Madras Pack Marine Co. vs Commissioner of Income Tax

C.N. Ramachandran Nair J.

This case referred to this court u/s 256(1) of the Income Tax Act, 1961, by the Income Tax Appellate Tribunal, Cochin Bench, arises from the order of the Tribunal for the assessment year 1989-90. Even though the assessee sought reference of several questions of law for decision of this court, the Tribunal has consolidated the issue and referred the following question for decision by this court, as according to the Tribunal, the single question will cover the entire gamut of controversy raised by the assessee :

"Was the Appellate Tribunal justified and correct in law in the facts and circumstances of the case, in holding that the cancellation of registration was valid under the provisions of the Income Tax Act?"

We have heard Sri Kochunni Nair, senior counsel appearing for the assessee and Sri P.K.R. Menon, senior standing counsel appearing for the respondent. The short question to be considered is whether the Tribunal was justified in sustaining the order of the Assessing Officer cancelling the registration granted to the assessee-firm u/s 186(1) of the Income Tax Act. The facts on record based on which the Tribunal rendered the decision are that the assessee, which was engaged in marine export, did not carry on any business during the accounting year relevant to the year 1989-90 and in fact during the relevant year, the assessee sold plant and machinery and returned income from capital gains. On going through income assessed in the assessment year, we find the income assessed is from long-term capital gains and income from other sources in the form of interest. In other words, the assessee did not return any income or loss from business. Even though the profit and loss account showed a credit of Rs. 10,710 on sale of prawn, the Tribunal noticed from the finding of the Assessing Officer that there was no entry relating to purchase and sale of prawn in the books of account of the assessee. Therefore the entries in the profit and loss account are only manipulation and are not reflected in the books of account of the assessee, is the finding of the Tribunal. Going by the findings of the three authorities below, including the Tribunal, we have to proceed on the assumption that the assessee had no business during the relevant accounting year and it is on record that even in the preceding year, the assessee did not have any business and the assessee had during the year, sold the plant and machinery and assets of the establishment. Therefore business was not only not continued but even closed. Hence the short question is whether the withdrawal of registration originally granted or cancellation of registration u/s 186(1) is justified or not.

The assessee was granted renewal in the original assessment completed u/s 143(3) of the Act based on Form No. 12 declaration filed by the assessee in terms of Section 184(7) of the Act. However, when the Assessing Officer noticed that the assessee did not carry on any business during the previous year and had in fact closed the business, he issued notice and cancelled the registration u/s 186(1) of the Act. It is this order which was carried in appeal by the assessee before the first appellate authority and again before the Tribunal, without any success.

Counsel for the assessee contended that the cancellation of registration u/s 186(1) can be justified only when there is no genuine firm. According to him, there is no scope for cancellation of registration once granted based on the Form No. 12 declaration filed as at the time of grant of registration, the officer was satisfied about the existence of the firm. The contention of counsel is that even if the assessee did not carry on business, the firm is in existence and therefore renewal of registration granted u/s 184(7) cannot be cancelled u/s 186(1) of the Act. Senior standing counsel appearing for the respondent contended that there is no distinction between legal existence of the firm or genuineness of the firm for the purpose of continuation of registration, and if the firm which got renewal of registration was not legally in existence, then the question of considering such firm as a genuine firm does not arise. He also relied on Sections 4 and 6 of the Partnership Act and contended that a firm cannot exist except for the purpose of carrying on business and when the assessee admittedly closed the business, there is no firm in existence and the argument to the contrary cannot be sustained. The assessee also has no case that it carried on business. However, it raised a technical contention that the genuineness of the firm is different from existence of the firm. Counsel for the assessee contended that once the firm is allowed renewal of registration, the registration so granted cannot be cancelled. His further contention is that the officer himself has opted to assess tax on the petitioner as a registered firm u/s 183(b) of the Act and so much so, the Department cannot decline registration to the firm. Counsel for the assessee also relied on the decision of this court in Commissioner of Income Tax Vs. Jacobs, whereunder this court held that temporary cessation of business or a lull in the business should not be taken as closure of business or non-existence of partnership. However, the assessee''s case is not cessation of business for a short period, but this is a case of complete stoppage of business and later the assessee sold the business assets including plant and machinery. Therefore when the assessee sold the plant and machinery it cannot be said that the assessee is temporarily not in business, or intends to resume business. Therefore, the decision does not apply to this case and the argument based on the said decision is not tenable. The assessee has also relied on the decision in Mandsaur Starch and Chemicals Vs. Commissioner of Income Tax, . However, we find that the Tribunal has relied on the decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Udayalaxmi Hardware Stores, , wherein the High Court of Andhra Pradesh held as follows (headnote) :

"The object underlying Section 186 of the Income Tax Act, 1961, is for the purpose of cancelling registration already granted to a partnership firm, if, after the grant of registration, the Income Tax Officer finds that the firm was registered u/s 185 of the Act erroneously. The same consideration which prevail for according registration u/s 185 should also prevail when the registration is sought to be cancelled. The Legislature did not intend that registration could be cancelled u/s 186, only if the firm is found to be not factually genuine and not in a case where a firm, having no legal existence, was registered."

The Andhra Pradesh High Court rendered the above decision based on the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Sivakasi Match Export Company, wherein the Supreme Court dealing with a similar provision, namely, section 26A of the Indian Income Tax Act, 1922, held as follows (page 209) :

"A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income Tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence."

We are of the opinion that there is no difference between eligibility for grant of registration and the ground for cancellation of registration. If a firm is not entitled to registration either on account of the fact that it has no legal existence or is not genuine or is bogus, then grant of renewal of registration is wrong, and for the very same reason, the registration renewed can be cancelled u/s 186(1) of the Act. Since admittedly the assessee did not carry on business and does not intend to carry on business and has in fact closed the business by selling plant and machinery and assets, there is no firm existing in the eye of law and the renewal of registration originally granted based on the Form No. 12 declaration furnished by the assessee was rightly withdrawn by the Assessing Officer u/s 186(1) of the Act and the Tribunal rightly sustained it. We, therefore, answer the question referred to us against the assessee and in favour of the Department.

The Registry will forward a copy of this judgment under the seal of and the signature of the Registrar to the Income Tax Appellate Tribunal, Cochin Bench.