1. The assessee in appeal is V.S. Madhusudan Dayal & Co. of Delhi. The year of assessment involved is 1975-76.
2. Admittedly, the assessee-firm came into existence in June 1971 with three partners, namely, Shri Madhusudan Dayal, Shri Varinder Singh and Shri Narinder Singh. By the time the impugned order in the present case under Section 184(7) of the Income-tax Act, 1961 ("the Act") was passed by the ITO for the year under consideration, the assessee-firm had already been granted registration for the accounting period relevant to the assessment year 1972-73 and continuation of registration for the accounting period relevant to the assessment years 1973-74 and 1974-75.
The ITO on application made by the assessee-firm for continuation of registration under Section 184(7) for the year under consideration noticed that the said application was in the prescribed form No. 12 requesting for continuation of registration and that application was in order and in time. He, however, disallowed continuation of registration on the ground that in terms of the partnership deed constituting the assessee-firm the profits/losses of the firm to be distributed were the net and not gross amount. According to the ITO, the division of gross receipt, after defraying fixed expenses as provided under the partnership deed, was not envisaged in the Indian Partnership Act, 1932. According to the partnership deed, the profits of the assessee-firm were to be distributed after defraying Rs. 2,000 as fixed expenses to the partners Shri Varinder Singh and Narinder Singh out of the gross receipt and giving them one-eighth of the resultant balance, although their shares in the profits and loss were two annas each and that of partner Shri Madhusudan Dayal of 12 annas in a rupee. Shri Madhusudan Dayal was to incur all other expenses and he had to receive the resultant income. The ITO further observed that the profits of the assessee-firm had not been distributed according to the terms and conditions of the partnership deed.
3. Aggrieved by the said order of the ITO under Section 184(7), the assessee-firm brought the matter by way of appeal before the AAC. He went into the terms and conditions of the partnership deed and came to the conclusion that though, as required by the Indian Partnership Act, 1932, the net profits of the partnership were to be shared by the partners, the partners Shri Varinder Singh and Shri Narinder Singh were entitled to share in the profit of the income earned from commission and not any other income of the firm. What was more was that for the purpose of determination of share of these two partners which is 25 per cent of the gross commission receipts was taken first and then out of it an estimated expenditure of Rs. 2,000 was deducted and the balance so left was to be divided equally between these two partners. According to him, what was being divided by those two partners was the 25 per cent of the gross commission receipts which was certainly not the net profit of the firm. The deduction of Rs. 2,000 was also an estimated expenditure which might or might not have been incurred by the partners. Shri Madhusudan Dayal was not liable for the expenditure of Rs. 2,000, as his share, according to the partnership deed, was the net profit left after deducting all the expenses of the partnership and the shares of the other two partners in the manner mentioned above. To say in other words, his share which was stated to be 75 per cent was not in the net profit of the firm. From this, the AAC inferred that the share of the partners not being defined with reference to the net profit of the firm, the firm could not be considered to be a firm validly established under the Indian Partnership Act, 1932. The present case was not a case of a genuine firm. Further, the partners in the present case had not at all divided the net profit of the firm. He, therefore, agreed with the ITO to refuse confirmation of registration on the above score.
4. At the same time, he set aside the order of the ITO and restored the case to his file to pass a fresh order in accordance with law by observing as under : Shri Sethi pointed out that the order of the ITO refusing renewal of registration could only be under Section 186(1). According to him the order of the ITO under appeal was in fact the order under Section 186(1). That being so he further pointed out that the said order was not according to the provision of Section 186(1), because no reasonable opportunity was given to the assessee and also because no previous approval of the Inspecting Assistant Commissioner of Income-tax was taken, before cancelling the registration of the firm. I find from the records that this contention of Shri Sethi is correct. The ITO did not issue any notice to the assessee to this effect nor he obtained any previous approval of his IAC. The order of the ITO, therefore, suffers from this defect and has to be set aside on this account.
5. In the appeal before the Tribunal, the learned counsel for the assessee Mr. Gupta urged that the admission made by the assessee before the AAC that Section 186(1) of the Act could be applied to the application made by the assessee under Section 184(7), being an admission against law, has to be ignored. There is never an estoppel against law. According to the learned counsel for the assessee, Mr.
Gupta, the ITO can take recourse to Section 186(1) to cancel the registration of a firm for the year for which it was registered or for which it has granted registration as effective under Section 184(7). In this connection, he laid down great emphasis on the words "as registered" in Section 186(1). According to Mr. Gupta, Section 186(1) cannot be invoked by the ITO in the proceedings arising out of the application made by the assessee under Section 184(7). Mr. Gupta further urged that once the assessee-firm was granted registration and the assessee for a subsequent year made the requisite application as required by Section 184(7) then the assessee was entitled as a matter of right to continuation of registration, provided the firm furnished before the expiry of time for filing the return of income under Section 139, the declaration signed by the partners showing that there is no change in the constitution of the firm or in the shares of the firm, if such an application is filed in time and is in order. The ITO cannot refuse continuation of registration to the assessee-firm even if there is a defect in the partnership deed and the profits are not distributed amongst the partners in such subsequent year. Once the continuation of registration is granted under Section 184(7), the ITO, if he makes out a case, can pass an order under Section 186(1) to cancel the same but not prior to the granting of continuation of registration.
6. These arguments are controverted by the departmental representative who has urged that the assessee in the present appeal cannot be permitted to argue that the admission made by the assessee before the AAC could not be used against it. The plea to that effect was never raised by the AAC and so the assessee could not be heard in this respect. Further, the powers of the AAC under the Act are wider than of the Appellate authority under the Code of Civil Procedure and those powers are not restricted to the subject-matter of appeal. He can examine the matter covered by the assessment and correct the assessment order in respect of such matter even to the prejudice of the assessee.
His powers are co-extensive to the powers of the ITO under the Act. The AAC could, therefore, in the appellate proceedings take recourse to Section 186(1), which according to the departmental representative, was rightly invoked by the AAC, more so when there was a concession from the side of the assessee.
7. We have given consideration to the above arguments. There is no estoppel against law. The assessee before us is bound by admission of facts made by it before the tax authorities unless he proves the admission to be wrong on facts but on a point of law, the admission, if any, made wrongly, is no admission in the eyes of law. That being the position, if it is correct as urged by the learned counsel for the assessee before us, that Section 186(1) could not be invoked in the present case involving an order to be passed on the application made by the assessee for continuation of registration then the concession made by the assessee before the AAC that the provisions of Section 186(1) were attracted to the proceedings under Section 184(7) has to be ignored.
(1) If, where a firm has been registered, or its registration has effected under Sub-section (7) of Section 184 for an assessment year, the ITO is of the opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the IAC cancel the registration of the firm for that assessment year : A perusal of this provision clearly shows that if the firm was not genuine and was wrongly registered in the past or was genuine but ceased to be a genuine firm, the ITO may cancel its registration or for which it had effect of registration under Section 184(7) (sic). The words "as registered" in Section 186(1) make it implicitly clear that the power of the ITO under Section 186(1) embraces only to those cases where registration is initially granted or extended by virtue of the provisions of Section 184(7) is sought to be cancelled. To say in other words, Section 186(1) talks of cancellation of registration already granted in the manner indicated herein before and not in a proceeding arising out of the application contemplated by Section 184(7). We, therefore, agree with the learned counsel for the assessee, Mr. Gupta, that Section 186(1) has no application to the proceeding initiated pursuant to the application contemplated by Section 184(7). The concession to that effect made by the assessee before the AAC being contrary to law is not of any avail to the department, since the effect of the order of the AAC restoring the matter to the ITO will be to take action under Section 186(1) in the proceeding initiated persuant to the application contemplated by Section 184(7) but the provision of Section 186(1) cannot be invoked to those proceedings. To say in other words, the effect of the impugned order of the AAC will be to confer jurisdiction on the ITO which he does not have. It is well established in law that jurisdiction cannot be conferred by consent on an authority which in law it does not possess. That being the position, the order of the AAC setting aside the order of the ITO to take proceedings under Section 186(1) is bad in the eyes of law and cannot be sustained. We hold like that.
9. As already stated above, the application contemplated by Section 184(7) was made by the assessee-firm in time and the same was in order, inasmuch as, it was signed by all the partners. There was no change in the constitution of the firm or in the share of the partners. That being the position, the ITO could not refuse continuation of registration of the assessee-firm, even if the apportioning of the profits under the partnership deed constituting the assessee-firm was not permissible under the Indian Partnership Act, 1932, or even if the profits were not apportioned amongst the partners in the year under consideration in the manner contemplated by the partnership deed or even if there is defect in the partnership deed which was not noticed in the prior years. See in this connection the commentary at page 1020 by Kanga and Palkhivala in Law and Practice of the Income-tax (7th edn., Vol. 1). That being the position in law, the orders of the tax authorities refusing continuation of registration to the firm on the ground that the profits have not been distributed amongst the partners in accordance with the provisions of the partnership deed or in the manner permissible under the Indian Partnership Act, 1932 cannot be sustained. The order of the AAC could not be sustained in law since the application for continuation of registration was made in time and was in order. The assessee-firm is entitled to the continuation of registration for the year under consideration.