MITRA J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessee is a firm of three partners under a deed of partnership dated August 20, 1947. Registration had been granted to the firm from 1948-49 till the assessment year 1955-56. For the assessment year 1956-57 the assessee filed an application for renewal of registration in time. There was no compliance, it appears from the statement of the case, with the notices issued under section 22(2) and section 22(4) of the Act. The assessment was made under the provisions of section 23(4). The Income-tax Officer said :
'Assessed under section 23(4) on a total income as indicated above. For reasons recorded by the separate order under section 26A registration is refused to the firm. The firm is to be treated as unregistered firm and should pay tax directly.'
Below that in a separate paragraph the Income-tax Officer has stated :
'Order under section 26A -
Application for renewal of registration has been filed in time. The assessee-firm has not complied with notices under section 22(2) and 22(4) issued from this office. Registration is a concession granted to assessees under certain circumstances detailed in the Rules and in the Act prescribed for the same. This concession is not surely meant for recalcitrant assessees. This is one of such cases where return under section 22(2) has not been filed though the scheduled time for the same is long over. I, therefore, refuse to grant registration to this firm under section 23(4) of the Income-tax Act.'
The assessee made an application under section 27 which was rejected by the Income-tax Officer. The assessee appealed against it. The Appellate Assistant Commissioner did not interfere with the order of the Income-tax Officer.
The assessee also appealed to the Appellate Assistant Commissioner against the order refusing renewal of registration. It contended that the Income-tax Officers refusal to grant renewal of registration was based on irrelevant considerations. The Appellate Assistant Commissioner found that there had undoubtedly been default in compliance with the notice under section 22(2); but sufficient time had not been granted to the assessee for complying with the notice issued under section 22(4). The Appellate Assistant Commissioner held that since the firm had been granted registration from 1948, the invocation of the penal provisions of section 23(4) for refusing renewal of registration was improper. In his view the order passed by the Income-tax Officer was not justified and he directed the granting of renewal of registration.
The department preferred an appeal to the Tribunal. It contended that the Appellate Assistant Commissioner having come to the conclusion that the assessee had committed default in compliance with the notice under section 22(2), the assessment under section 23(4) had been properly made and it was up to the Income-tax Officer to invoke the penal provisions of that section and refuse registration. And in the circumstances, the Appellate Assistant Commissioners interference with the order of the Income-tax Officer was not correct.
The Tribunal found that if the section 23(4) order stood as it must because the section 27 appeal had been dismissed by the Appellate Assistant Commissioner, the Income-tax Officers discretion to refuse renewal of registration could not be assailed.
The Tribunal also held that though the Income-tax Officer should have decided the section 26A application on its merits and then as a penalty under section 23(4) refused registration; on the facts the registration had been refused as a penalty in the assessment under section 23(4) which held the field and it did not make any difference.
On the above facts the following question of law has been referred to this court by the Tribunal for its opinion :
'Whether in view of the fact that the Appellate Assistant Commissioner by confirming the order of the Income-tax Officer refusing to reopen under section 27, upheld the assessment under section 23(4) for the year 1956-57 he was competent to examine the merits of the Income-tax Officers refusal to register the firm under section 23(4) ?'
Mr. Balai Pal, learned counsel for the Commissioner, contends before us that in the present case the order under section 23(4) refusing registration was passed only for one default or one contumacy namely, non-compliance with the notice under section 22(2) for filing the return. The assessee thereafter preferred its appeal against the order under section 23(4) refusing renewal of registration and not against any order passed under section 26A. The Appellate Assistant Commissioner, continues Mr. Pal, had come to the find that this default, that is, non-compliance with the notice under section 22(2) on the part of the assessee, was there, there being no sufficient grounds for such non-compliance. Having come to that finding, the Appellate Assistant Commissioner had no option but to affirm the order under section 23(4). He had no jurisdiction to go into the question whether for any particular reason the assessee could not comply with the requirements of section 26A. No matter concerning section 26A was the subject-matter of the appeal before him and he was, therefore, precluded from going into it.
Mr. Pal has submitted to us that the question referred by the Tribunal should be reframed by this court as follows :
'Whether in view of the fact that the Appellate Assistant Commissioner came to the finding that the assessee had committed default in complying with the notice under section 22(2) of the Indian Income-tax Act, 1922, he was justified in interfering with the order of the Income-tax Officer passed under section 23(4) ?'
In case the question suggested by Mr. Pal did not appeal to us, he submitted further, as an alternative that, at least the words 'and was justified in reversing the order of the Income-tax Officer refusing registration' should be added to the question framed.
Mr. Pal had cited a number of authorities in support of his proposition that the High Court can always reframe the question of law submitted for answer so as to bring out the real issue in controversy between the parties. This can be done, he says, subject to two limitations, namely, (1) on the facts on record the question as reframed can be said to arise, and (2) the question reframed raises a point of law which was considered by the Tribunal.
We might have been inclined to accept the contentions of Mr. Pal if we were satisfied on the facts on record that the Income-tax Officer had refused renewal of registration only on the ground of default under section 22(2) of the Indian Income-tax Act. In that event, there might not have been any reason for the Appellate Assistant Commissioner or any higher authority to interfere with the discretion exercised in imposing penalty by the Income-tax Officer. In those circumstances, we might have also been inclined to reframe the question either in the manner suggested by Mr. Pal or in any other suitable manner. But when we closely examine the orders passed by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal we do not feel inclined either to accept the arguments of Mr. Pal or to reframe the question.
I would first come to the order of the Income-tax Officer at page 6 of the paper-book regarding refusal to register which has been already quoted earlier in this judgment. Mr. Pal lays special emphasis on the words 'this is one of such cases where return under section 22(2) has not been has not been filed though the scheduled time for the same is long over. I therefore, refuse, to grant registration etc.' Unfortunately, this is only a portion of the Income-tax Officers order. We have to read the order as a whole and when we do so, we are left with no doubt that the Income-tax Officer is relying not merely on default under section 22(2) but also on default under section 22(4). In any event, it cannot be said that the default under section 22(4) had no effect on the mind of the Income-tax Officer.
The Appellate Assistant Commissioner also has understood the order of the Income-tax Officer in the same sense as indicated in the forgoing paragraph. At page 8 of the paper book the Appellate Assistant Commissioner says :
'According to the Income-tax Officer the appellant-firm has not complied with notice under section 22(2) and 22(4) and as the registration is a concession granted to the assessee under certain circumstances detailed in the Rules and in the Act, and as this concession is not meant for recalcitrant assessees, the registration was refused by the Income-tax Officer.'
The Appellate Assistant Commissioner has also recorded the Income-tax Officers further statement with respect to default under section 22(2) in the concluding portion of his order but the fact remains that the Appellate Assistant Commissioner has to take note of the position that the Income-tax Officer had taken into consideration both the defaults as well.
I come now to the order of the Appellate Tribunal in paragraph 3 of its order at page 12 of the paper book. The Appellate Tribunal placed on record the argument advanced on behalf of the department in these words :
'The department in their appeal contend that the Appellate Assistant Commissioner having come to the conclusion that the assessee had committed default in complying with the section 22(2) notice, the 23(4) assessment was properly made and it was up to the Income-tax Officer to invoke the penal provisions of that section and refuse registration.'
Now what does this argument mean It means that the Income-tax Officer has validly and properly made an assessment under section 23(4) by reason of default under section 22(2). And in view of this valid and proper assessment it was for the Income-tax Officer and the Appellate Assistant Commissioner or the Tribunal to refuse to renew registration under section 23(1). In other words, if the best judgment assessment stands the refusal order must also stand.
That was the argument which the department has advanced before the Appellate Tribunal. And the Tribunals verdict runs in these words :
'Whereas according to his own finding if the section 23(4) assessment stands, the Income-tax Officers right to refuse registration as a penalty cannot be assailed.' (Vide paragraph 4, page 13 of the paper book).
In paragraph 5 of its order at page 13 of the paper book the Tribunal states as follows :
'The matter boils down to this that on the facts and on the findings, the 23(4) assessment is valid though it would have been more proper for the Income-tax Officer to have decided the 26A application on its merits and then as a penalty under section 23(4) refuse registration. But he has in fact come to the conclusion that there was no case for grant of registration under section 26A as he refused registration as a penalty order under section 23(4). In the above circumstances, in any case, the order passed by the Appellant Assistant Commissioner cannot be sustained and must be set aside.'
The ration decidendi of the Tribunals order is that, since the assessment under section 23(4) is valid the refusal to grant renewal of registration imposed as a penalty by the Income-tax Officer cannot be attacked. In other words, the Tribunal finds that its hands are tied by the assessment under section 23(4). And that is why the Tribunal did not go into the merits of the exercise of discretion by the Income-tax Officer in the appeal before it.
I would now support the conclusions we have reached by the facts mentioned in the statement of the case. From paragraph 2 of the statement we get two facts namely, (1) there was no compliance with the notices issued under section 22(2) and 22(4); and (2) the assessee made an application under section 27 which was rejected by the Income-tax Officer. In paragraph 4 of the statement the contention of the department before the Tribunal has been noted and the Tribunal also refers to paragraphs 4 and 5 of its order the basis whereof is a valid and a proper assessment under section 23(4). Then the following significant statement is made :
'The Tribunal found that if the section 23(4) order stood as it must because the section 27 appeal had been dismissed by the Appellate Assistant Commissioner, the Income-tax Officers right, (the more proper word to use would have been discretion), could not be assailed.'
This particular sentence in the statement of the case makes it abundantly clear that the Tribunals view is that if an assessment under section 23(4) be valid and proper, there can be no question of going into the merits of an order of refusal to renew registration. In other words, on the facts of this case the Appellate Assistant Commissioner was not competent to examine the merits of the Income-tax Officers refusal to register the firm under section 23(4). In this context, in our opinion, the question for our consideration requires no reframing whatsoever. We shall, therefore, proceed to answer the question as referred to us.
The relevant portions of section 23(4) runs as follows :
'If any person fails to make the return required by any notice given under sub-section (2) of section 22. ..... or fails to comply with all the terms of a notice issued under sub-section (4) of the same section ...... the Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered.'
It is clear from these provisions 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 : Commissioner of Income-tax v. Krishnamma & Co. Section 30 of the Act gives to the assessee-firm an express right of appeal against an order of refusal under section 23(4). The discretion to be exercised by the Income-tax Officer is a judicial discretion and in an appeal against that discretion the appellate authority has certain will 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. As early as in 1881 Jessel M. R. in Ex parte Merchant Banking Company of London, at page 635 stated :
'...... it is the exercise of a judicial discretion, which means a discretion founded on sufficient reasons. And, like every other such discretion the exercise of it is subject to appeal, but the Court of Appeal will not be ready to interfere with the judges exercise of his discretion unless it is shewn that he was clearly wrong.'
In a recent case our appellate court (P. N. Mookerjee and Law JJ.) has expressed itself on this point in Serajuddin & Co. v. Michael Golodetz at page 725 in these words :
'Before, however, we deal with the said question on the merits, it is necessary to make some preliminary observations. Rightly or wrongly, the discretion in the matter has been exercised by the learned trial judge in favour of the defendants. It is urged on the defendants behalf that we, as the appellate court ought not to interfere with the said exercise of discretion. That it should not be lightly interfered with is well established on the authorities, but we do not think that law does, in any way, fetter the power of the appellate court to interfere in a proper case. Where the discretion has been exercised on a consideration of all relevant materials and circumstances and in accordance with sound judicial principles and no injustice has been done or is likely to result from the trial courts order, no question of interference arises even if the appellate court does not agree with the trial courts actual exercise of discretion or conclusion on the point and might have decided differently if the original discretion had lain with it. In other words, in such circumstances, the appellate court would not have been entitled to substitute for the trial courts exercise of discretion in the matter of its own exercise of the same. Where, however, the trial court has not considered all the relevant materials or has proceeded on assumption, not borne out or justified by the records, or has applied wrong legal principles, leading to an unjust order, it is not only the right, and in the powers of the appellate court, but clearly also its duty to interfere with the same and set matters right by undoing the mischief and injustice, occasioned by the trial courts order. Otherwise, there will be no point in providing for an appeal in matters of discretion and such a provision would be wholly nugatory and its purpose would be frustrated. It is, undoubtedly, true that this power of interference should not be exercised lightly, or except for preventing gross mischief or miscarriage of justice, but, subject to that, the appellate courts power in this behalf is wide, ample and unrestricted and may and always should be exercised to relieve the aggrieved party.'
The appellate court has relied on the classical observations of the learned law Lords in Evans v. Bartlam, and Charles Osenton & Co. v. Johnston.
The next point is that this right of appeal against an order of refusal to register which has been conferred on the assessee by section 30 of the Act is independent of his right of appeal against the best judgment assessment. This right of appeal against the order of refusal remains or survives also if one of the grounds for assessment is also a ground for refusal. In Mannilal Sagarmal v. Commissioner of Income-tax, the Allahabad High Court has held that there is no provision in the Income-tax Act which gives an assessee a right to make an application asking for cancellation of an order refusing to register a firm made under section 23(4) of the Act; the only remedy provided is an appeal under section 30(1). Where the Income-tax Officer, the Allahabad High Court says, makes a best judgment assessment under section 23(4) and consequently refuses an application for the registration of the firm, if the assessee is satisfied with the best judgment assessment under section 23(4) he need not make an application under section 27, but if he is dissatisfied with the order refusing to register the firm he can appeal that order of Income-tax Officer challenging it on any ground whatsoever including grounds on which he could have asked for cancellation of the assessment under section 27. The mere fact that he did not make an application under section 27 for the cancellation of the best judgment assessment cannot stand in the way of his challenging the order refusing to register the firm on the same ground. When an appeal is filed against the order passed under section 23(4) refusing to register a firm, the appellate authorities should examine on its merits the finding of the Income-tax Officer that the assessee had committed the default mentioned in section 23(4) ignoring the fact that no application was made under section 27 for cancellation of the best judgment assessment.
Mr. Balai Pal, learned counsel for the Commissioner does not dispute these propositions laid down by the Allahabad High Court. We accept them so far as they apply to the facts of the present reference.
We agree, however, with Mr. Pal that the Appellate Assistant Commissioner in the instant case has advanced certain erroneous reasons in setting aside the order of refusal keeping in mind considerations germane to an application under section 26A of the Act. 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. 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 Commissioner 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 observation of Pickford L. J. in Cheater v. Cater at page 252 that 'If a judge states two grounds for his judgment and bases his decision upon both, neither of those grounds is a dictum.' Then there is a judgment of the Supreme Court under the Preventive Detention Act, 1950, in Shibban Lal Saksena v. State of Uttar Pradesh. The detention order in this case was made containing two grounds under sub-clauses (ii) and (iii) of clause (a) of section 3(1) of the Preventive Detention Act, 1950, as amended by later Acts. In exercise of the powers under section 11 of the Act the Government confirmed the detention order against the detenu under sub-clause (ii) of section 3(1) (a) of the Act but as regard the second ground under sub-clause (iii) of section 3(1) (a) the Government did not uphold his detention and revoked it under this sub-clause. It was held that the original order made under section 3(1) (a) was not sustainable. The Supreme Court observes that to say that the other ground which still remains is quite sufficient to sustain the order would be to substitute an objective judicial test for the subjective decision of the executive authority which is against the legislative policy underlying the statute. In such cases the position would be the same as if one of these two grounds was irrelevant for the purpose of the Act or was wholly illusory and this would vitiate the detention order as a whole. It is well settled, the Supreme Court has said, that the power to issue a detention order under section 3 of the Preventive Detention Act depends entirely upon the satisfaction of the appropriate authority specified in that section. The sufficiency of the grounds upon which such satisfaction purports to be based provided they have a rational probative value and are not extraneous to the scope or purpose of the legislative provision cannot be challenged in a court of law except on grounds of mala fides. Section 11 of the Preventive Detention Act lays down what action the Government is to take after the advisory board has submitted its report. If in the opinion of the board there is sufficient reason for the detention of a person, the Government may confirm the detention order and continue the detention for such period as it thinks proper. On the other hand if the advisory board is of opinion that there is no sufficient reason for the detention of the person concerned, the Government is in duty bound to revoke the detention order. What the Government had done in this case, the Supreme Court thought, was to confirm the detention order and at the same time revoke it under one of the sub-clauses of section 3(1) (a) of the Act. This, according to the Supreme Court, is not what the section contemplates.
I have already observed that the two authorities cited above have no direct bearing on the point under consideration. All that we intend to say is that the effect of an insufficient ground on the Income-tax Officer in exercising its discretion must be subjected to review by the appellate authority. It does not appear to us that in the instant case either the Appellate Assistant Commissioner or the Appellate Tribunal has adopted this course.
In view of the discussion aforesaid it is clear that the Appellate Tribunal has erred in holding that the Appellate Assistant Commissioner was not competent to examine the merits of the Income-tax Officers refusal to register the firm under section 23(4), having regard to the fact that he by confirming the order of the Income-tax Officer refusing to reopen under section 27, upheld the assessment under section 23(4) for the year 1956-57. 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.
The answer to the question of law referred to this court is, therefore, in the affirmative.
The respondent will pay to the applicant the costs of this reference.
SEN J. - I agree.
Question answered in the affirmative.