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Commissioner of Income-tax Vs. Mothooram Premchand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference Nos. 85, 86, 88 and 89 of 1974
Judge
Reported in(1980)14CTR(P& H)110; [1980]121ITR59(P& H)
ActsIncome Tax Act, 1961 - Sections 184, 184(7), 185, 185(1), 185(4) and 246
AppellantCommissioner of Income-tax
RespondentMothooram Premchand
Appellant Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Respondent Advocate B.S. Gupta,; C.R. Dhayia,; A.N. Mittal and;
Cases ReferredNavnit Lal C. Javeri v. K.K. Sen
Excerpt:
.....acquire knowledge of passing of the said order. - 185. (1) on receipt of an application for the registration of a firm, the income-tax officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and--(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm. these are to be dealt with under section 185. in case the ito is satisfied that during the previous year there was a genuine firm in existence, he shall pass an order for registering it. it is, however, the procedure that..........refused registration to m/s. mothooram premchand, phagwara (hereinafter to be referred to as the 'assessee-firm') for the assessment year 1967-68, on the basis of the order, he rejected the application of the assessce-firm for continuation of registration under section 184(7) of the act, for the assessment year 1968-69. he also made an assessment of the firm as an unregistered firm. two appeals were filed against the orders of the ito before the aac. the appeal against the order under section 184(7) was dismissed by him on the ground that it was not maintainable. he also dismissed the other on the ground that there was no merit in it. the assessee-firm filed two appeals against the orders of the aac before the income-tax tribunal, namely, i.t.a. no. 751/72-73, praying that the.....
Judgment:

R.N. Mittal, J.

1. This judgment will decide references Nos. 85, 86, 88 and 89 of 1974, which contain similar questions of law. The facts are being given, in the judgment, from references Nos. 88 and 89 of 1974. The Income-tax Tribunal, Amritsar, referred the following two questions for the opinion of this court, under Section 256(1) of the I.T. Act, 1961 (hereinafter to be referred to as 'the 1961 Act '):

(Arising out of ITA No. 751/7.2-73)

'1. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly directed the Income-tax Officer to take the status of the assessee as registered firm for the assessment year 1968-69 ?'

(Arising out of ITA No. 754/72-73)

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that an appeal was maintainable before the Appellate Assistant Commissioner against the order of the Income-tax Officer refusing to renew registration under Section 184(7) of the Income-tax Act, 1961 ?'

2. Briefly, the facts which have given rise to these references are as follows :

The ITO, Jullundur, vide order dated March 4, 1972, refused registration to M/s. Mothooram Premchand, Phagwara (hereinafter to be referred to as the 'assessee-firm') for the assessment year 1967-68, On the basis of the order, he rejected the application of the assessce-firm for continuation of registration under Section 184(7) of the Act, for the assessment year 1968-69. He also made an assessment of the firm as an unregistered firm. Two appeals were filed against the orders of the ITO before the AAC. The appeal against the order under Section 184(7) was dismissed by him on the ground that it was not maintainable. He also dismissed the other on the ground that there was no merit in it. The assessee-firm filed two appeals against the orders of the AAC before the Income-tax Tribunal, namely, I.T.A. No. 751/72-73, praying that the authorities below should have taken the status of the assessee-firm as registered firm, and I.T.A. No. 754/72-73 praying that the AAC erred in holding that no appeal was maintainable against an order under Section 184(7) of the Act.

3. In ITA No. 751/72-73, the Tribunal observed that (vide order of even date in ITA No. 753/72-73) it had directed the ITO to grant registration to the assessee-firm for the assessment year 1967-68. Consequently, for similar reasons, it accepted the claim of the assessee-firm and directed the ITO to take the status of the assessee-firm as registered firm for the assessment year 1968-69. The appeal was decided accordingly. In Income-tax Appeal No. 754/72-73 the Tribunal held as follows :

'It has been held by the Delhi High Court in the case of Sant Lot Kashmiri Lal v. CIT : [1972]86ITR76(Delhi) that an order refusing to continue registration under Section 184(7) tantamounts to an order refusing registration under Section 185 and as such an appeal lies to the Appellate Assistant Commissioner against such an order. In the light of this authority, the Appellate Assistant Commissioner was not justified in dismissing the appeal filed by the assessee as incompetent. In this view of the matter, we would have normally remanded the case to the Appellate AssistantCommissioner for deciding the same on merits, but since we have already directed the Income-tax Officer in ITA No. 751/72-73 to take the status of the assessee as registered firm, it is not necessary to refer the case back to the Appellate Assistant Commissioner. We, therefore, accept the claim of the assessee. For statistical purposes, the ITA No. 754/72-73 is allowed.'

4. The CIT made an 'application to the Income-tax Appellate Tribunal under Section 256(1) of the Act to make a reference of the questions stated above to this court. Consequently, the questions were referred to this court.

5. References Nos. 85 and 86 of 1974 relate to the assessment year 1969-70. In these references similar questions have been framed. The only difference is that in the former question instead of the assessment year 1968-69, the assessment year 1969-70 is mentioned.

6. It is contended by the learned counsel for the revenue that the assessee moved an application under Section 184(7) of the 1961 Act but it was declined by the ITO on the ground that the registration of the firm had been refused for the assessment year 1967-68. He contends that an appeal is a creature of statute and unless the assessee has been given a specific right to file an appeal under the statute, he has no right to file one. He further contends that Section 246 relates to appealable orders wherein no appeal has been provided against an order under Section 184(7). Consequently, according to him, in this case the assessee-firm had no right to file an appeal. In support of his contention he places reliance on Ashwani Kumar Maksudan Lal v. Addl. CIT : [1972]83ITR854(All) and Sandersons & Morgans v. ITO : [1973]87ITR270(Cal) .

7. We have given a deep thought to the argument of the learned counsel. In order to determine the question it will be relevant to refer to Sections 184, 185 and 186 of the 1961 Act and Rules 22 to 25 of the I.T. Rules, 1962. Section 184 relates to application for registration, Section 185 to procedure on receipt of applications and Section 186 to cancellation of registration. Section 184(7) provides that the registration once granted to a firm for any assessment year shall have effect for every subsequent assessment year. The assessee is, however, required to inform the department that no change in the constitution of the firm or the shares of the partners had taken place and to furnish a declaration in the prescribed manner. Section 184(8) provides that if there has been any change in the previous year, the firm shall apply for fresh registration for the assessment year concerned. The abovesaid sub-sections are reproduced below :

'184. (7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year:

Provided that--

(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and

(ii) the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner.

(8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.'

8. Section 185 lays, down as to how the application for registration is to be dealt with by the ITO. The section is reproduced below for ready reference:

'185. (1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and--

(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;

(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.

(2) The Income-tax Officer shall not reject an application for registration merely on the ground that the application is not in order, but shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation.

(3) If the defect is not rectified within such time, the Income-tax Officer may reject the application.

(4) Where a firm is registered for any assessment year, the Income-tax Officer shall record a certificate on the instrument of partnership or on the certified copy submitted in lieu of the original instrument, as the case may be, to the effect that the firm has been registered under this Act, for that assessment year ; and where a declaration under Sub-section (7) of Section 184 is furnished by the firm, for the relevant subsequent assessment year......'

9. Rule 22 of the 1962 Rules relates to application for registration of a firm, Rule 23 to intimation regarding subsequent changes in constitution, etc., Rule 24 to declaration for continuation of registration and Rule 25 to certificate of registration. Rule 24 provides that the declaration to be furnished under Sub-section (7) of Section 184 shall be in Form No. 12 and shall be verified and signed by the persons concerned in accordance with Sub-rule (5) of Rule 22. In Form No. 12, there is a column in which the assessee has to state that the firm was granted registration. Section 184 (1) and (2) makes a provision forfiling the application for registration. These are to be dealt with under Section 185. In case the ITO is satisfied that during the previous year there was a genuine firm in existence, he shall pass an order for registering it. If the firm is registered for an assessment year, it is not necessary to make an application for its registration for the subsequent assessment years. The assessee thereafter can file declarations under Section 184(7); on the basis of the declaration, the ITO is required to record a certificate on the instrument of partnership. From the scheme of Sections 184 and 185, it appears that the ITO is required to decide the application for registration within the assessment year for which the registration is claimed. The reason is that if registration is granted then the firm is to furnish the declaration for subsequent years under Section 184(7) and if it is not granted then the firm is to file a fresh application for registration for the subsequent year. However, it is not clear from the sections that if an application for registration is not decided by the ITO whether the firm should file an application for registration or declaration for continuation of registration for subsequent assessment years. The matter was brought to the notice of the CBR and it, in order to clarify the matter, issued the following circular :

'The provisions of Section 184(7) apply in a case where registration has been granted to the firm for any assessment year. If an application for registration has been filed but such application has not been disposed of by the Income-tax Officer, it cannot be said that the firm has been granted registration. The firm should, therefore, in such a case file an application for registration and not a declaration for continuation of registration for subsequent assessment years. If the firm instead files a declaration for the continuation of registration in such a case, the Income-tax Officer would, technically, be correct in denying the benefit of registration to the firm. This action will not, however, be fair to the assessee. The Board have therefore, decided that in such cases the firm should not be denied the benefit of registration merely on the ground that it has filed a declaration for the continuation of registration instead of an application for registration under Section 184 of the Act. Where assessments of a firm for more than one year are simultaneously pending before the Income-tax Officer, the application for registration for an earlier year should invariably be decided by the Income-tax Officer before taking up the assessment for the subsequent year. If, for any reason, the application for registration is rejected after the firm has filed a declaration for continuation of registration for a later year, he, should, instead of rejecting the declaration as incompetent, allow the partners of the firm concerned an opportunity of filing an application for registration within a reasonable time, say, one month, provided the declaration for the continuation of registration for that year was filed in time. The application for registration so filed should be decided on its merits.'

10. It is a settled proposition of law that the circulars issued by the CBR would be binding on officers and persons employed in the execution of the I.T. Act. (See observations of the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC : [1965]56ITR198(SC) ). In view of the above instructions, the procedure adopted by the petitioner in filing the declaration under Section 184(7) is legal and valid and it cannot be said by the department that the assessee should have filed an application for registration along with the declaration so that if the registration had been denied to it in the assessment year for which the registration was sought, the application for registration could be decided by the ITO.

11. After noticing the abovesaid provisions of the 1961 Act, a Division Bench of the Delhi High Court in Sant Lal Kashmiri Lal v. CIT : [1972]86ITR76(Delhi) , came to the conclusion that the order on the declaration filed under Section 184(7) will be treated to be an order under Section 185. The observations of Hardayal Hardy C.J., who prepared the judgment for the Bench, are as follows (p. 87):

'The order of continuation of registration under Sub-section (7) of Section 184 has not been expressly provided in that sub-section. It has to be gathered by implication for it has been said in the substantive portion of the section that where registration is granted to a firm for any assessment year it shall have effect for every subsequent assessment year. It is, however, the procedure that is outlined in Section 185 that deals with the registration of the firm and in principle there is no distinction between a fresh registration as well as continuation of registration. In either event, the certificate that the Income-tax Officer has to append to the instrument of partnership or on the certified copy submitted in lieu of the original instrument, has to be in the same terms.

In that view of the matter, it is the procedure laid down in Section 185 that has to be taken into account and since the Income-tax Officer did not give an opportunity to the assessee to rectify the defect, the order was made by him under Section 185 of the new Act.'

12. We are in respectful agreement with the observations of the learned Chief Justice. It may be mentioned that the learned Chief Justice placed reliance on the observations of the Supreme Court in Sir Hukumchand and Mannalal Co. v. CIT : [1966]60ITR99(SC) . In that case, the appellant was a firm and the ITO registered it under Section 26A of the 1922 Act for 1950-51. The registration was renewed for the years 1951-52, 1952-53 and 1953-54. Later, the ITO cancelled the registration under Rule 6 'B'. The appellant went up in appeal against that order to the AAC who rejected the sameon the ground that no appeal was maintainable against the order of the ITO cancelling the registration. The appeal to the Income-tax Appellate Tribunal by the assessee was also dismissed. A question in this regard was referred to the Madya Pradesh High Court and a Division Bench of that court decided it against the appellant. Section 30 of the 1922 Act, inter alia, provided that any assessee objecting to the cancellation by the ITO of the registration of a firm under Sub-section (4) of Section 23 or to a refusal to register a firm under Sub-section (4) of Section 23 or Section 26A can file an appeal to the AAC against the assessment or against such refusal or order The cancellation in that case was not under Sub-section (4) of Section 23. Subba Rao J. (as he then was), after noticing various sections and the rules, observed that the order cancelling registration is nothing more than refusing to renew the certificate of registration. The learned judge further observed that if that be the construction of an order made cancelling the certificate renewed, such an order directly attracts the appellate jurisdiction conferred on the AAC under Section 30 of the Act. Though some changes have been made in the 1961 Act, the above ratio still holds good in spite of the changes. It may be highlighted that under Section 184(7) an assessee is required to file a declaration. There is no provision for the making of an order by the ITO under the said sub-section. The procedure on receipt of the application is provided in Section 185. From the scheme of the Act it appears that the refusal to accept the registration of the firm for the subsequent year will tantamount to refusing to register the firm under Section 185(1). In principle there is no difference between fresh registration of the firm and continuation of its registration. Section 246(1)(j) provides an appeal against an order cancelling the registration of a firm under Clause (b) of Sub-section (1) of Section 185. Thus, the order passed on the declaration under Section 184(7) is appealable.

13. It is also relevant to point out that the CBR specifically provided in the circular mentioned above that if the application for registration is rejected after the firm has filed the declaration for continuation of registration for a later year, he should instead of rejecting the declaration as incompetent, allow the partners of the firm concerned an opportunity of filing an application for registration within a reasonable time. In the present case it is not disputed that the declaration for continuation of registration for the relevant years was filed in time. In that eventuality if the ITO had given time to the assessee to file an application for registration on the ground that the registration for the earlier year had been rejected after the filing of the declaration, the assessee would have got an opportunity to file an appeal, in case the ITO had rejected the application for registration. The aforesaid circumstance further fortifies us in our observations that the rejection of a declaration by the ITO in this case would amount to an order under Clause (b) of Sub-section (1) of Section 185.

14. A similar view was taken by the Andhra Pradesh High Court in Addl. CIT v. Chekka Ayyanna : [1977]106ITR313(AP) . In that case, it was held by the Division Bench that an order passed by the ITO on a declaration under Section 184(7), refusing to allow 'Continuation of the registration to a firm, was appealable under Section 246(1)(j) of the Act, since it amounts to refusal to grant registration.

15. In Ashwani Kumar Maksudan Lal's case : [1972]83ITR854(All) , a Division Bench of the Allahabad High Court observed that there is no right of appeal from the refusal of the ITO to record a certificate, on the declaration filed by an assessee under Section 184(7) of the 1961 Act, of the continuation of registration of a firm. To similar effect are the observations by the Calcutta High Court in Sandersons & Morgans' case : [1973]87ITR270(Cal) . It appears that Sir Hukumchand and Mannalal Co.'s case : [1966]60ITR99(SC) , decided by the Supreme Court, was not brought to the notice of the learned judges. With great respect to them we are unable to accept the view expressed in the aforesaid judgment. After taking into consideration all the aforesaid circumstances, we are of the opinion that the Tribunal was right in holding that an appeal was maintainable before the AAC against the order of the ITO refusing to renew registration under Section 184(7) of the 1961 Act. Question No. 2 is decided accordingly.

16. Now, we advert to question No. 1. While deciding the appeal, the Tribunal observed that they would have normally remanded the case to the AAC for re-deciding the same on merits but since they had already directed the ITO in ITA No. 751/72-73 to take the status of the assessee as a registered firm, it was not necessary to refer the case back to the AAC. The provisions of Section 184(7) have already been reproduced above. According to the said sub-section, the registration shall have effect for a subsequent assessment year if the firm furnishes within a specified period a declaration to the effect that there was no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted. Rule 24 prescribes the declaration. It says that it shall be in Form No. 12. In the said form certain blanks are to be filled in by the assessee and it is to be signed by all the partners. These are the various formalities which were required to be done under the provisions of the Act and the rules before the ITO could record a certificate on the instrument of partnership under Section 185(4). These are all questions of fact which require determination by the I.T. authorities. Without going into all the aforesaid facts, we are of the view that the Tribunal was not right in directing the ITO to take the status of the assessee as a registered firm for the assessment years 1968-69 and 1969-70. We, consequently, decide question No. 1 accordingly.

17. For the aforesaid reasons, we decide question No. 1 in the negative,that is, in favour of the revenue and question No. 2 in the affirmative, thatis, in favour of the assessee. In the circumstances of the case, we make noorder as to costs.

J.V. Gupta, J.

18. I agree.


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