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Paul Mathews and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 464 to 470 of 1982
Judge
Reported in(1991)98CTR(Ker)12; [1992]195ITR716(Ker)
ActsIncome Tax Act, 1961 - Sections 185, 185(2) and 186
AppellantPaul Mathews and Co.
RespondentCommissioner of Income-tax
Appellant Advocate P.G.K. Warriyar, Adv.
Respondent Advocate P.K. Ravindranatha Menon and; N.R.K. Nair, Advs.
Excerpt:
direct taxation - registration of firm - sections 185, 185 (2) and 186 of income tax, 1961 - department cancelled registration of firm on ground of erroneous partnership deed - whether cancellation of registration of partnership firm valid - department required to intimate defects in partnership deed for cancellation of registration of partnership firm - department did not intimate assessee about defects in partnership deed - cancellation of partnership not confirmed - matter remanded back. - - the identity of the partners as well as their shares ought to be specified in the instrument of partnership. the term 'assessee' defined in section 2(7) will take in a firm as well and there are special provisions applicable for assessment of firms in sections 180 -189 of the income-tax act......k.a. nayar, j.1. these income-tax reference cases arise out of the order of the income-tax appellate tribunal, cochin bench, in i. t. a. nos. 68 to 74/cochin of 1982. we are concerned with the assessment years 1971-72 to 1976-77. the assessee is a partnership firm carrying on business as a transporting contractor. the firm was originally constituted by a deed dated march 28, 1966, with sri paul mathew and abraham paul mathew as partners. the firm was duly registered. thereafter, it was reconstituted under a deed dated july 1, 1970, adding three more partners, viz., three other sons of shri paul mathew. the new partners were babu paul mathew, george paul mathew and kuruvila paul mathew. on behalf of the firm, an application in form no. 11a accompanied by a certified copy of the deed dated.....
Judgment:

K.A. Nayar, J.

1. These income-tax reference cases arise out of the order of the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. Nos. 68 to 74/Cochin of 1982. We are concerned with the assessment years 1971-72 to 1976-77. The assessee is a partnership firm carrying on business as a transporting contractor. The firm was originally constituted by a deed dated March 28, 1966, with Sri Paul Mathew and Abraham Paul Mathew as partners. The firm was duly registered. Thereafter, it was reconstituted under a deed dated July 1, 1970, adding three more partners, viz., three other sons of Shri Paul Mathew. The new partners were Babu Paul Mathew, George Paul Mathew and Kuruvila Paul Mathew. On behalf of the firm, an application in Form No. 11A accompanied by a certified copy of the deed dated July 1, 1970, was submitted on March 31, 1971, and the Income-tax Officer granted registration to the firm for the assessment year 1971-72. The benefit of continuation of registration was granted for the succeeding years, 1972-73 to 1976-77, accepting the declaration in Form No. 12; Subsequently, the Income-tax Officer, by order passed under Section 186(1), cancelled the registration of the firm for the years 1971-72 to 1976-77 for the reason that there was no valid instrument of partnership in existence during the year 1971-72. He found that the three partners had not signed the deed dated July 1, 1970, and that the purported signatures of these partners in the deed were supplied by their father, Paul Mathew. In addition, the partner, Kuruvila Paul Mathew, was a minor on the date of execution of the deed, his date of birth being July 11, 1952. The Income-tax Officer, therefore, held that the partnership deed was invalid and that there was no genuine firm as registered during the relevant years. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals) who agreed with the findings of the Income-tax Officer. The assessee carried the matter in further appeals before the Income-tax Appellate Tribunal.

2. Before the Tribunal, the assessee contended that registration originally granted cannot be cancelled on the grounds mentioned by the Income-tax Officer. According to the assessee, the only ground on which registration can be cancelled is that the firm is not genuine and, for considering the genuineness of the firm, it is immaterial whether the partnership deed is signed by all the partners or hot. Reliance was placed on the decision in Jagan Nath Pyare Lal v. CIT .

3. On behalf of the Revenue, it was pointed out that the defect in the partnership deed is one that goes to the root of the matter and, if there is no valid partnership deed, there would be no firm in existence. Hence, it was contended on behalf of the Revenue that the registration granted would be cancelled under Section 186(1) of the Income-tax Act.

4. The Tribunal, after analysing the provisions of the above section and considering the decision, came to the conclusion that the genuineness of the firm has to be determined in the background of the firm as it was registered. The firm should be really in existence during the relevant previous years and evidenced by an instrument of partnership. The identity of the partners as well as their shares ought to be specified in the instrument of partnership. The Tribunal took the view that, if the instrument of partnership is not valid in law, the partnership is not evidenced by an instrument and that no genuine firm with the specified constitution is then in existence. In that view of the matter, the Tribunal took the view that the firm could not have been registered and that, therefore, the registration could be cancelled on the ground that there was no genuine firm in existence as registered. The Tribunal relied upon the decision in Seetharam Dharamvir Singh v. CIT : [1980]123ITR150(All) and came to the conclusion that, when the partnership deed is invalid on the date of the application, there cannot be a genuine firm in existence. The Tribunal also noticed that the language of Section 185(1)(a) of the Income-tax Act, 1961, is materially different from the provision for registration under the Indian Income-tax Act, 1922. After examining the deed, the Tribunal held that the partnership deed dated July 1, 1970, produced by the assessee on the last day of the previous year as the instrument of partnership in existence on the date of the application for registration was not a valid instrument evidencing the partnership and it was not an operative deed in force during the previous year. Hence, the Tribunal held that there was no genuine firm in existence during the previous year as registered.

5. Aggrieved by the decision of the Tribunal, three common questions were suggested by the assessee for reference under Section 256 of the Act. The question suggested on behalf of the assessee was modified and simplified as a comprehensive question arising for the years 1971-72 to 1976-77 out of the order of the Tribunal and was referred for our opinion as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that there is no genuine firm in existence as registered and, therefore, the order of cancellation of registration is valid ?'

6. An additional question arose for consideration from the order of the Tribunal as to whether the cancellation of registration is valid when the partners have been assessed for the assessment years, taking into account their shares in the firm. The Tribunal rejected the contention of the assessee that the firm cannot be assessed as an unregistered firm after the partners have been assessed and, therefore, the order of cancellation is inconsequential. Hence, the following question in respect of the assessment years 1973-74 to 1976-77, was referred :

'Is the Tribunal justified in rejecting the additional ground relating to the assessment year 1973-74, namely, that inasmuch as the partners have already been assessed on their respective share income in the profit earned by the firm, it is not legally possible to assess the firm as an unregistered firm as contemplated under Section 186(3) after cancellation of registration under Section 186(1) of the Income-tax Act ?'

7. It is now settled law that even though, under the general law, a firm is not a legal person, the firm is treated as an entity and is a unit of assessment for the purpose of the Income tax Act. Section 4 of the Act provides that income-tax shall be charged for any assessment year, at the rate applicable, in respect of the total income of the previous year of every person. Under Section 2(31) of the Act, 'person' will include a firm. 'Firm' has been defined in Section 2(23) by reference to the Indian Partnership Act. Section 4 of the Indian Partnership Act, 1932, defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm-name. The term 'assessee' defined in Section 2(7) will take in a firm as well and there are special provisions applicable for assessment of firms in Sections 180 - 189 of the Income-tax Act. Section 182 relates to the assessment of registered firms and a registered firm under Section 2(39) means a firm registered under the provisions of Section 185(1)(a) or deemed to be registered under Section 185(6) or Section 184(7). The benefit conferred on registered firms under the Income-tax Act is a special benefit under that Act and, therefore, the same can be availed of only if the conditions precedent for availing of the same are complied with. Under Section 184, an application for registration of a firm will have to be made before the Assessing Officer on behalf of the firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. Such application can be made either during the existence of the firm or after its dissolution before the Assessing Officer having jurisdiction to assess the firm. The application will have to be signed by all the partners other than minors, personally. The application will have to be made before the end of the previous year for the assessment year in respect of which registration is sought, though power is given to the Assessing Officer to entertain belated applications on sufficient cause being shown. The application will have to be accompanied by the original instrument evidencing the partnership together with a copy of the same. Rules 22 to 25 of the Income-tax Rules prescribe the forms and particulars to be included in the application. Where the application is made before the end of the relevant previous year and where there is no change in the constitution of the firm or in the shares of the partners from the previous years, the application is to be submitted in Form No. 11 and it should accompany the original instrument evidencing the partnership. But, where any change in the constitution of the firm or in the shares of the partners have taken place (as was the case here in the present case), the application will have to be made in Form No. 11A and it shall be accompanied by the original instrument evidencing the partnership as in existence from time to time during the previous year up to the date of the application, together with a copy. The application will have to be signed personally by all the partners, not being minors, in the firm as constituted on the date of the application. Where registration is granted or deemed to have been granted, it shall have effect for every subsequent year provided there is no change in the constitution of the firm or in the shares of the partners and the firm furnishes before the time allowed for furnishing returns for such subsequent year, a declaration in Form No. 12 verified in the manner indicated in the said form. That also will have to be signed personally by all the partners, not being minors, of the firm as constituted on the date of the application. On receipt of the application, the Assessing Officer shall enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. If he is satisfied that there is or there was, during the previous year, a genuine firm in existence with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year. If the Assessing Officer considers that the application is defective, he will give an opportunity to the firm to rectify the defect. This will apply to a defect in the declaration as well. Since the provision relating to registration of firms as constituted above is a benefit given to avail of a lower rate of tax, the provisions of the Act and the Rules will have to be strictly complied with for availing of the benefit.

8. A firm may be registered under the Partnership Act. But, to avail of the benefits of a registered firm under the Income-tax Act, the aforesaid provisions for registration of the firm under the Income-tax Act will have to be complied with. In Koduri Sambasivadu and Sons v. CIT : [1963]47ITR465(AP) , the application for renewal of registration was signed by four partners and the power of attorney holder of the fifth partner. The Assessing Officer refused to renew the registration. The appeal by the assessee to the Appellate Assistant Commissioner proved unsuccessful, and the same fate awaited the further appeal to the Income-tax Appellate Tribunal. The question referred to the Andhra Pradesh High Court was whether the refusal to register the firm was justified. The High Court held that the partnership firm, in order to get the benefit of registration, must satisfy the requirements of the provisions of the Income-tax Act and the Rules and that it was incumbent on all the partners to sign the application personally. The court held (at page 467) :

'This position is well established by the authoritative pronouncement of the Supreme Court in Rao Bahadur Ravulu Subba Rao v. CIT : [1956]30ITR163(SC) , apart from the plain language of the section and the Rules. Since, in the instant case, the application for renewal of registration suffered from that vice, it was properly rejected by the Income-tax Officer.'

9. If an application or declaration is defective, an opportunity should be given to rectify the defect. It is so provided in Section 185(2). Referring to the said provision, the Supreme Court in CIT v. Amar Singh Gowamal and Sons : [1986]161ITR315(SC) , observed (at page 319) :

'In any view of the matter in the facts of this case and in view of the so-called alleged defects in the application according to the Income-tax Officer, the Income-tax Officer under Sub-section (2) of Section 185 of the Act should have given an opportunity to the firm, and in not having done so, did not act validly and the rejection of the application was invalid. The question referred to the High Court was rightly answered in the negative.'

10. To the same effect is the decision in Ganga Motor Service v. CIT : [1977]106ITR132(Patna) , wherein a Division Bench of the Patna High Court held that Section 185(2) was inserted by the Legislature to relieve the assessee of the hardship, by providing for an opportunity to be given to cure the defect in the application. The Division Bench further held that the enabling provision will extend to giving an opportunity to cure the defect in the partnership deed accompanying the application also. In Alankar Jewellers v. CIT : [1979]116ITR89(Patna) , where the application for registration was not accompanied by a certified copy of the instrument of partnership, it was held by the same High Court that the Income-tax Officer ought to have issued notice to the assessee to cure the defect. In Brij Rattan Lal Bhoop Kishore v. CIT : [1982]136ITR722(All) , the Allahabad High Court held that, if the application for registration is not personally signed by all the partners, instead of rejecting the application, the Income-tax Officer must give an opportunity to the firm to supply the desideratum. But, in Singh Bros, and Co. v. CIT , the Gauhati High Court held that the power and jurisdiction to rectify the defect under Section 185(2) is limited to allowing the assessee to rectify the defect in an application for registration and not any defect in the partnership deed. We are not called upon to resolve this dispute. This provision will not apply where the application or declaration is made on behalf of the partners forging their signatures. In such cases, fraud vitiates the action and the benefits of Section 185(2) and (3) will not be extended to such persons. (See Matreja and Co. v. CIT : [1977]106ITR378(All) ). The condition precedent for granting registration is the satisfaction of the Assessing Officer of the existence of a genuine partnership. The partnership must exist according to the terms specified in the deed. If he is satisfied that there is no genuine firm in existence, or the instrument of partnership is not valid or has no existence in law, registration can be refused.

11. In the case in hand, the assessee did not dispute the finding that the partnership deed dated July 1, 1970, was not duly executed by the three partners, viz., Abraham Paul Mathew, Babu Paul Mathew and Kuruvila Paul Mathew, by affixing their signatures thereon, that the signatures appearing in the deed and the application are not genuine and that, on July 1, 1970, Kuruvila Paul Mathew was a minor. The contention is that the registration having once been given, the same cannot be cancelled under Section 186(1) of the Act. Section 186 authorises the Assessing Officer to cancel the registration of the firm if he is of the, opinion that there was no genuine firm in existence as registered. But, before doing so, he should give a reasonable opportunity of being heard to the assessee. If the firm as registered was never genuine and was wrongly registered, the Assessing Officer can cancel the registration. In Sheonath Prasad Motilal v. ITO : [1963]47ITR493(All) , the firm was constituted of three partners originally under an oral agreement and commenced business. An instrument of partnership was subsequently brought into existence after a year which retrospectively governed the relationship between the partners. The application for registration of the firm was made for the assessment year 1958-59 which was granted. Renewal was also granted for subsequent years. Thereafter, a show-cause notice was issued stating that the firm was not genuinely formed under an instrument of partnership for the year 1958-59 and proposed to cancel the registration under Rule 6B of the Income-tax Rules then in existence. The Income-tax Officer cancelled the registration on the ground that the firm which functioned during the relevant accounting year had not been constituted under an instrument of partnership and, therefore, it was not a genuine firm. It was not the case of the Income-tax Officer that the firm did not have three partners or that it was merely a faked name under which the business was being carried on by some other persons. It was held in that case that the mere fact that the instrument of partnership may not have been in existence during the relevant accounting period could be no ground for holding that the firm was not genuine. It was further held that (at page 495) :

'Merely because the instrument of partnership was not there in the accounting period, when there was no finding that the firm which was in existence was not a genuine firm, could not warrant the passing of an order under Rule 6B.'

12. The finding in this case is that the partnership deed dated July 1, 1970, was not executed by all the partners signifying their assent and, therefore, it was not a genuine deed. Further, after discussion, the Tribunal also found that there was no genuine firm in existence during the relevant previous year as registered.

13. In CIT v. Bajaj and Co. : [1983]143ITR218(All) , the firm was granted registration. On a minor admitted to the benefits of partnership attaining majority, no fresh deed of partnership was drawn up. The Income-tax Officer was of the opinion that continuance of registration even after the minor attained majority was erroneous and, therefore, cancelled the registration. On appeal, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer. On further appeal, the Tribunal took the view that the only ground on which a certificate of registration of the firm once granted can be cancelled is that the certificate has been obtained without there being a genuine firm in existence. The mere fact that the instrument of partnership may not have existed during the accounting period relevant to the assessment year for which registration is granted is not a ground for holding that no genuine firm was in existence. The Department argued on reference before a Division Bench of the Allahabad High Court that, as one of the partners became a major during the relevant previous year, a change had taken place in the constitution of the firm and a fresh deed should have been drawn up for registration. As this was not done, the continuance of registration was erroneous. The genuineness of the firm was not disputed at any stage in that case. The only question was whether recourse could be had to Section 186(1) of the Act for cancellation of the continuance of registration granted to the firm. The court held (at page 221) :

'Even assuming that a change in the constitution took place, the genuineness of the firm was not at all affected. The mere fact that a fresh instrument of partnership was not brought into existence could not mean that a firm which was genuine ceased to be so. Since the registration could be cancelled only if there was during the previous year no genuine firm in existence, which was not the situation in the present case, the order of the Income-tax Officer was rightly held to be erroneous and unsustainable.'

14. The requirement of law for registration of a firm and the requirement for cancellation of the registration have been examined by a Division Bench of the Karnataka High Court in CIT v. Kirana Traders : [1986]161ITR726(KAR) . In that case, the firm was originally constituted with six partners in 1966. When one of the partners died on March 17, 1978, a fresh deed of partnership was executed on March 21, 1978, to come into effect from April 1, 1978. This means that the firm did not have a deed of partnership between March 18, 1978, and March 31, 1978. On appeal, the Appellate Assistant Commissioner allowed the appeal holding that the Income-tax Officer had no reason to believe that there was no genuine firm in existence with which view the Tribunal also agreed. Answering the question referred in favour of the assessee, Jagannatha Shetty, Acting C. J., held (at pages 728, 729) :

'The emphasis in the provision is with regard to the satisfaction of the Income-tax Officer as to the non-existence of a genuine firm during the previous year. There is thus a limitation imposed by the Legislature for cancellation of registration. It has been confined to one ground only, that is, that the firm that existed during the relevant year was not genuine. Such a power cannot be equated with the power to grant registration. For the purpose of granting registration to a firm under the Act, it is now not in dispute that there shall be a firm valid in law and also in fact. The concept of the firm being valid in law is distinct from its factual genuineness and, for the purpose of granting registration, both the aspects are relevant and must be present and one without the other will be insufficient (see S.P. Gramophone Co. v. CIT : 1986ECR28(SC) ).

But these two requirements need not be present for the purpose of cancelling the registration once granted. If the Income-tax Officer wants to cancel the registration under Section 186(1), all that he has got to know is whether there was during the previous year no genuine firm in existence as registered. The word 'genuineness' appears to have been used in contradistinction to the words 'sham', 'bogus or not real'. Our view finds support from the decision of the Allahabad High Court in CIT v. Bajaj and Co. : [1983]143ITR218(All) and the decision of the Andhra Pradesh High Court in CIT v. Badjanapara Salt Co. [1974] Tax LR 19.

Since the Income-tax Officer did not form an opinion that there was during the previous year no genuine firm in existence, he ought not to have cancelled the registration under Section 186(1).'

15. From these decisions, it is seen that the power of cancellation of registration has been exercised mainly on the ground that the firm was not genuine and not on the ground of defect in accounting or for non-existence of the partnership in the accounting year. In Mahabir Prasad Kishanlal and Co. v. CIT , a Division Bench of the Gauhati High Court held that, if the deed of partnership is invalid in law offending any of the provisions of the Indian Partnership Act or the Indian Contract Act, the Income-tax Officer can legally hold that registration was obtained without there being a firm in existence and, therefore, such registration is liable to be cancelled in exercise of his power under Rule 6B of the Indian Income-tax Rules, 1922. In that case, the firm consisted of eight partners out of whom three were minors. The minors entered into the partnership through their fathers. The firm was granted registration on the basis of the partnership deed dated April 1, 1952. Thereafter, the registration was renewed for the year 1955-56. The Income-tax Officer, by his order dated March 26, 1964, cancelled the renewal of registration granted for the year 1955-56 with the approval of the Inspecting Assistant Commissioner. The Income-tax Officer held that the renewal of registration for the assessment year 1955-56 was erroneous as the minor partners were liable for losses also in the partnership on the basis of which registration was granted. The partnership was contrary to the provisions of Section 30 of the Indian Partnership Act, 1932. The Income-tax Officer held that since the firm was not valid, there can be no registration of the same. In appeal, the order of the Income-tax Officer was set aside. The Appellate Assistant Commissioner found that the partnership deed was clearly defective to the extent that it made the minors also liable for losses and, therefore, registration could be refused for such a defect in the partnership deed. But, he further held that, in cancelling the registration already allowed, the Income-tax Officer ought to show that there was no genuine firm in existence. As the partners, as shown in the partnership deed, shared profits and losses as agreed upon and, as none of the partners was bogus, the Appellate Assistant Commissioner found that there was a genuine firm in existence. In further appeal, the Appellate Tribunal found that there was no genuine firm in existence and that, as the firm was invalid in law, it could not have a legal existence in the eye of law. The Tribunal, therefore, restored the order of the Income-tax Officer. The court held that, to come to a decision as to whether there is or is not a genuine firm in existence, the Income-tax Officer is required to consider the validity of the deed of partnership. The definition of partnership under Section 4 of the Indian Partnership Act contains three elements : (a) there must be an agreement entered into by all the persons concerned ; (b) the agreement must be to share the profits of a business ; and (c) the business must be carried on by all or any of the persons concerned acting for all. Under the Indian Contract Act, an agreement to have the force of a legal contract, free consent of the parties who are competent to contract must be there. As a minor is incompetent to enter into a partnership, the partnership was held to be contrary to the relevant provisions of the Indian Contract Act and the Indian Partnership Act. The partnership deed was held to be invalid. Hence, it was held that the Income-tax Officer, in exercising his power of cancellation, was justified in being satisfied that there was no genuine partnership in existence. The court held (at page 471) :

'If such a deed of partnership is invalid in law offending any of the provisions of the Indian Contract Act or the Indian Partnership Act, 1932, the Income-tax Officer may legally hold that the registration was obtained without there being a firm in existence and such registration is liable to be cancelled in exercise of powers under Rule 6B.'

16. In CIT v. Sri Ramakrishna Motor Transport : [1983]144ITR797(AP) , the Andhra Pradesh High Court held that where a minor was admitted as a full-fledged partner, cancellation of registration under Section 186 was valid. That decision noted the distinction between genuineness and validity as pointed out by a Bench decision of the same High Court in CIT v. Balaji Pictures : [1983]144ITR807(AP) and pointed out that some of the High Courts have construed Section 186 to include even cases of illegality and ultimately held (at p. 806) :

'In the case before us, indeed, the action of the Income-tax Officer will be justified both under Section 154(1)(a) as well as under Section 186(1). Merely because the Income-tax Officer purported to act under Section 154, there is no bar to relate it to the power under Section 186(1), if necessary, and to sustain it on that basis. Both procedure-wise and limitation-wise, the action taken can be sustained under Section 186(1) as well, if held applicable. Looked at from either angle, we are of the opinion that the Income-tax Officer had power to cancel the registration on the ground that the partnership itself was illegal in the eye of law.'

17. But, in the decision in CIT v. Balaji Pictures : [1983]144ITR807(AP) in fact, the Income-tax Officer cancelled the registration on the ground that a minor was treated as a full-fledged partner in the partnership deed. On appeal, even though the Appellate Assistant Commissioner agreed with the order of the Income-tax Officer, the Tribunal held that Rule 6B will apply only to firms which were not genuine, i.e., firms which did not exist in fact. The question before the Division Bench was whether the Income-tax Officer was right in cancelling the registration. The Division Bench noted the submission of counsel for the Department that a firm which included a full-fledged minor partner was not a firm in the eye of law and, therefore, action can be taken under Rule 6B and held (at pp. 807, 808) :

'We are not prepared to agree with the submission of the learned counsel. The use of the expression 'genuine' puts the matter beyond doubt. We are of the opinion that Rule 6B applies only to firms which do not exist in fact as distinguished from the firms which may exist in fact but may be considered as non-existent in law. We are supported in our view by the decision of Obul Reddi and Venkateswara Rao JJ. in R. C. No. 83 of 1968.'

18. This decision, it would appear, has not adverted to the decision of the Supreme Court in CIT v. Sivakasi Match Exporting Co. : [1964]53ITR204(SC) , wherein the Supreme Court held (headnote) :

'The combined effect of Section 26A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income-tax Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership, A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Further, the discretion conferred on him under Section 26A is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence.'

19. If, in law, the constitution of the partnership is void, the firm can be said to be not in existence.

20. The ambit of the power of cancellation of registration under Section 186 of the Income-tax Act has been discussed by a Full Bench of this court in CIT v. Phair Laboratories : [1985]154ITR141(Ker) . In that case, the assessee-firm consisted of seven partners as evidenced by an instrument dated December 10, 1963. At the time of execution of the document, one of the partners was a minor who subsequently attained the age of majority on July 26, 1964. For the assessment years 1965-66 and 1966-67, the assessee filed an application in Form No. 11 for registration of the firm signed by all the partners including the partner who became a major in the year previous to the assessment year 1965-66. The Department had no case that the firm had not, in actual fact, existed during the accounting year. For the assessment year 1966-67, the assessee applied for fresh registration. Registration was granted for both the years. For the subsequent years, viz., 1967-68 to 1972-73, the assessee applied for continuation of registration and the same was granted in respect of those years. It was this registration that was cancelled by the Income-tax Officer on the ground that one of the partners who signed the partnership was a minor. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer in appeal. The assessee did not press the appeal before the Tribunal for the assessment year 1965-66. The Tribunal, on appeal, set aside the order for the assessment years 1966-67 to 1972-73. The question referred for adjudication was whether the cancellation of registration for the assessment year 1966-67 and cancellation of continuation of registration for the assessment years 1967-68 to 1972-73 was without jurisdiction and improper. The Full Bench found that the partner had no disqualification to be a full partner at any time during the year previous to the assessment year 1966-67 when registration was sought on the basis of an instrument containing the names of all the partners and their particulars as well as the full details regarding their individual shares. The application was in the proper form containing the prescribed particulars and none of the partners was a minor at the relevant time. There was no disqualification attributable to any of the partners. A genuine partnership existed and, therefore, it was held that the mere fact that one of the partners was not a major on the date of execution of the partnership deed cannot stand in the way of registration if he had become a major, as he did, prior to the relevant accounting year. The Full Bench also, on the basis of the facts, found that the orders of the Income-tax Officer cancelling the registration were not reasonably supported by any material warranting the exercise of the power under Section 186. But, while explaining the legal position, the Full Bench observed (at pp. 146, 147):

'A firm which does not produce a valid instrument evidencing the partnership does not qualify for registration. If the instrument shows that during the previous year relevant to the assessment year when registration was sought or granted, the partnership consisted of a minor who was admitted as a full partner, and not merely to its benefits as permitted under Section 30 of the Indian Partnership Act, 1932, such instrument is not valid for the purpose of registration under the Act and any registration granted on that basis is liable to be cancelled. See CIT v. Dwarkadas Khetan and Co. : [1961]41ITR528(SC) . It is however not necessary that a firm should have come into existence on the basis of a written instrument. A firm which was created by word of mouth, but the constitution of which has subsequently been reduced to writing, can very well qualify for registration. All that is required is that there should be a valid instrument of partnership at the relevant time, i.e., during the year previous to the assessment year when registration is sought. The partnership business should have been carried on in accordance with the terms of that instrument which was operative during the accounting year: See R.C. Mitter and Sons v. CIT : [1959]36ITR194(SC) . It is not necessary that the instrument had been signed by all the partners, provided those who did not sign it assented to it in unmistakable terms by presenting an application in the proper form duly signed by them jointly with the others who are signatories to the instrument : Jagan Nath Pyare Lal v. CIT ; CIT v. R. Dwarkadas and Co. : [1971]80ITR283(Bom) ; Bulchand v. CIT AIR 1930 Sind 301 and In re Ramlal : AIR1931Cal682 .'

21. From the above, it is seen that the Full Bench observed that, if the instrument shows that, during the previous year relevant to the assessment year when registration is sought or granted, the partnership consisted of a minor who was admitted as a full partner and not merely to its benefits as permitted under Section 30 of the Indian Partnership Act, 1932, such instrument is not valid for the purpose of registration under the Act and any registration granted on that basis is liable to be cancelled. The question whether registration once granted to a firm which consisted of a minor as a full partner can be cancelled on the ground that the firm has no legal existence due to the fact that the partnership is ab initio void came once again for consideration in CIT v. Udayalaxmi Hardware Stores (No. 1) : [1990]183ITR159(AP) . The limited contention urged on behalf of the assessee in that case was that, notwithstanding that the partnership instrument was signed by a minor as a partner, the provisions of Section 186 were wrongly invoked to cancel the registration already granted, because that section can be invoked only if the Income-tax Officer was of the opinion that there was no genuine firm in existence as registered during the previous year. According to counsel for the assessee, registration once granted can be cancelled only on the ground of non-genuineness of the firm, but not on the ground that the firm has no legal existence, because the deed of partnership was ab initio void. Counsel for the Revenue contended that a non existing firm cannot be treated as a genuine firm. The Division Bench held that (at p. 164) :

'... an enquiry into the genuineness of the firm has to be directed in two different directions, firstly, to find out whether the firm shown in the document presented for registration is a genuine one or not; and, secondly, whether the firm, as evidenced by the deed of partnership, has legal existence. If, in a given case, the Income-tax Officer comes to the conclusion that the firm is not genuine on factual considerations or has no legal existence because the partnership firm is void in law, then, in either event, it will be open to the Income tax Officer to refuse registration to the firm. It would, therefore, be seen that the Supreme Court dealt with the two aspects of genuineness as well as legal existence as forming an inseparable part of the enquiry into the question regarding the grant of registration. If a partnership firm is found to be invalid, having been constituted contrary to the provisions of any statute, it is not clear how such a partnership firm, which has no legal existence, can be considered to be factually existing for purposes of genuineness. A firm which is not a firm in the eye of law and has no legal existence cannot be said to have factual existence. A partnership firm, the constitution of which is found to be void and is, therefore, legally non existent, must be considered to be non-existent for all purposes. It would be a contradiction in terms to say that the firm has no legal existence because it is void and yet has factual existence.'

22. In the decision in CIT v. K.C. Thomas and Co. : [1983]142ITR332(Ker) , to which one of us was a party, this court considered the scope of the power under Section 186. This court held (at p. 340) ;

'We are of the view that condition No. 5 specified by their Lordships of the Supreme Court in R.C. Mitter and Sons v. CIT : [1959]36ITR194(SC) , at page 198, is satisfied in this case, namely, that the partnership in the instant case is admitted to be genuine and it has actually existed in conformity with the terms and conditions of the instrument. Further, this is not a case, as contended by counsel for the Revenue, where the Income-tax Officer has purported to exercise the powers in accordance with Section 186 of the Act similar to Rule 6B of the Rules under the 1922 Act, which fell for consideration in Y. Narayana Chetty v. ITO : [1959]35ITR388(SC) . In the event of cancellation under Section 186 of the Income-tax Act, the question that will fall for consideration is, as to whether in the opinion of the Income-tax Officer, there was during the previous year a genuine firm in existence as registered. That section is hedged in by limitations specified therein. No such question falls to be considered in the instant case.'

23. The authorities in these cases found that there was no genuine firm in existence as registered during the relevant previous years. All the partners had not signed the partnership deed and one of the partners was also a minor. The application was also not signed by all the partners.

24. When the registration is cancelled under Section 186, how the assessments have to be dealt with is mentioned in Section 186(3) of the Act. Where the registration of a firm is cancelled for any assessment year, the Income-tax Officer will have to amend the assessments of the firm and its partners for that assessment year on the footing that the firm is an unregistered firm. The Full Bench of this court, in the decision referred to above, also observed (see : [1985]154ITR141(Ker) ) :

'... Upon cancellation of the registration, the officer has to amend the assessments of the firm and its partners for the relevant assessment year on the basis that the firm is an unregistered firm.'

25. Therefore, the fact that the partners have already been assessed for the assessment years 1973-74 to 1976-77, taking into account their share in the firm, will not be a ground for holding that the firm cannot be assessed as an unregistered firm after cancellation of the registration. There cannot be an estoppel against that.

26. Under Section 185(2) of the Act, it is obligatory after April 1, 1971, for the Income-tax Officer to intimate the defect in the application submitted for registration of the firm and also to give an opportunity to the firm to cure the defect. That alone will ensure 'fairness' in action. If notice for cancellation was given under Section 186, the assessee could have submitted a proper application for the subsequent years ; that is, for the period in which all the partners have become major, they could have submitted a proper application signed by all the partners and also could have cured the defect. This procedure is not seen adopted by the assessing authority in this case. We are of the view that such procedure should be followed. Then alone, there will be a full, proper and effective consideration of the matter which will result in a proper final order being passed in the case. Such a situation has not arisen herein. In the absence of such pre-requisites or preliminary steps, any order passed can only be considered as provisional or tentative but not final or conclusive or binding. We, therefore, decline to answer the question referred to this court but direct the concerned officer to afford an opportunity to the assessee to explain and, thereafter, pass final orders.

27. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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