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Commissioner of Income-tax Vs. Soorajmul Nagarmull - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 101 of 1971
Judge
Reported in[1983]139ITR239(Cal)
ActsIndian Income Tax Act, 1922 - Sections 64A, 22(4) and 23(4)
AppellantCommissioner of Income-tax
RespondentSoorajmul Nagarmull
Appellant AdvocateB.L. Pal, Adv.
Respondent AdvocateK. Roy and ;S. Chatterjee, Advs.
Cases ReferredCheater v. Cater
Excerpt:
- c.k. banerjee, j. 1. the following question is involved in this reference at the instance of the commissioner of income-tax, central, calcutta, under section 66(2) of the indian i.t. act, 1922 (hereinafter referred to as 'the act') :'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the income-tax officer was not justified in refusing, under section 23(4) of the indian income-tax act, 1922, to register the assessee-firm under section 26a of the said act.'2. the statement of the case relates to the assessment year 1949-50, for which the relevant previous year ended on the ram navmi day of the samvat year 2005. the assessee is a firm and it applied for registration under section 26a of the act for the said assessment year. in the course of.....
Judgment:

C.K. Banerjee, J.

1. The following question is involved in this reference at the instance of the Commissioner of Income-tax, Central, Calcutta, under Section 66(2) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act') :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not justified in refusing, under Section 23(4) of the Indian Income-tax Act, 1922, to register the assessee-firm under Section 26A of the said Act.'

2. The statement of the case relates to the assessment year 1949-50, for which the relevant previous year ended on the Ram Navmi Day of the Samvat year 2005. The assessee is a firm and it applied for registration under Section 26A of the Act for the said assessment year. In the course of the assessment proceedings, the ITO served a notice under Section 22(4) of the Act requiring the assessee to produce the books of the following businesses as belonging to the assessee ;

1. Prahladrai Agarwalla,

2. Babulal Maheswari,

3. Anandilal Bajoria,

4. Srinivas Sultania,

5. Ramkumar Bishwanath, and

6. India Coal Tar Supply Co.

3. As the assessee did not comply with the , aforesaid notice, the ITO wrote several letters asking the assessee to produce those books but the assessee did not do so. The contention of the assessee before the ITO was that those businesses did not belong to it and, therefore, it was unable to produce those books. The ITO, however, rejected the said contention and held that those businesses were the benami businesses of the assessee and the assessee had deliberately withheld those books. In these circumstances, the ITO made a best judgment assessment, initiated penalty proceedings and also refused the registration on the ground that the assessee has deliberately failed to comply with the said requisitions contained in the aforesaid notice under Section 22(4) of the Act.

4. In the quantum appeal filed by the assessee, the AAC held that the businesses or the transactions in the names of Prahladrai Agarwalla, Babulal Maheswari, Ramkumar Bishwanath and India Coal Tar Supply Co. were the benami businesses or transactions of the assessee. The AAC also sustained the additions made by the ITO relating to these businesses. The assessee appealed to the Income-tax Appellate Tribunal from the said order of the AAC. The Tribunal held that the businesses in the names of Prah-ladrai Agarwalla, Babulal Maheswari and the India Coal Tar Supply Co. were the benami businesses of the assessee. As to the business in the name of Ramkumar Bishwanath, the Tribunal held that the assessee was the owner of the money deposited in the name of Ramkumar Bishwanath and the assessee earned interest on that money. The Tribunal also sustained the additions made by the ITO regarding those businesses and transactions.

5. India Coal Tar Supply Company was also an assessee and its assessed total income of Rs. 1,21,921 for the year under reference was added to the income of the assessee by the ITO. As already stated, this addition was sustained by the Tribunal. It may be noted that in the earlier assessment year, that is, 1948-49, in the quantum appeal by the India Coal Tar Supply Co. the Tribunal had held that one Anandilal Saraf was the sole proprietor of India Coal Tar Supply Co.

6. The assessee also filed an appeal from the order of the ITO refusing to register the assessee-firm. The AAC found that in the assessment order, the ITO has stated that in the previous assessment the assessee had denied its connection with several benami businesses but later on admitted that it owned some of those businesses and that the ITO also referred to the findings of the Investigation Commission and has held that the activities of the above businesses could not have been carried on by the assessee without maintaining regular books of account.

7. In view of his own finding in the quantum appeal, the AAC rejected the contention of the assessee that the businesses in the names of Prahladrai Agarwalla, Babulal Maheswari, Ramkumar Bishwanath and India Coal Tar Supply Co. did not belong to the assessee. He held that the books of account of at least these businesses were deliberately withheld by the assessee. He also held that non-production of the books of account of these businesses is a material default, as correct computation of profits will be impossible and it will also be impossible to verify whether the profits have been divided between the partners in proportion to the shares specified in the instrument of partnership. He, therefore, held that the order of the ITO did not suffer from any want of judicial discretion and dismissed the appeal.

8. The assessee filed a further appeal from the aforesaid order of the AAC. The Tribunal held that the words 'income, profits or gains' do not mean income, profits or gains as understood under the I.T. Act for the purposes of division between the parties and that under Section B of the Schedule to the form prescribed by Rule 3 of the Indian I.T. Rules, 1922, the assessee was not required to ascertain the profits in accordance with the provisions of the Act and to apportion them. The Tribunal further held that the mere fact that the assessee indulged in benami businesses and the profits from those benami businesses had not been taken into account by the assessee in its books would not disentitle it from registration. In view of its own contradictory findings regarding the ownership of the business of India Coal Tar Supply Co. in the aforesaid appeals, the Tribunal held that the provisions of Section 23(4) being of a penal nature, could not be used for the exercise of discretionary power of refusal of registration. The Tribunal allowed the appeal and directed the ITO to grant registration after stating as follows :

'We find that in the scale of justice, on one side there is a compliance by the assessee in respect of various incomes showr by it in its return from time to time which constituted the bulk of its total income and on the other side there is contumacious conduct of the assessee with regard to businesses, specially relating to Prahladrai Agarwalla and Babulal Maheswari and earning of interest of Rs. 7,257 in the name of Ramkumar Bishwanath and these formed a small part of the income of the assessee. Taxing statutes are designed to see that burden of tax falls equally and uniformly upon the assessee avoiding as far as possible unjust and unreasonable result. In a matter like this, the scale must be held even, neither prejudicially nor sympathetically. The judicial gaze or vision has to be steadfast seeing everything relevant. Penal proceedings have been taken against the assessee by passing order under Section 23(4), by starting proceeding under Section 28(1)(b) for non-compliance with the terms of some of the notices and for furnishing inaccurate particulars of income in its return and by refusing to register the application for registration under Section 26A of the Act. Considering the cumulative effect of the penal provisions taken against the assessee and after considering the totality of all the facts and circumstances of the case, we are of the opinion, that the Revenue authorities were unjustified in rejecting the claim for registration of the assessee. Even if we have doubt about our conclusion, we would resolve it in favour of the assessee; taking resort to the doctrine which Lord Radcliffe has characteristically described as the last refuge to judicial hesitation, that if two views are possible in a taxing statute, the view which favours the assessee must be preferred.'

9. It may be noted here that the order of the ITO refusing registration and the appellate order of the AAC relating to it and, forming part of the statement of the case, were not printed in the paper book and, therefore, at the instance of both the parties, we have allowed the copies of the aforesaid orders to be filed and they now form part of the records of this reference.

10. It may also be noted here that the learned counsel for both the parties confined their arguments solely to the businesses or transactions in the names of Prahladrai Agarwalla, Babulal Maheswari, Ramkumar Bishwanath and India Coal Tar Supply Co.

11. Depicting the order of the Tribunal as utterly confusing, hopelessly muddled, devoid of meaning and full of rigmarole and contradictions, Mr. Kalyan Ray, learned counsel for the assessee, submitted before us that we should call for a supplementary statement of the case from the Tribunal. But the relevant facts found by the Tribunal being clear to us for the purpose of answering the question in this reference, we are unable to accede to his submission and as such the reliance by Mr. Ray on the case of Keshav Mills Co. Ltd. v. C1T : [1965]56ITR365(SC) is wholly misplaced. That apart, his contention is directed not against the statement of the case but against the order of the Tribunal and, therefore, it must fail as we have no power to ask the Tribunal to rewrite its order.

12. Mr. B. L. Pal, learned counsel for the Revenue, contended that it has been concurrently found by the ITO, the AAC and the Tribunal that the conduct of the assessee has been contumacious in complying with all the terms of the notice issued by the ITO under Section 22(4) of the Act and the ITO was, therefore, justified in refusing registration to the assessee. Mr. Pal submitted that the ITO issued a notice dated July 31, 1953, to the assessee under Section 22(4) of the Act, calling for the books of account of the head office and of all the branches disclosed or undisclosed, in respect of the businesses and investments belonging to the assessee in the names, inter alia, of (1) Prahladrai Agarwalla, (2) Babulal Maheswari, (3) Ramkumar Bishwanath, and (4) India Coal Tar Supply Co. Whatever might be the ultimate conclusion of the Tribunal (correctness whereof is disputed by Mr. Pal), the Tribunal has found that there has been non-production of books by the assessee with regard to those four parties which were held to be benami businesses of the assessee by the Tribunal itself in the appeal against the assessment of the assessee in the year relevant to this reference, Mr. Pal, therefore, submitted that once non-compliance with all the terms of the notice under Section 22(4) of the Act on the part of the assessee is found, the ITO is entitled to use his discretion in refusing registration to the assessee.

13. Mr. Pal drew our attention also to the fact that apart from the notice dated July 31, 1953, the ITO, by his letters dated January 14, 1952, January 22, 1954, Februaey 11, 1954 and March 11, 1954, again and again requested the assessee to produce the books of account of the benami businesses mentioned in those letters which included, inter alia, Prahladrai Agarwalla, Babulal Maheswari, Ramkumar Bishwanath, and India Coal Tar Supply Co., but the assessee did not comply with the same.

14. The Tribunal has categorically found that the businesses in the names of Prahladrui Agarwalla, Babulal Maheswari and Ram Kumar Bishwanath were benami businesses of the assessee and there was admittedly contumacious conduct of the assessee with regard to these businesses. Mr. Pal, therefore, argued that the Tribunal has taken an extraordinary and novel view, namely, that the income derived from the above benami businesses formed a small part of the total income of the assessee and as such the contumacious conduct of the assessee with regard to those businesses should be ignored in the matter of exercising discretion for refusal of registration under Section 23(4) of the Act. Mr. Pal, submitted that the smallness or vastness of income is not at all a consideration relevant for the exercise of the discretionary power under Section 23(4) of the Act. The only consideration, according to him, is whether the conduct of the assessee was contumacious and it has failed to comply with the terms of the notice under Section 22(4) of the Act.

15. As to India Coal Tar Supply Co., Mr. Pal argued that in the quantum appeal filed by the assessee it has been held by the Tribunal that this business was a benami business of the assessee and it had also sustained the addition of Rs. 1,21,921 as the income of the assessee from this business in the relevant year and the aforesaid amount having been already included in the assessment of the assessee, it cannot be said that it formed only a small part of the income included in the total income of the assessee. Mr. Pal further drew our attention to the fact that it was admitted before the Tribunal on behalf of the assessee that India Coal Tar Supply Co. maintained books of account which were produced before the ITO in the assessment proceedings of India Coal Tar Supply Co. Admittedly, those books of account were not produced before the ITO by the assessee in utter defiance of the aforesaid notice issued under Section 22(4) of the Act. Therefore, he argues that the view taken by the Tribunal in relation to this business by drawing inspiration from an earlier assessment proceeding of India Coal Tar Supply Co., as aforesaid, was wholly unwarranted and utterly a wrong approach to the case. He also argues that the reference made by the Tribunal to certain passages from Maxwell on the Interpretation of Statutes in that behalf are wholly inapplicable, inasmuch as no question of interpretation of any statute was involved before it. The Tribunal, he says, itself created a confusion in its own mind by the aforesaid contradictory finding in the aforesaid two appeals and has wrongly given the assessee the benefit of doubt inasmuch as not only the principle laid down by Lord Radcliffe has no application, but also, the Tribunal was not at all concerned with its finding in the assessment appeal of India Coal Tar Supply Co., in an earlier year.

16. Mr. Pal also drew our attention to the decision of the Bombay High Court in Mauladin Ayub Firm v. CIT : [1959]35ITR449(Bom) , and argues that contumacy on the part of the assessee having been found by the Tribunal, it went wrong in holding that the ITO was wrong in refusing registration.

17. Mr. Pal rightly submitted that the Tribunal in quoting the observations of Chagla C.J,, from the aforesaid case, has introduced the words 'criminal intention' by way of its own gloss and embellishment. He argued that, on the facts and circumstances of the case and that contumacy on the part of the assessee having been proved, established and also found by the Tribunal beyond reasonable doubt, the Tribunal should have held that the ITO had rightly exercised his discretionary power against the assessee by refusing to register it.

18. Mr. Pal further contended that the aforesaid penalty proceedings initiated against the assessee cannot be taken into account in determining whether the registration of the assessee-firm should be refused or not under Section 23(4) of the Act. He argued that the Tribunal was only concerned with questions, namely, whether the assessee had failed to comply with the terms of the aforesaid notice and, if so, whether such default was as contemplated by the relevant section of the Act and, if so, whether it was of such a nature as to merit the penalty of denial of registration in view of the decision of this court in the case of Askaran Kissenlal v. CIT : [1969]73ITR522(Cal) , and the Tribunal was entirely wrong in not following the aforesaid decision which was cited before it by the departmental representative.

19. Mr. Pal also cited the case of Durga Prasad Chandi Prasad v. CIT : [1971]79ITR553(Patna) . In this case, their Lordships of the Patna High Court, relying on the observations of the Madras High Court in the case of J.M. Sheth v. CIT : [1965]56ITR293(Mad) , held that the ITO was justified in refusing renewal of registration under Section 26A of the Act while exercising his discretion under Section 23(4) of the Act. The Madras High Court observed as follows (p. 296):

'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 consequence : (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.'

20. Mr. Pal aruged that it was not the case of the assessee before the Tribunal that the ITO had exercised his discretion arbitrarily or capriciously and, therefore, the Tribunal was wholly unjustified in holding that the Revenue authorities were not justified in refusing to register the assessee-firm.

21. Mr. Ajit Sengupta, the learned junior of Mr. Pal, rightly contended that the Tribunal was wholly wrong in its interpretation of the Indian I.T. Rules, 1922, and in holding that the assessee was not required to ascertain the profits in accordance with the provisions of the Act and to apportion them, because in the form of application for the renewal of registration of a firm under Section 26A of the Act specified in the rules framed therefor, the applicant had to certify that the profit (or loss, if any) of the previous year to be divided or credited as shown in the particulars of apportionment of the income, profits or gains (or loss) of the business of the previous year, were so divided or credited as shown in the particulars. The said particulars as well as the certificate given in respect thereof would be incorrect and false because of non-production of the books of account of the benami businesses or transactions of the assessee. The books of account of the assessee produced before the ITO will not show the income derived by the assessee from these benami businesses or transactions and the real profits earned by the assessee cannot be ascertained because of the non-production of the books of account of the benami businesses.

22. Mr. Kalyan Roy submitted that the Tribunal had not found that the conduct of the assessee, in so far as India Coal Tar Supply Co. was concerned, was contumacious. We are unable to accept his contention. It will appear from the order of the Tribunal that the learned counsel for the assessee admitted before the Tribunal that India Coal Tar Supply Co. produced its books of account before the ITO in its own assessment. Those books of account of India Coal Tar Supply Co. were, however, not produced before the ITO in the assessment proceedings of the assessee in spite of notice under Section 22(4) of the Act, issued by the ITO, and further requisitions for production thereof made by the ITO by subsequent letters. The finding of the AAC that the books of account of India Coal Tar Supply Co, were not produced before the ITO in the assessment proceedings of the assessee even though specifically called for by the ITO, was not challenged by the assessee before the Tribunal and the Tribunal did not find the same to be incorrect. The said finding of the AAC should, therefore, be taken to be admitted by the assessee.

23. In our opinion, the view taken by the Tribunal in the matter of India Coal Tar Supply Co., as stated by us earlier, was not only non-germane to the consideration before it, but also entirely wrong.

24. Mr. Roy next contended that a mere default in the production of books will not attract the penalty of cancellation or refusal of registration and the exercise of discretion requires further factors apart from an assessment under Section 23(4) of the Act. According to Mr. Roy, if valid reasons could be found in the orders of the AAC and of the Tribunal, the refusal can be sustained. The question before this court, Mr. Roy submitted, shows that the justifiability of the order of the ITO is in question, that is, whether there was any objective satisfaction of the ITO. In the instant case, the order of the ITO refusing registration to the assessee does not give any reason which may constitute sufficient material to establish that he had exercised the discretion objectively.

25. We are unable to accept the contention of Mr. Roy. The order of the ITO, in the instant case, is as follows :

' As the assessee's assessment for 1949-50 is being made under Sub-section (4) of Section 23 for deliberate non-compliance with the requisitions made under Sub-section (4) of Section 22 of the Income-tax Act in spite of repeated opportunities, I refuse to register the firm for this assessment.'

26. The language of the order of the ITO shows that the order of refusal to register the assessee was made by the ITO in the course of the assessment proceedings of the assessee under Section 23(4) of the Act and in the course of the said proceedings there was deliberate non-compliance by the assessee with the requisitions made by the ITO under Section 22(4) of the Act in spite of repeated opportunities having been given by the ITO to the assessee. In the result, the ITO refused to grant registration to the assessee for the assessment year under reference. The order of the ITO clearly established that there was objective satisfaction on the part of the ITO before he passed the order. The question before us is not whether the AAC or the Tribunal was justified in refusing registration to the assessee but whether the Tribunal was right in holding that the ITO was not justified in refusing registration to the assessee. The ITO and the AAC have held that the assessee did not produce the books of the current year in respect of the businesses in the names of Prahladrai Agarwalla, Babulal Maheswari, Ramkumar Biswanath and India Coal Tar Supply Co. belonging to the assessee, even though specifically called for, which was not challenged by the assessee before the Tribunal and the Tribunal also has not found anything to the contrary as will appear from its order, shorn of the rigmarole.

27. Mr. Roy next submitted that the Act does not use the word 'contumacy'. The word has found its place in judgments of courts. Mr. Roy dilated upon the dictionary meaning of the word 'contumacy' and submitted that in legal parlance the word means 'wilful disobedience to the summons or order of a court'. Section 23(4) speaks about failure on the part of the assessee to do the things enumerated in that section. In short, there must be a default on the part of the assessee as contemplated by Section 23(4) of the Act. Default, Mr. Roy submitted, may be a technical default. Mr. Roy again dilated upon the dictionary meaning of the word 'default', which means 'failure of something or failure in performance'. Mr. Roy submitted that a mere default is not sufficient for imposing the penalty of refusal of registration under Section 23(4). There must be a default on the part of the assessee without reasonable cause and then the next question will be, in the case of such a default, what will be the course of action of the ITO. Although, in the instant case, Mr. Roy argued, that it may be said that there has been a default on the part of the assessee without reasonable cause, still the question remains what would be the course of action of the ITO. Mr. Roy contended chat the ITO, in the instant case, at first gave one opportunity to the assessee and then gave another opportunity to the assessee which presupposes that the ITO was satisfied that the default was not without reasonable cause. There can be only one default. The ITO is a creature of the statute and he has to act under the statute. There cannot be default more than once. If the. ITO gave opportunities, it must be presumed that he did so for good reasons and it cannot be said that he gave opportunities without good reasons. In support of his above contention, Mr. Roy referred to the decision of the Allahabad High Court in the case of Mohd. Atiq v. ITO : [1962]46ITR452(All) and relied on the following observations of the court at page 455 of the report :

'The other ground which the Income-tax Officer has taken is that numerous adjournments were prayed for and granted to the petitioner. I do not see that the seeking of adjournments or the granting of all of them by the Income-tax Officer has anything to do with the matter. If the adjournments were granted, presumably they must have been granted for good reasons ; if adjournments were allowed for good reasons, it follows that the adjournments were not sought merely for causing delay. Therefore, to my mind, there is nothing at all in the petitioner having sought adjournments and adjournments having been granted.'

28. Whether adjournment was granted for reasonable or good cause must depend on the facts and circumstances of a particular case. The presumption spoken of by his Lordship, in our opinion, is not of universal application. Further, we are not concerned in this reference with any question of adjournment and that apart, in our opinion, it is not a sound proposition of law that if more than one opportunity is given to a party to do something which he has failed to do on earlier occasions, it would automatically raise a presumption that the earlier failure was for a reasonable or good cause.

29. Mr. Roy then assailed the statement of the case by saying that it will appear from the order of the AAC and the Tribunal in the assessee's quantum appeals that the facts stated in the statement of the case were not in accordance with the facts found and recorded in the aforesaid orders and, therefore, we should call for a supplementary statement of the case. After carefully looking into the aforesaid orders, including the appellate orders relating to the registration, we do not find any contradiction, wrong or mis-statement of facts in the statement of the case and his contention must, therefore, fail and, accordingly, it is unnecessary for us to deal with the cases cited at the Bar in this behalf.

30. Mr. Roy then contended that this reference is incompetent, for, according to him, the aforesaid question is a pure question of fact. In Askaran Kissenlal v. C1T : [1969]73ITR522(Cal) of the report, this court says thus :

' .....the only relevant consideration for deciding whether the action of the Income-tax Officer in refusing registration under Section 23(4) was justified are : (1) whether there had been a default on the part of the assessee as contemplated in that section, and (2) whether such default was of such a nature as to merit the penalty of denial of registration.'

31. Mr. Roy, therefore, argued that no legal principles are involved in determining the aforesaid two factors, for, according to him, the question as to whether there had been any default on the part of the assessee is a pure question of fact and if there has been such a default the question as to whether it is of such nature as to merit the penalty of denial of registration is also a conclusion of fact. He argued that the conclusion reached by the Tribunal is a conclusion of fact and thus the question in this reference is a pure question of fact. He also argues that since the finding of the Tribunal has not been challenged on the ground of perversity, no question of law is involved in this reference.

32. In support of his aforesaid contentions, Mr. Roy cited the case of CIT v. Jekisondas Bhukandas : [1967]66ITR515(Guj) , in which it has been held by the Gujarat High Court that the discretion vested in the ITO under Section 23(4) is a judicial discretion and it cannot be exercised arbitrarily or capriciously but must be exercised on proper and relevant consideration based on the materials on record.

33. Mr. Roy also cited the cases of Cooper v. Stubbs [1925] 10 TC 29, CIT v. S. P. fain : [1973]87ITR370(SC) , Lysaght v. IRC [1928] 13 TC 511, CIT v. Lakhiram Ramdas : [1962]44ITR726(SC) , Patiala Biscuit . v. CIT : [1971]82ITR812(SC) , Manji Dana v. CIT : [1966]60ITR582(SC) , CIT v. Ashoka Marketing Ltd. : [1976]103ITR543(SC) , Sir Kasturchand Ltd. v. CIT : [1949]17ITR493(Bom) , Ezra Proprietary Estate Ltd. v. CIT : [1950]18ITR762(Cal) and Poolchand Gajanand v. CIT : [1966]62ITR232(All) .

34. In Cooper v. Stubbs [1925] 10 TC 29, the question was whether the profits arising from dealings in future delivery contracts were profits assessable to income-tax under Schedule D of the I.T. Act, 1918. Warrington and Atkin L. JJ. held that the findings of the Commissioner that the transactions in question did not constitute the carrying on of a trade was entirely one of fact with which the court could not interfere. Pollock M. R., however, took a contrary view and held that the transactions constituted the carrying on of a trade and the profits arising therefrom were assessable to income-tax.

35. In CIT v. S.P. Jain : [1973]87ITR370(SC) , the Supreme Court was mainly concerned with the question whether certain shares were purchased by the assessee in the benami of the Rana. The Supreme Court posed two questions : (1) whether the findings of fact reached by the Tribunal were liable to be interfered with on any of the grounds recognised by law and (2) whether the Revenue had been able to establish that the shares alleged to have been purchased by the Rana were actually purchased by the assessee and the Rana was a mere benamidar for the assessee. Then the Supreme Court observed that the findings reached by the Tribunal were prima facie findings of fact and before rejecting those findings the court must be satisfied that there were grounds in the case recognised by law, which empowered the court to interfere with those findings.

36. In Lysaght v. IRC [1928] 13 TC 511, the question was whether the appellant was resident and ordinarily resident in U.K. for certain years and in dealing with the above question the House of Lords considered whether the findings of the Commissioner that the respondent was resident and ordinarily resident in England is a finding of fact, which cannot be disturbed. The House of Lords observed that the distinction between question of fact and question of law was difficult to define, and held that the word 'reside' or 'residence' in other Acts may have special meaning, but in the Income-tax Acts it is used in its common sense and it is essentially a question of fact whether a man does or does not comply with its meaning.

37. In CIT v. Lakhiram Ramdas : [1962]44ITR726(SC) was a case of reassessment under Section 34(1)(a) of the Indian Income-tax Act, 1922, on the ground of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment and the Supreme Court observed that in the circumstances of that case the question whether the assessee had or had not failed to disclose fully or truly all material facts necessary for his assessment was a question of fact.

38. In Patiala Biscuit . v. CIT : [1971]82ITR812(SC) , the question was whether the loss suffered by the assessee from sale of certain shares was a capital loss or a revenue loss and the Supreme Court in considering the matter observed that 'normally, the finding of the Tribunal on the question whether a particular loss is a trading loss or not, being essentially a finding of fact, would not be disturbed unless it was shown that the Tribunal had taken into consideration irrelevant circumstances or failed to consider relevant circumstances '.

39. In Manji Dana v. CIT : [1966]60ITR582(SC) , the Supreme Court, in considering whether the discretion of the Tribunal had been properly exercised in a given case in refusing to allow a question to be raised which had not been set forth in the memorandum of appeal, observed that the same would normally be a question of fact and would not be a question of law.

40. In CIT v. Ashoka Marketing Ltd. : [1976]103ITR543(SC) , one of the considerations was whether the assessee has concealed its income or not and the Supreme Court observed that, on the facts, whether or not the assessee had concealed his income was a question to be decided on the facts of the case, and that since the decision was based on the respondent's agreement with D.J. Co. Ltd., which the Tribunal accepted as true, no question of law arose from the order of the Tribunal.

41. In Sir Kasturchand Ltd. v. CIT : [1949]17ITR493(Bom) , the question was as to justifiability of the order under Section 23A of the Indian I.T. Act, 1922, made by the ITO and their Lordships of the Bombay High Court observed that the question whether the loss incurred by the company in earlier years or the smallness of the profits made was such as to make the payment of a dividend or a larger dividend than that declared unreasonable, was one essentially for the satisfaction of the ITO. It was a question of fact on which no reference could lie.

42. In Ezra Proprietary Estates Ltd. v. CIT : [1950]18ITR762(Cal) , the question was again as to justifiability of an order under Section 23A of the Indian I.T. Act, 1922, made by the ITO and this court, inter alia, observed that whether the payment of a larger dividend than that declared would be unreasonable by reason of losses in the earlier years or of the smallness of profit for that particular year, was a question of fact. This court, however, considered the facts of the case and came to the conclusion that the finding of the ITO, in that case, that a larger dividend could have been reasonably paid, was based on no evidence.

43. In Phool Chand Gajanand v. CIT : [1966]62ITR232(All) , the Allahabad High Court, in considering what was the previous year relevant to a particular source of income, observed that the same was a question of fact and whether there was a system of accounting for the undisclosed sources of the assessee and whether any option was exercised by it in respect of the previous year relating to that source, were questions of fact.

44. The above short resume made by us of the decisions cited by Mr. Roy clearly shows that none of the said decisions related to the question before us or applied to the facts and circumstances of this case.

45. In further support of his argument that the question in the present reference is a question of fact, Mr. Roy cited a passage from Vol. III of Sampath Iyengar's Book on Income-fax, 6th, edition, appearing at page 1964, which runs, inter alia, as follows :

'The issue, upon cases stated by the Tribunal, whether a question is one of fact or law has been before the courts in innumerable cases, A review of the cases leaves one with the impression that it is difficult to reduce the various statements of high authority into a single or simple formula of uniform application. It also appears that, in considering this question, the courts have disdained guidance from decisions on the identical question in other branches of the law. It is clear that such concepts as under discussion are bound to be unmanageable and confusing unless they have an invariant meaning, that is, unless they serve the same purpose for every legal problem for which they are invoked'. However, the cases do furnish some general principles and hence a broad discussion of the cases follows.'

46. The learned author summarised the principles laid down by both the English and Indian courts and in particular by our Supreme Court on the question as to whether a given question on a given state of facts and circumstances was a question oi law or a question of fact. The discussions and observations of the learned author, however, do not help or give any guidance in arriving at a conclusion as to whether the question in this reference before us is a question of fact or a mixed question of law and fact or a pure question of law.

47. Mr. Pal, on the other hand, argued that the discretion vested in the ITO under Section 23(4) of the Act is a judicial discretion and he must exercise it on the principles laid down by the courts. Therefore, whether he has exercised his discretion judicially or not is a mixed question of law and fact. Accordingly, the decision of the Tribunal on the question, as to whether the ITO has exercised his discretion judicially or not, is also a mixed question of law and fact, because the Tribunal must decide that question by applying the principles laid down by the courts.

48. In support of his foregoing contention, Mr. Pal placed reliance on Askaran Kissenlal's case : [1969]73ITR522(Cal) and the cases of Harnan-drai Badridas v. CIT [1969] 71 ITR 339, Y. Namyana Chetty v. ITO : [1959]35ITR388(SC) and Prabhat Mills Stores Co. Ltd. v. CIT : [1966]59ITR197(Cal)

49. Mr. Pal also cited the decision of this court in Aluminium Corporation of India Ltd. v. C. Balakrishnan [1959] 37 ITR 267 (Cal), which lays down that the discretion to be exercised by the WTO in the case of an application made by the assessee for a stay of realisation of the taxes assessed and not to treat the assessee as in default, had to be exercised in a judicial manner.

50. Reliance was also placed by Mr, Pal on the decision of the Patna High Court in Laheriasarai Central Co-operative Bank Ltd. v. CIT : [1968]69ITR441(Patna) , of the House of Lords in Farmer (Surveyor of Taxes) v. Trustees of the late William Cotton [1915] 6 TC 590, and of this court in Worth Trading Co. v. CIT ILR [1973] (Cal) 54.

51. The case of Laheriasarai Central Co-operative Bank Ltd. : [1968]69ITR441(Patna) , was on the exercise of discretion by the Tribunal in condoning the delay in filing an appeal before it and their Lordships of the Patna High Court observed that 'it is well-settled, whether a discretion vested in a Tribunal under a statute has been exercised judicially or not is a question of law'.

52. In Farmer (Surveyor of Taxes) v. Trustees of the late William Cotton [1915] 6 TC 590, the House of Lords was concerned with the question as to whether a block of buildings let out to tenants and not in the occupation of the assessee, was entitled to partial exemption from 'Inhabited House Duty' under the Customs and Inland Revenue Act, 1878. Lord Parker of Waddington observed (p. 600) :

'The views from time to time expressed in this House have been far from unanimous, but in my humble judgment where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only.'

53. In the case of Worth Trading Co. [1973] TLR 54, this court had concerned itself with the question as to whether certain sums shown as loans taken by the assessee-firm were the income of the assessee-firm from undisclosed source and Masud J., after considering the principles laid down by the Supreme Court in the case of Sree Meenakshi Mills Ltd. v. CIT : [1957]31ITR28(SC) , observed that 'the legal effect of the basic fact as found by the Tribunal is a question of law'.

54. The case of Prabhat Mills Stores Co. Ltd. : [1966]59ITR197(Cal) is a case of refusal of renewal of registration of a firm under Section 23(4) of the Act for non-compliance with a notice under Sections 22(2) and 22(4) resulting in best judgment assessment of the assessee-firm and this court observed (at pp. 205, 207, 208, 209) :

'It is clear from these provisions (provisions in Section 23(4) of the Act) that when defaults are committed by an assessee either in respect of Section 22(2) or of Section 22(4) it is mandatory that the Income-tax Officer has to make the assessment to the best of his judgment. This section also confers a power on the Income-tax Officer to refuse registration not automatically, but in his discretion... The discretion to be exercised by the Income-tax Officer is judicial discretion, and in an appeal against that discretion, the appellate authority has certain well-recognised duties. In the case of an order made in the exercise of discretion the appellate authority ought to examine the circumstances in which the discretion was exercised and may disturb the order appealed against in a proper case... To our mind in an appeal against an order of refusal under Section 23(4) the relevant considerations are defaults with respect to provisions mentioned therein and contumacy in connection therewith......We should also point out in the instant reference that the refusal to renew registration under Section 23(4) is in the nature of a penalty imposed on an assessee who has committed certain specified defaults... All that we intend to say is that the effect of an insufficient ground on the Income-tax Officer in exercising his discretion must be subjected to review by the appellate authority... In our opinion, the Appellate Assistant Commissioner was fully competent to go into the merits of the appeal against the order of refusal to grant registration whatever his view on the best judgment assessment might have been. Under the provisions of Section 31(3)(c) of the Act, after examining the merits of the appeal and testing the contentions raised on 'behalf of the assessee in the light of recognised judicial principles we have discussed in this judgment, the Appellate Assistant Commissioner was free either to confirm the order of refusal, or cancel it and direct the Income-tax Officer to register the firm.'

55. It was, therefore, submitted on behalf of the Revenue that the exercise of discretion by the ITO under Section 23(4) of the Act in refusing to register a firm was a judicial discretion and the order of refusal was in the nature of a penalty. When there is default and contumacy on the part of the assessee the penal consequence will follow. The question in this reference involves a consideration as to whether the ITO exercised his discretion judicially or not in making the order of refusal to register the assessee and whether the Tribunal had tested the same in the light of recognised judicial principles. The contention of the assessee against the said order of the ITO, that in arriving at his conclusion the ITO had not exercised his discretion judicially and, therefore, the ITO was not justified in refusing registration to the assessee, clearly gives rise to a question of law.

56. The Revenue also relied on the case of Hindustan Steel Ltd, v. State of Orissa : [1972]83ITR26(SC) , wherein the Supreme Court at page 29 of the report observed as follows :

'An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.'

57. Mr. Pal also argued that, in the present case, it was never cqntended nor it is contended before us on behalf of the assessee that the assessee did not fail to produce the books called for by the ITO by his notice under Section 22(4) of the Act nor has the Tribunal found to the contrary. Mr. Pal further argued that the assessee has deliberately withheld those books to. avoid its tax liabilities and the ITO had rightly exercised his discretion in refusing registration to the assessee-firm. It is the submission of Mr. Pal that the Tribunal had neither followed the principles laid down by this court in Askaran Kisaenlal's case : [1969]73ITR522(Cal) nor did it find that in the matter of exercise of his discretion, the ITO did not follow the said principles. On the contrary, the Tribunal has sought to lay down a principle which was wholly unwarranted and also applied extra-judicial tests, namely, (1) smallness of the amount ascertained by the ITO in the assessment proceedings of the assessee in the cases of Prahladrai Agarwalla, Ram-kumar Bishwanath and Babulal Maheswari, and (2) different views as to the ownership of India Cual Tar Supply Co. which were taken by the Tribunal in the assessment proceedings of India Coal Tar Supply Co. and in the assessment proceedings of the assessee, and that too in two different years. He argued that by the above process the discretion under Section 23(4) of the Act which is given only to the ITO was substituted by the Tribunal by its own discretion, which the Tribunal has no jurisdiction to do. The Tribunal, however, can set aside the order of the ITO on certain well recognised legal principles and that is a question of law.

58. Reliance was also placed on behalf of the Revenue on Kanga and Palkhivala's book on 'The Law and Practice of Income-tax', 7th Edition, under the heading 'Nature of questions which the Tribunal can be required to refer' appearing at pages 1153 and 1154 of the book which, in our opinion, does not advance the matter either way.

59. In our opinion, the question in this reference is a mixed question oflaw and fact and not a pure question of fact. It is settled law that the ITOmust act judicially in exercising his discretion in refusing to register afirm.

60. It has been laid down in Askaran Kissenlal's case : [1969]73ITR522(Cal) , that the default on the part of the assessee 'must be as contemplated in that section' In Harnandrai Badridas' case [1969] 71 ITR 339, this court said that ' the provisions of the Act indicate that if the assessee fails to comply with the requirement of the Act, particularly the notice under Section 22 or Section 24, powers attracted by the ITO are those enumerated in Sub-section (4) of Section 23'

61. In Narayana Chetty's case : [1959]35ITR388(SC) , the Supreme Court held that by its failure to comply with the requirements of law the assessee had incurred the penalty of having its registration cancelled.

62. Therefore, the ordinary dictionary meaning of the word 'default' cannot be taken into account in determining the question as to whether there is a default on the part of the assessee as contemplated in that section. Since the 'default' must be as contemplated in that section, the ITO must apply his mind to the provisions of that section and then ascertain whether the default in question fell within the four corners of that section. The appellate authorities must also ascertain the provisions of that section to find out whether a particular default is a default under that section. Therefore, the contention of Mr. Roy that a 'default' is a pure finding of fact and no law was involved in it must fail.

63. Argument of Mr. Roy that no legal principle is involved in determining the question as to whether the default is of such a nature as to merit the penalty of denial of registration, must also fail in view of Askaran Kissenlal's case : [1969]73ITR522(Cal) . In that case, the ITO, in the course of the assessment proceedings, issued notice under Section 22(4) of the Act for production of books of the earlier years and the assessee did not produce the books deliberately in order to prevent the ITO from making an investigation into its business affairs. The AAC gave an opportunity to the assessee for producing the books, but the assessee did not avail of that opportunity on some frivolous pretext. In those circumstances, it was held by this court that the registration was rightly refused by the ITO.

64. Therefore, the ITO in considering the question as to whether the nature of the default is such as to merit the denial of registration must take into account whether it is a mere technical default or a deliberate default with a view to avoiding the tax liability. If it is a mere technical default, the registration cannot be refused. But if it is a deliberate default with a view to avoiding the tax liability, the ITO will be justified in refusing to register the firm. Accordingly, it cannot be said that no legal principle was involved in determining the said question.

65. Mr. Roy then argued that the Tribunal did not consider or apply any legal principle in holding that the ITO was not justified in refusing to register the assessee-firm. But we overrule his contention as the relevant portion of the order of the Tribunal, quoted earlier, clearly shows that it has laid down various legal principles and has also applied wrong principles in the facts and circumstances found by it in the appeal before it in respect of the proceeding for the refusal of registration of the assessee.

66. We do not agree with the submission of Mr. Roy that the Tribunal has exercised its discretion based on reasonings which are not illogical. Mr. Roy also argued that the case of the Revenue, not being that the Tribunal has not acted bona fide, we should not disturb the conclusions reached by the Tribunal in view of the following observations of the Allahabad High Court in Phool Chand Gajanand's case : [1966]62ITR232(All) of the report :

'...The Tribunal has to exercise the discretion judicially, i.e., not arbitrarily. So long as it exercises it for reasons which have some logical connection with the way in which it is exercised, it cannot be said to have acted arbitrarily. It must act on the assumption of the correctness of the reasons found by it; if the reasons are subsequently found by another authority to be incorrect, it cannot be said that the Tribunal acted arbitrarily, merely because the reasons on which it based its discretion were incorrect, provided it acted bona fide. It is required to act judicially and not correctly.'

67. Neither the aforesaid argument of Mr. Roy nor the aforesaid observations relied on by him, has any bearing on the question involved in this reference, for we are not concerned with any arbitrary act of the Tribunal.

68. The last contention of Mr. Roy was that the ITO exercised his discretion on the basis that the assessee had deliberately withheld the books of six benami businesses of the assessee. The AAC held that out of those six businesses, two were not benami businesses of the assessee. The Tribunal held that there was doubt at least in respect of one of those businesses. Thus, regarding the books of those three businesses, there cannot be any default on the part of the assessee and the discretion exercised by the ITO is wholly invalid and, accordingly, he was not justified in refusing to register the assessee-firm. In support of his contention, Mr. Roy cited the decision of this court in Prabhat Mills Stores Co, Ltd.'s case : [1966]59ITR197(Cal) and relied on the following observations of this court (p. 207):

'We should also point out in the instant reference that the refusal to renew registration under Section 23(4) is in the nature of a penalty imposed on an assessee who has committed certain specified defaults. When this penalty is being imposed upon the assessee on two grounds (default under Section 22(2) and default under Section 22(4))--one of which the appellate authority rejects as insufficient--(the Appellate Assistant Commmissioner has found that sufficient time had not been granted for complying with the notice issued under Section 22(4)) the effect on the mind of the Income-tax Officer that the insufficient ground had created to persuade him to exercise his discretion in favour of refusal has to be carefully reviewed in appeal. We have not been able to lay our hands on any direct authority on this point under the Income-tax Act. We may incidentally refer to the observations of Pickford L. J. in Cheater v. Cater [1918] 1 KB 247 that 'If a judge states two grounds for his judgment and bases his decision upon both, neither of those grounds is a dictum'.'

69. Mr. Roy, also relied on the decision of the Supreme Court in Dhirajlal Girdharilal v. CIT : [1954]26ITR736(SC) , where the Supreme Court observed as follows (p. 740) :

'When a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding.'

70. Mr. Pal argued that the basic question is whether there was a failure on the part of the assessee to produce the books of account called for by the ITO, be they for six businesses or three or four businesses and whether such failure was without any excuse or was deliberate, so that the conduct of the assessee was contumacious. The Tribunal having specifically found that the conduct of the assessee was contumacious, there were, therefore, materials to justify the order of the ITO. In support ot the above contentions, Mr. Pal cited two decisions under Section 33B of the Indian I.T. Act, 1922. The first was a decision of the Supreme Court in Rampyari Devi Saraogi v. CIT : [1968]67ITR84(SC) in which the Supreme Court observed that there was ample material to show that the ITO made the assessment in undue haste, without any evidence on enquiry and the other observations made by the Commissioner in his order as to the conduct of the assessee in attracting the jurisdiction of that particular ITO by giving fictitious address and by giving her name afterwards, were additional materials which were supporting materials and did not constitute the basic ground on which the order under Section 33B was passed. The other case, a decision of this court in CIT v. Panna Devi Saraogi : [1970]78ITR728(Cal) is identical on facts with the case of Rampyari Devi Saraogi : [1968]67ITR84(SC) and this court held that the basic grounds of the order of the Commissioner under Section 33B were sound and unassailable which were also contained in the notice dated December 19, 1962, given to the assessee by the Commissioner. Our attention was drawn to the fact that in Panna Devi Saraogi's case : [1970]78ITR728(Cal) , Mr. Roy appeared for the assesses before this court and made similar arguments which were repelled by this court.

71. The aforesaid plea of Mr. Roy, was not mooted before the Tribunal, nor the Tribunal based its decision on it. The question of perversity of the decision of the ITO, therefore, does not arise out of the order of the Tribunal nor does it fall within the framework of the question under reference. We cannot, accordingly, entertain this new plea as it cannot be said to be another facade or aspect of the question under reference.

72. Apart from it, there is no merit in his contentions. Four out of those six businesses were the benami businesses of the assessee. The ITO issued notice under Section 22(4) of the Act for production of the books also of those four benami businesses. He also gave repeated opportunities to the asses-see for production of those books. The assessee deliberately withheld those books from the ITO. In these circumstances, it cannot be said that the order of the ITO is bad in law.

73. To us it also appears that the Tribunal has invented certain novel tests for the exercise of discretion by the ITO under Section 23(4) of the Act which are not warranted by law. The principles on which the ITO must act have been clearly laid down by this court in the case of Askaran Kissenlal : [1969]73ITR522(Cal) and also in Prabhat Mills Stores Co. Ltd. : [1966]59ITR197(Cal) . We have already quoted elsewhere what this court has said in Askaran Kissenlal's case. In the case of Prabhat Mills Stores Co, Ltd. : [1966]59ITR197(Cal) , this court observed (p. 207) :

'To our mind in an appeal against an order of refusal under Section 23(4) the relevant considerations are defaults with respect to provisions mentioned therein and contumacy in connection therewith.'

74. The principles laid down by this court in the aforesaid two cases must be followed by the ITO and the appellate authorities as well. It is not a relevant consideration that the income from some of these benami businesses, as found by the ITO, is small. It is also not a consideration that other penal proceedings were initiated against an assessee. Similarly, the finding in the assessment proceedings of other parties (that too in some other year as in the instant case) is wholly an irrelevant consideration. If an assessee-firm has deliberately withheld the books to avoid its tax liability in utter defiance of a notice issued under Section 22(4) of the Act, the ITO will be wholly justified in refusing registration to it. Exactly the same thing has happened here and in spite thereof the Tribunal has taken into account the various irrelevant matters and factors in holding that the Revenue authorities were not justified in refusing to register the assessee-firm.

75. It also appears to us from the order of the Tribunal quoted earlier that it has applied certain principles of law which have no bearing whatsoever on the question involved before it. It has also invented wrong principles of law and applied them in the facts and circumstances of the case:

Having disposed of all the contentions of Mr. Roy, and after carefully considering the arguments made on behalf of both the parties, we answer the question in the negative And in favour of the Revenue. The assessee will pay the costs of this reference.

Deb, J.

76. I agree.


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