1. These two tax cases bear on the same assessment year of the same assessee under the I.T. Act, 1961. The following questions of law have been referred for our opinion by the Income-tax Appellate Tribunal :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to the benefit of registration till December 7, 1969, for the assessment year 1970-71
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment should be made in the status of a registrated firm till December 7, 1969, and thereafter till March 31, 1970, the assessment should be made in the status of an unregistered firm ?'
2. The facts bearing on these two questions may be shortly stated : The assessee is a partnership firm, assessed to income-tax in the status of a registered firm till the assessment year 1969-70. The firm had four partners. One of them, Velayutha Nadar, died on December 7, 1969, in the midst of the firm's account year, which would normally have ended on dissolved on December 7, 1969. The surviving partners, however, did not proceed to an accounting of the partnership as on December 7, 1969, but closed the accounts only on March 32, 1970. This they did apparently on the basis of an independent agreement which was come to on November 26, 1969, in and by which the surviving partners agreed to continue the partnership till March 31, 1970. The fact, however, was that subsequent to the death of Velayutha Nadar on December 7, 1969, no transactions were effected by the partnership firm, but only the business of the partnership was wound up and the accounts taken for the purpose of dissolution of partnership as on December 7, 1969.
3. While so, however, in connection with the firm's assessment for the assessment year 1970-71, the surviving partners and the legal representatives of the deceased partner filed a declaration in Form No. 12 of the forms prescribed under the Income-tax Rules, 1962, and prayed for a declaration that their firm, which had obtained registration till 1969-70, might be declared to be entitled to registration even for the assessment year 1970-71. In filing up the form, however, the applications asked for registration for the previous year ended with March 31, 1970, even though the firm was dissolved by the death of Velayutha Nadar on December 7, 1969.
4. The ITO scanned the form of declaration filed by the surviving partner and held that the particulars mentioned therein were defective. According to the ITO, the continuance of registration to the firm could not be granted for the assessment year 1970-71 for the reason that the continuance was asked for in respect of the year ended March 31, 1970, on the basis that the constitution of the firm remained unchanged, whereas, in point of fact, there had been the death of one of the partners, Velayutha Nadar. On appeal by the assessee-firm, the AAC confirmed the order of the ITO, refusing to grant continuance of registration to the firm for the assessment year 1970-71, more or less on the same grounds which weighed with the ITO.
5. On further appeal, the Tribunal held that the firm came to close on December 7, 1969, with the death of the partner, Velayutha Nadar, having regard to s. 42 of the Indian Partnership Act, 1932. The Tribunal also took note of the fact on the dissolution, by the partner's death of this firm, no fresh partnership was entered into by the surviving partners and the legal representatives of the deceased partner, nor was the firm reconstituted in any other manner. In these circumstances, the Tribunal held that the registration of the firm as an assessable entity must be granted till December 7, 1969, after which date, the declaration filed by the surviving partners and the heirs of the deceased partner would not hold good having regard to the provisions of the I.T. Act, 1961. In the result, they directed the ITO to recognise the firm as a registered firm for the assessment year 1970-71 for the relevant period ended December 7, 1969. For the period thereafter, the Tribunal directed that an assessment should be made on the firm in the status of an unregistered firm. In this manner, the Tribunal disposed of the appeals filed by the assessee firm both against the rejection of the application for registration and also against the assessment made in the character of an unregistered firm of the entirety of the previous year.
6. In these references, brought at the instance of the Commissioner, the Department's learned counsel, Mr. A. N. Rangaswamy, submitted that with the death of one of the partners, it must be held that there was a change in the constitution of the firm. He further urged that the application for declaration of the registration to continue for the assessment year 1970-71 was not properly made and hence the ITO was quite justified in refusing to continue the registration and in treating the firm as an unregistered firm for the whole of the assessment year 1970-71. The learned counsel, accordingly, submitted that the decision of the Tribunal to the contrary was not in accordance with the Rules.
7. Sections 184 and 185 of the I.T. Act, 1961, provide for the procedure for registration of firms. Section 184 deals with an application filed for the first time for registration of a firm for the purposes of the Act. Section 184(7) expressly provides that where registration is granted to any firm for any assessment year it shall have effect for every subsequent assessment year it shall have effect for every subsequent assessment year. This position is subject to the proviso that the firm is not involved in any change either in its constitution or in the shares of the partners as set out in the instrument of partnership. The other condition for the continuance of registration of the firm is set out in s. 184(7)(ii). This provision lays down that the registered firm should file a declaration in the prescribed form and verify it in the prescribed manner to the effect that there was no change in the constitution of the firm and the shares of partners as evidenced by the instrument of partnership remain inchanged. Form No. 12 in the I.T. Rules has been prescribed for the purposes, pursuant to this provision. The form provides for a declaration by the partners to the effect that there has been no change in the constitution of the firm and the shares remained the same as in the proceeding year. Clause (ii) of the firm is in the following terms :
'We... declare that : (ii) there has been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year 19... up to the date of the previous year relevant to the assessment year, or to the date of dissolution of the firm.'
8. In this clause (ii) the words 'up to the date of dissolution of the firm' indicate that up to the date of the dissolution of the firm, the partnership must be regarded as remaining unchanged if the same partners were there up to the date of dissolution. In the present case, the four partners, who had obtained registration for the firm up to and inclusive of the assessment year 1969-70, included Ganesan, Senthirajammal, Shanmughatai Ammal and Velayutha Nadar. When the declaration in Form No. 12 came to be filed Velayutha Nadar had already died on December 7, 1969. Hence the declaration in Form No. 12 was signed by the three surviving partners and the heirs of the deceases partner, Velayutha Nadar. Strictly in accordance with heirs of the deceased partners and the heirs of the deceased partner, Velayutha Nadar. Strictly in accordance with the clause (ii) of Form No. 12 which we have quoted above, all these applicants would have been well within their rights in asking for a declaration for continuation of registration for the assessment year 1970-71 from the beginning of the relevant previous year up to the date of dissolution, by death of Velayutha Nadar, viz., up to December 7, 1969. If such a declaration had been filed, no objection whatever could have been taken even on the technicalities bearing on the matter of strict compliance with the prescribed Form No. 12. As it happened, however in the form (Form No 12), which was subscribed to by the surviving partners and the heirs of the deceased partner, what they declared was, that there had been no change in the consistution of the firm till March 31, 1970. Obviously this was a mistake, which might be said to be apparent even from the application, because the application itself was subscribed to, not by all the four partners, but only by three partners, who survived the death of Velayutha Nadar and Velayutha Nadar's legal representatives. The statement, however, that there had been no change in the constitution of the firm was quite accurate since the dissolution of a firm by death of the partner does not make for any change in the constitution of the firm, up to the date of dissolution. The only consequence which is brought by the dissolution of the firm by death or by other cause is the end of the firm. The firm merely because there was a dissolution. It is on this principle that brought to the notice of the partners the slight discrepancy in their asking for registration for the previous year ended March 31, 1970, when in point of fact, the firm itself stood dissolved as at an earlier date with the death of Velayatha Nadar on December 7, 1969. The Act, no doubt makes express provision for the ITO to return the declaration from, which for one reason or other, is defective. Section 185 lays down elaborately the procedure to be adopted by the ITO when once he receives an application for registration of the firm or when he receives a declaration filed by the partners under. s. 184(7) of the Act. Sub-section (3) of s. 185 provides that '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 was clearly intended to make the ITO go to the assistance of a firm or the partners thereto in the matter of filing an appropriate declaration form an do grant them an opportunity to rectify any defect in their declaration. The provision is intended for the benefit of the assessees, obviously with the expectation that that provision would be beneficently applied by the ITO in every case where it is found that a declaration form file by the partners of a firm is not in order.
9. In the present case, as we have earlier observed, there can be no doubt whatever that the partners were entitled to continuance of registration under s. 184(7) on the ground that there was no change whatever in the constitution of the firm during the relevant previous year for the assessment year 1970-71, as compared to the previous year corresponding to the assessment for 1969-70. They were, therefore, entitled, as of right, to the continuance of registration. All that was needed for continuance of registration was the formality of an application of declaration and an order being made thereon by the ITO. The one and only defect, if it can be so called in the declaration form, was not material to the continuance of registration, for, it was a palpable error on the part of the partners to say that the firm was entitled to registration till March 31, 1970, when they themselves clearly demonstrated in the application itself that one of the partner had died and, by reason of his death, his heirs and legal representatives had to subscribed to that application. If the ITO had followed what we regard as a mandatory procedure in returning the application as enacted under s. 185(3), it could have assisted the partners to have defect rectified and then asked continuance of registration on the basis of a perfect declaration under s. 184(7) of the Act. As it happened, however, the ITO did not follow this procedure. He did not return the declaration. Nor did he drew the attention of the partners to the defect in the declaration. On the contrary, as we might observe, he took advantage of the defect in the declaration and on that basis denied the continuance of registration to the firm for the year 1970-71. In our judgment, the ITO was not justified under the law in doing so.
10. The Tribunal was quite right in holding that the slight defect in the declaration ought to have been overlooked and the application for declaration itself must be taken to be one for continuance of registration from the beginning of the relevant previous year up to the date of death of Velayutha Nadar, viz., December 7, 1969, and on that basis, continuance of registration should have been granted on the basis of the declaration field.
In a situation of this kind, another Tribunal might well have remanded the matter to the ITO requiring him to comply with the terms of s. 185(3) of the Act. But, the fact that the Tribunal thought the slight defect in the declaration as something which could be read as a formal defect, which could be slurred over and the declaration accepted as correct in all respects, cannot be regarded as a wrong disposal of the matter before them. The result, is that the Tribunal's decision is correct on the basis of s. 184(7) of the Act read with the provisions of s. 185(3) of the Act.
11. Mr. Rangaswamy, however, argued that in the events that happened in this case, the assessee firm could not have filed a declaration at all in Form No. 12 prescribed by the Rules. According to the learned counsel, this case must be regarded as one involving a change in the constitution of the firm, since even after the death of Velayutha Nadar, the books were not closed and the firm was apparently continued up to March 31, 1970. The learned counsel submitted that where one of the partners drops out, but the business is continued to be carried on with the surviving partners as if nothing had happened, that would really amount to a change in the constitution of the firm. He cited in his support a judgment of the Orissa High Court reported in Jawaharlal Khandelwal v. CIT : 110ITR884(Orissa) . In that case, an assessee firm was granted registration up to the assessment year 1968-69. In the course of the account year 1969-70, one of the partners died. The partnership books, however, were not closed on the date of death of the partner nor was there any reconstitution of the firm subsequent to his death. They, however, filed declaration in Form No. 12 for the year 1969-70 asking for continuance of registration from the beginning of the account year till the end of the account year, viz., from September 1, 1968, the ITO refused registration. This decision was upheld by the Tribunal in appeal by the Department. On a reference, at the instance of the assessee, the Orissa High Court up held the Tribunal's decision on the score that the assessee-firm continued the business without a break even after the death of the partner and also filed a single return for the entirety of the previous year. In those circumstances, according to the learned judges, the assessee-firm could not be treated as a registred firm during the previous year. In was urged before the learned judges that the firm was entitled to continuance of registration at least up to the date of death of a partner during the previous year relevant to the assessment year 1969-70. This argument was also repelled by the learned judges on the ground that under s. 187(1) of the Act, registration for a part of the year cannot be maintained.
12. Although the learned judges have referred to some decided cases, it is not quite clear from their judgment as to what was the precise basis on which they came to the ultimate conclusion that registration cannot be granted to the firm even up to the period of the death of the partner. It is quite possible that the learned judges had proceeded on the footing that there had been to dissolution at all. But, even in that event, unless there was a change in the constitution of the firm, the continuance of registration cannot be refused having regard to the provisions of s. 184(7) of the Act.
13. Quite apart from the difficulty we felt in discovering the precise basis for the decision of the Orissa High Court, we must express our view that, on similar facts, which we have in the present case, the continuance of registration could not be refused merely on the score that the accounts had not been made up as on the date of death of the partner bringing about the dissolution of the firm. As we had earlier observed, when a firm is dissolved either by the death of a partner or by any other cause, what happens is that the partnership relationship in the firm comes to an end. The dissolution does not result in any change in the constitution of the firm. It would, therefore, be quite inaccurate to refer to such a situation as ruling out the provisions of s. 184(7) of the Act. If the decision of the Orissa High Court relied on by the learned counsel for the Department is under stood to lay down a different principle, we must, with respect, discountenance it as not being in accordance with the law.
14. Mr. Rangaswamy cited a subsequent decision of the same High Court, CIT v. Panda & Co : 121ITR342(Orissa) . This judgment, however, is of no assistance whatever to the present discussion, since the question for decision by the High Court, in that case, had no bearing whatever on the treatment of a firm which had already been registred and which had asked for a continuance of registration already granted. The case was concerned with the application for registration of a firm for the first time under the Act under s. 184(1) of the Act. We may, however, refer to one aspect of the discussion contained in this judgment, which has reference to the procedure provided for under s. 185(2), which is more or less similar to the procedure prescribed for the processing of a declaration under s. 185(3). In that case, an application for registration was made apparently in defective form. The argument addressed before the learned judges of the Orissa High Court was that with an application for registration in a defective form, the ITO was under a duty to return the application giving an opportunity to the firm to rectify the defects and reliance was placed on the provisions of s. 185(2) of the Act. In that case, on the peculiar turn of facts it so happened that the partners of the firm made an application in Form No. 12 instead of in Form No 11 or 11A. It was urged on behalf of the assessee firm that the ITO ought to have drawn the attention of the assessee to the in appropriateness of this form and given an opportunity to rectify the defects. The learned judges, however, took the view that since what was filed was a declaration in Form No. 12, there was, in the proper sense, no application at all, to which the provisions of s. 185(2) can be applied under which the assessee firm would have obtained an opportunity to rectify the defects. Without deciding whether on the facts before the learned judges, this conclusion was or was not correct, we might observe that the provisions of s. 185(2), in the same way as the other provision in s. 185(3), does require the ITO to be helpful to the assessees in the matter of processing the applications for registration or declaration, as the case may be, drawing their attention to defects and putting them in the way of rectifying those defects and giving them an opportunity, which the statute itself provides with a time - limit of one month for such rectification. The ITO would be failing in his duty if he does not follow this statutory mandate.
15. If the point of Mr. Rangaswamy's argument in citing the letter Orissa case, CIT v. Panda and Co. : 121ITR342(Orissa) , is that the ITO, in this case, was justified in giving to the assessee firm's application in Form No. 12 a final disposal without returning the form for compliance, we should express our view in no uncertain terms that such is not the position under the law. We may observe that these two provisions in s. 185, viz., sub s. (2) and sub-s (3), either in their present form or before they were amended by the Taxation Laws (Amendent) Act, 1970, were deliberately introduced in the status book, following widespread criticism by the learned judges of the High Courts of the harsh way in which the registration procedure was administrated under the comparable provision of s. 26A of the Indian I.T. Act, 1922. The experience of the learned judges hearing tax references under the 1922 Act was that the I.T. Department were merely seizing upon technical or venial defects in the applications for registration or for renewal of registration for the purpose of denying to the assessee-firms the privileges to which they would otherwise have been entitled if only such defects had been pointed to and rectified in time. To cite only one instance of judical criticism of the harsh administration of the law relating to registration of firms under the Income-tax Act, witness the following observations of Jagadisan J., in V. M. Periasamy Chettiar & Co. v. CIT : 52ITR134(Mad)
'We must also observe that the department is over-punctilious in considering applications for registration of firms and is not a verse or refuse registration quite readily in a facile manner.'
16. Section 185(2) and (3) of the I.T. Act 1961, is a welcome parliamentary reaction to judicial observations of this kind. At this time of the day therefore, it would be too much to urge that the ITO is not under a duty bound to give a helping hand to assessees, who even with expert professional advice, might falter here and there in filing the applications, which the ITO might not quite regard as being in order. In those cases, not only normal courtesy, but the dictates of the statutory requirements would make for a return of the (defective) applications with an express reference to the defects contained in the applications and an opportunity given to the assessee-firms to rectify the defects. Such a procedure had not been gone through in this case. As we observed, since the defect was a minimal one, the Tribunal was justified in reading the declaration as if it did not contain even that defect and in proceeding to grant continuance of registration on that basis.
17. Time was when the provisions relating to registration of firms in the I.T. Act were buttressed by such judicial utterances as that 'registration is not a common law right but a statutory privilege'. Even now, the registration of firms might remain very much a statutory privilege, but the assessee are entitled to be given the guidance, at official level, which the statute compels the ITO to render to them. At the end of the discussion we express our opinion on the two questions of law by saying that the answer to both shall be in the affirmative.
18. We may add that so far as the second part of the second question is concerned, we did not hear any arguments from the learned counsel for the assessee that for the period subsequent to the death of the partner, the assessment must be only in the status of a registred firm. The learned counsel agreed that, having regard to the limitations subject to which a declaration could be filed even in the present case, the assessment for the period subsequent to December 7, 1969, could only be made in the character of an unregistred firm. This is what the Tribunal had held.
19. In the result, the references are answered accordingly in the affirmative. The Commissioner will pay the costs of the assessee. One set Counsel's fee Rs. 500.