Commissioner of Income Tax vs India Sea Foods

K.S. Paripoornan, J.—At the instance of the Revenue, and as directed by this court in O. P. No. 4377 of 1987-S, the Income Tax Appellate Tribunal has referred the following two questions of law for the decision of this court:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the defect should be treated as a technical defect and in directing the Income Tax Officer to return Form No. 12 to the assessee-firm with a direction to submit the same after rectifying the defect within the time given by the Income Tax Officer ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the Income Tax Officer to dispose of the question of granting registration to the assessee-firm after the expiry of the time given by the Income Tax Officer for complying with the defect in Form No. 12 ?"

The respondent/assessee, a firm of ten partners, was granted registration for the assessment year 1978-79. We are concerned in this reference with the assessment year 1979-80, for which the accounting period ended on December 31, 1978. For the assessment year 1979-80, the assessee filed an application seeking continuation of registration. It turned out that two of its partners, who held 8% share each, did not sign the declaration in Form No. 12 of the Income Tax Rules. The mother of the above two persons affixed her signature in Form No. 12 as per the power of attorney enclosed to the application, The Income Tax Officer held that the declaration in Form No. 12 filed before him was not in order and continuation of registration was declined. The order of assessment is dated September 23, 1982. In the appeal, the Commissioner of Income Tax (Appeals) held that if there was a defect in Form No. 12 filed by the assessee, the Income Tax Officer should have granted an opportunity to rectify the defect. He directed the assessing authority to grant continuation of registration to the assessee-firm. The Revenue appealed before the Income Tax Appellate Tribunal. By order dated December 19, 1985, the Income Tax Appellate Tribunal held that the absence of signature by two of the partners in Form No. 12 is a technical defect and the Income Tax Officer ought to have granted time to the assessee-firm for rectifying the defect instead of rejecting outright the application in toto and refusing registration. It was further held that the absence of signature by two of the partners in Form No. 12 declaration filed before the officer seeking continuation of registration is only a technical defect. The Income Tax Appellate Tribunal directed the Income Tax Officer to return Form No. 12 so filed to the assessee-firm with a direction to resubmit the same after rectifying the defect within the time given by the Income Tax Officer and then to dispose of the question of granting continuation of registration to the assessee-firm after the expiry of the time given by him for complying with the defect in Form No. 12. In this view, the matter was remitted to the Income Tax Officer. It is thereafter at the instance of the Revenue and as directed by this court in 0. P. No. 4377 of 1987-S that the two questions of law formulated hereinabove have been referred by the Income Tax Appellate Tribunal for the decision of this court.

We heard counsel for the Revenue, Mr. P. K. R. Menon, as also counsel for the respondent/assessee, Mr. S. Vijayan Nair. Counsel for the Revenue submitted before us that the absence of signature in the Form No. 12 declaration filed cannot be considered to be a technical defect, that it was a case where there was no proper or valid declaration in Form No. 12 before the Income Tax Officer, that the Form No. 12 declaration without the signature of two of the partners will render the entire declaration non est in law, and at any rate, even if the Appellate Tribunal took the view that an opportunity should be given to the firm, the entire matter should have been remitted to the Income Tax Officer without expressing any opinion as to whether the absence of signature by two of the partners in Form No. 12 declaration is only a technical defect, and so considered, the Tribunal was in error in directing the Income Tax Officer to return the Form No. 12 declaration filed by the assessee-firm with a direction to resubmit the same after rectifying the defect within the time given by the Income Tax Officer. It was submitted that the Appellate Tribunal was incompetent in law in giving a direction to the Income Tax Officer to return the Form No. 12 declaration filed by the assessee-firm with a direction to resubmit the same after rectifying the defect within the time given by the Income Tax Officer. Counsel for the Revenue brought to our notice the decisions in Ravula Subba Rao and Another Vs. The Commissioner of Income Tax, Madras, ; Commissioner of Income Tax, Patiala Vs. Jagannath Pyarelal, ; RAMPATMAL TIRKHA RAM Vs. COMMISSIONER OF INCOME TAX., ; J. Subba Rao and Sons Vs. Commissioner of Income Tax, Mysore, and Commissioner of Income Tax Vs. Delhi Colonizers, .

On the other hand, counsel for the assessee submitted that the assessee-firm was granted registration for the assessment year 1978-79, that for the assessment year 1979-80 the assessee had filed an application for continuation of registration and filed the declaration in Form No. 12 and if the Income Tax Officer felt that the assessee cannot be given the status of a registered firm as hitherto enjoyed by it, fairness in action behoved on the Income Tax Officer to give notice to the assessee before denying the continuation of registration. It was further argued that the filing of declaration in Form No. 12, its validity and the opportunity to be afforded to the assessee in case Form No. 12 declaration filed is not in order and found to be defective, etc., are all governed by statutory provisions (section 184(7) read with section 185(3) of the Act), that the absence of signatures of two of the partners in the Form No, 12 declaration is only a defect which will not render the declaration filed totally infirm or non est and that it behoved the Income Tax Officer to give an opportunity to the assessee-firm to cure the defect within the time fixed by him, and in case the Officer failed to do so, the Appellate Tribunal, as the appellate authority, was competent to direct the Income Tax Officer to afford the assessee-firm such an opportunity and then consider the continuation of registration.

We considered the rival pleas urged before us by counsel for the Revenue and also counsel for the respondent/assessee. It will be useful to refer to the statutory provisions applicable to the case on hand.

"184. Application for registration.--(1) An application for registration of a firm for the purposes of this Act may be made to the Income Tax Officer on behalf of any firm, if-

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in that instrument. ..

(3) The application shall be made to the Income Tax Officer having jurisdiction to assess the firm, and shall be signed -

(a) by all the partners (not being minors) personally ; or

(b) in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

Explanation.--In. the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent Mm ...

(6) The application shall be made in the prescribed form and shall contain the prescribed particulars.

(7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year :

Provided that -

(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the 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 ...

Procedure on receipt of application.--(1) On receipt of an application for the registration of a firm, the Income Tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and -

(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;

(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm ...

(2) Where the Income Tax Officer considers that the application for registration is not 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.

(3) Where the Income Tax Officer considers that the declaration furnished by a firm in pursuance of Sub-section (7) of section 184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration 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, declare that the registration granted to the firm shall not have effect for the relevant assessment year."

THE Income Tax RULES, 1962

"PART V

REGISTRATION OF FIRMS

Application for registration of a firm.--(1) An application for registration of a firm for the purposes of the Act shall be made in accordance with the provisions of Sub-rules (2) to (5) ...

(5) The application shall be signed personally by all the partners (not being minors) in the firm as constituted at the date of the application and, in the case of a dissolved firm, personally by all the persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased so, however, that in the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent him."

"24. Declaration for continuation of registration.--The declaration to be furnished under Sub-section (7) of section 184 shall be in Form No. 12 and shall be verified in the manner indicated therein and shall be signed by the persons concerned in accordance with Sub-rule (5) of rule 22."

Even at the outset, we should say that the Income Tax Act of 1961 has made considerable inroads in the law relating to registration of firms. Under the Indian Income Tax Act of 1922, registration granted to a firm enured only for a year and a fresh application for renewal of registration had to be made every year. Under the Income Tax Act of 1961, if registration is granted to a firm in a year, if there was no change in the constitution of the firm or in the shares of the partners, no application for renewal is required to be made and the registration once granted will have effect for every subsequent year, provided the firm furnishes, before the expiry of the time for filing the return of income, a declaration signed by all the partners that there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of partnership. In other words, in cases governed by section 184(7) of the Income Tax Act, the registration will have effect for subsequent years. Even under the old Act, if an application for registration filed was defective, the court took the view that it was the duty of the Income Tax Officer to bring to the notice of the firm the defect and afford it an opportunity to rectify the same. (See Commissioner of Income Tax Vs. Hyderabad Stone Depot and Others, ). The relevant statutory provisions (sections 184 and 185 of the Act) were amended by Taxation Laws (Amendment) Act, 1970. Even earlier, the scope and effect of section 184(7), considered in the light of section 185(2) of the Act was laid down in the circular issued by the Central Board of Direct Taxes in Circular letter P. No. 26/3/65-IT(A I) dated June 26, 1965, which is extracted in Sampath Iyengar''s Law of Income Tax, Volume 4, page 3889, which is as follows ;

"Section 185(2) already provides that the Income Tax Officer shall not reject an application for registration merely on the ground that the application is not in order but shall intimate the defect to the firm and give it an opportunity to rectify the defect within a period of one month from the date of such intimation. Although a specific provision to this effect has not been made in Sub-section (7) of section 184 in regard to declarations filed for continuance of registration, the Board are of the view that in consonance with the spirit of the provision in section 185(2), a declaration u/s 184(7) should not be rejected merely on the ground that it is technically defective. The Income Tax Officers may, therefore, be instructed that the procedure u/s 185(2) should also be followed with regard to defective declarations u/s 184(7)."

Further, the scope and effect of section 184(7) read with section 185(2) and (3) of the Income Tax Act have been laid down in a later circular issued by the Central Board of Direct Taxes, Circular No. 56 dated March 19, 1971, which is extracted in the Law of Income Tax by Sam-path lyengar, Volume 4, page 3886, which is as follows :

"By an amendment to section 185, it has also been provided that where the Income Tax Officer finds that the declaration furnished by the firm in pursuance of section 184(7) is not in order, he shall intimate the defect in the declaration to the firm and give it an opportunity to rectify the defect within a period of one month from the date of such intimation. If the defect is not rectified within that period, then only the Income Tax Officer will pass an order in writing declaring that the registration granted to the firm for the earlier year or years shall not have effect for the relevant assessment year. This provision has been made in a new Sub-section (3) of section 185. The substance of the existing Sub-section (3) of section 185 has been incorporated in a new Sub-section (2) (substituted for the existing Sub-section (2) of that section) providing, inter alia, that where the application for registration of a firm is rejected by the Income Tax Officer on the ground that the defect in the application is not rectified within the time allowed, as provided in the existing Sub-section (3), the Income Tax Officer shall do so by an order in writing. At present, there is no provision requiring the Income Tax Officer to allow an opportunity to the firm to rectify any defect in the declaration furnished by it in pursuance of section 184(7). Nor is there any requirement, at present, that a written order should be made by him rejecting the application for registration on account of its being defective, even after the grant of opportunity to the firm to rectify the defect, or declaring that the registration granted to the firm for an earlier assessment year or years shall not have effect for the relevant assessment year. The amendment removes the inconvenience and hardship caused to a partnership firm by reason of the absence of any such provisions."

The language of section 184(7) read with section 185(3) of the Act is very clear. If registration is granted for any assessment year, it shall have effect for every subsequent assessment year, if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of partnership. The firm should furnish, before the expiry of the time allowed u/s 139(1) of the Act for furnishing the return of income, for subsequent year a declaration to that effect, in Form No. 12. Rule 24 of the Income Tax Rules enjoins that Form No. 12 shall be verified in the manner indicated therein and shall be signed by the persons concerned in accordance with rule 22(5). The declaration should be signed personally by all the partners. u/s 185(3) of the Act, if the declaration furnished by a firm is not in order, the Income Tax Officer shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration 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 an order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year. It is evident that the provision inserted by section 185(3) of the Act is in consonance with the principles of fairness in action. The Income Tax Officer shall not arbitrarily reject the declaration in case the declaration furnished by the firm is not in order. In conformity with the principles of natural justice, section 185(3) of the Act enjoins on the Income Tax Officer to give an opportunity to the firm to rectify the defect. u/s 185(3) of the Act, the Assessing Officer cannot reject a declaration filed u/s 184(7) of the Act solely on the ground that it is not in order. He is bound to intimate the defect to the assessee-firm and afford it an opportunity to cure the defect within one month from the date of intimation. The only short question is whether, in a case where the declaration was not signed by all the partners, it is a case of a mere defect as urged by counsel for the assessee, or it is a case where the declaration itself is totally infirm and non est in law ?

In our opinion, when an assessee-firm files a declaration which is not signed by all the partners, it is a case where the declaration filed by the firm is not in order. It is a defective one. The declaration filed is not one in accordance with law. It does not satisfy section 184(7) of the Act read with rule 22(6) and rule 24 of the Rules. It cannot be said that the declaration so filed, notwithstanding the defect aforesaid, is not a declaration and so totally infirm or non est in law. It is a case where a declaration is filed, but it is defective and it has not satisfied the requirements of the law. In such a case where a declaration filed does not in terms conform to the requirements of law and so technically defective, a duty is cast on the Income Tax Officer, u/s 185(3) of the Act, to intimate the said defect to the firm and afford it an opportunity to rectify the defect within one month. Courts have laid down that where an application for registration or a Form No. 12 declaration is not personally signed by one of the partners, it is only a technical defect for which the firm should be given an opportunity to rectify the defect. (See Brij Rattan Lal Bhoop Kishore Vs. Commissioner of Income Tax, ; Commissioner of Income Tax Vs. Ghosh and Sons, ; CIT v. M.N. Ghosh and Sons [1987] 167 ITR 125 and Vijoy Cloth Stores Vs. Commissioner of Income Tax, ). Even in the absence of section 185(3) of the Act, the position in law was understood in the above manner by the Central Board of Direct Taxes, as stated in Circular letter F. No. 26/3/65-IT (A-I) dated 26-6-1965 (vide Sampath Iyengar''s Law of Income Tax, 7th edition, volume 4, page 3889 ; the circular is quoted in para 7 (at p. 522) supra). The circular of the Centra) Board of Direct Taxes has the force of law. It can even supplant the law where it is beneficial to the assessee and has mitigated or relaxed the rigour of the law. It can be enforced by the courts. (See Ellerman Lines Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, ; Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) ; K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, and Commissioner of Income Tax Vs. Punalur Paper Mills Limited, ). We are concerned in this case with a period when section 185(3) of the Act had already been inserted in the statute book and the position is made very specific and clear. At this juncture, we should state that the decisions cited by counsel for the Revenue are distinguishable. All of them do not deal with any defect or infirmity in the application for registration or the declaration filed in Form No. 12. In most of those cases, the basic or fundamental or vital deed itself was found to be defective or infirm. There, the question was whether there was any "agreement" in the eye of law, in the absence of signature of the parties, in the deed and the said decisions arose under the Indian Income Tax Act, 1922, wherein the provisions were different. The decisions cited by counsel for the Revenue have no relevance to the case on hand wherein we are concerned with the statute in a different form altogether.

In the light of the above statutory provisions, we have no doubt in our mind that the Income Tax Appellate Tribunal was justified in holding that non-subscribing of the signature by one or more of the partners in the Form No. 12 declaration seeking continuation of registration should be considered to be a technical defect and when such a declaration is filed, there is a duty cast on the Income Tax Officer, u/s 185(3) of the Act, to afford an opportunity to the firm to rectify the defect within a period of one month from the date of such intimation and only if the defect is not rectified within that period, can the Assessing Officer proceed to treat the registration granted already to the firm as ineffective for the particular assessment year. The decision of the Appellate Tribunal, in that behalf, is justified in law. We are further of the view, that as the appellate authority, the Appellate Tribunal itself could do what the Officer should have done in the matter and, in this perspective, the Income Tax Appellate Tribunal was justified in directing the Income Tax Officer to return Form No. 12 filed to the assessee-firm with a direction to resubmit the same after rectifying the defect within the time given by the Income Tax Officer and in further directing the officer to dispose of the question of granting continuation of registration to the assessee-firm after the expiry of the time given by him for complying with the defect in the Form No. 12 declaration.

In the light of the above discussion, we answer question No, 1 in the affirmative, against the Revenue and in favour of the assessee. We answer question No. 2 in the affirmative, against the Revenue and in favour of the assessee.

The reference is answered as above.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.