Chandra Chikan Products vs Commissioner of Income Tax

R.K. Agrawal, J.—The Tribunal, Allahabad, has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') for opinion of this Court:

Whether the Tribunal, on the facts and circumstances of the case, was justified in cancelling the registration u/s 186(1) and in interpreting the provisions of Section 184(7) as made by the Tribunal ?

The reference relates to the assessment year 1985-86.

Briefly stated the facts giving rise of the present reference are as follows:

The applicant firm consists of three partners, namely, Smt. Shila Rastogi, Smt. Shikha Rastogi and Shri Mukesh Rastogi, having shares held at 40 per cent, 40 per cent and 20 per cent, respectively. The firm deals in manufacturing and sale of Chiken goods. The registration was granted to the firm for the first time in the immediately preceding year, i.e., 1984-85. A search was conducted in the business and residential premises of the assessee and their related group of the firm. During the course of search, it was found that the business of the firm M/s Chandra Chiken Products was conducted in the same premises where M/s Chandra Ghiken Udyog was conducting a similar type of business of Chiken goods. The statements of the two ladies, namely, Smt. Shila Rastogi and Smt. Shikha Rastogi were also recorded u/s 132(4) of the Act during the course of the search. Thereafter, the assessing officer, after giving an opportunity of being heard to the applicant, cancelled the registration u/s 186(1) of the Act. In appeal, the Commissioner (Appeals) set aside that order and directed the assessing officer to grant registration. The department being aggrieved came up in second appeal before the Tribunal. The Tribunal after hearing the parties at length had come to the conclusion that there was no genuine firm in existence and the assessing officer was fully justified in cancelling the same u/s 186(1) of the Act.

We have heard Sri R.S. Agarwal, learned Counsel for the applicant and Sri R.K. Upadhyaya, learned standing counsel appearing for the revenue.

Learned Counsel for the applicant submitted that the applicant firm was granted registration for the first time in the immediately preceding year 1984-85. The return filed by the partners of the firm had been accepted u/s 143(1) of the Act which amounts to assessment and, therefore, the registration certificate of the firm could not have been cancelled as it would amount to taxing the same income twice, first at the hands of the partners and other at the hands of the firm treating it as an unregistered firm which is not permissible under law. In support of the aforesaid pleas, he has relied upon the following decisions:

CIT v. Prakash Wine Agencies (1994) UPTC 21 (All),

Commissioner of Income Tax Vs. Smt. Jagjit Kaur, ,

Vipin Khanna Vs. Commissioner of Income Tax and Others,

Sri R.K. Upadhyaya, on the other hand, submitted that the existence of the return u/s 143(1) of the Act in case of the partners did not amount to passing of an assessment order which would preclude the assessing officer from cancelling the registration of the firm in the event the conclusion arrived at that there is no genuine firm in existence. He further submitted that neither the partners had knowledge about the existence of the firm nor about their shares in the said firm which fact itself establishes that there was no genuine firm in existence and the names of the ladies were only taken to dilute the profit of the firm. According to him the Tribunal was justified in upholding the order cancelling the registration of the firm u/s 186(1) of the Act. He has relied upon a decision of the Punjab and Haryana High Court in the case of RODAMAL LALCHAND Vs. COMMISSIONER OF Income Tax, PATIALA-II.,

We have given our anxious consideration to the various pleas raised by the learned Counsel for the parties. It is not in dispute that in respect of preceding assessment year, i.e., 1984-85, the applicant firm had been granted registration under the Act. The partners of the applicant-firm had filed their return of income for the assessment year in question i.e., 1985-86 which had been accepted u/s 143(1) of the Act. Section 143(1)(a) as it stood prior to 31-3-1989 empowered the assessing officer to make assessment of the total income or loss of the assessee after making such adjustment as provided there a without requiring the presence of the assessee for the production of any evidence in respect of the return. Thus, u/s 143(1)(a) of the Act the order is to be treated as an order of assessment. We may mention here that under Sub-section (40) of Section 2 the word ''regular assessment'' has been defined during the relevant assessment year to be the assessment made u/s 143 of the Act irrespective of the fact that whether it was made under Sub-section (1) or (3) was treated as the regular assessment.

In the case of Smt Jagjit Kaur (supra), this Court has held that u/s 2(40) of the Act as it stood during the assessment year i.e., 1964-65, the assessments made u/s 143 or Section 141 of the Act are regular assessments. The position remained till 1-4-1989 and would cover the assessment order in question.

In the case of Prakash Wine Agencies (supra), this Court has held once the partners had been separately assessed in respect of their shares of the income of the firm the Inspecting Assistant Commissioner was not justified in treating the firm as an unregistered firm and the Income Tax Officer could not assess the same income twice once in the hands of partners and then again treating the assessee firm as an unregistered firm relying upon its earlier decision in the case of Setha Ram Dhanvir Singh Vs. Commissioner of Income Tax,

In the case of Rodamal Lalchand (supra) the Punjab and Haryana High Court has held that there is no prohibition in Section 4 of the Act restraining the assessing officer from proceeding against the firm which is a taxable entity even though two of its partners had been separately assessed in respect of their share of the income from the partnership business. In this case the firm was having five partners whereas the assessment order has been passed in respect of only two partners.

From the aforesaid decisions it is absolutely clear that this Court has taken consistant view that the assessment made u/s 143(1)(a) of the Act prior to its amendment with effect from 1-4-1989 did amount to a regular assessments. The view of this Court further has been that once the assessment of the partners have been made on the income of the firm according to their share, the same income cannot be taxed again in the hands of the firm by treating the firm as unregistered. Reference can be made to the Circular dated 24-8-1966 issued by the CBDT being Circular F. No. 75/19/191/62-ITJ, wherein it has been decided as follows :"The effect of this decision is that once the Income Tax Officer assesses directly an assessee''s share of income from an AOP or firm, it is not open to him to assess the same income again in the hands of the AOP of firm. In other words, once the assessment of the partner of a member of an association has been made by taxing directly as proportionate share from the firm or association, the Income Tax Officer is precluded from assessing the firm in the status of an unregistered firm or as an association of person. Thus, all the partners of the firm or members of the association will have to be assessed as partners of a registered firm, even though while dealing with the assessment of the firm, the Income Tax Officer comes to the conclusion that the firm is not entitled to registration. Although the Supreme Court''s decision is under the Income Tax Act, 1922, the Board is advised that it will equally apply to the assessments made under the Income Tax Act, 1961."

The aforesaid circular is binding upon the revenue in view of the provisions of Section 119 of the Act. In the present case as all the partners of the firm have been assessed u/s 143(1) of the Act on the share of their profits and gains from the firm, the firm could not have been taxed by treating it as an unregistered firm and, therefore, the cancellation of registration u/s 186(1) of the Act was not justified in law.

In view of the foregoing discussions we answer the question referred to us in affirmative, i.e., in favour of the assessee and against the revenue. However, in the circumstances of the case the parties shall bear their own costs.