1. These two appeals by the revenue relate to the assessment year 1976-77. The assessee is a firm deriving income from business in copra.
The assessee follows the mercantile system of accounting. The previous year relevant for the assessment year 1976-77 ended on 31-3-1976. The return for the assessment year had to be filed on 31-3-1976. The firm was registered for the purpose of the Income-tax Act, 1961 ('the Act'), for the assessment year 1975-76. The assessee filed the declaration in Form No. 12 for the continuation of the registration for the assessment year 1976-77 along with the return under Section 139(1) of the Act on 16-8-1976. The delay of 16 days in filing the declaration was explained in an application for condoning the delay. The ITO considered the explanation as not satisfactory and rejected the petition. In completing the assessment the firm was treated as unregistered. The ITO also noticed a peak credit of Rs, 29,800 as on 31-7-1975 in the books of account. The assessee stated that these credits represented credit purchases from farmers and dealers and that the dealers, being unregistered under the Sales Tax Act, had given bogus addresses. The books as on 31-7-1975 were credited with amounts in the names of 19 persons whose identities, according to the ITO, were not verifiable.
The total credit in the names of these persons amounted to Rs. 22,300.
This amount was added to the income as unexplained credits.
2. The assessee filed separate appeals before the AAC against the order of assessment making such addition and against the order made in the status of an unregistered firm, on refusal to allow continuation of registration. The AAC accepted the assessee's contention that the ITO erred in coming to the conclusion that out of the 22 persons in whose names the credits appeared 19 persons were bogus. In this view, the ITO should have issued summons to all the 22 parties before drawing such a conclusion. He considered the assessment as one having been made not on proper grounds. He, therefore, set aside the assessment and directed the ITO to summon the persons to whom summons had not been issued and make necessary enquiries before coming to any conclusion regarding the nature of the credits. The order dated 19-7-1979 thus setting aside the assessment is under attack by the revenue in IT Appeal No. 357 (Coch.) of 1979.
3. IT Appeal No. 358 (Coch.) of 1979 is directed against the order of even date allowing the assessee's appeal against the order treating the assessee as an unregistered firm. The assessee contended before the AAC that the delay in filing the application was negligible and properly explained and that the refusal to allow continuation of registration was not justified. Accepting this contention, the AAC condoned the delay and directed the ITO to grant registration to the firm.
4. We shall first deal with the status of the assessee, before going to the quantum appeal. The assessee had been assessed as a registered firm in the assessment year 1975-76. There was no change in the constitution of the firm in the previous year relevant to the assessment year 1976-77. The declaration filed on 16-8-1976 was, however, delayed by 16 days and the application for condoning the delay was rejected by the ITO and the assessee was refused continuation of registration.
According to the revenue, the order of the ITO, thus, rejecting the application for condonation of the delay, is one based under the proviso to Section 187(7) of the Act and it is not an appealable order ; the appeal before the AAC was, therefore, incompetent and the order of the AAC directing to grant registration to the firm was, thus, one without jurisdiction. It was pointed out that Section 246(y') of the Act which enumerates the orders from which appeals lie does not provide for an appeal from an order rejecting an application for condonation of delay. According to the departmental representative, there is no order under Section 185(1)(6) or 185(2) or 185(3) of the Act which can attract Clause (./) of Section 246 and the AAC was, therefore, wrong in having entertained the assessee's appeal. It was also stated that the ITO in rejecting the application, had only exercised his discretion, as the explanation of the assessee was not satisfactory ; and the AAC was, therefore, not justified in having interfered with the discretionary order passed by the ITO.5. The learned counsel for the assessee maintained that an appeal is specifically provided for in Section 246(j) from an order refusing registration, that the order rejecting the application for condonation of the delay in filing the declaration under Section 184(7) is in effect an order refusing to allow registration for the assessment year under consideration and that the appeal, therefore, lies before the AAC under Clause (j). It is also stated that the assessee was under the impression that the declaration need be filed along with the return of income and in fact the declaration was filed along with the return of income for 1976-77 and that there was sufficient cause for the delay.
Reference was made to the decisions reported in New Orissa Traders v.677"  107 ITR 553 (Ori.), CIT v. New India Restaurant [ 1978] 111 ITR 197 (Gauhati), Indo Traders v. CIT  111 ITR 355 (Cal.), Excel Motors v. CIT  122 ITR 379 (Ker.), CIT v. Timr Medical Hall  126 ITR 395 (Ker.), CIT v. Dineshchandra Industries  100 ITR 660 (Guj.) and Addl. CIT v. Chekka Ayyanna  106 ITR 313 (AP).
6. Under Section 246(./) any assessee aggrieved by an order of the ITO under Clause (b) of Sub-section (1) or under Sub-section (2) or Sub-section (3) or Sub-section (5) of Section 185 may appeal to the AAC against such order. An order under Section 185(1)(6) is one refusing to register the firm. Under Sub-section (2) of Section 185 the ITO may pass an order rejecting an application for registration if the defect is not rectified within a period of one month. Sub-section (3) provides that the declaration, if defective, shall be rectified within a period of one month from the date of its intimation and if the defect is not rectified within that period the ITO shall by order, in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year. Under Sub-section (5) the ITO may refuse to register the firm for the assessment year for failure as is mentioned in Section 144. These orders are made specifically appealable under Clause (j) of Section 246. The order under Sub-section (7) of Section 184 is not specifically mentioned in Clause (j). It has, therefore, to be seen whether an order passed under the proviso to Section 184(7) could be brought under Section 185(1)(&) or under Sub-section (2), (3) or (5). Sub-section (7) of Section 184 deals with the effect with regard to registration in respect of a firm to which registration has already been granted for any assessment year. It provides that such registration granted to a firm in any assessment year should have effect for every subsequent assessment year provided there is no change in the constitution of the firm or the shares of the partners and the firm files a declaration to that effect in the prescribed form within the time allowed. The sub-section clearly states that where registration is granted to a firm in any assessment year, it shall have the effect for every succeeding assessment year and the proviso only deals with the conditions to be satisfied for that purpose. It would mean that if the conditions are satisfied, the effect is the grant of registration for the assessment year in which the declaration is filed. It is only when a change has taken place in any previous year that the firm has to apply for any fresh registration.
Thus, if the ITO accepts the declaration filed by the assessee and allows continuation of registration, it has the effect of registration for that assessment year. It must follow that when the ITO rejects the declaration as belated or refused to condone the delay and thereby rejects the declaration, the effect is a refusal to grant registration for that assessment year. This order, even though it purports to be one under Section 184(7), is, in substance, an order falling under Section 185(1)(&) for the relevant assessment year. Such an order is made appealable. The order rejecting the application for condonation resulting in refusal of continuation of registration could also be treated as one falling under Sub-section (3) of Section 185. In that view also it will be an appealable order. The decision of the Andhra Pradesh High Court in Chekka Ayyanna (supra) is directly on this point.
The facts of that case are on all fours with the case before us. The ITO in that case found that there was no convincing explanation on behalf of the assessee for the late filing of the declaration under Section 184(7) and refused to allow continuation of registration to the assessee-firm. Dealing with the contention that the order was not appealable under Section 246(i), it was held that Section 185(1)(b) of the Act, brings within its purview not only applications filed for the first time for registration but also cases where continuity of previous registration is refused for subsequent years. It was further held that when the declaration is defective and the assessee has not rectified the same within the time given, any order passed by the ITO would be under Section 185(1)(6) and, hence, such an order is appealable under Section 246(j) either from the view point of Section 185(1)(Z>) or Section 185(3). The Court held that an order passed by the ITO under Section 184(7) refusing to allow continuation of registration to the firm is appealable to the AAC under Section 246(y) since it amounts to refusal to grant registration. The decision of the Gujarat High Court reported in Dineshchandra Industries (supra) and that of the Allahabad High Court in Ashwani Kumar Maksudan Lal v. Addl. CIT  83 ITR 854 were referred to. It is to be noted that Sub-section (7) of Section 184 was amended with effect from 1-4-1971 and the decisions relied on by the departmental representative, i.e., New India Restaurant (supra), Indo Traders (supra) and New Orissa Traders (supra), are cases which arose before the amendment.
7. In the recent decision in CIT v. Kepeecee Trading Co.  129 ITR 124 the Kerala High Court considered the question of continuation of registration. In that case, the assessee-firm was granted registration for the assessment year 1972-73. For the assessment year 1973-74 a declaration in Form No. 12, in compliance with the proviso to Sub-section (7) of Section 184, filed by the assessee, was beyond the time limit specified in the proviso. The explanation furnished by the assessee for the delay was rejected by the ITO who assessed the firm in the status of an unregistered firm. The appeal filed by the assessee was allowed by the AAC. The Tribunal sustained the order of the A AC, rejecting the contention of the revenue that no appeal lay before the AAC against the refusal by the ITO to allow the assessee-firm to furnish the declaration, under the proviso to Sub-section (7) of Section 184, beyond the time limit specified therein. The High Court held that the appeal was filed by the firm against the assessment order for the year 1973-74 and it was by that order, and not by a separate order, that the ITO had held that the assessee-firm was to be assessed as an unregistered firm. It was held that the assessee had the right to prefer an appeal before the AAC against the assessment order of the ITO and, in that appeal, it was open to the assessee to canvass the correctness of every finding entered by the ITO in his order of assessment and, therefore, the appeal preferred by the assessee to the AAC against the order of the ITO was competent. In the light of what has been thus stated in these decisions, we find no merit in the contention of the revenue that the appeal before the AAC was incompetent. The explanation offered by the assessee has been accepted by the AAC as satisfactory in the circumstances of the case. The conclusion does not call for any interference by us. The departmental appeal relating to the status of the assessee must, therefore, fail.
8. The other appeal relating to the quantum has also to be dismissed.
The AAC in setting aside the assessment has directed the ITO to make necessary enquiries before coming to any conclusion of the nature of the credits. The main ground urged by the revenue is that the burden is on the assessee to explain the credits satisfactorily and when the assessee has failed to discharge that burden it was not necessary for the ITO to issue summons to all the persons and the direction by the AAC to the ITO to summon the persons is, therefore, unwarranted. It is also pointed out that in spite of the summons issued to the creditors they could not be examined as they are proved to be fictitious and in such circumstances the addition was to be sustained. The assessee's counsel stated that it was not impossible for the assessee to produce the creditors if sufficient opportunity was given and in the light of the explanation given no addition could be justifiably made. The learned counsel also undertook to produce the creditors before the ITO without any summons being issued, stating that the opportunity to prove the genuineness of the credits should not, therefore, be denied to the assessee. We agree with the AAC that the ITO had made the addition without completing the enquiry regarding the nature of the credits. Now when the assessee has undertaken to produce the concerned persons it is only proper that the assessee is given an opportunity to establish his case. The assessment has been set aside by the AAC and the order is confirmed, subject to the modification that the assessee shall produce the persons before the ITO without the ITO summoning the persons as directed by the AAC.