P L D 1968 Karachi 805 (PLP)

QADEERUDDIN AHMAD, J.‑This reference has been made by the income-tax Appellate Tribunal (Karachi Bench) at the instance, of the Income‑tax Department.

2. The facts, which form the background of the case, are that the respondent/assessee was assessed to income‑tax for the year 1961‑62 and the assessment was completed by the Income‑tax Officer under section 23(4) of the Income‑tax Act, 1922 by his order, dated the 27th of April 1961. The reason was that the assessee had failed to comply with the notices which were issued under that provision.

3. The assessee being a partnership, had been reconstituted on the 1st of April 1960, and an application for its registration was made under section 26‑A of the Income‑tax Act, on the 15th of August 1960. It was taken up by the Income‑tax Officer for decision on the same day on which the assessment order was made, but after making the best judgment assessment under section 23(4) of the Income‑tax Act, and disposed of as follows :‑ "The assessee has not claimed any status (counsel say that in the return, it was not stated that it was submitted by a firm). However, application for registration is filed which is dated 15th August 1960. There is no deed on record. (Counsel for the parties agree that the word `no' is a misprint for the letter `a'). In view of the fact that assessment has been made under section 23(4) for reasons already explained, I exercise my discretion under the same section and refuse to register the firm under section 26‑A for the assessment year 1961‑62."

4. The assessee appealed against the order by which best judgment assessment was made under section 23(4) of the Income tax Act, 1922 as well as against the order by which registration of the firm was refused. It was dismissed by the Appellate Assistant. Commissioner of Income‑tax on the 5th of February 1963. The assessee, therefore, went in Second Appeal to the Income‑tax Appellate Tribunal, Karachi Bench, which has rejected it against the best judgment assessment, but has accepted it against the order by which registration was refused.

5. The appellate order shows that the contention of the Departmental Representative was that section 23(4) of the Income tax Act, 1922 envisages two types of orders, one of them being an ex parte assessment, and the other, refusal to allow registration. He seems to have argued that the. Income‑tax Officer had not expressly made any order under section 23(4) of the Income‑tax Act, 1922 refusing registration, but described the assessee in the best judgment assessment as an unregistered firm ; therefore, it amounted to refusal of the Income‑tax Officer to allow registra tion of the assessee as a firm. This contention has been repelled by the Income‑tax Appellate Tribunal as follows :‑ "In the instant case the first order (best judgment assessment) is there with all the reasons therefore, but the other is significantly non‑existent. An order on a matter is not to be inferred ; it has got to be ;fated in clear words. Filling up a column (in the best assess ment judgment, and describing the assessee in it as an unregis tered firm), in our opinion, would not amount to recording a formal order which was so necessary to be recorded. After all a very precious right of the assessee was being denied which could not be so done by mere inferences as the Departmental Representative suggests." The Departmental Representative had advanced another argu ment in addition to the above‑mentioned contention. That argu ment was that the Assessing Authority had exercised its discre tion and the said section 23(4) at the time of disposing of the application of the assessee for getting itself registered. This argument had been repelled by the Tribunal as follows: "Refusal to accord registration could be appropriately and in law recorded only in the body of the order made under section 23(4) of the Act, or, in any case, only under the said section 23 (4). Section 26‑A of the Act specifies altogether different considerations for refusing registration and those defaults of the assessee which may necessitate an order under section 23(4) to refuse to grant registration do not find place among the said considerations. On looking up the assessment proper order, it appears as if the assessing officer decided not to exercise his discretion to refuse registration, which means he left the matter of registration to be considered at the time of deciding the registration application, and when he came there he rejected that application on a ground which legally is no ground for passing an order under section 26‑A of the Act, the provision of law under which he actually passed that order. On the facts as found and narrated above, we are of the view that the order on the question of registration, if ex parte assessment was to be the basis of that order, it could be passed only under section 23(4) of the Act, and not under section 26‑A thereof, as has been done in this case."

6. The gist of the above reasoning is that an order refusing or cancelling registration, if made under section 23(4) of the Income‑tax Act, 1922 ought to he made in the same order by which the best judgment assessment is made ; if this is not done, then such an order cannot be made under section 26‑A of the Income‑tax Act, 1922. In this case, according to the Appellate Tribunal, an inference could be drawn that the Income‑tax officer had not refused registration, because no order expressing such refusal was made at the time of making the best judgment assessment. On the contrary, while disposing of the application of the assessee that was made under section 26‑A of the Income- tax Act, 1922, he made an order under section 26‑A, and not under section 23(4).

7. The Department applied to the Appellate Tribunal for a reference to this Court under section 66 (1) of the Income‑tax Act, 1922 and suggested a question which .was criticised by Mr. Ali Athar, counsel for the assessee, who himself framed a question for reference. His suggestion was accepted, and the following question bas been referred to us "Whether in a proceeding under section 26‑A of the Income- tax Act, registration of the firm could be refused on the ground that assessment has been made under section 23(4) even though there is no indication in the assessment order itself that the Income‑tax Officer exercised his discretion."

8. The gist of the above question is that in the proceeding which was taken under section 26‑A of the Income‑tax Act, the registration of the firm was refused on the basis of the best judg ment assessment although discretion under section 23(4) was not exercised at the time of making the assessment. The emphasis, therefore, is on the dis-joinder of the two orders. Mr. Ali Athar has explained this view as follows "Discretion under section 23(4) of the Income‑tax Act, 1922, must be exercised at the time of making the best judgment assessment under section 23(4), and in the same order. The discretion cannot‑ be exercised thereafter while considering an application under section 26‑A of the Income‑tax Act, 1922, because the Income‑tax Officer became functus ofcio after making the best judgment. assessment order under the provision."

9. The above discussion of the question referred to us, and the explanation given by Mr. Ali Athar; shows that the point for consideration before us is the effect of making two separate orders under section 23 (4), one while making a best judgment assessment, and the other at the time of disposing of the assessee's application under section 26‑A. Counsel emphasised that there were two separate orders which were made under two separate proceedings. He said that the assessee had preferred two appeals to the Appellate Assistant Income‑tax Commissioner and two to the Tribunal. The Appellate Assistant Commissioner disposed of them by two orders, but the Income‑tax Appellate Tribunal has disposed of them by one order. The fact that two first appeals and two second appeals were filed, according to counsel, establishes his contention that registration was not refused by the Income‑tax‑Officer at the time of making the best judgment assessment, but was refused in a different proceeding at the time of disposing of the application of the assessee, which was made under section 26‑A.

10. There is no dispute about the facts. Counsel for the parties by agreement referred to the printed form of the appli cation, which is required by the relevant rules to be used for making a request for the registration of a firm. It is obvious that such an application cannot be made by an assessee‑firm under section 23(4) of the Income‑tax Act, 1922. It must be made under section 26‑A of the Act. An application in this form, according to Mr. Ali Athar, could be disposed of only under section 26‑A of the Act.

11. In the above circumstances, the objection of the assessee boils down to this : two types of orders are permissible under section 23(4) of the Income‑tax Act, 1922, but they cannot be made separately and must be made as one order at the time of making the best judgment assessment. We repeatedly called upon Mr. Ali Athar to show to us anything in the section which can lead to this inference, and his reply has been that in the last part of sub section (4), the words "and" and "may" lead to this conclusion. For purposes of convenience, we may reproduce here the relevant part of the provision, which is as follows: " . . :.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." Counsel said that the word "and" after the words "such assess ment" connects the power to refuse or cancel registration with the power to make a best judgment assessment ; therefore, this authority must be exercised simultaneously with the exercise of the authority of making the best judgment assessment. Moreover, according to counsel, there being a discretion with the Income‑tax Officer to refuse and cancel registration or not, as a consequence of the failure of the assessee to comply with notices, all the consequences that arise from such failure should be dealt with simultaneously.

12. We have not been able to see how it becomes necessary that all consequences be dealt with simultaneously and in one order, and for what reason two orders made separately would be illegal. The emphasis of counsel seems to be on the idea that two kinds of orders, permissible under section 23(4), if not made in one continuous effort, so as to embody the entire thought in one order, cannot be considered to have been made in exercise of the power conferred by this provision. We do not find justification for this view in the language of the provision, and have a feeling that such an emphasis takes an exceedingly narrow view of legalities.

13. Counsel has relied on the following cases: (1) (1963) 7 Taxation 289 at 293 (Commissioner of Income- tax, Dacca v. Noble Trading Co,, Dacca), a decision of the Dacca High Court ; (2) (1962) 15 (Taxation Delhi) 495 (Messrs Ram Shanker Prasad & Bros. v. C. I. T. ana I. T. O.), a decision of the Allah abad High Court ; (3) (1955) 28 I T R 273 (Commissioner of Income‑tax, Madras, v. Krishnamma & Co., Gudur), a decision of the Andhra High Court.

14. Taking up the three judgments, we may mention that according to counsel, the following part of the judgment of the Dacca High Court support his contention "What the Income‑tax Officer did by his first order of the same date is not refusal but that `renewal of registration is to be refused'. At the same time before the refusal of the registration he assessed the firm and it must be on the basis of renewal of the registration, as till then he did not refuse renewal of the registra tion of the firm. The subsequent refusal too was not under section 23(4) but under section 26‑A of the Income‑tax Act as it appears from the second order of the same date itself. It is apparent from that order that the Income‑tax Officer purported to act not under section 23(4) of the Act but under section 26‑A. If that is so, that is absolutely an illegal order because section 26‑A does not provide for refusal of registration for non‑compliance with the notices under section 22(2) and 22(4), of the Act. Refusal of registration under section 26‑A is only provided in subsection (4) of the section 26‑A quoted above provides for cancellation only in case the Income‑tax Officer is satisfied that such order was passed without there being a genuine firm in existence as constituted under the law." The above observations show that the considerations on which registration is refused under section 26‑A are different from those on which such refusal is made under section 23(4). Moreover, they show that no order was made under section 22(4). The consequence, therefore, was that the cancellation was taken to have been made under section 26‑A for non‑compliance with notices issued under subsections (2) and (4) of section 22 of the Act. In our view, those circumstances are different from the circumstances of this case. In this case, the contention is that even if an order refusing or cancelling registration is made under section 23.(4), but is made separately, and after an order of best judgment assessment has been made, then, such cancellation is illegal. In this case before us, the Income‑tax Officer has stated as follows: "In view of the fact that assessment has been made under section 23(4) for reasons already explained, I exercise my discretion under the same section . . . . . . " This order is of a different nature and, to our minds, does not attract the considerations on which the Dacca judgment proceeded.

15. In the judgment of the Allahabad High Court, counsel has relied on the following observations: " . . the question is whether the order of the Commissioner, dated 18th October 1959 refusing renewal of registration was a correct order. It proceeds upon the view that on account of the exercise of discretion by the Income‑tax Officer under section 23(4), it was not open to him to interfere with that discretion. In view of what has been stated above, the Com missioner was plainly in error. The refusal or renewal was under section 26‑A, and was not and could not be under section 23(4) in the absence of an order under that section."

16. The above observations are again based on a finding that no order was made under section 23(4). This is not the situation in the case before us.

17. In fairness to counsel for the Assessee, we may mention that he has contended that in the order in question before us, the Income‑tax Officer did ostensibly exercise discretion under section 23(4), but, in reality dismissed an application which was made under section 26‑A ;therefore, his own declaration that he exercised discretion under section 23(4) does not make his order to be so. In other words, the Income‑tax Officer dealt with an application which was made under section 26‑A ; therefore, the proceedings which were taken on it should be presumed to be governed by that section, and to have been concluded in terms of it. The mere fact that the Officer has mentioned section 23(4), cannot change the nature of the proceedings.

18. The above contention is, to begin with, not in conso nance with the tenor of the question which has been referred to us. It has much less harmony with the explanation which counsel has offered in these proceedings, and which we have reproduced above in inverted commas. Moreover, we do not think that it is a fair construction of the nature of the proceed ings in which the order refusing registration was made to say that they were proceeding under section 26‑A. The Income‑tax Officer was no doubt disposing of an application which was made under section 26‑A, and which could only be made under that section according to the prescribed form but the Income‑tax Officer purported to refuse registration in exercise of his dis cretion under section 23(4). He has made this perfectly clear. He did not want to accept it in view of his own best judgment assessment, nor could he allow it to remain undisposed of, there fore, he dismissed it, exercising discretion‑ under section 23(4). This is a result of the legal situation. An application for regis tration cannot be made under section 23(4) but it can be dismissed under that section as well as under section 26‑A.

19. Taking up the judgment of the Andhra High Court, to which we have referred above, we may point out that its central idea is that registration cannot be refused under section 23(4) as a matter of course, or to use the language of the judgment as an "automatic". Consequence of a best judgment assessment. An order refusing or cancelling registration must be expressly made. We do not think that there is reason to have any quarrel with that proposition in these proceedings, because in the order, which is under consideration, the Income‑tax Officer has expressly refuse registration, and has done so specifically in exercise of his discre tion under section 23(4). The fact that the assessee had applied under section 26‑A, cannot obliterate that purported exercise, no can it be said that the application could be dismissed in exercise of discretion conferred by section 23(4) in any other manner, excepting by dismissal after the Income‑tax Officer had made his best judgment assessment. If he dismissed it by making an order at the foot of the order of assessment, it would nevertheless have been a separate order although over one anal the same signature. Now he had signed twice.

20. In conclusion of the above discussion, our answer to the question, which has been referred to us, is in the affirmative. S.Q. Reference answered in the affirmative.