Alankar Jewellers vs Commissioner of Income Tax and Another

B.P. Jha, J.—The petitioner filed an application under Articles 226 and 227 of the Constitution of India challenging the validity of the orders contained in annexures 2 and 3. By virtue of the order dated February 28, 1973 (annexure 2), the ITO refused to grant registration to the firm. In revision, the Commissioner upheld the order of the ITO by his order dated January 30, 1975, as contained in annexure 3. These two orders have been challenged by the petitioner-firm in the writ petition.

The petitioner applied for registration of the firm for the assessment year 1971-72 u/s 184(1) of the I.T. Act, 1961 (hereinafter to be referred to as "Act of 1961") in Forms 11 and 11A. The application was filed on 30th September, 1970. It was also signed by all the partners. The application was not accompanied with the original deed of partnership. It was also not accompanied with the certified copy of the partnership deed.

On these facts, the ITO refused to grant registration to the firm on the ground that the application was not accompanied with the original partnership deed.

It is an admitted position in the present case that the I.T. authority did not not issue any notice as required u/s 185(2) of the Act of 1961. It is relevant to quote Section 185(2) of the Act of 1961, which runs as follows:

"Where the Income Tax Officer considers that the application for registration is riot in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation ; and if the defect is not rectified within that period, the Income Tax Officer shall, by order in writing, reject the application.

On a perusal of Section 185(2) of the I. T. Act, 1961, it is clear that if an application for registration is not in order, the ITO shall intimate the firm to remove the defect, in the application and, as such, the ITO shall allow an opportunity to the firm to rectify any defect in the application within a period of one month from the date of such intimation.

The short question for decision is : "Whether the ITO is required in the present case u/s 185(2) of the Act of 1961, to intimate the defect to the firm ?" In the present case, the defect was that application form was not accompanied with either the original partnership deed or the certified copy of the partnership deed. In view of the provision of Section 185(2) of the Act of 1961, it was incumbent on the ITO to intimate to the firm to rectify the defect in the application. In the present case, no such notice was given by the ITO. In my opinion, it is mandatory on the part of the ITO to intimate the firm to rectify the defect in the application for grant of registration. So far as the I.T. Act, 1922 (hereinafter to be referred to as the "Act of 1922") is concerned, the ITO was justified in refusing to grant registration if the application for registration was not accompanied with the original partnership deed or the certified copy of the partnership deed. Under the old Act (Act of 1922), in my opinion, it was a routine matter for the ITO to reject such application, but the position is different under the Act of 1961. In my opinion, refusal to grant registration should be an exception under the Act of 1961. It is for this reason that the legislature has engrafted Section 185(2) in the Act of 1961.

Learned counsel for the I.T. authorities contends that the word "application" occurring in Section 185(2) of the Act of 1961 means the application form and not the documents enclosed thereto. If the contention of learned counsel for the revenue is correct, then instead of "application" the words "application form" would have been mentioned in Section 185(2) of Act of 1961. Hence, I am unable to accept this contention. The application for registration is filed u/s 184(1) of the Act of 1961, read with rule 22 of the I.T. Rules, 1962. Sub-section (1) of Section 184 provides that the application shall be accompanied with the original partnership deed. It also provides that the application shall be made in the prescribed form and shall contain the prescribed particulars. In my opinion, the word "application." occurring in Section 185(2) of the Act of 1961 includes the documents which are required to be enclosed thereto. The partnership deed, which shall accompany the application for registration, is part of the application. This view is also supported by a Division Bench decision of this court in Ganga Motor Service Vs. Commissioner of Income Tax and Others, . In this view of the matter, I hold that the ITO erred in law in not issuing a notice u/s 185(2) of the I.T. Act of 1961.

In the present case, the ITO asked the petitioner to show cause as to why the registration should not be refused on the basis of a decision of the Allahabad High Court in ABDUL SHAKOOR and CO. Vs. COMMISSIONER OF Income Tax, LUCKNOW., . While replying to the show-cause notice, the original partnership deed was enclosed to the show-cause application. The show-cause application was filed on February 28, 1973 (annexure 1). The learned ITO was of opinion that the principle laid down in ABDUL SHAKOOR and CO. Vs. COMMISSIONER OF Income Tax, LUCKNOW., applies to the facts of this case. In my opinion, the decision in ABDUL SHAKOOR and CO. Vs. COMMISSIONER OF Income Tax, LUCKNOW., , does not apply to the present case. That was a decision under the Act of 1922. Under the Act of 1922, an application for grant of registration was to be filed u/s 26A of that Act. Under the provisions of the Act of 1922, if the registration application was not accompanied with the original instrument of partnership or a certified copy thereof, the ITO was justified in refusing to grant registration. There was no such provision like Section 185(2) of Act of 1961 under the old Act. Therefore, the rejection of the application for registration was a routine matter under Act of 1922, because it was mandatory on the part of the applicant to attach the original partnership deed or a certified copy thereof with the registration application at the time of filing an application for grant of registration of a firm. The situation is different under Act of 1961. Section 185(2) provides that if there is any defect in the application, it is mandatory on the part of the ITO to intimate such defect so that an opportunity should be given to the firm to rectify such defect within one month from the date of such intimation. In view of Section 185(2), there is a vast difference between the Act of 1922 and the Act of 1961. In this view of the matter, I quash the orders of the ITO and the Commissioner as contained in annexures 2 and 3 and direct the ITO to consider the application of the petitioner for registration afresh. It is clear that the firm has filed the original partnership deed. Even now if the ITO thinks that there is any defect in the application, he should again intimate it to the petitioner as required u/s 185(2) of the Act of 1961.

In the result, the orders contained in annexures 2 and 3 are quashed, and the case is remanded for a fresh consideration to the ITO in accordance with law and in the light of the observations made above. The writ application is thus allowed but the parties shall bear their own costs.

S.K. Jha, J.

I respectfully agree that this application be allowed and the order of the ITO as contained in annexure 2 and that of the CIT as contained in annexure 3 be quashed. I, however, feel obliged to make a few observations of my own.

Notwithstanding the apparent divergence of judicial opinion in the case of ABDUL SHAKOOR and CO. Vs. COMMISSIONER OF Income Tax, LUCKNOW., on the one hand and that in the cases of Kanhaiya Lal Moti Lal Vs. Commissioner of Income Tax, , a Bench decision of the Allahabad High Court, and Ganga Motor Service Vs. Commissioner of Income Tax and Others, , a Bench decision of our own court, on the other, I proceed to point out certain inherent fallacies in the order of the learned ITO (annexure 2) which will have a definite bearing upon the point involved for decision in this case.

As my learned brother has already pointed out, the dispute in the instant application centres round the true interpretation of Sub-section (2) of Section 185 read with the provisions of Section 184(5) of the 1961 Act. Before, however, proceeding to analyse the different relevant provisions of Sections 184 and 185 and the corresponding rules for registration or renewal of registration of firms, namely, rules 22 to 25 of the I.T. Rules, 1962 (hereinafter to be referred to as "the Rules") and Form 11 as prescribed under the Rules, I think it worthwhile to make reference to some portions of the impugned order of the ITO in annexure 2. In paragraph 2 of that order, the learned ITO has expressed the view that:

"Although the decision of ABDUL SHAKOOR and CO. Vs. COMMISSIONER OF Income Tax, LUCKNOW., is under the old Act yet there has not been any difference in the procedure of registration in the new Act. Therefore, the case cited above is applicable in toto under the new Act."

The ITO has proceeded to observe that the non-accompaniment of the original partnership deed with the application in Form 11 read with rule 22 of the Rules amounts to non-fulfilment of a substantive mandatory requirement of law entitling the revenue to reject an application on this ground simpliciter, especially in the absence of any certified copy of the partnership deed having been accompanied with the application under the sanction, express or implied, of the ITO. The failure to fulfil this substantive mandatory requirement of law does not entitle, according to the case of the revenue, the revenue authorities to take recourse to the provision of Section 185 of the 1961 Act for the purpose of giving an opportunity to the assessee-firm of rectifying the defects. The stand of the revenue has been that the defect envisaged u/s 185(2) of the 1961 Act is one of a technical nature which does not confer any jurisdiction on the revenue authorities to condone any lapses on the part of the assessee-firm to act in consonance with the provisions of Section 184(5).

I must state at the outset that the reasoning of the revenue authorities on principle''s fallacious. It is wrong to say that the provisions with regard to the registration of a firm under the taxing statute as obtained under the 1922 Act in Section 26A thereof have undergone no change in the 1961 Act. It is now well nigh settled that in so far as the provisions relating to registration under the 1961 Act are concerned, there are only four conditions with which the ITO is concerned, on the fulfilment of all of which an application for registration u/s 184(1) of the 1961 Act must be allowed. To that extent, the concept under the 1922 Act that the grant of registration to a firm was a privilege can no longer be held to hold the field under the 1961. Act. Under the provisions of the 1961 Act, the matter of registration has, if I may say so, transgressed from the realm of privilege to a right conferred on an assessee-firm. As I was saying, the only four conditions for registration with which the revenue is concerned under the 1961 Act are :

(i) On behalf of the firm an application should be made to the ITO before the end of the accounting year and the application should comply with the requirements of Section 184 read with rr. 22 to 24 of the Rules.

(ii) The firm should be "evidenced by an instrument" of partnership. This is a distinct departure from the provision in Section 26A of the 1922 Act, which required the partnership to be "constituted under an instrument". I shall not dilate at any length upon the difference in the terminology used in the two statutory provisions, namely, as to the distinction between a partnership "evidenced by an instrument" and a partnership "constituted under an instrument" for, it is not necessary to be gone into in the instant case.

(iii) The instrument should specify the individual shares of the partners, and

(iv) The partnership should be a valid and genuine one and should actually be constituted as specified in the instrument.

If the aforesaid conditions are satisfied, the ITO has no authority to refuse the registration of a firm. The substance of the matter, therefore, is that there should be a genuine and valid partnership and that such a partnership should be evidenced by an instrument. It may not be necessary always and invariably that the instrument evidencing partnership should be one instrument only. The terms of such partnership may be gathered from a series of correspondence, all of which cumulatively taken may be said to constitute an evidence of instrument of partnership. If these are the substantive essential requirements of the 1961 Act and if a firm has made an application specifying therein the individual shares of the partners constituting the firm, substantial requirements of law have already been fulfilled.

In my view, it is hair splitting argument to contend that Section 185(2) of the 1961 Act cannot have any reference to the requirement of Sub-section (5) of Section 184, If that be so, that will be stretching the language of Section 185(2) to a point which the legislature had not intended the courts to do. Let us look to the language of Section 184(1). Section 184(1) provides, inter alia, that an application for registration of a firm for the purpose of the Act may be made to the ITO on behalf of any firm. Such an application can be made on behalf of the firm if the partnership is evidenced by an instrument and the individual shares are specified in that instrument. While looking to the substance of the statutory requirements, one will at once notice that it is the application for registration which is relevant for the purpose of registration and not the accompaniment of the partnership evidenced by instrument or instruments. The question with regard to the existence, validity or genuineness of a partnership evidenced by an instrument shall fall for consideration by the ITO only at a time when registration is being granted or sought to be refused ; prior to that, it is merely a formality which, in order to avoid all technicalities, has to be followed by an assessee making an application containing a concise statement of the particulars which ought to be in Form 11 read with Rule 22. That at once brings us to Rule 22 of the Rules. Sub-rule (1) of Rule 22 lays down :

"An application for registration of a firm for the purposes of the Act shall be made in accordance with the provisions of Sub-rule (2) to (5)."

In Sub-rule (2)(i)(a) it has been said that the application shall be made in Form 11, and Form 11 in paragraph 2 mentions that the original/certified copy of the instrument evidencing the partnership together with a copy/ duplicate copy is to be enclosed. That goes on further to state that the prescribed particulars are to be given in the Schedule. In the Schedule, it will be found that the particulars of the firm as constituted at the date of the application and of the shares of the partners in the income (or loss) of the firm are to be furnished therein. That is followed by a tabular chart leaving therein spaces for insertion of the name of the partners and addresses thereof, date of their admittance to partnership and, inter alia, the share in the balance of profits (or loss) percentage. Whatever had to be given in substance, on filing the original or certified copy of the instrument evidencing partnership along with the copy or duplicate thereof with the application, has already been given both in the form prescribed and the Schedule attached to Form 11. It is nobody''s case that the Schedule to Form 11 which the petitioner had filed before the revenue authority, had not been duly filled in. For all practical purposes, therefore, the substantive requirements of law had already been complied with.

Under the 1961 Act, an application for registration cannot be rejected simply because it is not in order. Section 185(2) of that Act enjoins that the assessee be given an opportunity to rectify the defects in the application. The non-accompaniment of either the original or a certified copy of the instrument evidencing partnership with the application does not go to the root of the matter and, there is conceivably no reason as to why it should not be held that the opportunity to rectify the defect--and the non-filing of the instrument evidencing partnership along with the application I treat merely as a defect u/s 185(2)--is not fatal to the application. The 1922 Act contained no such express provision. There is a purpose and intent behind this legislative expression in the shape of Section 185(2) and it would be too great a" hardship keeping in view the logical inference that the simplification of the procedure for getting a firm registered under the 1961 Act is a piece of legislation to benefit the assessee-firm. There is no reason to confine the language of Section 185(2) of the 1961 Act to the requirements other than the requirement of Section 184(5). The moot question in such cases is as to whether under the 1961 Act an application, although full in all other particulars but not accompanied by the original or a certified copy of the instrument evidencing partnership together with a copy or duplicate copy thereof, is non est in law. If the answer be in the negative, then all that can be said is that the application is defective. And, I am not prepared to go to the length of saying that merely because the original or the certified copy of the instrument evidencing partnership has not been filed along with the application in Form 11, as required by Section 184(1) read with Rule 22, the application is non est in law. If in fact and in substance an application for registration is there then all that can be said in favour of the revenue is that the application is at best defective which can certainly be cured by taking recourse to the provisions of Section 185(2) of the 1961 Act.

For the reasons given above, I am in complete agreement--and I say so with respect--with the view expressed by the Allahabad High Court in the case of Kanhaiya Lal Moti Lal Vs. Commissioner of Income Tax, and that expressed by a Bench of this court in Ganga Motor Service Vs. Commissioner of Income Tax and Others, that the ITO has to consider the substance of the application and must not attach much importance to the form. Having noticed some of the salient features in the 1961 Act which have made the law relating to registration of a firm much more liberal than under the 1922 Act, it will be piling unreason upon technicality to take any other view of the provisions of Section 185(2) of the 1961 Act. I, therefore, also agree that the matter go back to the learned ITO to proceed with the question of registration of the petitioner in accordance with the well settled principles enunciated by courts from time to time under the 1961 Act and in the light of the observations made in this judgment.