M. S. MENON C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The assessment year with which we are concerned is 1959-60. The question referred is :
'Whether the refusal of registration was correct ?'
Section 23 of the Indian Income-tax Act, 1922, deals with the assessment of the total income and the determination of the tax payable. Sub-section (4) of that section provides that in the circumstances specified in that sub-section, 'The Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registere : Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income-tax Officer to the firm intimating his intention to cancel its registration.'
There is no doubt that what is vested in the Income-tax Officer by the provision is a discretion to refuse registration or to cancel the same. This is implicit in the expressions 'may refuse' and 'may cancel' as opposed to 'shall make 'in the earlier part of the sub-section. In J. M. Sheth v. Commissioner of Income-tax, the Madras High Court said :
'Refusal to register, however, does not appear to be an inevitable statutory consequence resulting from the defaults enumerated in section 23(4). The use of the words may refuse in section 23(4) would rather indicate that the Income-tax Officer has a discretion not to refuse registration or cancel registration even in spite of the default of the assessee. Significantly, the statute uses the words shall make the assessment to the best of his judgment in the first part of the section. If the words shall and may are found in two different limbs of the same section, there cannot be a better legislative pointer to indicate that the first is obligatory and the second is discretionary. We have no doubt that the statute does not compel the officer to deprive the assessee of the benefit of registration under the last part of section 23(4). In other words, it would be wrong to assume that the defaults listed in section 23(4) of the Act would lead to a two-fold penal consequenc : (1) a best judgment assessment, and (2) in the case of firms, refusal to register or cancellation of the existing registration, if any. It is, therefore, incumbent upon the Income-tax Officer to consider the question of registration on the materials available before him instead of refusing registration on the ground that a different conclusion would be illogical or not self-consistent. What consideration should weigh with the officer in the matter of his decision regarding registration cannot of course be laid down exhaustively or comprehensively. Suffice it to say that the matter is purely one of discretion to be exercised by the officer and, therefore, he should exercise it not arbitrarily or capriciously but in a manner consistent with judicial standards. This, in our opinion, is the true scope of section 23(4) of the Act.'
That the discretion vested in the Income-tax Officer under section 23(4) has not been exercised at all in this case is clear from his order which has been appended as annexure 'A' to the statement of the case. The order reads as follows :
'Sub : - Trivandrum Tobacco Combines, Trivandrum -1959-60. Assessment - Order under section 26A - regarding :
Order under section 26A
The assessee had applied for registration for 1959-60 assessment on June 22, 1959. An application for renewal has been filed on August 24, 1960. For reasons discussed in 1956-57 and earlier orders, the statue of the assessee will be taken as that of an association of persons.
Even if the assessee was a firm, in view of the fact that the assessment is completed under section 23(4), I would have refused registration under section 26A.'
The Income-tax Officer does not say that he is refusing registration in exercise of his discretion under section 23(4) of the Act. All that he says is that, in view of the fact that the assessment is an assessment under section 23(4) he, 'would have refused registration under section 26A.'
What is material is not what the Income-tax Officer would have done but what he did, and that seems to be not a refusal of registration in exercise of the discretion vested in him under section 23(4) but a refusal under section 26A of the Act which reads as follows :
'(1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purpose of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.
(2) The application shall be made by such a person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed'.
It is not contended that the Income-tax Officer was justified in refusing registration under this provision.
In Commissioner of Income-tax v. V. Krishnamma & Co. the income-tax Officer refused registration under section 26A on a ground that was not tenable and added :
'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.'
Subba Rao C.J. said :
'The Income-tax Officer 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. The order must, therefore, be deemed to have been made under section 26A(1), having regard to the provisions of rule 4 of the Income-tax Rules. Though the procedure prescribed for the registration of the firm is the same, whether an order is made under rule 4 of the Income-tax Rules, or under section 23(4) an assessee cannot be made to suffer the penal consequences of an order of the Income-tax Officer unless an express order is made under that section. There is no such order in this case. We answer the question accordingly.
The only contention before us is that the Income-tax Officer was entitled to refuse registration under section 23(4) of the Act. That is so; but only in the exercise of a discretion, and as he has not exercised that discretion but has only stated, 'in view of the fact that the assessment is completed under section 23(4), I would have refused registration under section 26A', we cannot but answer the question referred in favour of the assessee and against the department. We do so; but without any order as to costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.
Question answered in favour of the assessee.