Commissioner of Income Tax vs Kesava Prabhu and Sons

K.S. Pakipoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law for the decision of this court :

" Whether, on the facts and in the circumstances of the case, the learned Tribunal is right in cancelling the cancellation of the registration ? "

The respondent herein is a firm. It carries on business as general merchants and commission agents. We are concerned with the assessment year 1981-82. For the earlier years, the firm had obtained registration under the Income Tax Act. For the instant assessment year, Form No. 12 was belatedly filed on August 3, 1981. The assessee had sought extension of time for filing the said form. The assessee had not closed the accounts in time. It did not allocate the share income among the partners as stipulated in the partnership deed. The assessment was completed u/s 144 of the Income Tax Act for failure on the part of the assessee to file its return of income. In consequence, the Income Tax Officer declined to grant registration to the firm. In doing so, he invoked Section 185(5) of the Act. The order so passed is dated August 16, 1983 (annexure A). The assessee took up the matter in appeal before the Appellate Assistant Commissioner of Income Tax, Trivandrum. The Appellate Assistant Commissioner found that the delay in filing Form No. 12 deserved to be condoned. He also adverted to the fact that one of the partners, Shri Purushothama Prabhu, met with a traffic accident on July 14, 1981, and died on the spot and that the accountant of the firm was keeping indifferent health and so could not complete the accounts. The above factors affected the smooth running of the firm. Even then, in view of the past records of the assessee pointing out that he is a regular defaulter and the failure to file the return in time notwithstanding the warning by the Income Tax Officer, the Appellate Assistant Commissioner upheld the order of the assessing authority refusing registration by order dated December 7, 1983 (annexure B). The assessee carried the matter by way of second appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal held that though registration was cancelled by the Income Tax Officer by invoking Section 185(5) of the Act, it was in fact and in substance an order u/s 186(2), i.e., cancellation of registration already granted to the firm. The Tribunal held that no return was filed by the assessee and the assessment was made u/s 144 of the Act. It was found that the death of a partner, illness of the accountant and the death of the eldest son of the managing partner, who was a young man aged twenty four (on July 14, 1981), should have considerably affected the smooth running of the firm and should have resulted in various impediments, and the plea of the assessee that the above factors delayed the preparation of accounts and the filing of the returns should be viewed sympathetically and so the circumstances of the case do not justify the cancellation of registration. On this basis, the appeal filed by the assessee was allowed. The cancellation of registration of the firm was annulled. It is thereafter at the instance of the Revenue that the Income Tax Appellate Tribunal has referred the question of law, formulated hereinabove, for the decision of this court.

We heard counsel. The main plea raised by counsel for the Revenue, Mr. N.R.K. Nair, was that the Appellate Tribunal erred in holding that the order cancelling the registration was one rendered u/s 186(2) of the Act. The assessing authority exercised his powers u/s 185(5) of the Act and the Appellate Tribunal was in error in holding that Section 185(5) of the Act only applies to cases of initial registration and in cases where registration is continued or deemed to continue by virtue of Section 184(7) of the Act, the view of the Tribunal that the exercise of the power u/s 185(5) of the Act is not warranted and that the order should be construed as one passed u/s 186(2) of the Act is a clear error. Counsel also submitted that, considering the matter u/s 186(2) of the Act, the view of the Tribunal that the circumstances disclosed do not justify the cancellation of registration is unwarranted. We are unable to accept the above pleas.

For the purpose of understanding the pleas advanced, it is necessary to advert to the relevant statutory provisions. They are Sections 184(1), 184(2), 184(4), 184(7), 185(5), 186(1) and 186(2) of the Income Tax Act :

"184. Application for registration.--(1) An application for registration of a firm for the purpose 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.

(2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution ....

(4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought : . . .

(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 . . .

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 ...

(5) Notwithstanding anything contained in this section, where, in respect of any assessment year, there is, on the part of a firm, any such failure as is mentioned in Section 144, the Income Tax Officer may refuse to register the firm for the assessment year.

Cancellation of registration.--(1) If, where a firm has been registered, or its registration has effect under Sub-section (7) of Section 184 for an assessment year, the Income Tax Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for that assessment year :

Provided that no such cancellation shall be made after the expiry of eight years from the end of the assessment year in respect of which registration has been granted or has effect.

(2) If, where a firm has been registered or its registration has effect under Sub-section (7) of Section 184 for any assessment year, there is, on the part of the firm, any such failure in respect of the assessment year as is mentioned in Section 144, the Income Tax Officer may cancel the registration of the firm for the assessment year, after giving the firm not less than fourteen days'' notice intimating his intention to cancel its registration and after giving it a reasonable opportunity of being heard."

The Appellate Assistant Commissioner held that the delay in filing Form No. 12 deserves to be condoned and this was not questioned before the Appellate Tribunal by the Revenue. On the basis that the assessee-firm had complied with the requirements u/s 184(7) of the Act, the registration granted to the firm for the earlier assessment year will be effective for the assessment year 1981-82. According to the Appellate Tribunal, in such circumstances, the order passed by the Income tax Officer refusing registration to the firm u/s 185(5) of the Act should be construed as cancellation of registration u/s 186(2) of the Act. After construing the relevant provisions of sections 184, 185 and 186 of the Act, the Appellate Tribunal held that, on a harmonious construction of the provisions of Section 185(5) and Section 186(2) of the Act, it should be held that Section 185(5) of the Act will not apply in a case where registration is continued u/s 184(7) of the Act and Section 185(5) applies only to cases of initial registration. In other words, Section 185(5) of the Act can be applied only in the case of an application made for the first time. Section 186(2) of the Act was held to be a specific provision operating in the case of an earlier registration having effect u/s 184(7) of the Act. We are of the view that the above view of the Appellate Tribunal is justified on a proper reading of Section 185(5) read with Section 184(7) and Section 186(2) of the Act. In a case where the firm has been granted continuance of registration, if, subsequently, a best judgment assessment of the firm is made or warranted u/s 144 of the Act, the assessing authority can only cancel the registration in exercise of his powers u/s 186(2) of the Act. It is not a case where the assessing authority can refuse registration u/s 185(5) of the Act. We are of the view that the Income Tax Officer has no power to refuse registration to a firm in a case where continuance of registration is granted in exercise of the powers u/s 184(7) of the Act. We hold that Section 185(5) of the Act applies only at the initial stage of granting or recognising registration. In cases where continuance of registration of the firm is granted, if a best judgment assessment u/s 144 of the Act is made or warranted, thereafter, the Income Tax Officer can invoke his powers u/s 186(2) of the Act. We are fortified in this view by the Bench decision of the Allahabad High Court in ADDL. COMMISSIONER OF Income Tax, LUCKNOW Vs. RADHA KISHAN BANWARILAL., . Having held that Section 186(2) of the Act applied to the instant case, the Income Tax Appellate Tribunal held that, even in the case of a best judgment assessment made u/s 144 of the Act, the refusal or cancellation of the registration is not automatic or mandatory and as to whether the penal consequence should be imposed in a given case would depend upon the facts and circumstances obtaining in that case. Reliance was placed on the decision of this court in C.K. Abdul Khader and Co. Vs. Income Tax Officer, B-Ward and Another, . The Appellate Tribunal further held that, in the present case, the accountant of the assessee who was in service for a long time had undergone an operation and the assessee could not make alternative arrangements, and the assessee had also suffered heavy losses in the business and their survival in the business was very much in doubt, that the eldest son of the managing partner died in an accident on July 14, 1981, and these aspects deserve a sympathetic view and, so viewed, the circumstances of the case do not justify the cancellation of registration. We are of the view that the Appellate Tribunal was justified in holding that, even In the case of a default in the nature of Section 144, a best judgment assessment may be warranted, but refusal or cancellation of registration is not automatic. As to whether the penal consequence should follow or should be imposed in a given case would depend upon the facts and circumstances of the case. We are of the view that the decision in C.K. Abdul Khader and Co. Vs. Income Tax Officer, B-Ward and Another, , lays down the correct law. In the light of the principles laid down in the said decision, as the final fact-finding authority, the Appellate Tribunal referred to the peculiar facts that were present in the instant case which disabled the assessee from preparing the accounts and filing the returns in time. It was held that the peculiar facts stated in its order dated October 31, 1984, deserve a sympathetic view and justify the plea that there was sufficient cause for the default. In such circumstances, as the final fact-finding authority, the Appellate Tribunal held that the circumstances disclosed and adverted to by it, in paragraph 10 of the order, did not justify the cancellation of registration.

On the facts adverted to and found by the Tribunal, it cannot be said that the conclusion arrived at by it is in any way perverse or irrational or is not based on material. In the light of the facts found by the Tribunal, we have to hold that the Tribunal was justified in annulling the cancellation of registration. We, therefore, hold that the question referred to this court should be answered in the affirmative and 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 sent to the Income Tax Appellate Tribunal, Cochin Bench.