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K.C. Trunk and Bucket Factory Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
Subject;Direct Taxation
CourtGuwahati High Court
Decided On
Case NumberIncome-tax Reference No. 10 of 1974
Judge
ActsIncome Tax Act, 1961 - Sections 170, 184, 184(2), 184(4), 184(7), 184(8), 185, 185(3), 187 and 187(2); Income Tax Rules - Rules 22 and 24; Income Tax (Amendment) Act, 1970
AppellantK.C. Trunk and Bucket Factory
RespondentCommissioner of Income-tax
Appellant AdvocateS.K. Sen and J.P. Sharma, Advs.
Respondent AdvocateG.K. Talukdar and D.K. Talukdar, Advs.
Excerpt:
- - 185. (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. it is a..........of a year means assessment as a registered firm for that part of the year, and for the rest of the year assessment as an unregistered firm. separate assessments for an assessment year are not permissible except under section 188, in case of succession of one firm by another in accordance with the provisions of section 170, if the case is not one covered by section 187. we have already held that a change has taken place in the constitution of the assessee-firm and as such the present case is covered by section 187. 27. the above view gets support from a decision of the calcutta high court in commissioner of income-tax v. kejriwal traders : [1969]71itr463(cal) in which it has been held : 'it was not, therefore, permissible to break the periods of accounting and to allow piece-meal.....
Judgment:

Baharul Islam, J.

1. The following two questions have been referred to us for our opinion by the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati:

'(i) Whether, on the facts and in the circumstances of the case, and on a proper construction of the deed of partnership dated May 25, 1959, the Tribunal was justified in holding that the assessee-firm was not entitled to continuation of registration under Section 184(7) of the Income-tax Act, 1961, for the assessment year 1965-66 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that continuation of registration could not be allowed for a part of the year, i.e., till the death of the deceased partner ?'

The relevant facts may be briefly stated:

The assessee, M/s. K. C. Trunk & Bucket Factory, Gauhati, was a firm, registered under the Indian Partnership Act. The partnership deed dated May 25, 1959, shows that the firm had three partners, Kisturchand Siotia, Bhairulal Siotia, and Mahabir Prasad Siotia, who executed the deed and that a minor, Sohanlal Siotia, was admitted to the profits of the firm. It is recited in the deed that the parties have been carrying on business in partnership under a deed of partnership with effect from March 24, 1953, with two minors, Mahabir Prasad Siotia and Sohanlal Siotia, who were admitted to the benefits of the partnership. On Mahabir Prasad Siotia having attained majority, the deed dated May 25, 1959, was executed as aforesaid. The deed further shows that the firm was to continue as K. C. Trunk and Bucket Factory and the shares in profits of the three partners and the minors were shown as 25% each and the losses were to be equally shared by the three partners. Paragraph 12 of the deed further recites that the firm shall not be liable for dissolution by the death of any of the partners but the heir or heirs of the deceased partner shall be taken in as partner in his place with the consent of the other partners. One of the partners, K. C. Siotia, died on September 24, 1964. No new partner was, however, brought in, and no fresh deed of partnership was drawn. On April 10, 1965, a new deed of partnership (annexure 'C-l' in the paper-book) was executed between the above mentioned three partners and Soni Devi, widow of late K. C. Siotia. The partnership was effective from April 10, 1965, as stipulated in para. 2 of the deed. Sohanlal Siotia, aforesaid, was still a minor. The deed of partnership dated April 10, 1965, shows that K. C. Siotia died on September 24, 1964, and that with the consent of the parties Soni Devi, aforesaid, was taken in as a partner in place of K. C. Siotia. The deed further shows that the firm shall continue in the name and style of K. C. Trunk and Bucket Factory, the business of the firm shall be effective from April 10, 1965, and the shares in profits and losses had to be shared by the parties equally at 25%.

2. For the assessment year 1965-66, the assessee filed a return on January 20, 1967, along with a declaration under Section 184(7) of the Income-tax Act, 1961 (hereinafter called 'the Act'). The declaration made in para. (11) was in the following terms :

' There has been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year.........19.......... up to the last date of the previous year relevant to the assessment year 1965-66......'

3. The Income-tax Officer assessed the firm in the status of an unregistered firm. He held that there was a change in the constitution of the firm on the death of the partner, K. C. Siotia, but it was not recorded and registration not applied for. He also held that, as per accounts of the firm, the capital account in the name of K. C. Siotia was left undisturbed to which the profit of the year under consideration was credited. He, therefore, held that the declaration filed under Section 184 showing K. C. Siotia as a partner for the whole year was invalid. It was alternatively prayed before him by the assessee that in any case the registration of the firm should be allowed for the part of the year till the death of K. C. Siotia, but the prayer was rejected.

4. The assessee preferred an appeal before the Appellate Assistant Commissioner of Income-tax, who upheld the relevant order of the Income-tax Officer. A second appeal was preferred by the assessee to the Income-tax Appellate Tribunal who also upheld the order.

5. A registered firm is assessed under Section 182 of the Act and an unregistered firm is assessed under Section 183 of the Act.

6. A registered firm, under the Income-tax Act, gets certain facilities, which are not available to an unregistered firm.

7. An application for the registration of a partnership firm, for the purposes of the Income-tax Act, may be made under Section 184 of the Act, if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument (Sub-section (1)). The application shall be made in a prescribed form and shall contain the prescribed particulars. Sub-sections (7) and (8) of Section 184 are material and need be quoted :

'184. (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, along with its return of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner.

(8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.

185. (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) 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 in the application within a period of one month from the date of such intimation.

(3) If the defect is not rectified within such time, the Income-tax Officer may reject the application.

(4) Where a firm is registered for any assessment year, the Income-tax Officer shall record a certificate on the instrument of partnership or on the certified copy submitted in lieu of the original instrument, as the case may be, to the effect that the firm has been registered under this Act, for that assessment year; and where a declaration under Sub-section (7) of Section 184 is furnished by the firm, for the relevant subsequent assessment year.

(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.'

8. Where a registration is granted to a firm for any assessment year, under Sub-section (7) of Section 184, the registration shall have effect for every subsequent assessment year ; provided (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, along with its return of income for the assessment year concerned, a declaration to the effect that there is no change in the constitution of the firm. The declaration is to be made in the prescribed form and verified in the prescribed manner.

9. Sub-section (8) of Section 184 provides for a case where a change in the constitution of the firm has taken place. In such a case the firm shall apply for fresh registration for the assessment year concerned, in accordance with the provisions of Section 184, when necessary enquiries shall be made by the Income-tax Officer under Section 185.

10. In the instant case, it is needless to say, that no application for registration was, at all, made; and although one of the partners was dead, no fresh deed of partnership was executed on his death and no application for fresh registration was made by the assessee. As stated above, when the assessee submitted the return, along with it the assessee submitted a declaration, to the effect, inter alia, that 'there has been no change in the constitution of the firm.........since the last day of the previous year.........up to the last date of the previous year relevant to the assessment year, 1965-66.........'

11. The first question that falls for consideration is whether the registration earlier granted to the firm shall continue for the assessment year 1965-66, under Sub-section (7) of Section 184.

12. Shri S. K. Sen, learned counsel appearing for the assessee, submits that Sub-section (7) of Section 184 of the Act was complied with. He submits that there has been no change in the constitution of the firm as evidenced by the instrument of partnership, and that under proviso (ii) the declaration has been made to that effect. The point that now falls for consideration is whether there has been a change in the constitution of the firm. This question has both a factual and a legal aspect. It is not denied by learned counsel that K. C. Siotia, one of the partners, died on September 24, 1964, which was before the year of assessment and filing of the return. The submission of learned counsel is that no change in the constitution of the firm, nor in the shares of the partners has taken place as the change has not been evidenced by the instrument of partnership, on the basis of which the registration was granted. This submission of learned counsel has no substance. A change in the constitution cannot be evidenced by the deed of partnership on the basis of which registration was granted as the deed was executed for the purpose, inter alia, of the constitution of the firm and the change is subsequent. The change may be by operation of law or by act of the parties. In neither case, it will automatically appear on the instrument on the basis of which the registration was granted. It is for the parties to disclose the change. Shri Sen refers to para. 12 of the partnership deed dated May 25, 1959, which is in the following terms :

'12. That the firm shall not be liable for dissolution by the death of any partner but the heir or heirs of such deceased partner shall be taken in as partner in his place with the consent of the other partners.',

and submits that in spite of the death of one of the partners the firm continues. The argument of learned counsel is fallacious. Nobody denies that the firm has not been dissolved and is continuing. But the question is whether it is not continuing with a change in the constitution and with a different status.

13. Section 187(1) provides for making an assessment on a firm under Section 143 or 144. When there has been a change in the constitution of the firm, the assessment shall be made on the firm as constituted at the time of making the assessment. Sub-section (2) of Section 187 lays down when there is a change in the constitution of the firm for the purpose of Section 187. It reads:

'(2) For the purposes of this section, there is a change in the constitution of the firm-

(a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change :

(b) where all the partners continue with a change in their respective shares or in the shares of some of them.'

14. The contingency of Clause (b) of Sub-section (2) of Section 187 has not taken place in the case in hand. In the instant case, admittedly, one of the partners, namely, K. C. Siotia, ceased to be a partner on account of his death and the other two partners of the firm continue as partners after that death, and, as such, there is a change in the constitution of the firm within the meaning of Sub-section (2)(a) of Section 187 of the Act.

15. It was mandatory, therefore, for the assessee to make an application under Sub-section (8) of Section 184 for fresh registration of the firm for the assessment year in question. But this was not so done.

16. Shri Sen refers to Sub-sections (2) and (3) of Section 185 as amended in 1970. Sub-sections (2) and (3) of Section 185 of the Act, before the amendment in 1970, were as follows :

'(2) 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 in the application within a period of one month from the date of such intimation.

(3) If the defect is not rectified within such time, the Income-tax Officer may reject the application.'

17. The above two sub-sections, as amended by the amending Act 42 of 1970, read:

'(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.'

18. Shri Sen submits that, as no opportunity was given to the assessee by the Income-tax Officer, it was in violation of Sub-section (3) of Section 185. It is noticed that before the amendment in 1970, Section 185 of the Act did not contain any provision to give an opportunity to the assessee to rectify any defect in the declaration although there was such a provision for removing the defect in the application for registration. Mr. Sen relies on a decision of the Supreme Court in the case of State of Bihar v. S.K. Roy : 1966CriLJ1538 . In that decision their Lordships of the Supreme Court held that, in interpreting the ambiguous provision of law, the subsequent legislation on the point may be looked into. Their Lordships observed:

'It is a well-recognised principle in dealing with matters of construction that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation.'

19. We may assume that even before the amendment an opportunity should have been given to the assessee to rectify the defect, if the declaration furnished was not in order. What Sub-section (3) (as amended) of Section 185 contemplates is that when the declaration furnished by a firm in pursuance of Sub-section (7) of Section 184 is not in order, he shall indicate the defect to the firm and give it an opportunity to rectify the defect in the declaration. The defect contemplated by Sub-section (3) is a nominal or a formal defect. It does not contemplate a substantial defect in rectifying which the entire character of the declaration is changed. In the instant case, the declaration was to the effect that there was no change in the constitution of the firm. If an opportunity was given to the assessee, he could not have removed the 'defect' as that would have taken out the application from the scope of Sub-section (7) and will oblige the assessee to make an application under Sub-section (8) as he would have to declare there was a change in the constitution of the firm. As such the decision of the Supreme Court relied on by learned counsel is of no assistance to the assessee.

20. The provisions of sections 184 and 185 are mandatory and must be strictly complied with. In this case the Tribunal affirming the finding of the Income-tax Officer was justified in holding that there was a change in the constitution of the firm, and as such the assessee-firm was not entitled to the continuation of the registration under Section 184(7) of the Act, for the assessment year 1965-66.

21. In the result, we answer the first question in the affirmative and in favour of the department.

22. On the second question, Shri Sen repeats the submission made before the Appellate Tribunal, namely, that in any case the registration of the firm ought to have been granted till the death of K. C. Siotia on September 24, 1964. Admittedly, on the death of K. C. Siotia no fresh deed of partnership was drawn up for the assessment year 1965-66. The partnership business, however, was continued. A partnership deed was admittedly executed only on April 10, 1965, which was valid only for the assessment year 1966-67. It has been found that the accounts of the firm were not closed on the date of the death of K. C. Siotia and that the profits of the whole previous year were allocated to the deceased partner and even the return was filed for the whole accounting year.

23. Section 4 of the Act, which is the charging section, provides for charging income-tax 'for any assessment year'. Assessment year has been defined under Section 2(9) of the Act as 'the period of twelve months commencing on the 1st day of April every year'. Under Sub-section (4) of Section 184 the application for registration 'shall be made before the end of the previous year for the assessment year in respect of which registration is sought'. This Sub-section shows that registration is to be sought in respect of an assessment year and not part of a year. Sub-section (7) of Section 184 also shows that where registration is granted to any firm for any assessment year, it shall have effect for every subsequent year. Sub-section (7) of Section 184 does not provide that the registration granted to a firm for any assessment year shall have effect for any part of a year.

24. Rules 22 and 24 of the Income-tax Rules (hereinafter called 'the Rules') on which reliance has been placed by counsel for the assessee, provide:

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

Sub-rule (2)(ii)(a) of Rule 22 provides;

'(ii) and where any change or changes in the constitution of the firm or the shares of the partners have taken place during the previous year before the date of the application-

(a) the application shall be made in Form No. 11-A.'

Rule 24 provides:

'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 person concerned in accordance with Sub-rule (5) of Rule 22.'

25. Form 11A shows that the application is to be made to the Income-tax Officer for an assessment year. Form 12 also shows that the declaration has to be made in respect of an assessment year. Form 11 is a statutory form prescribed for the purpose of application for registration of a firm and does not apply to the case in hand in which no application has been made by the assessee for registration of the firm. Form 12 is also a statutory form for the declaration to be made under Section 184(7) of the Act for continuation of the registration. This is to be addressed to the Income-tax Officer and made for an assessment year. This declaration also does not show that the continuation can be sought for part of a year. On the contrary, it shows that the declaration is to be made for continuation of registration for an assessment year.

26. Registration of a firm for a part of a year means assessment as a registered firm for that part of the year, and for the rest of the year assessment as an unregistered firm. Separate assessments for an assessment year are not permissible except under Section 188, in case of succession of one firm by another in accordance with the provisions of Section 170, if the case is not one covered by Section 187. We have already held that a change has taken place in the constitution of the assessee-firm and as such the present case is covered by Section 187.

27. The above view gets support from a decision of the Calcutta High Court in Commissioner of Income-tax v. Kejriwal Traders : [1969]71ITR463(Cal) in which it has been held :

'It was not, therefore, permissible to break the periods of accounting and to allow piece-meal registration of the instrument of partnership under Section 26A of the Income-tax Act. The registration under Section 26A is an annual registration.'

28. Although Section 26A of the Indian Income-tax Act, 1922, fell for consideration in the above decision, the relevant law is unchanged in the 1961 Act.

29. In the result, we hold that the registration granted to a firm for any assessment year shall not have effect for a part of a subsequent year within the meaning of Sub-section (7) of Section 184. We, therefore, answer the second question also in the affirmative and in favour of the department.

30. A number of decisions were cited at the Bar. As we did not find them to be on the point, we have not noticed them here.

31. The reference is disposed of accordingly with costs. Hearing fee Rs. 200.

D. Pathak, J.

32. I agree.


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