CHANDRA REDDY, C. J. - At the instance of the Commissioner of Income-tax, Hyderabad, this court required the Income-tax Appellate Tribunal to refer the following question of law decision of this court, namely :
'Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in directing the Income-tax Officer to restore the status of the registered firm to the assessee for the year 1945-46 and to renew the registration to the firm for the year 1946-47 and the Appellate Assistant Commissioner to receive the application filed under rule 2 (c) of the Indian Income-tax Rules for the year 1947-48 and dispose of it according to law.'
In compliance with the direction of this court, the Tribunal submitted a statement of the case.
The facts giving rise to the reference may be briefly set out. The assesses, who are dealers in hardware goods at Hindupur in Anantapur District, were originally assessed for the assessment year 1945-46 on a turnover of Rs. 24,668 under section 23 (3) of the Indian Income-tax Act. In the course of investigation in regard to the assessment for the years 1946-47 and 1947-48, it came to the knowledge of the concerned Income-tax Officer that the assesses had omitted to account for the entire sales, that some of the sales were camouflaged as cash advances and also that fictitious sale bills were prepared. Consequently, he issued a notice under section 34 of the Act for reopening the assessment. The assesses were also required to produce their account books by a notice issued under section 22 of the Act. As they failed to do so, the Income-tax Officer proceeded to compute the assessable income to the best of his judgment under section 23 (4). He also canceled the registration of the firm which was originally granted and refused to renew the registration for the year 1946-47, after notice to the assesses to show cause why this should not be done. It may also be mentioned that no application was made before the Income-tax Officer for renewal of registration for the year 1947-48.
The assesses filed appeals before the concerned Appellate Assistant Commissioner against the orders of assessment as well as the orders regarding registration of the firm. During the pendency of these appeals, the assessee-firm filed a petition before the appellate authority for renewal of registration for the assessment year 1947-48 under rule 2 (c) of the rules framed under section 59 of the Income-tax Act. The Appellate Assistant Commissioner upheld all the orders of the Income-tax Officer and dismissed all the appeals. He also declined to admit the application under rule 2 (c).
The assesses thereupon carried appeals to the Tribunal. The Tribunal, which confirming the order of assessment for the years 1945-46 and 1946-47, gave slight relief in respect of the assessment for the year 1947-48. It, however, reversed the orders of the Income-tax Officer as regards the cancellation of the registration and the refusal to renew the registration for the subsequent year. The Tribunal further directed the Appellate Assistant Commissioner to entertain the application from the assesses for renewal of registration for the year 1947-48 under rule 2 (c) and dispose it of according to law.
When the Tribunal was requested by the Department to refer the matter from the opinion of this court under section 66 (1), it refused to do so on the ground that no questions of law arose in the matter. It was then that the Department invoked the jurisdiction of this court under section 66 (2) and, as already stated, this court directed the Tribunal to state a case on the question of law referred to above.
The first point that falls for decision is whether the order of the Tribunal in so far as it had set aside that of the Income-tax Officer as confirmed by the Appellate Assistant Commissioner is valid and, secondly, whether the interference by the Tribunal with the order of the Appellate Assistant Commissioner refusing to entertain the application under rule 2 (c) is warranted by section 33 (4) of the Income-tax Act.
It is apparent from the statement of the case and the order of the Tribunal that the Tribunal allowed the appeals of the assessee in regard to registration of the firm in the view that the assessee was a firm and this fact was not contradicted by the Department. It is thus clear that the Tribunal proceeded on the erroneous assumption that the matter dealt with by the Income-tax Officer fell under section 26A, overlooking the circumstance that it was under section 23 (4) that the Income-tax Officer canceled the registration for the year 1945-46 and refused to renew it for the year 1946-47. Thus, the Tribunal misdirected itself on the question for determination before it. It did not go into the question as to whether the Income-tax Officer had exercised his discretion properly or not.
It was argued by Sri Srinivasan for the assesses that the Income-tax Officer was under a mistaken impression that section 23 (4) was a mandatory provision with regard to cancellation of registration and that it was this that was responsible for cancellation of registration and the refusal to register the firm for the subsequent year. He also urged that the order of the Income-tax Officer was vitiated by reason of his not mentioning the grounds for cancellation of registration and for refusal to renew it. While we may agree with the counsel for the assesses that it is not incumbent upon the Income-tax Officer either to cancel registration or refusal to renew it and that the section vests a discretion in the officer concerned in that behalf and it does not purport to prescribe an automatic cancellation of registration or refusal to renew the registration, we cannot assent to the proposition that he should give separate reasons for exercising his discretion against the assesses. All that is needed is that there should be an express order canceling the registration etc. to indicate that he had applied his mind to the circumstances of the case and come to the conclusion that the power conferred on him by the section should be exercised against the assessee. It is not obligatory on his part to give independent reasons.
That this is so, is plain from the language of section 23 (4) which runs as follows :
'If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a revised return under sub-section (3) of the same section or fails to comply with all the terms of a notice issued under sub-section (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of this section, the Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if its is already registered.'
The section contemplates that after making the assessment to the best of his judgment the Income-tax Officer could also refuse to register the firm or cancel its registration if it is already registered. This is the effect of the use of the word 'and' after the expression 'on the basis of such assessment' and before the words 'in the case of a firm etc.' Having regard to the terms of the section, it is beyond controversy that the proper officer may as part of the order making the assessment to the best of his judgment also either cancel the registration, if the firm was already registered, or refuse to register it. The Income-tax Appellate Tribunal has not at all adverted to this aspect of the matter, namely, whether the Income-tax Officer has exercised his jurisdiction judiciously or not. On the other hand, the Tribunal thought that the Officer acted illegally in either canceling the registration for the previous year or refusing to renew it for the subsequent year, when the genuineness of the firm was not put in issue before it.
For these reasons, we must answer the question referred to in favour of the Department with regard to the years 1945-46 and 1946-47.
The next question for our consideration is whether the Tribunals decision directing the Appellate Assistant Commissioner to receive the application under rule 2 (c) and dispose of it according to law is warranted by the provisions of section 23 (4). The contention pressed upon as by Sri Srinivasan for the assesses in this behalf is that the Appellate Assistant Commissioner was influenced by irrelevant considerations in refusing to take cognisance of the application made under rule 2 (c). According to rule 2 (c), it was competent for the Appellate Assistant Commissioner to decide whether there were sufficient grounds to take on file the application filed in the course of proceedings before him and that it was outside his jurisdiction to consider whether there were grounds for renewing the registration or not.
We think that there is substance in this argument. It should be remembered that rule 2 (c) was framed under section 59 of the Income-tax Act. Section 26A does not prescribe the procedure to be adopted in regard to filing an application or the time within which such application should be filed. Consequently rules were framed by the competent authority to serve that purpose. Rule 2 (c) inter alia sets the limit within which such application has to be filed. That rule is in these words :
'Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf.
Such application shall be signed by all the partners (not being minors) personally and shall be made -
(c) with the permission of the Appellate Assistant Commissioner hearing an appeal under section 36 of the Act, before the assessment is confirmed, reduced, enhanced or annulled.'
It is immediately clear from this rule that clause (c) envisages only the condonation of delay by the Appellate Assistant Commissioner. It is open to him to accord permission to file a petition at that stage if he is satisfied that there are sufficient grounds for not filling the application before the Income-tax Officer. But he is not called upon to decide whether the registration should be renewed or not. That is a function entrusted by the Act to the Income-tax Officer.
However, that is not decisive of the matter here. It is not on the ground that the Appellate Assistant Commissioner exceeded his jurisdiction in going into the merits of the application for renewal of registration that his order was reversed by the Tribunal. In fact, the Tribunal does not seem to have been conscious of the scope and ambit of rule 2 (c). The Tribunal thought that since there were enough penal provisions, it was not necessary to refuse to entertain the application under rule 2 (c). It should be remembered that rule 2 (c) has clothed the Appellate Assistant Commissioner with discretion either to accord permission or refuse permission to file an application for registration depending upon whether or not a case has been made out for making the application at that stage before him. Of course, if the jurisdiction was perversely exercised, it is open to the Tribunal to set it right. But the Tribunal has not adverted to this aspect of the case. On the other hand, it thought that instead of refusing permission the Appellate Assistant Commissioner should resort to other penal provisions of the Income-tax Act.
For these reasons, we hold that the Tribunal had not acted in accordance with law in directing the Appellate Assistant Commissioner to admit the application under rule 2 (c) and dispose of it according to law. This question is answered in favour of the assesses.
It is open to the Tribunal to pass such orders as are necessary in this behalf under section 66 (5) of the Income-tax Act. The assesses will pay the costs of the Department. The advocates fee is fixed at Rs. 250.
Reference answered accordingly.