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Badri NaraIn Kashi Prasad Vs. Addl. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 637 of 1972
Judge
Reported in[1981]128ITR663(All)
ActsIncome Tax Act, 1961 - Sections 184(7), 263 and 263(1)
AppellantBadri NaraIn Kashi Prasad
RespondentAddl. Commissioner of Income-tax
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateA. Gupta, Adv.
Excerpt:
- - 10. the full bench decision*,therefore, upheld the conclusions of the commissioner of income-tax as well as the tribunal, but on different grounds. it can also appeal against an order refusing to grant registration as well as an order cancelling registration under section 246 of the act. act, 1961. in the aforesaid decision it was held that the order refusing to renew registration was appealable underclause (c) of section 246 of the act as well. 25. this case is clearly distinguishable. ' 33. if as a result of an error committed by the ito there is a diminution in the quantum of tax payable by an assessee, it is clearly a case of an error being prejudicial to the interests of the revenue......1969. in the body of these assessment orders the ito granted renewal of registration to the assessee-firm. 3. the cit found that chandi prasad, one of the minors, had attained majority on 4th january, 1964, and thereafter he had been made a full-fledged partner in the firm. he felt that there has been a change in the constitution of the firm, and since no fresh partnership deed was drawn up, the renewal of registration with effect from 1965-66 onwards was erroneous and prejudicial to the interests of the revenue. since assessment years 1965-66 to 1967-68 were beyond the prescribed period of limitation for action under section 263(1) of the i.t. act, he issued notices for the assessment years 1968-69 and 1969-70, after hearing the assessee he concluded that chandi prasad attained.....
Judgment:

Satish Chandra, C.J.

1. The assessee is a registered firm constituted under an instrument of partnership of April 8, 1960. It consisted of five partners. Two minors were admitted to the benefits of the partnership.

2. For the assessment year 1961-62 the firm was granted registration. It was renewed from year to year up to 1969-70. For the year 1968-69 the assessment order was passed on 8th July, 1969, and for the assessment year 1969-70 on 4th December, 1969. In the body of these assessment orders the ITO granted renewal of registration to the assessee-firm.

3. The CIT found that Chandi Prasad, one of the minors, had attained majority on 4th January, 1964, and thereafter he had been made a full-fledged partner in the firm. He felt that there has been a change in the constitution of the firm, and since no fresh partnership deed was drawn up, the renewal of registration with effect from 1965-66 onwards was erroneous and prejudicial to the interests of the revenue. Since assessment years 1965-66 to 1967-68 were beyond the prescribed period of limitation for action under Section 263(1) of the I.T. Act, he issued notices for the assessment years 1968-69 and 1969-70, After hearing the assessee he concluded that Chandi Prasad attained majority on 4th January, 1964, and had been made a full-fledged partner of the firm. In view of the decision of this court in Ganesh Lal Laxmi Narain v. CIT : [1968]68ITR696(All) , and as there has been a change in the constitution of the partnership, since no fresh partnership deed had been drawn up, the renewal of registration was erroneous and prejudicial to the interests of the revenue. He, therefore, cancelled the registration for both the aforesaid assessment years, and directed the ITO to recompute the tax demand treating the firm as unregistered.

4. Aggrieved by this order of the Commissioner dated 25th February, 1971, the assessee went up in appeal to the Tribunal. The Tribunal upheld the findings of the Commissioner.

5. It appears that the assessment order for the year 1968-69 dated 8th July, 1969, was taken up by the assessee in appeal. The appeal was decided on 22nd August, 1970. The assessment order for the year 1969-70 was similarly subjected to an appeal by the assessee. The same was pending when the Commissioner passed the order cancelling the registration on 25th February, 1971. This appeal was ultimately decided on 8th July, 1971.

6. The second submission before the Tribunal was that the order of the ITO granting registration merged in the appellate order. The Commissioner had no jurisdiction to interfere with the appellate order. The Tribunal repelled this submission. It held that the order granting registration did not merge in the appellate order passed in relation to the assessment order. The Tribunal dismissed the assessee's appeal.

7. At the instance of the assessee the Tribunal has referred the following questions of law for our opinion :

'1. Whether, on the facts and in the circumstances of the case, that part of the order of the Income-tax Officer by which he allowed continuation of registration to the assessee-firm for the assessment year 1968-69 and 1969-70 merged in the order of the Appellate Assistant Commissioner

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner had jurisdiction to cancel the order of the Income-tax Officer granting continuation of registration to the assessee-firm for the assessment years 1968-69 and 1969-70 as erroneous in law in so far as they were prejudicial to the interests of the revenue ?'

8. When this reference came up for hearing, a Division Bench felt that the decision of this court in Ganesh Lal Laxmi Narain v. CIT : [1968]68ITR696(All) required reconsideration. It, therefore, referred the following question to a Full Bench :

'Where a minor admitted to the benefits of a partnership attains majority and elects to be a partner of the firm, is there a change in the constitution of the firm as contemplated by Clause (i) of the proviso to Sub-section (7) of Section 184 of the Income-tax Act, 1961 ?'

9. The Full Bench held, Badri Narain Kashi Prasad v. Addl. CIT, : [1978]115ITR858(All) that when a minor attains majority and elects to be a partner in the firm, there is no change in the constitution of the firm, but there is a change in the shares of the partners. In case the original instrument of partnership evidences this change, the firm is entitled to continuance of the registration under Section 184(7) of the Act. On facts it was held that the original instrument of partnership did not provide for the ascertainment of the shares after the minor attained majority and became a full partner. In this case there was a change in the shares, but the original, instrument did not evidence it. The firm was not entitled to continuance of registration.

10. The Full Bench decision*, therefore, upheld the conclusions of the Commissioner of Income-tax as well as the Tribunal, but on different grounds. In this view it becomes necessary to examine the question of law, whether an order granting registration can merge in an order passed in appeal against the assessment order.

11. As already noticed, this question has become material because under Section 263(1) the Commissioner can interfere with an order passed by the ITO. He cannot do so in relation to an appellate order.

12. On behalf of the assessee it was submitted that when the assessee took the assessment order in appeal, the order granting renewal of registration, which was part of it, also became merged in the appellate order, and sowas outside the purview of the revisional jurisdiction of the Commissioner .

13. The question for consideration is whether an order granting registration is a part of the order of assessment.

14. Under the I.T. Act, a firm is an assessee, under Section 2(31), whether it is registered or not. The I.T. Act does not impose an obligation on firms to apply for and obtain registration. Even if a firm is registered in pursuance of an application made by it, no difference arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the ITO. The computation of taxable income is not at all affected by the registration or otherwise of the firm. The only effect of registration is that the determination of the tax payable and making the demand for the tax so found due, changes according as the firm is registered or unregistered--vide Sections 152 and 153 of the Act.

15. The Supreme Court in CIT v. Amritlal Bhogilal & Co. : [1958]34ITR130(SC) , held that this does not affect the computation of taxable income. It ruled (p. 137):

'It is important to bear in mind that the order granting registration to an assessee-firm is an independent and separate order and it merely affects or governs the procedure to be adopted in collecting or recovering the tax found due.'

16. The assessment order computes the taxable income. The order granting registration, changes the method of determining the tax payable. The two are independent and separate orders, 'determining entirely different subject-matters.

17. In that case it was also held that the question whether the order granting registration can be challenged by the revenue before the AAC where the assessee-firm has preferred an appeal against the order of assessment needed consideration, and it was ruled that in the scheme of the Act it is only the assessee who is given a right to make an appeal. The department has no right of appeal. The assessee can appeal against the assessment order. It can also appeal against an order refusing to grant registration as well as an order cancelling registration under Section 246 of the Act.

18. A Bench of this court in I.T.R. No. 161 of 1976 (ITO v. Vinod Krishna Som Prakash) decided on 23rd August, 1978 [since reported in : [1979]117ITR594(All) ], accepted the decisions of the Gujarat High Court in CIT v. Dineshchandra Industries : [1975]100ITR660(Guj) and of the Andhra Pradesh High Court in Addl. CIT v. Chekka Ayyanna : [1977]106ITR313(AP) , that the order refusing to renew registration is appealable at the instance of the assessee under Section 246(j) of the I.T. Act, 1961. In the aforesaid decision it was held that the order refusing to renew registration was appealable underClause (c) of Section 246 of the Act as well. Thus, an assessee can appeal against an order refusing to renew registration.

19. But no appeal has been provided against an order granting registration. The assessee is under no obligation to apply for registration. It is his option. If he exercises the option and applies for registration, and the same is granted, he can possibly be not aggrieved against such an order. That is why no appeal has been provided against an order granting registration. The department has, of course, no right of appeal against such an order. Apparently the order granting registration is outside the purview of the AAC while exercising appellate powers. In the aforesaid decision of Amritlal Bhogilal's case : [1958]34ITR130(SC) , the Supreme Court emphasised this. It ruled (p, 138):

'The powers of the Appellate Assistant Commissioner, however wide, have, we think, to be exercised in respect of the 'matters which are specifically made appealable under Section 30(1) of the Act. If any order has been deliberately left out from the jurisdiction of the Appellate Assistant Commissioner it would not be open to the appellate authority to entertain a plea about the correctness, propriety or validity of such an order. Indeed, if the respondent's contention is accepted it would virtually give the department a right of appeal against the order in question......'

20. It was held that the AAC could not cancel the order granting registration in exercise of his appellate jurisdiction.

21. The Supreme Court dealt with the question of an assessee's appeal against an order of assessment, and it held that it is true that in dealing with the assessee's appeal against the order of assessment the AAC may modify the assessment, reverse it or send it back for further enquiry; but any order that the AAC may make in respect of any of the matters brought before him in appeal will not and cannot affect the order of registration made by the ITO. If that be the true position, the order of registration passed by the ITO stands outside the jurisdiction of the AAC and does not strictly form part of the proceedings before the appellate authority. The Supreme Court then proceeded to hold (p. 139):

'Even after the appeal is decided and in consequence the appellate order is the only order which is valid and enforceable in law, what merges in the appellate order is the Income-tax Officer's order under appeal and not his order of registration which was not and could never become the subject-matter of an appeal before the appellate authority. The theory that the order of the Tribunal merges in the order of the appellate authority cannot, therefore, apply to the order of registration passed by the Income-tax Officer.....'

22. The Supreme Court drew a clear distinction between an order granting registration and an order of assessment. The two are separate andindependent. The appeal against the assessment order does not take within its purview the order granting registration.

23. It is true that the Supreme Court decision was in relation to orders of registration passed under the Act of 1922, but from the point of view of appealability and merger the position is the same under the 1961 Act.

24. Learned counsel for the assessee heavily relied upon a decision of this court in J. K. Synthetics Ltd. v. Addl. CIT : [1976]105ITR344(All) . In that case it was held that in an appeal against an assessment order the AAC had jurisdiction to look into and decide upon findings given not only against the assessee but also in his favour, because the entire subject-matter of the assessment order was within his jurisdiction.

25. This case is clearly distinguishable. The question whether an assessment order can encompass the order granting registration was neither raised nor decided there. The case was confined to the scope of appeal against an assessment order in relation to the various findings in the assessment order.

26. Learned counsel for the assessee then invited our attention to a circular issued by the Board of Direct Taxes in 1962 intimating that in a case where a minor attains majority, registration should not be refused on the ground that a fresh instrument of partnership was not drawn up. It was stressed that the circulars issued by the Board were binding on all I.T. authorities. That may be so. But this circular of the Board was modified by another circular dated 20th March, 1969, in which this position was not held to obtain in Uttar Pradesh. The Board's circular dated 20th March, 1969, having clarified the position, the Commissioner was entitled to interfere subsequent to that date, namely, on 25th February, 1971, when he passed the impugned order.

27. There is one more difficulty in accepting the assessee's submission in relation to the assessment year 1969-70. In respect of this year the Commissioner passed the order cancelling registration on 25th February, 1971. On that day the appeal filed by the assessee against the assessment order for this year was still pending. It was ultimately decided on 8th July, 1971. On 25th February, 1971, when the Commissioner acted, there was no appellate order in existence. During the pendency of an appeal against an order of assessment, the latter cannot merge in it. In Amritlal Bhogilal's case : [1958]34ITR130(SC) the Supreme Court at p. 140 held :

' There can be no doubt that even on the theory of merger the pendency of an appeal may put the order under appeal in jeopardy but until the appeal is finally disposed of, the said order subsists and is effective in law. It cannot be urged that the mere pendency of an appeal has the effect of suspending the operation of the order under appeal.'

29. For this year, therefore, there can be no question of the ITO's order having become non-existent by virtue of the theory of merger. The Commissioner could hence validly interfere with it.

30. In respect of the first question, the position seems to be that the order allowing continuance of registration does not merge in the appellate order passed in an appeal filed by the assessee against an order of assessment.

31. The second question referred for our opinion raises the question whether an erroneous grant of continuance of registration can be said to be prejudicial to the interests of the revenue.

32. In Addl. CIT v. Saraya Distillery [1978] 115 ITR 34, this court agreed with the view taken by the Calcutta High Court in Dawjee Dadabhoy & Co. v. S. P. Jain : [1957]31ITR872(Cal) :

'The words prejudicial to the interests of the revenue ' have not been defined, but it must mean that the orders of assessment challenged are such as not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized. It can mean nothing else.'

33. If as a result of an error committed by the ITO there is a diminution in the quantum of tax payable by an assessee, it is clearly a case of an error being prejudicial to the interests of the revenue. In Amritlal Bhogilal's case : [1958]34ITR130(SC) , the Supreme Court upheld that the Commissioner could exercise his revisional powers in a case where the ITO erroneously grants registration. The interests of the revenue are prejudicially affected because if the firm is assessed in the status of an unregistered firm, the entire income is assessed in its hands, yielding a larger revenue, as compared to it being assessed as a registered firm.

34. In the result both the questions of law referred for our opinion are answered in favour of the department and against the assessee. The Commissioner would be entitled to costs, which are assessed at Rs. 200.


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