Jagannatha Shetty, J.
1. This is a reference under s. 256(1) of the I.T. Act, 1961. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question :
'Whether, on the facts and in the circumstances of the case, there should have been a specific order in writing under s. 184(7) giving effect to continuance of registration to the assesses-firm for the assessment year 1974-75 before the ITO could cancel the registration under s. 186(2) ?'
2. The question required by the assessee for reference was not in this form. The assessee suggested the following two questions :
'(1) On the facts and in the circumstances of the case, whether the Tribunal was justified in law in holding that registration to the assesses-firm was rightly cancelled under s. 186(2) of the I.T. Act, 1961, for the assessment year 1974-75
1(2) On the facts and in the circumstances of the case, whether registration for the assessment year 1974-75 can be cancelled without first granting the registration ?'
3. The assessee is a firm which had been registered up to the assessment year 1973-74. The relevant assessment year concerned in this case is 1974-75. The assessee filed a declaration in Form No. 12 and that declaration was within the prescribed time. The assessee could not file the return of income as required under s. 139(1) on or before July 31, 1974. So, the ITO issued a notice under section 139(2). But there was no response from the assessee. Thereafter, the ITO issued two notices under s. 142(1) requiring the assessee to produce the books of account. The assessee unfortunately did not respond to these notices also. Consequently, the ITO made an assessment ex parte under s. 144 and cancelled the registration of the firm under s. 186(2).
4. Before cancelling the registration under s. 186(2) of the Act, the ITO had issued a notice dated February 25, 1975, calling upon the assessee to show cause why the registration granted should not be cancelled. It appears, there was no reply from the assessee even to this notice.
5. Here we may pause to mention one other fact. The ITO did not intimate the date of hearing which is required to be given to the assessee under s. 186(2). In fact, he did not fix any date for hearing the assessee.
6. The assessee preferred an appeal to the AAC. The AAC held that the discretion exercised by the ITO in cancelling the registration was not reasonable. He observed that since Form No. 12 had been filed in time and that the assessee had been generally complying with the various provisions of the Act, the ITO ought not to have cancelled the registration.
7. The assessee appears to have urged before the AAC that since no specific date of hearing had been given by the ITO, there was no opportunity of being heard to the assessee as required under s. 186(2). The AAC was not impressed with that contention. He said :
'Just because no specific date of hearing had been given, it cannot be said that opportunity of being heard had not been given to the appellant.'
8. He, however, held that, having regard to the circumstances of the case, the cancellation of the registration was arbitrary and the ITO should have exercised the discretion in favour of the assessee and should not have cancelled the registration. He, accordingly, directed the ITO to grant registration to the assesses-firm.
9. The Department took up the matter in appeal before the Appellate Tribunal. The Tribunal, after noticing the facts and circumstances of the case, found that there was no judicial impropriety committed by the ITO in exercising the discretion against the assessee by cancelling the registration. The Tribunal also dealt with the scope of s. 184(7). It held that there is an automatic continuance of registration if the firm has been registered for prior years if two conditions are satisfied, namely, that there is no change in the constitution of the firm and the declaration in the prescribed form is filed within time. When these two conditions are satisfied, there would be an automatic continuance of registration and it was that continuance of registration which was cancelled by the ITO under s. 186(2).
10. On the merits of the matter, the Tribunal, however, came to the conclusion that the exercise of discretion by the ITO to cancel the registration was proper and justified.
11. The primary question for consideration is whether, having regard to the facts and circumstances of the case, the ITO was justified in cancelling the registration under s. 186(2). Section 186(2) reads :
'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.'
12. This sub-section covers not only a firm which has been registered but also a firm whose registration has the effect under sub-s. (7) of s. 184 for any assessment year.
13. Sub-s. (7) of s. 184 reads :
'Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year.'
Proviso thereunder prescribes two conditions :
(i) that 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 within the stipulated time under s. 139(1) and (2) a declaration in the prescribed form and verified in the prescribed manner. If these two conditions are satisfied in the subsequent assessment year, registration granted to the firm for the earlier assessment year shall be continued to be operative even for the subsequent year.
14. Sub-s. (7) of s. 184 does not require any specific order to be made by the ITO for continuance of the registration. If the assessee satisfies the two requirements under the proviso thereunder, the earlier registration proprio vigore continues to operate for the subsequent year and the ITO must assessee the firm as a registered firm. A specific order may be necessary to discontinue the effect of registration and not to continue the effect of registration.
15. Section 186(2) provides the procedure for cancellation of the registration of a firm. It requires the ITO to give not less than 14 days' notice to the firm intimating his intention to cancel the registration. It also imposes a duty on the ITO to afford an opportunity of being heard. The mere notice intimating the ITO's intention to cancel the registration of the firm is not sufficient. The ITO must also afford an opportunity of being heard to the assessee in addition to the notice giving not less than fourteen days.
16. In the instant case, all that the ITO did was that he had issued a notice to the assesses-firm giving 14 days' time intimating his intention to cancel the registration. It was hardly sufficient. Without affording an opportunity of being heard, the ITO has no jurisdiction to cancel the registration granted to the assesses-firm. The cancellation of the registration was, therefore, illegal.
17. In the result, we answer the question in the negative.
18. We, however, hold that the cancellation of registration under s. 186(2) was improper and illegal.