JAGADISAN J. - The firm of Messrs. K. A.M. P. Meera Sahib Tharaganar and Bros., carrying on business at Kandy in Ceylon consists of two partners, K. A. Meera Sahib and K. A. Peer Mohammed. The firm is an assessee under the Indian Income-tax Act. Up to the assessment year 1951-52 the firm was granted the benefit of registration under section 26A of the Act. In respected by the Income-tax Officer, Tirunelveli. The assessee preferred appeals to the Appellate Assistant Commissioner of Income-tax, Tuticorin, and to the Income-tax Appellate Tribunal, Madras, but failed. On an application preferred by the assessee to this court, under section 66(2) of the Act, the Tribunal was directed to state the case raising the following question of law :
'Whether the order of the Appellate Tribunal confirming the refusal of the Income-tax Act was valid in law ?'
It is this question which we have now to answer.
There is no dispute about the facts and they may be briefly stated. The Income-tax Officer called upon the firm under section 22(2) of the Act to make a return of the income. The firm failed to make the return. The Officer next issued notice under section 22(4) of the Act for production of accounts by the firm. Though the Officer granted time for the production of the accounts by adjourning the proceedings several times, no books of accounts were produced. But the firm had filed an application for registration before the Officer. The Officer dealt with the application was certainly one preferred under section 26A of the Act, and refused registration. The reason for refusal is recorded thus by the Income-tax Officer :
'In the absence of accounts it is not possible to verify whether what has been stated by the partners in paragraph three in the application for renewal of registration is true and whether the partners accounts have actually been credited with half share of profits. Further, the application itself in incomplete inasmuch as paragraph two has not been filed in at all. In the circumstances, I am unable to entertain the application.'
The Income-tax Officer has to complete the assessment in the exercise of his powers under section 23(4) of the Act as the firm had failed to submit a return of the income and also failed to produce the books of accounts. In his order of assessment, the officer stated thus :
'By my separate order under section 26A dated July 31, 1954, I have refused to grant registration......The assessment will be made summarily under section 23(4) of the Act. The assessees auditor who appeared before me represented that as an application for renewal of registration has been filed in time renewal of registration should be sanction as there was a genuine firm in existence. I am unable to concede to his request also, as stated in my order under section 26A.'
The assessee challenged the correctness of the order of the Income-tax Officer refusing registration, before the appellate Assistant Commissioner urging the ground that, as the firm was genuine, registration ought to have been granted. The appellate authority took the view that the Income-tax Officer rightly rejected the application for registration as the assessee failed to produce the account books to satisfy the officer that the profits of the firm had been distributed between the partners in the manner indicated in the application for registration.
In the appeal before the Tribunal it was urged on behalf of the assessee that no opportunity was afforded to it to produce the books of accounts in the proceedings under section 26A of the Act and that, therefore, the refusal to register by the Officer was improper and unjust. The Tribunal obviously had this contention in mind when it made the following observation in its order :
'In the instant case, the Income-tax Officer has duly considered the application of the assessee for renewal of registration under section 26A but he had to refuse registration for the year in question under the proviso to section 23(4), as the assessee had failed to produce its books and the Income-tax Officer was prevented thereby to verify the correct apportionment of the profits as stated in the application. This reason is a valid reason and his refusal to register the firm must consequently by upheld.'
Before us, the learned counsel for the assessee urged the following contentions : (1) the order of refusal of registration under section 26A is bad as the assessee was not afforded any opportunity to produce the account books to prove the division and distribution of profits in the manner set out in the application for registration, and (2) there was no order by the Income-tax Officer refusing registration under section 23(4) of the Act and it is wrong to assume, as the Tribunal did, that the order expressly made under section 26A may yet be deemed to be one under section 23(4) overlooking the scheme of the Act which treats the two proceedings under sections 26A and 23(4) as different proceedings, one independent of the other.
We shall first refer to the relevant provisions of the statute and the ruled framed thereunder :
'26A. (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 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.'
Rules 2 to 6B of the Income-tax Rules lay done the procedure for preferring the application and for the granting of refusal of the certificate. Rule 4 is material and it reads thus :
'If, on receipt of the application referred to in rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely :..........'.
Sub-rule (2) of rule 4 states :
'If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the application.'
Section 23(4) is in these terms :
'If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a revised return under sub-section (3) of the same section or fails to comply with all the terms of a notice issued under sub-section (4) of the same section or, having made a return, fails to comply with all the terms of the notice issued under sub-section (2) of this 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 firm, may refuse to register it or may cancel its registration if it is already registered :
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.'
The Income-tax Officer can refuse registration either under section 23(4) or under section 26A read along with rules 2 to 6B. He may also exercise his powers cumulatively under both the provisions of law. But the scope of the power under the two section is not the same. Where the firm is genuine and where the application is made in the prescribed form and manner the Officer shall grant the necessary certificate of registration (rule 4). In dealing with the application under section 26A the Officer cannot look to anything beyond the question of the genuineness of the firm and the compliance with the formalities prescribed by the Rules. The power under section 23(4) to refuse registration is not circumscribed by any such limitation. Indeed, it seems to us to be a penal provision to which the assessee becomes subject consequent on his own default or contumacious conduct. However compelling the ground may be, for granting registration under section 26A, there is absolute discretion in the Officer to act under section 23(4) de hors section 26A. Registration can be granted, if at all, only under section 26A and can only be refused under section 23(4).
Where there is an order of refusal of registration of a firm in the course of assessment proceedings which have culminated in the 'best of judgment' assessment under section 23(4), the question whether the refusal was one under section 26A or in the exercise of discretion under section 23(4), would depend upon the terms of the order and the context and circumstances of the case. There may be a case in which the Officer may say. 'I am inclined to refused registration whichever way I look at the application having in my mind section 26A or section 23(4).' In such a case the order is as much one under section 23(4) as one under section 26A. It is, of course, possible to visualise a case where the order of refusal is purely one under section 26A there being materials to show that the Officer would not have refused registration under section 23(4) had he held in favour of registration under section 26A.
We shall, now, deal with the arguments advanced by the learned counsel for the assessee. We are not impressed with the argument that the absence of any notice to produce the account books caused to be issued under section 26A proceedings in any way vitiates the order of the Income-tax Officer. It is clear that the assessee was repeatedly called upon by the Income-tax Officer to produce the account books. The fact that the notices for production of account books were issued under section 22 of the Act does not, in any way, alter the situation. That the assessee was in no mood to produce the books of account before the Income-tax Officer is perfectly clear. A notice, headed under section 26A of the Act, calling upon the assessee to produce the accounts would not have persuaded the assessee to bring them before the officer. This contention of the assessee that he had no opportunity to satisfy the Income-tax Officer regarding the division of profits is totally devoid of substance.
We are not persuaded to hold that the order of refusal of registration, in the present case, is only under section 26A of the Act and not also one under section 23(4). It is true that the Income-tax Officer has prefaced the order of assessment by stating that he has refused to grant registration under section 26A; but some meaning will have to be attached to the concluding portion of the order of the officer wherein he definitely states that he is unable to accede to the request for registration which undoubtedly was one made in the course of the assessment under section 23(4). We are inclined to take the view that the terms of the assessment order under section 23(4) should, in the context, be read and understood as involving refusal of registration of the firm by the Officer in the exercise of his discretion under that provision. The learned counsel for the petitioner relied upon the decision of the Andhra High Court in Commissioner of Income-tax v. Krishnamma and Co. in support of the proposition that the powers of refusal under section 23(4) and section 26A of the Act should not be mixed up as each provision of law operates independently of the other, the sphere of one not being identical with that of the other. In that case, an application for registration of a firm was refused by the Income-tax Officer under section 26A of the Act on the ground that the partnership itself was illegal, one of the partners being a minor. The minor was not merely admitted to the benefits of the partnership but was made a full-fledged partner liable to losses as well. The firm committed default in not submitting the return called for and eventually the assessment was made under section 23(4) of the Act. The order of the Income-tax Officer making the assessment contained the following words :
'I am unable to register the firm now, inasmuch as the assessment of the firm is made under section 23(4) of the Act.'
On an appeal by the assessee to the Tribunal, the Tribunal directed the registration of the firm. Thereupon the department had the following question of law referred to the High Court :
'Whether it is open to the Income-tax Officer, after holding that a firm is genuine to pass the order refusing registration under the provision of section 26A of the Income-tax Act purporting to be under section 23(4) of the Act ?'
The question was answered against the department and in favour of the assessee, Subba Rao C.J. observing as follows :
'A perusal of the entire order clearly shows that the Income-tax Officer refused registration as, in his view, the provisions of rule 4 of the Income-tax Rules were not complied with. He 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 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 other. The order must, therefore, be deemed to have been made under section 26A(1).......'
We are in respectful agreement with that decision and we agree with the learned Chief Justice that section 23(4) clothes the authority with an overriding power to refuse registration notwithstanding the fact that conditions laid down in rule 4 had been complied with by the assessee. But we feel that the facts, in the present case, are different as there is enough indication here that the Income-tax Officer purported to exercise his discretion under section 23(4) of the Act in refusing registration.
We must also observe that even treating the order of refusal as purely one passe under section 26A of the Act, there are no materials to hold that the order was not warranted. The Income-tax Officer was entitled to satisfy himself whether the particulars disclosed in the application for registration are really true and well-founded. The assessee by its own volition and improper conduct prevented a proper scrutiny of the application and practically invited an adverse order of refusal against it.
We are, therefore, of opinion that the question should be answered in the affirmative against the assessee who will pay the costs of the department. Counsels fee Rs. 250.
Question answered in the affirmative.