Com. of In. Tax, Dacca Zone, Dacca
M/S. Badridas Full-chand, Saidpur, Rangpur
Ruhul Islam J
Badrul Haider Chowdhury J
Shahabuddin Ahmed J
Commissioner of Income Tax, Dacca Zone, Dacca ……………………..Appellant.
M/S. Badridas Full-chand, Saidpur, Rangpur… …………………………..Respondent
July 31, 1980.
Cases Referred to-
Raghunantiait Prasad Monohar Lai vs. Commissioner of Income-Tax, U.P., Lucknow, A.I.R. 1957 (Allahabad, 75 and the case of K. A. M, P. Meeresahib Tharagnar and Bros vs. Commissioner of Income-Tax, Madras, (1963) 7 Taxation, 418; Commissioner of Income-Tax vs. Md Asghar Muhammad Yunus & Co. (1968) 18 Taxation, 89; Commissioner of Income tax vs. D.A. Chetti and Co., 1948 I.T.R., 404; Commissioner of Income-tax vs. Md. Asgar Mohammad Yunus & Co. P.L.D, 1968 Karachi 805; Mohabir Glass Manufacturing Co. vs. C.I.T.A.I.R, i960 Patna, 516.
Habibul Islam Bhuiyan, Advocate, instructed by B. Hossain, Advocate-on-Record—For the Appellant.
Not represented-The Respondent.
Civil Appeal No. 79 of 1977.
(From the judgment and order dated 31 5.1973 passed by the High Court Division in Income Tax Reference Case No. 7 of 1970).
Badrul Haider Chowdhury J: This appeal arises by way of special leave. The respondent filed income-tax returns without any statement of accounts for the assessment years 1963-64, 1964-65 and 1965-66 and also filed an application for renewal of registration under section 26A of the Income-Tax Act for the said periods. The assessee-respondent did not comply with the terms of the statutory notices issued under sections 23(2) and 22(4) of the Income-Tax Act, as such the Income-Tax Officer completed the assessment under section 23(4) of the Income-lax Act and treated the status of the respondent as an unregistered firm and rejected the prayer of the respondent for renewal of the registration. The assessee- respondent filed appeals against the order of the Income-tax Officer and the said appeals were dismissed. The respondent then filed appeals before the Income-tax Appellate Tribunal and the Tribunal by a consolidated order allowed the appeals and set aside the orders of the Income-Tax Officer and directed renewal of tie registration of the firm for the years in question. Against the order of the Tribunal the appellant then filed an application under section 66(1) of the Income-Tax Act and the Tribunal referred the following questions of law before the High Court Division for opinion:
“Whether on the facts and in the circumstances of the case the Tribunal was justified in law in directing the Income-Tax Officer to allow renewal of registration for the assessment years, 1963-64, 1964-65 and 1965-66.”
2. A Division Bench of the High Court Division was of the view that the Income-Tax Tribunal was justified in law in directing the Income-Tax Officer to allow renewal of the registration. It was held by the High Court Division that it is to be granted to a firm which had already been registered in the immediately preceding year and “this renewal will be granted as a matter of course”. The High Court Division found it difficult to accept the contention that the Income-Tax Officer has been vested with the power to refuse renewal of registration under section 23(4). It noticed two decisions from the Indian High Courts, namely, Raghunantiait Prasad Monohar Lai vs. Commissioner of Income-Tax, U.P., Lucknow, A.I.R. 1957 (Allahabad, 75 and the case of K. A. M, P. Meeresahib Tharagnar and Bros vs. Commissioner of Income-Tax, Madras, (1963) 7 Taxation, 418. The High Court Division observed that “the two Indian cases clearly show that the Indian law on the subject is quite different in the sense that sub-sections (3) and (4) of section 26A which are the relevant provisions providing for renewal are not there in the Indian Act”. The case of Commissioner of Income-Tax vs. Md Asghar Muhammad Yunus & Co. (1968) 18 Taxation, 89 was noticed and it was distinguished on the ground that there was no question of refusal to renew registration under section 23(4), Accordingly, the High Court Division took the view that the Tribunal was justified in giving the direction to allow renewal of registration of the firm for the years in question and the reference was answered in the affirmative.
3. Leave was granted to consider whether the Income-Tax Officer was in his jurisdiction to refuse the renewal of the registration of the firm in view of section 23(4) of the Income-Tax Act read with rules 6 and 7 of the Income Tax Rules.
4. Registration of firms is regulated by the Act and Rules framed thereunder, a firm can trade without being registered under the Act. The question of registration is of vital importance in assessing the firms. An unregistered firm is charged as unit of assessment and is liable to super-tax. If the firm is a registered firm, it is not liable under section 55 to pay super-tax and as the tax levied on the registered firm is at the maximum rate of income-tax. The partner has the right under section 48 of the Income-tax Act to claim a refund if the partner’s individual assessment was not liable to be taxed at the highest rate of income-tax. The difference in procedure is provided by section 23 (5). It may be noted that there are three distinct steps in assessment proceedings—(i) computation of the taxable income, (ii) determination of the tax payable and (iii) demand for the tax so found due. Registration of the firm makes no difference for the purpose of the first stage but it does make a difference for the purpose of the second and third stages. A firm is a unit of assessment and the income of the firm is computed in the hands as that of entity irrespective of whether the firm is registered or unregistered. Sub-section (5) of section .23 draws distinction between the registered and unregistered firm and it comes into operation only after total income of the firm has been computed was assessed under one of the earlier sub-sections. As regards the determination of the tax payable and the demand, the question has the material bearing.
5. Now the implication of registration can be considered as it has been mentioned that registration confers certain benefits. Therefore, a firm is entitled to be registered if the conditions essential to registration are fulfilled, The Income-tax Rules framed in exercise of powers conferred by section 59 of the Act were promulgated in 1922 styled as, “Indian Income-tax Rules, 1922”. Rule 3 deals with the form for registration of a firm under section 26A. Rule 4 provides that if the Income-tax Officer is satisfied that the conditions have been fulfilled; he will give the certificate of registration. It is useful to quote the certificate because of the importance of the question that has been raised in this case and the cases that have been noticed in the judgment of the High Court Division. The form is in the following language.
“This instrument of partnership—has certified copy of an instrument of a partnership this day been registered with me. The Income-lax Officer for such ………under section 26A of the Indian Income-tax Act, 1922 and this certificate of registration shall have the effect for the assessment for the year ending on 31st day of March, 19……”
Rule (2) provides that if the Income-tax Officer is not so satisfied he shall pass an order in writing refusing to recognise the instrument of partnership. Rule 5 provides that certificate of registration granted under Rule 4 shall have effect only for the assessment to be made for the year mentioned herein. The certificate of registration is valid only for the year and this is a most important point that has not been properly noticed by the Courts below.
6. Next, Rule 6 provides “any firm to whom certificate of registration has been granted under rule 4 may apply to the Income-tax’ Officer to have the certificate of registration renewed for a subsequent year. It further provides that such application shall be signed by all the partners and it must be made before 30th day of June the year for which assessment” is to be made. Discretion, however, has been granted to the Income-tax Officer to entertain an application after the expiry of the said date if he is satisfied by sufficient cause for making the application before that date and rule 6 provides for the form for renewal of registration of a firm which reads thus:
“We……beg to apply for the renewal of registration of our firm under section 26A of the Income-tax Act, 1923 for the assessment for the Income-tax year 19……19……”
The form further provides for other particulars, namely, “interest on capital, salary or commission of firm, profit and loss, etc.”
7. Rule 6(a) provides for granting of renewal to the firm which is as under:
“The registration of the firm of……granted on………is renewed by me and will remain effective for the assessment for the year ending on 31st day of March, 19…… If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to renew that registration of the firm”.
Rule 6 and 6(a) provide for renewal which has just been noticed. It is, therefore, not correct to say that in the Indian Act there is no provision for renewal and it is unfortunate that the attention of the learned Judges of the High Court Division was not drawn to these rules which have been framed in 1922. The error was committed, because in the Indian enactment there is no corresponding provision for renewal as it has been the case with our enactment by amendment. But the rules which were framed in 1922 in pursuance of section 59 of the Income-tax Act are very much in existence as a part of law in India. In the case of Commissioner of Income tax vs. D.A. Chetti and Co., 1948 I.T.R., 404, the Madras High Court answered the question by observing:
“Section 26A does not refer in terms to renewal of registration. It follows that every renewal of registration is, in fact a registration under that section.”
8. Again the High Court Division unfortunately fell into an error by saying that the renewal application is to be treated as “a renewal will be granted as a matter of course”. Rule 6(a) as has been mentioned clearly says that if the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to renew the registration of the firm. Thus the foundation of the High Court Division’s judgment is shaken considerably because it is not warranted by law.
9. In 1962 Pakistan also framed rules and rules 2 to 7 of 1962 Rules are to the same effect. The material portion of the Rules may be quoted:
“Rule 6(1) (a)—Any firm to whom a certificate of registration has been granted under Rule 5 may apply for the renewal of the registration for a subsequent year”.
Rule 7(1)—On receipt of an application under rule 6, the Income-tax Officer shall, if be is satisfied that there exists (or was in existence) a firm as set out in the instrument of partnership on which the firm was registered in respect of the assessment year specified in the application, pass an order renewing the registration of the firm and grant a certificate in the following form, namely:
The registration of the firm of granted on the………..is hereby renewed under section 26-A of Income tax Act, 1922. This certificate of renewal of registration shall have effect for the assessment for the year ending on the 30th day of March) 19 June—-(2) If the Income-tax Officer is not satisfied as aforesaid, he shall pass an order in writing refusing to renew the registration of the firm and furnish a copy of such order to the appellant”. It is therefore clear that the renewal may be refused by the Income-tax Officer if he is not satisfied as to the existence of the firm.
10. In the instant case the assessee filed returns for the assessment years, 1963-64, 1964-65 and 1965-66 along with an application for renewal of the registration under section 26A of the Act. The Income-tax Officer issued notices under sections 22(4) and 23(2) of the Income-tax Act but there was no compliance with these notices.
11. Section 22(4) provides for notice to produce account books and other documents which will be required by the Income-tax Officer. Notice under section 23(2) can be served upon the assessee to attend the Income’ tax Officer’s Office and to produce evidence. Failure to do so immediately attracts the provision of sub-Section (4) which is in the following 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 sub-section (3) of the same section or fails to comply with all the terms of the notice issued under sub-section (4) or sub-section 4 (a) of the same section or having made a return fails to comply with all the terms of a notice issued under sub-section (2) of this section, the Income-tax Officer shall make the assessment to the best of his judgment and determine the same 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 14 days have elapsed from the issue of notice by the Income-tax Officer to the firm intimating his intention to cancel its registration.”
The assessee did not comply with the notice, nor appeared before the Income-tax Officer. The Income-tax Officer therefore says, “I would therefore complete the assessment to the best of my judgment under section 23 (4)”. Then says, “the status is determined as unregistered firm as claim for registration has been rejected by separate order”. Then he proceeds with recording an order under section 26A “The application for renewal of registration has not been filed within time. In the absence of account it is also not ascertain-able whether the terms of partnership deed in sharing the profit has been fulfilled. The claim for renewal of registration is rejected”.
12. It is clear that the Income-tax Officer was absolutely in his discretion to entertain the application which was time barred and since he was not satisfied that the firm was prevented by sufficient cause from making the application before that date in terms of rule 6, it was within his power to reject the application and no exception can be taken to it. This rejection of the renewal application may be treated as one made both under sections 26A and 23 (4). The Income-tax Officer has given a composite-order, namely (i) the application was not within time and (ii) absence of account, for which it is not ascertainable whether the terms, of partnership deed in sharing the profit has been fulfilled. The second step was taken in pursuance of section 23 (4) which has given-him power to refuse to register the firm and the substantive application for renewal was dealt with under section 26A and since it was time barred, he did not entertain the application for renewal. Both powers are available to him by law and no exception can be taken to such procedure. Reference may be made to decisions in Commissioner of Income-tax vs. Md. Asgar Mohammad Yunus & Co. P.L.D, 1968 Karachi 805 where it was observed:
“that the Income-tax Officer has expressly refused registration and has done so specifically in exercise of his discretion under section 23 (4)”.
It was further observed:
“the fact that the assessee has applied under sec. 26 (a) cannot obliterate that purported exercise nor 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 on assessment. If he dismissed it by making an order at the foot of the order of assessment it would nevertheless have been separate although over one and the same signature. Now he had signed twice.”
13. We are in respectful agreement with this proposition. The Income-tax Officer in his discretion had refused to renew this application for registration because it was time barred and that was an order under section 26A and rule 6(2) gives him ample power to do so. Again, he refused to register this firm as he was not satisfied as to its bonafide since the notice u/s 22 (2) and 22 (4) have not been complied with. As has been noticed, registration is valid for one year only and the certificate of registration is valid only for the assessment year vide rule 5. The firm was previously registered no doubt but during the assessment years in question namely, 1963-64, I964-65 and 1965-66 this firm was just an unregistered firm and its application was also time barred. So, the Income-tax Officer proceeded to assess it as an unregistered firm which absolutely is in accordance with law. Considerable powers and duties have been imposed by law upon the Income-tax Officer and sufficient discretion has been also conferred upon aim subject to appeal under section 30 of the Income-tax Act. Such appeals were dismissed and on further appeal the Tribunal took the view that the registration of the firm ought to have been renewed for which, however, no law could be cited. On the contrary, the step that was taken appeared to be in conformity with law and the rules. Same view has been taken in the care of Mohabir Glass Manufacturing Co. vs. C.I.T.A.I.R, i960 Patna, 516. The only safeguard is that if the firm is already registered a notice is to be given both under sections 23(4) and 26A but that was not the position in this case.
14. In the result, therefore, this appeal is allowed. The judgment of the High Court Division is hereby set aside and the answer of the question under section 66 (1) must be in the negative. There will be no order as to costs.
Source: , 1981, (AD)