects, if any, are curable, he pointed out that a defect could be curable only if there is a declaration in existence in the eye of law. Insofar as declaration has been given before the due date, there is no declaration in law. It is not a matter of hypertechnical objection but a matter of fact. He then pointed out that the Supreme Court in the case of Sri Ramamohan Motor Service v. CIT [1973] 89 ITR 274 has pointed out that there should be a strict compliance with the rules in order to get the benefit of registration. It is not sufficient if there is substantial compliance. He then referred to the decision of the Gauhati High Court in the case of K.C. Trunk & Bucket Factory v. CIT [1977] 106 ITR 348, wherein the assessee filed a declaration in Form No. 12 instead of an application in Form No. 11 and this was considered fatal to their granting registration. He then referred to the fact that the assessee had, while the proceedings under Section 263 were going on, filed fresh Form No. 12 for both the years and submitted that no cognizance can be taken of these forms. The reason was, according to him, the proceedings under Section 263 are not the proceedings for the benefit of the assessee, but the proceeding like reassessment proceeding is to garner additional revenue. Therefore, anything which goes in favour of the assessee cannot be considered for the first time by the ITO in his order passed consequent to the order under Section 263.
8. We have considered the submissions. Although a time limit is given in Section 184(7) for the filing of the declaration in Form No. 12, that time limit is only the point beyond which the assessee cannot file the declaration. The section does not bar the filing of the declaration at any point of time before the expiry of the time fixed in Sub- section (7). But Shri Santhanam wants us to infer that such a time limit is implied when the section requires a declaration that there is no change in the constitution of the firm or the shares of the partners. It is his case that unless the entire accounting period had elapsed it is impossible for anyone to predicate that there will be no change in the constitution of the firm or the shares of the partners. Sub-section (7) reads as follows :
(7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year :
Provided that-
(1) there is no change in the constitution of the firm or the shares of the partners as evidenced by (he instrument of partnership on the basis of which the registration was granted ; and
(ii) the firm furnishes, before the expiry of the time allowed under Sub- section (1) or Sub- section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Income-tax Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.
It will be seen that the expressions used in the proviso are 'there is no change in the constitution of the firm'. It will be noted that the verb 'is' is in present tense. Now if we were to wait till the accounting year were to be completed, then the normal expression to be used would be 'there was no change in the constitution of the firm'. The fact that no such expression is used would show that what is required to be furnished is the position as on the date of the declaration. It would be, therefore, apparent that in the said section there is nothing preventing the declaration being filed before the end of the accounting year.
9. In support of what we have stated above, we will refer to the wording found in the averments in Form Nos. 11 and 11 A. Where an application for registration is to be made after the dissolution of the firm, the averments are in the past tense. In paragraph 4, the form says 'we do hereby certify that the profits (or loss, if any) of the previous year were divided or credited'. It is an indicator that where a declaration or application has to be made after the accounting period is over, then past tense is used.
10. We have stated above that Form No. 12, as it is, does not imply any starting point of time before which the declaration cannot be furnished to the ITO. But let it be assumed that such a time limit is implied in Form No. 12, then we will have to see whether it is valid. It will be noticed that the declaration in Form No. 12 is in the present perfect tense. Paragraph 2 says 'there has been no change in the constitution of the firm'. Now this may be in contrast with the language used in Section 184(7) itself. There the verb is used in the present tense. It says 'there is no change'. We have pointed this out in paragraph 7 above. Thus, there is a difference in the language and content of Section 184(7) and Form No. 12. What Form No. 12 wants the assessee to declare is not what is found in the section. Thus, it is apparent that the form oversteps the contents of Section 184(7). Where there is no implied time limit, as per section, the form brings it into existence.
11. Now the question whether a rule can bring in certain time limit, which is not mentioned in the section, has been considered by various High Courts while considering the validity of the time limit given in Form No. 10. Now this form has to be given by a charitable trust for permission for accumulation of the profits. Paragraph 2 of the form and Rule 17 of the Income-tax Rules, 1962 ('the Rules') provided a time limit of four months which was not present in the section. The High Courts had held that such a time limit in the Rules and in the form was wholly ultra vires. Please see the decision of the Madras High Court in the case of Second ITO v. M.C.T. Trust [19761 102 ITR 138 and the decision of the Kerala High Court in the case of CIT v. Shree Padmanabhaswami Temple Trust [1979] 120 ITR 42. Both these decisions had held that the Rules which had prescribed a time limit were ultra vires of the section and it would be struck down. Therefore, even if there is an implied limit in Section 184(7) it would not be valid. We will now come to the decision of the Gujarat High Court, which is relied on heavily by the Commissioner. The finding of the Gujarat High Court rested mainly on the wordings in Form No. 12. They had stated on the basis of the paragraph found in that form that the declaration should be made after the last day of the previous year relevant to the assessment year. The following sentence occurs in Trinity Traders' case (supra) :
From these provisions it is quite evident that the declaration which is contemplated by Section 184(7) of the Act is the declaration that up to the last day of the accounting period the constitution of the firm and the shares of the partners have remained unchanged....(p. 85) In the case before the Gujarat High Court, the assessee had not taken up the point that the declarations required in Form No. 12 are at variance with the section. In any case, the developments regarding the case-law on the point of time limit being given in the Rules, which were not in the section, came later than the Gujarat High Court decision. Besides the facts before the Gujarat High Court, show an extreme case. Therein the accounting year ended in November, but the declaration was furnished in June itself. There was another five months to go for the end of the accounting year. It would, therefore, not at all possible to predicate whether there would be any change in the constitution of the firm. In the case before us there was a gap of only two days for one year. For the year 1982-83, the declaration was filed on 29th March when the accounting year closed on 31st March. On 29th March it is quite possible to say that there is no change in the constitution of the firm. This may of course bar death of any of the partner between 29th and 31st March. In such cases it would amount to dissolution of the firm as now held by the Andhra Pradesh High Court in the case of Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 (FB). Therefore, unlike the facts in the Gujarat High Court case, it is quite possible for the partners to say two days before the close of the accounting year that there has been no change in the constitution.
12. As far as the assessment year 1983-84 is concerned, the declaration had been filed on the last day of the accounting year. We fail to see how a declaration given on the last day of the accounting year could be held invalid even on the basis of the Gujarat High Court decision in Trinity Traders' case (supra). When on the last day itself, they had filed the declaration, it must be assumed that as far as they were concerned, the accounting year was over. In this connection, we may refer to the decision of the Supreme Court in the case of Badri Prasad Jagan Prasad (supra). That was a case which raised a question as to the date of succession to business. The assessee, an HUF had carried on business taxed under the English Indian Income-tax Act, 1918. The family underwent partial partition on 11-10-1948. Entries in the books of account on that date showed the partition. A partnership firm was effected by the erstwhile members of the family with effect from the next day, i.e., 12-10-1948. The question was whether the succession by the firm was on 11-10-1948 or 12-10-1948. The Supreme Court, in the course of judgment, itself disapproved such verbal quibblings in strong terms. All their observations would be applicable to the facts for the year 1983-84 before us. They had filed the declaration on 31-3-1983 and that means, as far as they are concerned, the end of the accounting year. It will be hyper-technicality if one were to hold that the previous year ended on 1st April and not on 31st March.
13. We may also refer to the decision of the Gujarat High Court in the case of Billimora Engg. Mart (supra). That was also a case where the assessee had not complied with the rules for registration. They had filed an application for registration in Form No. 11 at a time when even the partnership deed was not drawn up. The application for registration was made on 3-11-1969 and the partnership deed itself was drawn up on 8-1-1970. The Gujarat High Court pointed out that it was nobody's case that no valid and genuine partnership had come into existence during the accounting year. The only controversy was what was the effect of the failure on the part of the assessee for non-compliance of the requirements of Section 184(5), i.e., the application for registration not being accompanied by the instrument of partnership. They proceeded to state that, according to them, it was not the intent of the Legislature that unless there is the instrument of partnership in existence on the date of application, the assessee would not be entitled to registration. They then pointed out that if the application had been made on the last day of the accounting year and the required documents were annexed to the application, there would have been no objection for granting registration. A fortuitous circumstance that it applied earlier and produced the instrument of partnership later would not deprive the firm of registration. This case has a lot of relevance on the point at issue before us. It was merely a fortuitous circumstance that for the assessment year 1982-83, the assessee filed the declaration of Form No. 12 two days prior to the end of the accounting year. Had they been filed two days later there would have been no problem.
14. In the case before the Gujarat High Court relied on by the Commissioner, the assessment year involved was 1967-68. At that time, the statute did not contain a provision allowing the assessee to rectify any defect. Such a provision was introduced only with effect from the assessment year 1971-72. From that year onwards, where the ITO considers that the declaration furnished by the firm in pursuance of Section 184(7) is not in order, he should indicate the defect to the firm and give the firm an opportunity to rectify the same. Insofar as a declaration given two days before the end of the accounting year would be considered as defective, the assessee has a right under this section to get the defect rectified. In this connection, we may refer to a statement made by Shri Santhanam that the application was non est and not merely defective. On the facts of that case, the High Court has observed at p. 86 "under the circumstances the declaration, which is made by the assessee in the middle of the accounting period, is found to be not a declaration". Now in the case before us, the declaration is made at the end of the accounting year and not in the middle of the accounting year. Apart from that, as we have pointed out in paragraphs 10 and 11, the Gujarat High Court decision rested on the assumption that the paragraph in Form No. 12 is intra vires. Therefore, the decision given on that assumption will not be relevant to us. We have no other material to hold that the declaration is non est. Therefore, it is only a defective declaration and the provisions of Section 184(3) will be available to rectify it.
15. Shri Santhanam has pointed out certain other defects in the form like the assessment years being not mentioned and those columns being left blank. These are all defects only and are curable.
16. For the above reasons, we are of the opinion that the assessee is entitled to the continuation of registration for both these years.
17. We will now take up IT Appeal Nos. 1089 to 1091. These are three appeals by the assessee against the order under Section 263 for the assessment years 1981-82 to 1983-84. In these orders, the Commissioner had set aside the original assessment orders with the direction that the ITO should consider the applicability of the provisions of the proviso to Section 145 and redetermine the income according to law. The assessee is a firm having a contract for putting up transmission line towers. We will give the details of the assessment for 1981-82. For this year, the assessee had shown an income of Rs. 5,29,826. The assessment had been completed by the ITO after making adjustments to the income returned. The Commissioner is of the opinion that the order passed by the ITO was erroneous and prejudicial to the revenue on account of the fact that certain excess depreciation had been allowed and the interest deductions required certain adjustments. He also pointed out that Section 80G deduction had been allowed on a receipt which was not properly stamped.
18. In the course of the proceedings before the Commissioners, the question of the reasonableness of the profit returned by the assessee was examined by the Commissioner. It was submitted before him that the net profit, if certain adjustments are made, would amount to 6.55 per cent on the gross contract receipts of Rs. 1,17,54,123. In working out the gross profit, the assessee had made adjustments of the following amounts :
Rs.
Remuneration to partners 21,000
Interest paid 2,00,174
Donations 41,816
Bank charges 55,162
Interest (net) 1,56,764
Commission (net) 52,177
________
Total 5,27,093
________
According to the Commissioner, the gross profit rate of 6.55 per cent worked out after making these adjustments is not correct. The actual profit would only Rs. 3,09,937 as per the working given by the Commissioner in paragraph 8 of his order for the year 1981-82. This would amount to only 3 per cent of the contract receipts. According to him the ITO was not justified in accepting the low profit rate without a proper inquiry. The ITO ought to have recast the profit and loss account and inquired into the reasons for the low gross profit. Not having done so, the order passed by him was prejudicial to the revenue.
19. He then looked into the question of depreciation admissible to the assessee on certain jeeps. According to the Commissioner, jeeps could be allowed depreciation only at 20 per cent. For these reasons, he set aside the assessment order and directed the ITO to redo the same. Practically, same type of reasons had been given for the other two assessment years. It is not necessary to give further details of these two years.
20. Shri Ratnakar for the assessee submitted that the profit rate shown by the assessee is reasonable. He submitted that the Commissioner could come to a finding that the profit rate is not reasonable, if there was a comparative case. He submitted that there were not many other assessees, who were engaged in putting up transmission line towers in the State and, therefore, there was no comparable case. Outside the State, there are certain other parties, but according to Shri Ratnakar, they were showing lesser profit rate and one of them is showing losses. Therefore, there was no basis at all for holding that the gross profit rate was low. With regard to the points on depreciation and Section 80G, he submitted that these are of matters which should have be en rectified by the ITO and in any case even if the Commissioner felt that the orders of the ITO were prejudicial to the revenue, he ought not to have set at large the entire assessments but should have directed the ITO to go into the question of depreciation and Section 80G only.
21 Shri Santhanam for the department, submitted that for the earlier assessment years, i.e., 1979-80 and 1980-81, the ITO had applied the proviso to Section 145 and had made estimated additions. It is only for these three years that he had not made any such additions. He then submitted that the profit rate of 6.55 per cent is entirely notional and has no relevance to the facts of the case. To a question from the Bench, Shri Santhanam admitted that the ITO had made inquiries before the completion of the assessment and several hearings had been given to the assessee. But even then it cannot be said to be a proper assessment if material facts had been omitted. In view of this he submitted that the order of the ITO is prejudicial to the revenue. The ITO's assessment does not show that he has applied his mind to the questions. Relying on the decision of the Supreme Court in the case of CIT v. McMillan & Co. [1958] 33 ITR 182, he submitted that the Commissioner has the powers to apply the proviso to Section 145 where the ITO had failed to do so.
22. We have considered the submissions. In our opinion, it is not necessary for us to go into the question whether 6.55 per cent shown by the assessee is reasonable or not. Let us for the sake of argument assume that the profit rate was only 3 per cent as worked out by the Commissioner in paragraph 8 of his order. Apart from the low profit rate, the Commissioner has not shown any other material for the rejection of the book results and application of the proviso to Section 145. It is too well settled a matter that mere low gross profit rate is not a reason for rejecting the book results. The department must show other defects in the books of account maintained by the assessee and the defects must be such that it is not possible to determine the income properly. Since no other material had been brought on record, other than the low gross profit, the direction that the proviso to Section 145 should be considered, is, according to us, certainly not justified. We also find some force in the submission of Shri Ratnakar that there are no comparative cases shown by the ITO or the Commissioner. In order to show that the profit rate disclosed is low, it is necessary that the results of the assessee should be compared with another comparative case. If there are no comparative cases shown, it will be very difficult to come to a finding that the results are poor. So we do not find any justification for the setting aside of the assessments in order to apply the proviso to Section 145(1). We have no quarrel with the proposition submitted by Shri Santhanam that the Commissioner has powers to apply the provisions of the proviso to Section 145(1). What we point out here is that the basic facts for the application of the proviso have not been shown. We will accept the submissions of Shri Santhanam that where no proper inquiries had been made by the ITO it is open for the Commissioner to exercise his powers under Section 263 and direct the ITO to make a proper inquiry. But before that the Commissioner must show how the ITO had failed to make a proper inquiry. Shri Santhanam had admitted that the ITO had given sufficient hearings to the assessee, as the records show. This is not a case where the ITO without any proper inquiry had completed the assessment. The Commissioner has not shown any major omission in making the inquiries, which would result in setting aside of the entire assessment.
23. With regard to the minor findings regarding depreciation, we do not see any reason to go into the correctness of the order of the Commissioner, since this point was not seriously argued. We will uphold the orders of the Commissioner under Section 263 limited to the inquiry of the correctness of depreciation in respect of the vehicles.
24. In the result, we would allow the appeals subject to our finding that Section 263 orders would be limited to the purpose of an inquiry regarding the depreciation allowable.
25. Since we have disposed of the assessee's appeals, the miscellaneous petitions filed by the assessee, praying for the stay of the recovery proceedings, become infructuous and they are hereby dismissed.