1. This reference has been made by the Income-tax Appellate Tribunal, Indore, in accordance with the direction given by this court in Misc. Civil Case No. 311 of 1971, decided on November 28, 1972. The following questions have been referred :
'(1) Whether, on the facts and circumstances of the case, the renewal of registration has been validly refused by the Income-tax Officer ?
(2) Whether the refusal to renew registration was correct ?'
2. The reference arises out of the assessment for the year 1961-62. The assessee, M/s. Phoolchand Ramsahai, Neemuch, is a firm constituted of six partners, having one-sixth share each in the profits and losses of the business of the firm. It carries on business in groundnut and linseed. For the assessment year 1961-62, for which, the accounting period ended on Diwali, 1960, the assessee filed a return of income declaring an income of Rs. 8,441. The assessee also filed an application for renewal of registration under Rule 6 of the Indian I.T. Rules, 1922. The application for renewal of registration was filed on May 11, 1961.
3. The ITO refused to renew the registration of the firm observing that 'the partners of the assessee-firm have not applied for renewal of registration this year under Section 26A' and further on the ground that-
' ... no books of account have been produced. In the light of the above facts I am not satisfied that the profits have been distributed among the partners according to the share ratio mentioned in the partnership deed. The order has been passed ex parte under Section 23(4).'
4. Before the AAC, the assessee produced a certificate from the ITO to the effect that a renewal application was duly received in the income-tax office on May 11, 1961. When the ITO took up the assessment of theassessee ho served upon the assessee a notice tinder Section 23(2) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act'). But on October 28, 1965, nobody attended and a request for adjournment was made. It appears that some more adjournments were granted to the assessee and on November 8, 1965, when the authorised representative of the assessee along with a muneem--Rajmal--(son of one of the partners) attended the income-tax office and reported that the account books could not be produced, the assessee was pressed and was asked to produce the account books for the purpose of enabling the ITO to examine the accounts appearing therein. The assessee came forward with a plea that the account books had been lost in transit as they were being brought in a bedding from Neemuch to Indore. The ITO did not accept the story in regard to the loss of account books in transit and held that the account books were deliberately suppressed to avoid assessment of proper income of the assessee. The ITO, therefore, proceeded to make a best judgment assessment on the same day and also passed an order (referred to above) refusing renewal of registration.
5. When the assessee went up in appeal against this order it was pointed out that an application for renewal of registration was in fact filed and it was pointed out that the observation of the ITO is contrary to the record. The AAC held that even if the application for renewal was filed, the registration was refused because the account books were not produced under Section 23(4) for the reasons stated by the ITO and he confirmed the order passed by the ITO. On appeal, the Tribunal examined the explanation of the assessee about loss of account books in transit and rejected the same. The Tribunal held that the ITO was justified in refusing renewal of registration. An application under Section 66(1) of the Act was made on behalf of the assessee before the Tribunal but that too was rejected. Thereafter, the assessee approached this court and this court ordered as noted above, directing the Tribunal to make a reference.
6. Learned counsel appearing for the assessee contended that the ITO refused renewal of registration solely on the ground that the application for renewal was not filed and proceeded under Section 23(4) of the Act. This, according to learned counsel, was not justified in view of the provisions contained in Section 23(4) as, according to learned counsel, the order of the ITO refusing to renew registration has to be a judicial order because under Section 23(4) it is in his discretion to allow or to refuse this application. According to learned counsel, the order of the ITO is a mere mechanical order, as, in the first place, he states a wrong fact that an application was not made, and then he observes that as he has passed an order under Section 23(4) the renewal of registration is refused. This, according to learned counsel, is not exercise of discretion as contemplated by Section 23(4). Learned counsel franklyconceded that although two questions have been referred, in substance the answer to question No. 1 will automatically answer question No. 2. Learned counsel placed reliance on the decisions in CIT v. Krishnamma & Co. : 28ITR273(AP) , Trivandram Tobacco Combines v. CIT : 63ITR813(Ker) and J. M. Sheth v. CIT : 56ITR293(Mad) .
7. Learned counsel for the department contended that in fact the ITO refused renewal of registration on the ground that the books of account were not produced and, as observed by the ITO in his order, in the absence of the books of account, it was not possible for him to find out whether the profits according to the share ratio mentioned in the deed have been distributed among the partners or not. This, according to learned counsel, is good reason on the basis of which the ITO could reject the application for renewal of registration. He, however, contended that even if the observations about absence of an application are not correct, the ground about impossibility to ascertain whether profits have been actually distributed is itself a sufficient ground and it could not be said that refusal by the ITO is not justified in law. Learned counsel, however, frankly conceded that the order may not have been very well written, but hearing the appeal the Tribunal has explained this ground for refusal of registration wherein the Tribunal observed that the previous history which was before the ITO was that for the assessment year 1960-61 heavy additions were made in the accounts of the assessee because the assessee was doing business in fictitious accounts. It was found in that year by the ITO in the cqurse of the assessment that the credits appeared both in round figures and also in odd figures in the names of Rampal, Gopaldas and Narsinghdas, and all these names were admitted by the assessee to be fictitious names and it was found by the ITO that the assessee was doing business in these fictitious accounts and the same were squared up before the end of the accounting year so that they may not appear in the balance-sheet. Therefore, the income of the assessee in that assessment year was assessed over a lakh of rupees. The account books were ordered to be impounded. In this background, when the assessment for the year 1961-62 was being done, the assessee wanted some excuse to avoid the production of accounts and, therefore, he made a pretext that the books had been lost in transit. In this context, the Tribunal observed that this excuse was false and ultimately the ITO felt that, in the absence of the account books, it was not possible to find out as to whether the profits in the ratio as indicated in the deed of partnership have in fact been distributed to the partners or not. This, according to the Tribunal, was good reason for refusing renewal and, therefore, the Tribunal maintained the order of the ITO. Learned counsel, therefore, contended that the Tribunal being the appellate authority which ultimately maintained the order of the ITO and gave detailed reasons, itclearly goes to show that the ITO exercised his discretion and passed a reasoned order and, therefore, it could not be said that the order is not valid. Learned counsel did not dispute the proposition that merely because the ITO has proceeded to assess under Section 23(4) of the Act, on mere observation of this fact, renewal of registration could not be refused. But, according to learned counsel, that is not the only reason for refusing renewal in the present case.
8. In CTT v. Krishnamma & Co. : 28ITR273(AP) , the order refusing to register was in these terms:
'At any rate I am unable to register the firm now inasmuch as the assessment of the firm is made under Section 23(4) of the Act,' and it was this order refusing to register a firm that was considered in this decision by the Andhra Pradesh High Court and it was observed (page 279):
'A perusal of the entire order clearly shows that the Income-tax Officer refused registration as, in his view, the provisions of Rule 4 of the Income-tax Rules were not complied with. He did not exercise his discretion under Section 23(4), but made only a casual observation in regard to his power under that section. Section 23(4) does not purport to prescribe an automatic refusal of registration. Under that section, discretionary power is conferred on the Income-tax Officer to refuse registration in case an assessment is made under that section and, in this case, he did not purport to exercise his discretion one way or the other.'
9. It is, therefore, clear that the order passed by the ITO in this case did not indicate that he exercised his discretion one way or the other as contemplated under Sub-section (4) of Section 23 of the Act.
10. In Trivandrum Tobacco Combines v. CIT : 63ITR813(Ker) , their Lordships of the Kerala High Court agreed with the view of Subba Rao C.J. in CIT v. Krishnamma & Co. : 28ITR273(AP) and held that merely because the ITO has chosen to proceed under Section 23(4) to make a best judgment assessment,--merely on that ground--registration cannot be refused. In J.M. Seth v. CIT : 56ITR293(Mad) , their Lordships of the Madras High Court observed that merely because the ITO has proceeded to make a best judgment assessment under Section 23(4) of a firm for non-production of books of account, the ITO is not bound to cancel the registration.
11. It is, therefore, clear that merely on the ground that the ITO has proceeded to make the best judgment assessment, the registration cannot be refused and the ITO while refusing renewal of registration has to give reasons for his order. And to this proposition of law there is no contest. The only question before us is as to whether the order passed by the ITO and further clarified by the appellate authority, i.e., the Tribunal, goes to showthat the ITO exercised discretion and passed the order refusing to renew registration.
12. The order in question reads :
'Order under Section 26A.---The partners of the assessee-firm have not applied for renewal of registration this year under Section 26A. Further, no books of account have been produced. In the light of the above facts, I am not satisfied that the profits have been distributed among the partners according to the share ratio mentioned in the partnership deed. The order has been passed ex parte under Section 23(4). The renewal of registration is refused and the status of the firm is treated as unregistered firm. Dated Ratlam 27-1-66.'
13. If this order is analysed, it indicates that registration was refused for three reasons : (i) that no application for renewal has been made under Section 26A ; (ii) that account books have not been produced and the ITO is not satisfied that the profits have been distributed among the partners in accordance with the share ratio as mentioned in the deed of partnership; and (iii) that the order has been passed ex parte under Section 23(4).
14. It is no doubt true that the first reason stated by the ITO is not correct and in view of the law settled, the third reason alone could be no reason for refusal to renew registration. But so far as the second reason is concerned, it could not be doubted that it does indicate the exercise of discretion. The Tribunal has explained that in the context of the past history of the earlier assessment the ITO wanted to satisfy himself as to whether in fact the profits have been distributed among the partners and that it has been done in the same ratio as shown in the deed of partnership. It could not be disputed that if the ITO comes to this conclusion that the profits have not been distributed among the partners and that it has not been distributed in the same ratio as shown in the deed of partnership, the ITO will be right in refusing to renew the registration. It appears that the whole controversy has arisen because the order of the ITO is not a well written order. But the appellate authority, which ultimately maintained the order, has in detail discussed how the discretion is exercised. And even the order passed by the ITO as analysed above clearly shows that the second reason indicated in the order clearly gives a good reason indicating the exercise of discretion. If the second reason were not stated in the order, probably the contention advanced by learned counsel for the assessee would be accepted; but the second reason clearly indicates application of mind and exercise of discretion by the ITO.
15. In this view of the matter, our answer to the first question is in the affirmative. The answer to the second question follows. Reference is answered accordingly. Parties are directed to bear their own costs.