COMMISSIONER OF Income Tax, MADRAS vs KRISHNAMMA and CO., GUDUR.

SUBBA RAO, C.J. - The Income Tax Appellate Tribunal, Madras Bench B, had referred the following question u/s 66(1) of the Indian Income Tax Act to the High Court of Judicature, Madras :

"Whether it is open to the Income Tax Officer, after holding that a firm is genuine, to pass an order refusing registration under the provisions of section 26A of the Income Tax Act purporting to be u/s 23 (4) of the Act."

The reference had been transferred to this Court after its constitution.

The assessee firm had five partners, one of whom was a minor represented by his father and guardian. The partnership was reduced to writing and it was registered u/s 26A of the Act for the assessment year 1949-50. For the assessment year 1950-51, an application for the renewal of registration of the firm was filed u/s 26A of the Act on 30th September, 1950. As objection was taken to that deed on the ground that one of the partners was a minor, a fresh deed of partnership was executed on 12th October, 1950, by all the partners, including the quondam minor as by that time he also became a major. For the assessment year 1950-51, as the assessee made default u/s 22(4) of the Act, he made the assessment u/s 23(4). On the same day, he passed an order on the application made u/s 26A refusing registration on the ground that the deed was illegal as the minor was made liable to share the losses. He also made an observation at the end of the order to the following effect :

"At any rate I am unable to register the firm now inasmuch as the assessment of the firm is made u/s 23(4) of the Act."

When the assessee preferred an appeal against that order, it was dismissed by the Assistant Appellate Commissioner. The assessee preferred an appeal to the Tribunal. The Tribunal held that the partnership deed was valid on the ground that the document should be viewed as conferring only the benefits of the partnership on the minor. Indeed, the correctness of this position was not canvassed on behalf of the Income Tax Officer before them. They further held that the order refusing registration was not made u/s 23(4) of the Act and as the said deed was otherwise valid, it should have been registered u/s 26A of the Act. On the aforesaid facts, at the instance of the Commissioner of Income Tax, the aforesaid question was referred to the High Court.

Learned counsel for the Commissioner contended that the order was made u/s 23(4) of the Act and, therefore, though the application was properly made and though he was satisfied that the firm was in existence and was validly constituted, the Income Tax Officer was within his rights in refusing registration.

To appreciate the contention of the learned counsel, the relevant provisions of the Act may be read :

"Section 26A : (1) Application may be made to the Income Tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being inforce relating to Income Tax or super-tax.

The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form and be verified in such manner as may be prescribed and it shall be dealt with by the Income Tax Officer in such manner as may be prescribed."

The manner of disposal of such an application is prescribed by Rules 2 to 6B of the Income Tax Rules. Rule 4 says :

"If, on receipt of the application referred to in Rule 3, the Income Tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely :

confirm

This - instrument of partnership/certified copy of an instrument of partnership - has this day been registered with me, the Income Tax Officer for........ in the province of........ u/s 26A of the Indian Income Tax Act, 1922, and this certificate of registration shall have effect for the assessment for the year ending on the 31st of March, 19......."

Sub-rule (2) of Rule 4 state :

If the Income Tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership or the certified copy thereof and furnish a copy of such order to the applicants."

The said order is made appealable.

Section 23 (4) :

"If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a revised return under sub-section (3) of the same section or fails to comply with all the terms of a notice issued under sub-section (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of this section, the Income Tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered.

Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income Tax Officer to the firm intimating his intention to cancel its registration."

Under the said provisions, a firm for the purpose of assessment can apply for its registration. u/s 26A of the Act, if the Income Tax Officer is satisfied that the firm is in existence as shown in the partnership deed and the application has been properly made, he is bound to register it. He can only refuse it if he is not satisfied in regard to the aforesaid particulars. But section 23(4) gives him an overriding power to refuse registration, notwithstanding the fact that the conditions laid down in Rule 4 have been complied with, if he assesses the firm u/s 23(4) of the Act. Though it was suggested before us, that as one of the partners was a minor, the partnership deed was invalid, this objection was not raised before the Tribunal. The Tribunal proceeded on the basis that the deed should be construed as one whereunder the minor had only been given the benefits of the partnership. We, therefore, priced on the basis that the partnership deed originally filed was valid and that the conditions laid down in Rule 4 were satisfied. If so, the Income Tax Officer was bound to register the same unless he exercised his powers u/s 23(4) of the Act.

The order made by the Income Tax Officer does not disclose that he exercised his discretion to refuse registration u/s 23(4) of the Act. He refused registration u/s 26A on the ground that one of the partners was a minor, though he added the following rider to his order :-

"At any rate, I am unable to register the firm now inasmuch as the assessment of the firm is made u/s 23(4) of the Act."

A perusal of the entire order clearly shows that the Income Tax Officer refused registration as, in his view, the provisions of Rule 4 of the Income Tax Rules were not complied with. He did not exercise his discretion u/s 23(4), but made only a casual observation in regard to his power under that section. Section 23(4) does not purport to prescribe an automatic refusal of registration. Under that section, discretionary power is conferred on the Income Tax Officer to refuse registration in case an assessment is made under that section and, in this case, he did not purport to exercise his discretion one way or other. The order must, therefore, be deemed to have been made u/s 26A(1), having regard to the provisions of Rule 4 of the Income Tax Rules or u/s 23(4), an assessee cannot be made to suffer the penal consequences of an order of the Income Tax Officer unless an express order is made under that section. There is no such order in this case. We answer the question accordingly.

The applicant will pay the costs of the respondent which we fix at Rs. 200.

Reference answered accordingly.