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Mahabir Prasad Kishanlal and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
Subject;Direct Taxation
CourtGuwahati High Court
Decided On
Case NumberIncome-tax Reference No. 3 of 1974
Judge
ActsIncome Tax Act, 1922 - Sections 26A; Income Tax Rules, 1922 - Rule 6B; Income Tax Act, 1961 - Sections 186(1); Indian Partnership Act, 1932
AppellantMahabir Prasad Kishanlal and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateB.P. Saraf, Adv.
Respondent AdvocateG.K. Talukdar, Adv.
Prior history
Pathak, C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The following question of law as arising out of the Income-tax Appellate Tribunal's order has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restoring the order of the Income-tax Officer by which he cancelled the renewal of registration granted to the assessee-firm, M/s. Mahabir Prasad Kishanlal & Co., for the assessment year 1955-56 ?'
2. The fa
Excerpt:
.....of the application for registration, the income-tax officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and the application has been properly made, he shall register the firm and issue necessary certificate of registration and if he is not satisfied he will refuse to recognise the instrument of partnership. rule 6a provides that if the income-tax officer on receipt of an application for renewal of the certificate of registration is satisfied that the application is in order and there is or was a firm in existence constituted as shown in the instrument of partnership, he may grant to the assessee a certificate of renewal of the registration of the firm. if he is not satisfied the income-tax officer shall refuse to renew..........firm. if he is not satisfied the income-tax officer shall refuse to renew the registration of the firm. rule 6b is in the following terms : '6b. in the event of the income-tax officer being satisfied that the certificate granted under rule 4, or under rule 6a, has been obtained without there being a genuine firm in existence, he may cancel the certificate so granted.'11. on a consideration of the above provisions of the act and the rules we find that for the purpose of registration of a firm for the purposes of the income-tax act the firm must be constituted under an instrument of partnership. if a certificate of registration has been granted under rule 4, or a certificate granted under rule 4 has been renewed under rule 6a and the income-tax officer is subsequently satisfied that the.....
Judgment:

Pathak, C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The following question of law as arising out of the Income-tax Appellate Tribunal's order has been referred :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restoring the order of the Income-tax Officer by which he cancelled the renewal of registration granted to the assessee-firm, M/s. Mahabir Prasad Kishanlal & Co., for the assessment year 1955-56 ?'

2. The facts of the case are as follows :

3. The assessee-firm, M/s. Mahabir Prasad Kishaalal & Co., consists of eight partners out of which three are minors. The minors have entered into the partnership through their fathers. The assessee-firm was granted registration on the basis of the partnership deed dated April 1, 1952, under Section 26A of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the 1922 Act'). Thereafter, the registration was renewed for the year 1955-56, the relevant assessment year. The Income-tax Officer by his order dated 26th March, 1964, cancelled the renewal of registration granted

for the assessment year 1955-56 with the prior approval of the Inspecting Assistant Commissioner of Income-tax. The order was passed under Section 186(1) of the Income-tax Act, 1961 {hereinafter referred to as 'the 1961 Act'). The Income-tax Officer held that the renewal of registration for the assessment year 1955-56 was erroneous as the minor partners were made liable for losses also in the partnership deed on the basis of which registration was granted and which is contrary to the provisions of Section 30 of the Indian Partnership Act, 1932. The Income-tax Officer held that since the firm would not be valid there can be no registration of the same under the 1922 Act. Before the Income-tax Officer the assessee raised an objection that the proceedings for cancellation of registration in the instant case could not be taken up under Section 186 read with Section 297(2)(a) of the 1961 Act and Clause 2 of the Income-tax (Removal of Difficulties) Order, 1962. The assessee's contention was negatived by the Income-tax Officer.

4. Against the order of cancellation of the registration the assessee preferred an appeal before the Appellate Assistant Commissioner of Income-tax, who cancelled the order of the Income-tax Officer and allowed the appeal. The Appellate Assistant Commissioner found that the assessment for the year 1955-56 was completed under Section 23(3) and registration was allowed under Section 26A of the 1922 Act and, therefore, the Income-tax Officer in cancelling the registration should have proceeded under the 1922 Act as per provisions of Section 297(2)(a) of the 1961 Act. The Appellate Assistant Commissioner further observed that he could not cancel the order of the Income-tax Officer on this point alone as the word used in Section 297(2Xa) was 'may' while at other places the word 'shall' had been used and so in such a case if the order was passed under the new Act the order would not be bad. On the other point, the Appellate Assistant Commissioner found that the partnership deed was clearly defective to the extent that it made the minors also liable for losses and, therefore, registration could be refused for such a defect in the partnership deed. But he further held that in cancelling the registration already allowed, the Income-tax Officer had to show that there was no genuine firm in existence and in the instant case the partners, as shown in the partnership deed, shared profits and losses as agreed upon and none of the partners was bogus and, therefore, it could not be held that there was no genuine firm in existence. The order of the Income-tax Officer cancelling the registration was accordingly set aside.

5. The department preferred an appeal before the Income-tax Appellate Tribunal against the order of the Appellate Assistant Commissioner. The assessee also filed a cross-objection.

6. The Tribunal considered the question whether there was any genuine firm in existence and on the materials on record the Tribunal came to the finding that there was no genuine firm. The Tribunal reasoned that since the firm was invalid in law, the firm could not be in existence in the eye of law.

7. The Tribunal also considered the jurisdiction of the Income-tax Officer

for cancelling renewal of the registration in the instant case and came to

the finding that the Income-tax Officer had the power to cancel the

registration for the assessment year 1955-56 under the 1922 Act and that,

although the Income-tax Officer passed the order under Section 186(1) of

the 1961 Act, it should be deemed as an order under Rule 6B of the Indian

Income-tax Rules, 1922. Accordingly, the Tribunal set aside the order of

the Appellate Assistant Commissioner and restored the order of the Income-

tax Officer. The appeal was allowed and the cross-objection was

dismissed.

On the above facts the above question of law has been referred. Mr. B.P. Saraf, the learned counsel appearing for the assessee, has firstly submitted that the constitution of the firm is legal and even assuming that the firm was not legally constituted, the firm in fact has been existing, and, therefore, it was genuine and the Tribunal was wrong in holding that the Income-tax Officer was justified in cancelling the registration as he found that there was no genuine firm in existence.

8. The second submission of the learned counsel is that the proceedings for cancellation of the registration granted under Section 26A of the 1922 Act could not be taken up under Section 186(1) of the 1961 Act, and, therefore, the Tribunal was not justified in restoring the Income-tax Officer's order of cancellation of registration inasmuch as the Income-tax Officer had no competence to pass the order of cancellation.

9. Under Section 26A of the 1922 Act an 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 purpose of this Act and of any other enactment for the time being in force relating to income-tax or super-tax. The application for registration 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. It thus appears from the language of Section 26A that a firm constituted under an instrument of partnership only may apply for registration for the purpose of the Income-tax Act or any other enactment for the time being in force relating to income-tax or super-tax.

10. Rules 2 and 3 of the Indian Income-tax Rules, 1922 (hereinafter referred to as 'the 1922 Rules') prescribe the requirements of an application for registration as well as the form in which the application is to be made. Rule 4 provides that if, on receipt of the application for registration, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and the application has been properly made, he shall register the firm and issue necessary certificate of registration and if he is not satisfied he will refuse to recognise the instrument of partnership. Rule 5 provides that the certificate of registration granted under Rule 4 shall have effect only for the assessment to be made for the year mentioned therein. Rule 6 provides that a firm to whom a certificate of registration has been granted under Rule 4, may apply to the Income-tax Officer to have the certificate of registration renewed for a subsequent year. Rule 6A provides that if the Income-tax Officer on receipt of an application for renewal of the certificate of registration is satisfied that the application is in order and there is or was a firm in existence constituted as shown in the instrument of partnership, he may grant to the assessee a certificate of renewal of the registration of the firm. If he is not satisfied the Income-tax Officer shall refuse to renew the registration of the firm. Rule 6B is in the following terms :

'6B. In the event of the Income-tax Officer being satisfied that the certificate granted under Rule 4, or under Rule 6A, has been obtained without there being a genuine firm in existence, he may cancel the certificate so granted.'

11. On a consideration of the above provisions of the Act and the rules we find that for the purpose of registration of a firm for the purposes of the Income-tax Act the firm must be constituted under an instrument of partnership. If a certificate of registration has been granted under Rule 4, or a certificate granted under Rule 4 has been renewed under Rule 6A and the Income-tax Officer is subsequently satisfied that the certificate granted under Rule 4 or renewed under Rule 6A has been obtained without there being a genuine firm in existence, he may cancel the certificate so granted. So the power of cancellation of a certificate granted or renewed has its source in Rule 6B of the Rules. In the instant case the certificate of registration was renewed for the year 1955-56. Subsequently, the Income-tax Officer found that there was no genuine firm in existence. The Tribunal in its appellate order has found that there was no genuine firm in existence. Though a firm may exist even without a deed of partnership, yet if the firm wants registration under the Income-tax Act, it must be under an instrument of partnership. So, for the purpose of registration of a firm under the Act, the authority has to look to the deed of partnership and Rule 6B provides that if the Income tax Officer finds that there is no genuine firm in existence he may cancel the registration. To come to a decision whether there is or is not a genuine firm in existence the Income-tax Officer is required to consider the validity of the deed of partnership. If such a deed of partnership is invalid in law offending any of the provisions of the Indian Contract Act or the Indian Partnership Act, 1932, the Income-tax Officer may legally hold that the registration was obtained without there being a firm in existence and such registration is liable to be cancelled in exercise of powers under Rule 6B.

12. Section 4 of the Indian Partnership Act defines 'partnership' as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The definition of partnership contains three elements:

(1) there must be an agreement entered into by all the persons concerned ;

(2) the agreement must be to share the profits of a business ; and

(3) the business must be carried on by all or any of the persons concerned, acting for all.

13. Under the Indian Contract Act an agreement to have the force of legal contract must be made by the free consent of the parties who are competent to contract for a lawful consideration and with a lawful object. A minor thus cannot be a competent party to an agreement enforceable in law. So, the agreement that is essential to be made by the partners for a partnership cannot be made by a minor. Thus, a minor is incompetent to enter into a partnership firm. Section 30(1) of the Indian Partnership Act, however, provides that if all the partners agree then a minor may be admitted to the benefits of partnership. Thus, a minor is never a partner of a partnership firm though the partners of a partnership firm may admit a minor to the benefits of the firm. Sub-section (5) of Section 30 provides that within six months of his attaining majority, or of his obtaining knowledge that he has been admitted to the benefits of partnership, whichever date is later, such a person may elect to become a partner in the firm after complying with the requirements of Sub-section (5).

14. From the agreement of partnership, a copy of which is in the paper book, we find that eight persons have agreed to enter into the partnership and out of these eight persons, three are admittedly minors, on whose behalf their respective fathers have agreed. Clause 6 of the partnership deed provides that each partner shall have equal share in the partnership business and the profit and loss of the partnership shall be divided equally between and borne by the partners.

15. On consideration of the contents of the partnership deed it is quite clear that the minors also had been made partners and their fathers have agreed to form the partnership on behalf of the minors. It is not a case

of the partners agreeing to admit some minors to the benefits of the partnership as provided under Sub-section (1) of Section 30 of the Indian Partnership Act. The partnership in terms has sought to make the minors also full fledged partners and it has been stated that their respective fathers have agreed to enter into the partnership. It is thus found that the agreement of partnership in question is contrary to the relevant provisions of the Indian Contract Act and the Indian Partnership Act itself. That being so, the partnership deed is invalid, and, therefore, the Income-tax Officer in exercising his power for cancellation is justified in being satisfied that there was no genuine partnership in existence. The Income-tax Officer has to grant or renew registration of a firm which is constituted under an instrument of partnership. If the instrument of partnership, on the basis of which the firm is constituted, is found to be invalid in law, the Income-tax Officer has no jurisdiction to register or renew such a firm and, therefore, the Income-tax Officer has jurisdiction to cancel the registration or renewal of registration of a firm under Rule 6B when he finds that the instrument of partnership on the basis of which the firm is constituted is invalid in law. The Tribunal is thus found to have correctly held that in the absence of valid instrument of partnership there can be no existence of a genuine firm and, consequently, the Income-tax Officer may cancel the renewal of registration in the instant case.

16. The second submission of the learned counsel for the petitioner is that since the granting and renewal of registration of the firm was under the provisions of the 1922 Act, the cancellation of registration also should have been proceeded under the 1922 Act, as per provisions of Section 297(2)(a) of the 1961 Act. The relevant provisions of Section 297(2)(a) read as follows:

' 297. Repeals and savings.--(1) The Indian Income-tax Act, 1922 (II of 1922), is hereby repealed.

(2) Notwithstanding the repeal of the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as the repealed Act,--

(a) where a return of income has been filed before the commencement of this Act by any person for any assessment year, proceedings for the assessment of that person for that year may be taken and continued as if this Act had not been passed.'

17. Clause 2 of the Income-tax (Removal of Difficulties) Order, 1962, reads as follows:

'2. Registration and refund proceedings to be regarded as part of assessment proceedings.--For the purposes of Clauses (a) and (b) of Sub-section (2) of Section 297 of the Income-tax Act, 1961 (XLIII of 1961) (hereinafter referred to as the repealing Act), proceedings relating to registration of a firm or a claim for refund of tax shall be regarded as a part of the

proceedings for the assessment of the person concerned for the relevant assessment year.'

18. Relying on the above provisions of law, the learned counsel submits that the proceedings relating to registration of the firm for the year 1955-56 shall be regarded as a part of the proceedings for the assessment of the firm for that year and, therefore, the cancellation proceedings should have been taken under the 1922 Act, and the cancellation under Section 186(1) of the 1961 Act is without jurisdiction. Under the 1922 Act, the power of cancellation of registration is found in Rule 6B of the Indian Income-tax Rules, 1922, framed under Section 59 of the Indian Income-tax Act, 1922. The Income-tax Officer in the instant case exercised the power of cancellation and this power is referable to his jurisdiction under Rule 6B of the 1922 Rules. In the order of cancellation no doubt it has been mentioned that the order has been passed under Section 186(1) of the Income-tax Act, 1961. Under Section 297(2)(a) of the 1961 Act, the proceedings for cancellation of registration in the instant case should have been taken under the 1922 Act. So, apparently, the reference to Section 186(1) of the 1961 Act for the cancellation order is not correct.

19. In Hazari Mal Kuthiala v. Income-tax Officer, : [1961]41ITR12(SC) the Supreme Court observed:

'That the exercise of a power would be referable to a jurisdiction which conferred validity upon it and not to a jurisdiction under which it would be nugatory ; and the order of the Commissioner was not invalid merely because it was not made under the Patiala Act.'

20. In Hukumchand Mills Ltd. v. State of Madhya Pradesh : [1964]52ITR583(SC) the Supreme Court observed as follows :

'It is true that in the opening part of the notification it is said that the amendments were made under Rule 17 of the Tax Rules; but that in our opinion would not conclude the matter, for if the Government had the power to make amendments under Act 1 of 1948, the amendments in the Rules could be justified under that power in spite of the wrong words used in the opening part of the notification of December 28, 1949. It is well-settled that merely a wrong reference to the power under which certain actions are taken by Government would not per se vitiate the actions done if they can be justified under some other power under which the Government could lawfully do these acts.'

21. Relying on the above observations of the Supreme Court, this court in the case of Bidyut Prova Raha v. Income-tax Officer held :

' The order of assessment in the instant case, therefore, cannot be held to be invalid merely because of insertions of wrong sections in the order as well as in the notices.'

22. In the instant case we find that the jurisdiction of the Income-tax Officer for cancellation of the registration is referable to Rule 6B. Hence, even though in the order of cancellation reference has been made to Section 186(1) of the 1961 Act, the order would not be bad or vitiated because of such reference in view of the observations of the Supreme Court in the above-noted cases and also of this court in the above-noted case. It may also be observed that the provisions of Section 186(1) of the 1961 Act provides for cancellation of registration after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner of Income-tax. We do not find such language in Rule 6B. In the circumstances, when the power of cancellation under Rule 6B was exercised under the wrong description of the provision as Section 186(1) of the 1961 Act, in the instant case the assessee was not at all prejudiced. On the other hand, the assessee was given all reasonable opportunity of being heard and the previous approval of the Inspecting Assistant Commissioner was also obtained in addition to that, which requirements are not found in Rule 6B. That being so when the source of power of cancellation is referable to Rule 6B, the assessee cannot be said to be prejudiced in any way and the order of cancellation passed by the Income-tax Officer cannot be said to be without jurisdiction.

23. In the result we hold that, on the facts and in the circumstances of the case, the Tribunal was justified in restoring the order of the Income-tax Officer by which he cancelled the renewal of registration granted to the assessee-firm for the assessment year 1955-56. The question of law referred is answered against the assessee and in favour of the revenue.

24. The reference is accordingly answered. We make no order as to costs.

D.M. Sen, J.

25. I agree.


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