1972 PLP 517 (PTD)

At the instance of the assessee the Tribunal had referred the following question of law to this Court: "Whether, on the facts and fn the circumstances of the ease the refusal of registration under section 26‑A read with section 23(4) of the Indian Income‑tax Act to the firm for the assessment year 1955‑56 was in accordance with law?" Mr. S. Mitra, the learned counsel appearing on behalf of the assessee, submitted that he had to meet two point, namely: (i) that the Income‑tax Officer exercised his discretion under section 23(4) properly in refusing registration, and (ii) that no valid firm came into existence for having Hindu undivided family as a partner. So far as the first point is concerned, Mr. Mitra's submission were as follows: Section 23(4) provides for two kinds of penalties. On default of compliance with the notice under section 22(2) or section 22(4) or section 23(2) or in default of filing a return as required under section 22(3), a best judgment assessment necessarily follows as it s mandatory on the Income‑tax Office to make such an assessment. But the exercise of the further power given to the Income‑tax Officer to impose a second penalty, namely, in the case of a firm, to refuse registration or cancel registration already granted, is discretionary an the reasons for the exercise of such power are justiciable. The Income‑tax Officer must give his reasons for such refusal. The reasons given for making a best judgment assessment would n be sufficient in such a case. The Income‑tax Officer would ha to give such reasons as would justify the refusal of registration Such reasons must be cogent for the purpose of determine whether registration should be granted or. refused. In other wore the reasons must be such as would sustain a refusal of registration. under section 26‑A. The failure of the assessee in this ca to produce its books of accounts of the preceding year were not germane to the ground for refusal of registration, as such failure went to the determination of the quantum of the assessment and not to the distribution of the profits in terms of the partnership deed. The material considered by the Income‑tax Officer was not enough for him to have exercised his jurisdiction objectively. This is a penal provision and the discretion should be exercised against the assessee only in exceptional circum stances. Mr. Mitra relied on the following authorities for his proposition. Commissioner of Income‑tax v. Krishnamma & Co. ((1955) 28 I T R 273) where Subba Rao, C. J., as he then was, observed at pages 278‑79 as follows: "Under section 26‑A of the Act, if the Income‑tax Officer is satisfied that the firm is in existence as shown in the partnership deed and the application has been properly made, he is bound do register it. He can only refuse it if he is not satisfied in regard to the aforesaid particulars. But section 23(4) gives him an overriding power to refuse registration, notwith standing the fact that the conditions laid down in rule 4 have been complied with, if he assessee the firm under section 23(4) of the Act. . . We, therefore, proceed on the basis that the partnership deed originally filed, was valid and that the condi tions laid down in rule 4 were satisfied. If so, the Income tax Officer was bound to register the same unless he exercised his powers under section 23(4) of the Act." In J. M. Sheth v. Commissioner of Income‑tax ((1965) 56 I T R 293) the following observations of the Madras High Court at page 296 ware relied on. "It is clear that failure to make a return or a revised return, or failure to comply with all the terms of the notice under sec tion 22(4) would necessarily attract the Income‑tax Officer's juris diction to make an assessment to the best of his judgment. It might be said that defaulting assessees are visited with the penalty of a best judgment assessment. But such a penalty only flows from the conduct of the assessee himself. In the face of a contum acious default on the part of the assessee, the Income‑tax Officer vested with the statutory duty of making assessment has no alternative but to proceed to determine the assessment in as good a manner as possible, indulging of course In some guess work within the limits of honesty. Refusal to register, however, does not appear to be an inevitable statutory consequence resulting from the defaults enumerated in section 23(4). The use of the words "may refuse" in section 23(4) would rather indicate that the Income‑tax Officer has a discretion riot to refuse registration or cancel registration even in spite of the default of the assessees . . . . . . .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 con sequence : (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." A decision of this Court in Prabhat Mill Stores Co. Ltd. v. Commissioner of Income‑tax ((1966) 59 I T R 197) was also referred to by Mr. Mitra and the following passage at page 205 was relied on: "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 assessments 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 28(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 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." It is submitted by Mr. Mitra that the reasons given by the Income‑tax Officer in his order under section 26‑A were reasons for the imposition of the first penalty, namely, a best judgment assessment. He had given no reason for imposing the second penalty, namely, the refusal of registration, reasons showing that the non‑compliance with the notice under section 22(4) had affected the merits of the question. So far as the second point was concerned, Mr. Mitra sub mitted that Bhowarilal was the signatory to the deed ; as such, he was the person who was a party to the deed. It must, there fore, be held that he was the person who had been taken in as a partner. Though he purported to sign for and on behalf of the Hindu undivided family of Bhowarilal Kissenlal, that was merely a description. Similarly, the description of the fourth party to the deed as Bhowarilal Kissenlal, a Hindu undivided family, was also a case of misdescription. He referred to the decision of the Supreme Court in Kshetra Mohan Sannyasl Charan Sadhukhan v. Commissioner of Excess Profits Tax ((1953) 24 I T R 488 (S C)), where it was observed at page 492 that when two kartas of two Hindu undivided families enter into a partnership agreement, the partnership is popularly described as one between the two undivided families but in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners. Mr. Salai Pal, learned counsel for the department, did not challenge the first part of the submission of Mr. Mitra on question No.

1. He agreed that the action of the Income‑tax Offcer in refusing registration under section 23(4) might be justiciable but he joined issue with the further submission of Mr. Mitra that the reason given by the Income‑tax Officer for refusing registration under section 23(4) would also be cogent for the purpose of refusing registration under section 26‑A. He argued that section 23(4) was de hors section 26‑A and so the reasons which would attract refusal of registration under sec tion 26‑A could have no relation to the reasons for refusal of registration under section 23(4). Under the latter section, the Income‑tax Officer would have the discretion to refuse registration on the failure of the assessee‑firm :o comply with the notices under section 22(2), 22(4) or 23(2) even though the firm was a genuine firm and was otherwise entitled to registration under section 26‑A. He relied on the following observation of the Supreme Court in Y. Narayana Chetty v. Income‑tax Officer, Nellore (1): "The cancellation of registration under section 23(4) is in the nature of a penalty and the penalty can be imposed against a firm if it is guilty of any of the defaults mentioned in the said subsection. It would be noticed that where registration is cancelled under section 23(4), there is no doubt that the application for registration had been properly granted. The basis of an order under section 23(4) is not that the firm which had been registered was a fictitious one, but that, though the registered firm was genuine, by its failure to comply with the requirements of law, it had incurred the penalty of having its registration cancelled. That is the effect of the provisions of section 23(4)." Mr. Pal referred to the orders in proceedings under section 27 before the Income‑tax Officer, the Appellate Assistant Commis sioner and the Tribunal and pointed out that there was deliberate and persistent default on the part of the assessee to produce the books of account requisitioned under section 22(4) and the Tribunal had characterised such conduct as contumacious. He also pointed out that in Krishnamma's case, relied on by l4r. Mitra, the Court had observed that even if the partnership deed was valid and the conditions of rule 4 were satisfied, the Income‑tax Officer was bound to grant registration unless he exercised his powers under section 23(4). In Prabhat Mill's case, also relied on by Mr. Mitra, this Court had observed as follows at page 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." Mr. Pal submitted that in view of the Tribunal's finding that not only had there been default 1n compliance with the notice under section 22(4) but also that such default was deliberate and amounted to contumacious conduct on the part of the assessee, the refusal of registration by the Income‑tax Officer must be sustained and the question answered against the assessee. So far as the second point was concerned, Mr. Pal submitted that a Hindu undivided family has been made a party to the partnership deed and described as a partner, and as it had been found that there has been no such Hindu undivided family in exis tence, the authorities were justified in holding that no valid firm had come into existence under the deed. In view of the authorities cited by Mr. Pal, it must be held that the only relevant consideration for deciding whether the action of the Income‑tax Officer in refusing registration under sec tion 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. Whether the firm was genuine or not or whether it was otherwise entitled to registration under section 26‑A would not be germane for testing the propriety of the Income‑tax Officer's action in refusing registration under section 23(4). We agree with Mr. Mitra that the reasons given by the Income‑tax Officer in his order refusing registration do not constitute sufficient material to establish that he had exercised the discretion objectively. But the Income‑tax Officer and on appeal both the Appellate Assistant Commissioner and the Tribunal had referred to their respective orders in the proceedings under section 27 for sustaining the refusal of registration under section 23(4). All these orders had also been made annexures as part of the statement of the case. A perusal of those orders leaves no room for doubt that the assessee was deliberaly avoiding the production of its books of account of the earlier years in order to prevent the Income‑tax Officer from making a searching investigation into its business affairs. Even the opportunity given by the Appellate Assistant Commissioner, at the time of the hearing of the section 27 appeal, to the assessee for producing the books was not availed of on some frivolous pretext. It must, therefore, be held that the Income‑tax Officer was justified in refusing registra tion to the assessee firm for the assessment year under reference and the Tribunal was right in sustaining such refusal. We would like to point out that the Income‑tax Officer would do well to give his reasons for refusing registration in the order of refusal itself instead of leaving this Court to find out such reasons from various other proceedings in connection with the assessment. The Income‑tax Officer's order in the present case was most unsatisfactory. In view of our above finding it is not strictly necessary for us to express any opinion on the second branch of Mr. Mitra's argument. The question referred also seems to indicate that our advice is being sought only on the issue as to whether, the refusal of registration under section 23(4) was justified. However, as the matter has been fully argued and as we are informed that the assessee might be prejudiced in the subsequent years when there had been no default as contemplated under section 23(4) on the basis of the Tribunal's finding that the partnership deed dated the 3rd April 1952, was invalid, we would give our decision also on this matter. We agree with Mr. Mitra that where in a deed of partnership a Hindu undivided family is described as a partner, it is the karta, who executes the deed as representing the family, who becomes the partner in law. A Hindu undivided family as such cannot be a partner. The decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess profits Tax ((1956) 29 I T R 521 (S C)) is an authority for this proposition. We also agree that if the alleged Hindu undivided family is found to be non‑existent, then the representative character of Bhowarilal went and Bhowarilal would become a partner in his individual capacity. His description in the deed as the karta of the Hindu undivided family would be a case of mis‑description or even wrong description which would not invalidate the deed. It must, therefore, be held that under the deed dated the 3rd April 1952, a firm of six partners came into existence, the 4th partner being Bhowarilal Bothra. In view of our decision on the first issue the question referred to us must be answered in the affirmative and against the assessee. The assessee is to pay costs of this reference. BANERJEE, J.‑

I agree.