1. This appeal is by the revenue. The appeal relates to the assessment year 1980-81. This accounting year was from 1-4-1979 to 31-3-1980 and the assessee was a firm. In the accounting period under consideration, the partners were Ratnachandra Rao, Karuna Sagar and Prakash Rayudu.
After the finalisation of accounts on 31-3-1980, Prakash Rayudu retired and the firm with two partners, i.e., Ramachandra Rao and Karuna Sagar, continued. It is not in dispute that there was only a change in constitution when Prakash Rayudu went out. It is also not in dispute, as a matter of fact that the revenue has expressly contended in its grounds of appeal and that the change in constitution took place only after the accounting year.
2. Along with the return of income for the assessment year 1980-81, a declaration was filed in Form No. 12 on 25-7-1980. This declaration was signed only by partners Ramachandra Rao and Karuna Sagar or, in other words. Prakash Rayudu was not a signatory. It is not in dispute again that the declaration as filed was in time. On 29-7-1980, Prakash Rayudu wrote a letter to the ITO which read as under : I was a partner in the firm Maddala Ramachandra Rao as per the deed or partnership from 1-4-1976 till 31-3-1980.
The managing partner of the firm asked me through mediators in the month of June 1980 to sign Form No. 12 for assessment year 1980-81, which was rejected by me as he rejected to produce the accounts for my verification.
I has some information that he was in an idea to forge my signature in the Form No. 12 for assessment year 1980-81. So, 1 request your goodself to please inform me if any Form No. 12 for assessment year 1980-81 was filed with my signature, so as to enable me to give a police complaint for forgery.
For the assessment year 1980-81, you have filed declaration under Section 184(7) in Form No. 12 on 25-7-1980.
The declaration filed is not in order since one partner out of the three partners has not signed on the declaration. You are, therefore, requested to rectify the defect in the application within a period of one month from the date of receipt of this letter. If the defect is not rectified within the stipulated time, the registration granted to the firm earlier shall not have effect for the assessment year 1980-81.
With reference to your above letter we submit the following for your kind consideration.
One of our partners Sri Maddala Prakash Rayudu, who is a working partner in our firm from 1-4-1976 to 31-3-1980, has refused to sign the declaration in Form No. 12 due to differences. In this connection we submit that he never denied that he is not a partner.
He clarified this position in writing a copy of which is already filed in your office. As such we request your honour to grant registration of firm in these circumstances.
The ITO declined to continue registration and held the status of the assessee to be that of an unregistered firm for reasons set out in the assessment order dated 30-10-1980 which we reproduce in extenso as under : Status : The assessee filed declaration under Section 184(7) in Form No. 12 for continuation of registration on 25-7-1980. The declaration filed is not in order since one partner out of the three partners has not signed on the declaration. In this office letter dated 23-8-1982, the assessee-firm is asked to rectify the defect in the declaration within a period of one month from the date of receipt of the letter. The assessee-firm is also informed that if the defect is not rectified within the stipulated time, the registration granted to the firm earlier shall not have effect for the assessment year 1980-81. In spite of the opportunity given to the assessee in terms of Sub-section (3) of Section 185, the assessee has not rectified the mistake in the declaration and as such the continuation of registration is not granted to the firm.
The assessee's status is, therefore, taken as unregistered firm for this assessment year 1980-81.
The assessee appealed to the AAC and pleaded for the continuation of registration. The operative part of the order of the AAC reads as under : It is submitted that under Section 187 of the Income-tax Act and Rule 22(5) of the Income-tax Rules, application shall be signed by all the partners of the firm as constituted at the date of application. According to the appellant, on the date of application, i.e., on the last day of the closing of the year, there were only two partners. Further, it is stated that the third partner, who retired, has given a letter to the managing partner admitting that he is a partner for the earlier period a copy of which has been filed in the income-tax office. In view of these factors and since all the partners of the firm at the close of the accounting year have signed Form No. 12, I direct the ITO to grant registration since all the formalities have been complied with.
The revenue is aggrieved with the decision of the AAC and is in appeal before us.
3. The revenue has taken five grounds in appeal and the learned departmental representative was rather particular that we should go through each of the grounds and in such circumstances we set out the five grounds below : 1. On the facts and circumstances of the case the order of the AAC granting renewal of registration is contrary to law and weight of evidence.
2. The AAC erred in granting renewal of registration to the firm in the absence of Form No. 12 which is duly signed by all the partners.
In this case one of the partners by name M. Prakash Rayudu did not sign Form No. 12.
3. The AAC ought to have noticed that in spite of the fact that the ITO duly allowed opportunity to the firm to rectify the defect in Form No. 12, the partners did not avail of the opportunity given to them. The AAC allowed renewal of registration on vague facts which are not properly supported by evidence.
4. The AAC should have appreciated that registration is a special concession conferred upon firms and before a firm can claim benefits of Section 185, the firm must strictly comply with the requirements of that section. In this connection attention is invited to the Supreme Court's judgment in Shri Ramamohan Motor Service v. CIT  89 ITR 274 and also the judgment in the case of Kylasa Sarabhaiah v. CIT  56 ITR 219 (SC). In this case the partners failed to comply with the requirements of the section and rules governing the registration of the firms.
5. The AAC's observations in para 3 of the appellate order that under Section 187 of the Income-tax Act and Rule 22(5), applications shall be signed by all the partners as constituted at the date of application, are irrelevant and founded on incorrect appreciation of facts and law. The AAC erred in holding that there was a change in the constitution during the accounting year. He should have noticed that the change was occurred only in the next financial year.
4. The learned departmental representative further sought to amplify the contentions by submitting that Rule 22(5) of the Income-tax Rules, 1962 ('the Rules') really has been framed in the context of applications made in Form No. 11 and Form No. 11A and, therefore, the date of application would have to be considered as a date obtaining within the accounting period. Accordingly, he submitted that since Prakash Rayudu is not a signatory to the declaration seeking continuation of registration and did not sign the same in spite of a specific opportunity given in terms of Section 185(3) of the Income-tax Act, 1961 ('the Act') refusal of registration was absolutely in order.
5. The learned Counsel for the assessee, on the other hand, submitted that if the provisions of Rule 24 of the Rules, which relates to the declaration for continuation of registration, are read with Rule 22(5), it will be found that in the present case there had been full compliance with the rules, because there had been only a change in constitution and not a succession and, hence, this is not a case where the earlier firm of three partners had dissolved. He, therefore, submitted that signing the declaration by two persons who were partners on the date of making the declaration fully satisfied the requirements of the rule.
6. We have considered the rival submissions. There were three persons including Prakash Rayudu who were partners till the close of the accounting period when Prakash Rayudu went out of the firm. Since such event took place only after the closure of accounts, in the entire accounting period the partners were three. The change in constitution took place only subsequent to the accounting period when Prakash Rayudu retired and the firm was continued by the remaining two partners. The revenue did not contend for the proposition that there was dissolution of the earlier firm. As a matter of fact, in ground No. 5, the contention proceeds on the basis that there was only a change in constitution when Prakash Rayudu went out.
7. The rule relevant to declarations for continuation of registration is Rule 24 which reads as under : The declaration to be furnished under Sub-section (7) of Section 184 shall be in Form No. 12 and shall be verified in the manner indicated therein and shall be signed by the persons concerned in accordance with Sub-rule (5) of Rule 22.
The application shall be signed personally by all the partners (not being minors) in the firm as constituted at the date of the application and, in the case of a dissolved firm, personally by all the persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased so, however, that in the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent him.
The only controversy is whether the declaration has been signed by the person concerned in accordance with Rule 22(5). If we read Rule 22(5) substituting for the word 'application' the word 'declaration', because this is to be done to determine who is the person concerned, then it is clear that the declaration is to be signed personally by all the partners in the firm as constituted at the date of declaration normally, save in the case of a dissolved firm. The date of declaration in the present case is 25-7-1980 on which date the firm was constituted with only two partners, Ramachandra Rao and Karuna Sagar. Therefore, the declaration has been signed by the two persons who were partners on the date of the declaration. The declaration no doubt related to the assessment year 1980-81, but if the firm in the previous year 1-4-1979 to 31-3-1980 relevant to the assessment year 1980-81 had dissolved, then it was necessary that the three persons including Prakash Rayudu, who were partners in the period 1-4-1979 to 31-3-1980, should have signed the declaration. But, the present is not a case of dissolution, but only a change in constitution and, therefore, the requirement of the partner, who had gone out, signing does not arise. The rationale is not far to seek, because where one firm has dissolved, though business may be carried on in the same name by some other partners, the new partners cannot bind the old firm and it is necessary, therefore, that the partners who were partners in the dissolved firm should all sign because the new firm is an entity different from the firm which has dissolved. But, where there is only a change in constitution, the same firm continues and the signature by the continuing partners would be sufficient, because it would bind the entity existing before the change which is the same. Therefore, in the present case, the requirements of Rules 24 and 22(5) are fully satisfied notwithstanding that Prakash Rayudu has not signed.
8. The learned departmental representative submitted that where the ITO chose to give notice requiring the third person, who was a partner in the accounting period, to sign, such requirement had to be complied with and if it was not complied with, the non-compliance would be at the peril of the assessee. The ITO put forward the requirement that Prakash Rayudu also should sign the declaration in terms of Section 185(3) which reads as under : Where the Income-tax Officer considers that the declaration furnished by a firm in pursuance of Sub-section (7) of Section 184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration within a period of one month from the date of such intimation ; and if the defect is not rectified within that period, the Income-tax Officer shall, by order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year.
This provision will come into play only where, in accordance with law, the ITO considers that the declaration furnished was not in order. In the present case, we have elucidated how the requirements of Rules 24 and 22(5) are completely satisfied by only two persons signing notwithstanding that the third person, who was a partner in the accounting period but since retired, had given his reasons for not signing and had deliberately withheld his signature. As long as the rules as framed are completely satisfied, there can be no defect in the declaration. If the requirement of the ITO is a nullity, viz., that the third person should sign to make it a valid declaration, which it is in the present case, because the requirements of the rules otherwise stand satisfied, if an assessee does not comply with the same, the assessee cannot be visited with any penalty because there is no non-compliance within any specific requirement of law. Even if it is assumed that the ITO considered it advisable and bona fide believed that the three persons, who were partners in the accounting period, should sign, as long as the legal requirement stands satisfied by only two continuing partners signing the benefit of registration cannot be refused to the assessee, because there has been strict compliance with the requirements of the section which is the proposition expressly contended for by the revenue in ground No. 4. In ground No. 4 the revenue has urged that in the present case the partners failed to comply with the requirements of the section and the rules governing the registration of firms. This in essence is the contention of the revenue. We have elucidated how there has been no failure to comply with the strict requirements of the section and the rules governing the registration of firms. This being the position, though for reasons different from those set out by the AAC, we have to hold that continuation of registration has to be allowed.
9. We are unable to agree with the learned departmental representative that we have to read anything more into the rules than that which the plain words of the rules warrant. We do not have to consider what would have been the position if, instead of the declaration, application has to be made in Form No. 11 or Form No. 11A because that is beside the point here.