1969 PLP 664 (PTD)

Registration Failure to make return and produce accounts Application for registration Maintainability Power to make best judgment assessment and refuse registration Indian Income tax Act, 1922, Ss. 22(4), 23(4) & 26-A. The Income tax Officer can refuse registration of a firm either under section 23(4) or under section 26-A of the Incometax Act, 1922, read along with rules 2 to 6-B. He may also exercise his powers cumulatively under both the provisions of law--But the scope of the power under the two sections is not the same. Where the firm is genuine and where the application is made in the prescribed form and manner the officer must grant the necessary certificate of registration and in dealing with the application under section 26-A the officer cannot look to anything beyond the question of the genuineness of the firm and compliance with the formalities prescribed by the rules. The power under section 23(4) to refuse registration is not circumscribed by any such limitation. However compelling the ground may be for granting registration under section 26-A, there is absolute discretion in the officer to act under section 23(4) de hors section 26-A. Where there is an order of refusal of registration of a firm in the course of assessment proceedings which have culminated in a "best of judgment" assessment under section 23(4), the question whether the refusal was one under section 26-A or in the exercise of discretion under section 23(4), would depend upon the terms of the order and the context and circumstances of the case. The Income tax Officer called upon the assessee firm under section 22(2) of the Income tax Act, 1922, to make a return but no return was made. He issued a notice under section 22(4) to produce accounts and though several adjournments were given accounts were not produced. The assessee, however, made an application under section 26-A for registration of the firm. This application was dismissed on the ground that, as the accounts were not produced it was not possible to verify whether the statements in the application for registration were true and the profits had been divided between the partners, and a summary assessment was made under section 23(4) of the Act: Held, (i) that the rejection of the application for registration must, under the circumstances, be taken as one made under section 23(4) and was not illegal ; (ii) that even if it be taken to be an order under section 25-A, the order could be justified on the ground that owing to the non production of accounts the Income tax Officer could not satisfy himself that the statements made in the application were true. Commissioner of Income tax v. Krishnamma & Co. (t955) 28 I T R 273 ref. STATEMENT OF CASE In compliance with the requisition of the High Court under section 66(2) of the Indian Income tax Act, in T. C. P. No. 69 of 1958, dated the 9th December 1958, we state the case agreed to by the parties and refer it to the High Court of Judicature at Madras. The question of law on which the Tribunal has been directed to state the case is as follows: "Whether the order of the Appellate Tribunal confirming the refusal of the Income tax Officer to register the firm under section 26-A of the Income tax Act was valid in law ?" We shall, therefore, confine ourselves, as far as possible, to the facts relevant to that question.

2. The assessee is a firm of two partners, K. A. Meera Saheb and K. A. Peer Mohammed, having equal shares, doing business at Kandy in Ceylon. A notice under section 22(2) of the Act was issued on July 28, 1952. But no return of income was filed in spite of several reminders. Notice under section 22(4) of the Act was issued for production of accounts and the case was adjourned to a number of dates, the last of which was July 29, 1954. Beyond applying for time, the assessee did nothing.

3. The Income tax Officer made an assessment under section 23(4) of the Act. In that order, he wrote as follows: "The assessee firm is doing business in Kandy, Ceylon. A notice under section 22(2) of the Act was issued in this case on July 28, 1952. But the return of income has not been so far put in spite of several reminders. Notice under section 22(4) of the Act was issued for production of accounts on March 15-1953, and the case was adjourned to April 27, 1953, February 28, 1954 and May 14, 1954. The case was finally posted to July 29, 1954. The assessee merely applied for time. From the previous record also, it is seen that the assessee is a chronic defaulter. I am unable to give any further time. The assessment will be made summarily under section 23(4) of the Act. The assessee's auditor who appeared before me represented that as an application for renewal of registration has been filed in time renewal of registration should be sanctioned as there was a genuine firm in existence. I am unable to concede to this request also as stated in my order under section 26-A".

4. The assessee, though he did not file his return of income asked for renewal of registration, which had been granted for the assessment year 1951-52. The Income tax Officer, in dealing with this application under section 26-A wrote. "In the absence of accounts, it is not possible to verify whether what has been stated by the partners in paragraph three in the application for renewal of registration is true and whether the partners' accounts have actually been credited with half share of the profits. Further, the application itself is incomplete inasmuch as the paragraph two has not been filled in at all. In the circumstances, I am unable to entertain the application".

5. The assessee appealed to the Appellate Assistant Commissioner, who wrote: "It is no doubt true that in the earlier years the firm has been granted registration and there was no dispute about the genuineness of the firm. However, the requirement of the rule, viz. that the Income tax Officer should be satisfied that the application is in order, could not be complied with in the absence of the account books. In the circumstances, the Income tax Officer was justified in refusing to renew the registration of the firm."

6. The assessee appealed to the Appellate Tribunal and contended that the refusal of registration under section 26-A was wrong as there was a valid application for registration and a genuine firm for being registered. Next it was urged that the non production of books to enable verification by the Income tax Officer of statements made in the application for registration was no ground for refusing registration. The other point made was that if the Income tax Officer wanted to verify the contents of the application, lie should have issued a specific notice to the assessee calling for the books for the purpose, and lastly, that when the genuineness of the firm was not doubted, and an application for registration had been made, registration must be granted.

7. The Tribunal for reasons stated in its order, copy whereof is annexed hereunto as Annexure "A" and forms part of the case, held that as the assessment had been made under section 23(4) the Income tax Officer was entitled to refuse registration, if in his discretion the assessee did not deserve the concession granted to it by section 26-A of the Act. They held that the reasons given by the Income tax Officer refusing to register the firm were valid and upheld this order.

8. In their order dated 9th December 1958, in T. C. P. No. 69 of 1958, directing the Tribunal to state a case, their Lordships have observed: "In the application preferred to the Tribunal under section 66(1) of the Act, it was specifically pointed out that neither the Income tax Officer nor the Appellate Assistant Commissioner had purported to deal with it as a case in which the discretion vested in the Income tax Officer by section 23(4) of the Act had been exercised. But that point was left unnoticed in the order passed by the Appellate Tribunal on the application preferred under section 66(1) of the Act."

9. In this case, while submitting the statement of the case, we have been specifically asked to go into the question whether in fact the Income tax Officer had exercised or had purported to have exercised the discretion vested in him by section 23(4) of the Act and record a specific finding on that question.

10. In his order under section 23(4) the Income tax Officer has started off by saying: "By my separate order under section 26-A dated 31st July 1954, I have refused to grant registration." But lower down as is evident from the extract given at the opening of the statement of the case, he has stated: "I am unable to concede to this request also as stated in my order under section 26-A". Therefore, in our opinion, though the Income tax Officer has not in terms stated that he had exercised the discretion vested in him under section 23(4) of the Act, he has purported to do so in the sentence quoted above. T. V. Viswanatha Ayyar and S. Narayanaswami for the Assessee. S. Ranganathan for the Commissioner. JUDGMENT JAGADISAN, J. The firm of Messrs K. A. M. P. Meera Sahib Tharaganar & Bros., carrying on business at Kandy in Ceylon consists of two partners, K. A. Meera Sahib and K. A. Peer Mohammed. The firm is an assessee under the Indian Income tax Act. Up to the assessment year 1951-52 the firm was granted the benefit of registration under section 26-A of the Act. In respect of the assessment year 1952-53 the application for registration was rejected by the Income tax Officer, Tirunelveli. The assessee preferred appeals to the Appellate Assistant Commissioner of Income tax, Tuticorin, and to the Income tax Appellate Tribunal, Madras, but failed. On an application preferred by the assessee to this Court, under section 66(2) of the Act, the Tribunal was directed to state the case raising the following question of law: "Whether the order of the Appellate Tribunal confirming the refusal of the Income tax Officer to register the firm under section 26-A of the Income tax Act was valid in law?,? It is this question which we have now to answer. There is no dispute about the facts and they may be briefly stated. The Income tax Officer called upon the firm under section 22(2) of the Act to make a return of the income. The firm failed to make the return. The Officer next issued notice under section 22(4) of the Act for production of accounts by the firm. Though the Officer granted time for the production of the accounts by adjourning the proceedings several times, no books of accounts were produced. But the firm had filed an application for registration before the Officer. The Officer dealt with the application which was certainly one preferred under section 26-A of the Act, and refused registration. The reason for refusal is recorded thus by the Income tax Officer: "In the absence of accounts it is not possible to verify whether what has been stated by the partners in paragraph three in the application for renewal of registration is true and whether the partners' accounts have actually been credited with half share of profits. Further, the application itself is incomplete inasmuch as paragraph two has not been filled in at all. In the circumstances, I am unable to entertain the application." The Income tax Officer had to complete the assessment in the exercise of his powers under section 23(4) of the Act as the firm had failed to submit a return of the income and also failed to produce the books of accounts. In his order of assessment, the officer stated thus: "By my separate order under section 26-A dated 31st July 1954, I have refused to grant registration. The assessment will be made summarily under section 23(4) of the Act. The assessee's auditor who appeared before me represented that as an application for renewal of registration has been filed in time renewal of registration should be sanctioned as there was a genuine firm in existence. I am unable to concede to this request also, as stated in my order under section 26-A." The assessee challenged the correctness of the order of the Income tax Officer refusing registration, before the Appellate Assistant Commissioner urging the ground that, as the firm was genuine, registration ought to have been granted. The appellate authority took the view that the Income tax Officer rightly rejected the application for registration as the assessee failed to produce the account books to satisfy the officer that the profits of the firm had been distributed between the partners in the manner indicated in the application for registration. In the appeal before the Tribunal it was urged on behalf of the assessee that no opportunity was afforded to it to produce the books of accounts in the proceedings under section 26-A of the Act and that, therefore, the refusal to register by the Officer was improper and unjust. The Tribunal obviously had this contention in mind when it made the following observation in its order: "In the instant case, the Income tax Officer has duly considered the application of the assessee for renewal of registration under section 26-A but he had to refuse registration for the year in question under the proviso to section 23(4), as the assessee had failed to produce its books and the Income tax Officer was prevented thereby to verify the correct apportionment of the profits as stated in the application. This reason is a valid reason and his refusal to register the firm must consequently be upheld." Before us, the learned counsel for the assessee urged the following contentions. (1) the order of refusal of registration under section 26-A is bad as the assessee was not afforded any opportunity to produce the account books to prove the division and distribution of profits in the manner set out in the application for registration, and (2) there was no order by the Income tax Officer refusing registration under section 23(4) of the Act and it is wrong to assume, as the Tribunal did, that the order expressly made under section 26-A may yet be deemed to be one under section 23(4) overlooking the scheme of the Act which treats the, two proceedings under sections 26-A and 23(4) as different proceedings, one independent of the other. We shall first refer to the relevant provisions of the statute and the rules framed thereunder: "26-A. (1) Application may be made to the Income tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purpose of this Act and of any other enactment for the time being in force relating to income tax or super tax. (2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income tax Officer in such manner as may be prescribed." Rules 2 to 6-B of the Income tax Rules lay down the procedure for preferring the application and for the granting or refusal of the certificate. Rule 4 is material and it reads thus: "If, on receipt of the application referred to in rule 3, the Income tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely . . . . .". Sub rule (2) of rule 4 states: "If the Income tax officer is not so satisfied, he shall pass an order in writing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the applicants.'" Section 23(4) is in these terms: "If any person fails to make the return required by any notice given under subsection (2) of section 22 and has not made a return or a revised return under subsection (3) of the same section or fails to comply with all the terms of a notice issued under subsection (4) of the same section or, having made a return, fails to comply with all the terms of the notice issued under subsection (2) of this section, the Income tax officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered: Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income tax Officer to the firm intimating his intention to cancel its registration." The Income tax Officer can refuse registration either under section 23(4) or under section 26-A read along with rules 2 to 6-B. He may also exercise his powers cumulatively under both the provisions of law. But the scope of the power under the two sections is not the same. Where the firm is genuine and where the application is made in the prescribed form and manner the Officer shall grant the necessary certificate of registration (rule 4). In dealing with the application under section 26-A the Officer cannot look to anything beyond the question of the genuineness of the firm and the compliance with the formalities prescribed by the Rules. The power under section 23(4) to refuse registration is not circumscribed by any such limitation. Indeed, it seems to us to be a penal provision to which the assessee becomes subject consequent on his own default or contumacious conduct. However compelling the ground may be, for granting registration under section 26-A, there is absolute discretion in the Officer to act under section 23(4) de hors section 26-A. Registration can be granted, if at all, only under section 26-A and can only be refused under section 23(4). Where there is an order of refusal of registration of a firm in the course of assessment proceedings which have culminated in the "best of judgment" assessment under section 23(4), the question whether the refusal was one under section 26-A or in the exercise of discretion under section 23(4), would depend upon 'the terms of the order and the context and circumstances of the case. There may be a case in which the Officer may say, "I am inclined to refuse registration whichever way I look at the application having in my mind section 26-A or section 23(4)." In such a case the order is as much one under section 23(4) as one under section 26-A. It is, of course, possible to visualise a case where the order of refusal is purely one under section 26-A there being marerials to show that the Officer would not have refused registration under section 23(4) had he held in favour of registration under section 26-A. We shall, now, deal with the arguments advanced by the learned counsel for the assessee. We are not impressed with the argument that the absence of any notice to produce the account books caused to be issued under section 26-A proceedings in any way vitiates the order of the Income tax Officer. It is clear that the assessee was repeatedly called upon by the Income tax Officer to produce the account books. The fact that the notices for production of account books were issued under section 22 of the Act does not, in any way, alter the situation. That the assessee was in no mood to produce the books of account before the Income tax Officer is perfectly clear. A notice, headed under section 26-A of the Act, calling upon the assessee to produce the accounts would not have persuaded the assessee to bring them before the officer. This contention of the assessee that he had no opportunity to satisfy the Income tax Officer regarding the division of profits is totally devoid of substance. We are not, persuaded to hold that the order of refusal of registration, in the present case, is only under section 26-A of the Act and not also one under section 23(4). It is true that the Income tax Officer has prefaced the order of assessment by stating that he has refused to grant registration under section 26-A; but some meaning will have to be attached to the concluding portion of the order of the officer wherein he definitely states that he is unable to accede to the request for registration which undoubtedly was one made in the course of the assessment under section 23(4). We are inclined to take the view that the terms of the assessment order under section 23(4) should, in the context, be read and understood as involving refusal of registration of the firm by the Officer in the exercise of his discretion under that provision. The learned counsel for the petitioner relied upon the decision of the Andhra High Court in Commissioner of Income tax v. Krishnamma & Co. ((1955) 28 I T R 273) in support of the proposition that the powers of refusal under section 23(4) and section 26-A of the Act should not be mixed up as each provision of law operates independently of the other, the sphere of one not being identical with that of the other. In that case, an application for registration of a firm was refused by the Income tax Officer under section 26-A of the Act on the ground that the partnership itself was illegal, one of the partners being a minor. The minor was not merely admitted to the benefits of the partnership but was made a full-fledged partner liable to losses as well. The firm committed default in not submitting the return called for and eventually the assessment was made under section 23(4) of the Act. The order of the Income tax Officer making the assessment contained the following words: "I am unable to register the firm now, inasmuch as the assessment of the firm is made under section 23(4) of the Act." On an appeal by the assessee to the Tribunal, the Tribunal directed the registration of the firm. Thereupon the Department had the following question of law referred to the High Court:? "Whether it is open to the Income tax Officer, after holding that a firm is genuine to pass the order refusing registration under the provisions of section 26-A of the Income tax Act purporting to be under section 23(4) of the Act?" The question was answered against the Department and in favour of the assessee, Subba Rao, C. J. observing as follows:? "A perusal of the entire order clearly shows that the Incometax officer refused registration as, in his view, the provisions of rule 4 of the Income tax Rules were not complied with. He did not exercise his discretion under section 23(4), but made only a casual observation in regard to his power under that section. Section 23(4) does not purport to prescribe automatic refusal of registration. Under that section, discretionary power is conferred on the Income tax Officer to refuse registration in case an assessment is made under that section and, in this case, he did not purport to exercise his discretion one way or other. The order must, therefore, be deemed to have been made under section 26-A (1) . . . . :" We are in respectful agreement with that decision and we agree with the learned Chief Justice that section 23(4) clothes the authority with an overriding power to refuse registration notwithstanding the fact that conditions laid down in rule 4 had been complied with by the assessee. But we feel that the facts, in the present case, are different as there is enough indication here that the Income tax Officer purported to exercise his discretion under section 23(4) of the Act in refusing registration. We must also observe that even treating the order of refusal as purely one passed under section 26-A of the Act, there are no materials to hold that the order was not warranted. The Income tax Officer was entitled to satisfy himself whether the particulars disclosed in the application for registration are really true and well founded. The assessee by its own volition and improper conduct prevented a proper scrutiny of the application and practically invited an adverse order of refusal against it. We are, therefore, of opinion that the question should be answered in the affirmative against the assessee who will pay the costs of the Department. Counsel's fee Rs.

250. Question answered in the affirmative.