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Commissioner of Income-tax Vs. Udayalaxmi Hardware Stores - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 65 of 1980
Judge
Reported in[1990]183ITR159(AP)
ActsIncome Tax Act, 1961 - Sections 186; Partnership Act - Sections 30
AppellantCommissioner of Income-tax
RespondentUdayalaxmi Hardware Stores
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateM.J. Swamy, Adv.
Excerpt:
.....contrary to provisions of statute - held, registration rightly cancelled. head note: income tax firm-registration--cancellation--minor described as major in partnership deed--firm therefore illegal and void ab initio held : the firm constituted under the deed of partnership dated 5-4-1971 is illegal, inasmuch as n, who was a minor on the date when the partnership deed was executed, was described as a major and was a party to the agreement of partnership and the said minor was also burdened with losses, contrary to the provisions contained in s. 30 of the partnership act. the ito has rightly invoked the provisions of s. 186 to cancel the registration already granted to the firm for the asst. yr. 1972-73 income tax act 1961 s.185 - motor vehicles act (59 of 1988)section 149 (2):..........and, that is, where the income-tax officer is of the opinion that there was no genuine firm in existence as registered during the previous year. it is submitted that the revenue does not dispute the guanines of the assessee-firm-genuineness speaking from a casual point of view. learned counsel for the assessee resisted the revenue's plea that the power to cancel registration already granted under section 186 on the ground of non-genuineness should not be confused with the power to cancel registration on the ground that the partnership firm has no legal existence, because the deed of partnership was ab initio void. according to learned counsel, registration already granted can be cancelled in the former case but not in the latter. learned counsel invited our attention to the.....
Judgment:

Y.V. Anjaneyulu, J.

1. In this reference arising under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax, the following questions of tax are referred for the opinion of this court:

'(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to continuation of registration of the firm for the assessment years 1972-73 and 1973-74?'

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the Income-tax Officer has no power under Section 186(1) to cancel the registration granted to the firm?'

2. A firm was constituted under a deed of partnership dated April 2, 1970. There were three partners. A minor by name Narasimha Rao was admitted to the benefits of the partnership. A fresh deed of partnership was executed on April 5, 1971 specifying that the partnership evidenced by the deed dated April 5, 1971, came into existence with effect from April 1, 1971. Narasimha Rao who was previously admitted to the benefits of partnership was a party to this deed of partnership and he was described as a major on April 1, 1971. The assessee-firm constituted under the deed dated April 5, 1971, applied for registration under section 184 of the Income-tax Act (hereinafter referred to as 'the Act') for the income-tax assessment year 1972-73. While the assessment proceedings for the year 1972-73 were still pending, the income-tax Officer seems to have passed an order granting registration to this firm for the assessment year 1972-73. During the course of the assessment enquiry, the Income-tax Officer found that Narasimha Rao attained majority only on April 28, 1971, and he was not a major either on April 1, 1971, from which date the assessee-firm came into existence or on April 5, 1971, when the partnership deed was executed. The Income-tax Officer, therefore, held the view that the partnership deed executed on April 5, 1971, describing Narasimha Rao as major partner was ab initio void, in as much as Narsimha Rao, being a minor on April 5, 1971, could not be a contracting party to the partnership agreement and he could not also be burdened with any share in losses while he continued to be a minor. Since an order registering the partnership firm was already passed for the assessment year 1972-73, the Income-tax Officer invoked section 186 of the Act and cancelled the registration granted to the assessee-firm. In as much as the registration was cancelled for the assessment year 1972-73, the Income-tax Officer declined to continue registration to the assessee-firm under section 184(7) of the Act for the next assessment year 1973-74.

3. The assessee appealed against the Income-tax Officer's order cancelling the registration under section 186 of the Act for the Income-tax assessment year 1972-73. The Appellate Assistant Commissioner allowed the assessee's appeal and granted registration for the assessment year 1972-73 and continuation of registration for the assessment year 1973- 74. The Income-tax Officer filed appeals to the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner granting registration. The Tribunal upheld the orders of the Appellate Assistant Commissioner and dismissed the appeals filed by the Income-tax Officer. The tribunal purported to follow two decisions of this court in dismissing the appeals filed by the Income-tax Officer and in affirming the grant of registration. One was the decision in CIT v. Badjanapara Salt Co. [1974] TLR 19 (AP) and another was in CIT v. Balaji Pictures : [1983]144ITR807(AP) . Aggrieved by the order of the Tribunal, the Commissioner of Income-tax applied for and secured the present reference.

4. It is not in dispute that Narasimha Rao became a major only on April 28, 1971. It is admitted that he was misdescribed as a major and shown as a contracting party in the partnership agreement executed on April 5, 1971. It is also not seriously disputed that, if a minor is shown as a party to the agreement and is also burdened with losses arising to the partnership firm, the firm itself is ab initio void and can have no legal existence. It is not even seriously disputed that, if the income-tax Officer were to pass an order granting registration to the firm under section 185 of the Act, the partnership deed dated April 5, 1971, would present a formidable difficulty in securing registration to the firm, as the deed of partnership was illegal and the partnership firm was void in law. The limited contention urged by Sri Ch. Srirama Rao, learned counsel for the assessee, is that, notwithstanding the above infirmities, the provisions of section 186 were wrongly invoked to cancel the registration already granted to the assessee-firm. Learned counsel claims that section 186 of the Act can be invoked to cancel registration already granted in only one circumstance and, that is, where the Income-tax Officer is of the opinion that there was no genuine firm in existence as registered during the previous year. It is submitted that the Revenue does not dispute the guanines of the assessee-firm-genuineness speaking from a casual point of view. Learned counsel for the assessee resisted the Revenue's plea that the power to cancel registration already granted under section 186 on the ground of non-genuineness should not be confused with the power to cancel registration on the ground that the partnership firm has no legal existence, because the deed of partnership was ab initio void. According to learned counsel, registration already granted can be cancelled in the former case but not in the latter. Learned counsel invited our attention to the two decisions of this court to which we have already referred above. The opposite view is canvassed by learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy. According to him, genuineness includes not only the factual aspect but also the legal aspect. According to learned standing counsel, if a firm cannot be said to be existing in the eye of law, there is no question of such a non-existing firm being treated as a genuine firm. This is the limited controversy before us.

5. It is doubtless that the two decisions of this court referred to above support the view canvassed by learned counsel for the assessee. In fact, in spite of some reservations in the matter, the Tribunal dismissed the appeals filed by the Income-tax Officer because of the two decisions this court referred to above.

6. As first blush, the argument of learned counsel for the assessee that section 186 cannot be invoked except on grounds of non-genuineness of the firm factually appears attractive. Indeed, the two decisions of this court referred to above followed this line of reasoning and held that registration of the firm cannot be cancelled under section 186 except on the ground that the firm was not genuine factually. We are respectfully bound by the two decisions of this court supporting the view canvassed by learned counsel for the assessee. we are, however, confronted with the decision of the Supreme Court in CIT v. Sivakasi Match Exporting Co. : [1964]53ITR204(SC) to which attention of this court was not invited in the two cases referred to above. We have, therefore, to consider the impact of the observations contained in the judgment of the Supreme Court above referred to. If the judgment of the Supreme court should support the conclusion that genuineness, for purposes of section 186, covers not only the factual ground but also the ground of non-existence in law because of the void nature of the partnership firm, then the two decisions of this court must be held to be per incuriam.

7. In CIT v. Sivakasi Match Exporting Co. : [1964]53ITR204(SC) above referred to, the Supreme Court was concerned with the question of granting registration to a firm under the provisions of the 1922 Act which are more or less analogous to the provisions contained in the 1961 Act. It may be pointed out that rule 6B of the Income-tax Rules, 1922, is analogous to section 186 of the 1961 Act. The Supreme Court made a thorough survey of the provisions contained in the 1922 Act as well as the corresponding rules. The following observation are relevant (at page 208):

'A combined effect of section 26A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income-tax Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership. 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.'

8. The above observations were made by the Supreme Court after considering the effect of rule 6B of the Income-tax Rules, 1922, which, as already observed, is analogous to section 186 of the 1961 Act. The above observation should undoubtedly indicate that an enquiry into the genuineness of the firm has to be directed in two different directions, firstly, to find out whether the firm shown in the document presented for registration is a genuine one or not; and, secondly, whether the firm, as evidenced by the deed of partnership, has legal existence. If, in a given case, the Income-tax Officer comes to the conclusion that the firm is not genuine on factual considerations or has no legal existence because the partnership firm is void in law, then, in either event, it will be open to the Income-tax Officer to refuse registration of the firm. It would, therefore, be seen that the Supreme Court dealt with the two aspects of genuineness as well as legal existence as forming an inseparable part of the enquiry into the question regarding the grant of registration. If a partnership firm is found to be invalid, having been constituted contrary to the provisions of any statute, it is not clear how such a partnership firm, which has no legal existence, can be considered to be factually existing for purposes of genuineness. A firm which is not a firm in the eye of law and has no legal existence cannot be said to have factual existence. A partnership firm, the constitution of which is found to be void and is, therefore, legally non-existent, must be considered to be non-existent for all purposes. It would be a contradiction in terms to say that the firm has no legal existence because it is void and yet has factual existence. We may refer to the decision of the Allahabad High Court in Bhagat Shyam and Co. v. CIT : [1980]123ITR164(All) . In that case, the registration of the firm was cancelled under section 186 of the Act on grounds of illegality. It was held that an Income-tax officer is empowered to cancel registration under section 186 of the Act, if the firm is held to be illegally constituted. The Gauhati High Court has taken a similar view in Mahabir Prasad Kishanlal and Co. v. CIT . It was held that, where an agreement of partnership was contrary to the relevant provisions of the Indian Contract Act and the Indian Partnership Act and was, therefore, invalid, the Income-tax Officer had jurisdiction to cancel the registration of the firm, once granted, under section 186(1) of the Act. It would be seen that the facts in Mahabir Prasad Kishanalal's case are identical with the facts in the assessee's case. We may refer to the decision of a Division Bench of this court in CIT v. Sri Ramakrishna Motor Transport : [1983]144ITR797(AP) . The scope of cancellation of registration under sections 154 and 186 of the Act and come up for consideration in that case. Attention of this court was invited to the earlier decision of this court in CIT v. Balaji Pictures : [1983]144ITR807(AP) , to which we have already adverted. The decision of the Allahabad High Court and the Gauhati High Court above referred to were also noticed by this court. The following observations at page 806 of the report are pertinent:

'In the case before us, indeed, the action of the Income-tax Officer will be justified both under section 154(1)(a) as well as under section 186(1). Merely because the Income-tax Officer purported to act under section 154, there is no bar to relax it to the power under section 186(1), if necessary, and to sustain it on that basis. Both procedure - wise and limitation-wise, the action taken can be sustained under section 186(1) as well, if held applicable. Looked at from either angle, we are of the opinion that the Income-tax Officer had power to cancel the registration on the ground that the partnership itself was illegal in the eye of law.'

9. It would thus be seen that this court had also taken the same view that registration can be cancelled under section 186(1) on the ground that the partnership itself was illegal in the eye of law. In our opinion, the decisions of the Allahabad High Court and the Guahati High Court above referred do do not lay down any different principle. In coming to a contrary conclusion in CIT v. Badjanapara Salt Co. [1974] TLR 19 and CIT v. Balaji Pictures : [1983]144ITR807(AP) this court did not have occasion to notice the decision of the Supreme Court in CIT v. Sivakasi Match Exporting Co. : [1964]53ITR204(SC) above referred to and those two decisions must, therefore, be held to be per incuriam.

10. The object underlying section 186 of the Act is obvious. It 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 under section 185 of the Act erroneously. The same considerations which prevail for accordiang registration under section 185 should, in our opinion, also prevail when the registration so sought to be cancelled. If this is the real object, we cannot accept the submission that the Legislature intended that registration could be cancelled under section 186 only if the firm is found to be not factually genuine and did not so provide if a firm, having no legal existence, was registered. The power conferred by the Legislature on the Income-tax Officer under section 186 of the Act to cancel registration must cover either event, as otherwise, we cannot find an explanation for the ommission to confer power on the Income-tax Officer to cancel registration already granted to a firm which has no legal existence.

11. We are satisfied that, on the undisputed facts of this case, the firm constituted under the did of partnership dated April 5, 1971, is illegal, inasmuch as Narasimha Rao, who was a minor on the date when the partnership deed was executed, was described as a major and was a party to the agreement of partnership and the said minor was also burdened with losses, contrary to the provisions contained in section 30 of the Partnership Act. The Income-tax Officer has rightly invoked the provision of section 186 of the Act to cancel the registration already granted to the firm for the assessment year 1972-73. In view of the cancellation of registration for the assessment year 1972-73, the Revenue was right in holding that the question of continuing registration under section 184(7) of the Act for the assessment year 1973-74 did not arise. The Tribunal was in error in coming to a contrary conclusion.

12. For the aforesaid reasons, we answer the question referred to us in the negative, that is to say, in favour of the Revenue and against the assessee. In the circumstances of the case, the parties shall bear their own costs.

APPENDIX


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