CIT Vs. KESAVA PRABHU AND SONS

JUDGEMENT

(1.) AT the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law for the decision of this Court: " Whether, on the facts and in the circumstances of the case, the learned Tribunal is right in cancelling the cancellation of the registration?"

(2.) THE respondent herein is a firm. It carries on business as general merchants and commission agents. We are concerned with the assessment year 1981-82. For the earlier years, the firm had obtained registration under the Income Tax Act. For the instant assessment year, Form No. 12 was belatedly filed on 3-8-1981. THE assessee had sought extension of time for filing the said form. THE assessee had not closed the accounts in time. It did not allocate the share income among the partners as stipulated in the partnership deed. THE assessment was completed under S. 144 of the Income Tax Act for failure on the part of the assessee to file return of income. In consequence, the Income Tax Officer declined to grant registration to the firm. In doing so, he invoked S. 185 (5) of the Act. THE order so passed is dated 16-8-1983 (Annexure-A ). THE assessee took up the matter in appeal before the Appellate Assistant Commissioner of Income Tax, Trivandrum. THE Appellate Assistant Commissioner found that the delay in filing Form No. 12 deserves to be condoned. He also adverted to the fact that one of the partners, Shri Purushothama Prabhu, met with a traffic accident on 14-7-1981 and died on the spot and the Accountant of the firm was keeping indifferent health and so could not complete the accounts. THE above factors affected the smooth running of the firm. . Even then, in view of the past records of the assessee pointing out that he is a regular defaulter and the failure to file the return in time notwithstanding the warning by the Income Tax Officer, the Appellate Assistant Commissioner upheld the order of the assessing authority refusing registration, by 'order dated 7-12-1983 (Annexure-B ). THE assessee carried the matter by way of second appeal before the Income Tax Appellate Tribunal. THE Appellate Tribunal held that though registration was cancelled by the Income Tax Officer by invoking S. 185 (5) of the Act, it was in fact and substance an order under S. 186 (2), i. e. cancellation of registration already granted to the firm. THE Tribunal field that no return was filed by the assessee and the assessment was made under S. 144 of the Act. It was found that the death of a partner, illness of the Accountant and the death of the eldest son of the managing partner, who was a young man aged twenty four (on 14-7-1981)should have considerably affected the smooth running of the firm and should have resulted in various impediments, and the plea of the assessee, that the above factors delayed the preparation of accounts and the filing of the returns, should be viewed sympathetically, and so the circumstances of the case do not justify the cancellation of registration. On this basis, the appeal filed by the assessee was allowed. THE cancellation of registration to the firm was annulled. It is thereafter, at the instance of the Revenue, the Income Tax Appellate. has referred the question of law, formulated herein above, for the decision of this Court.

(3.) THE Appellate Assistant Commissioner held that the delay in filing Form No. 12 deserves to be condoned and this was not questioned before the Appellate Tribunal by the Revenue. On. the basis that the assessee-firm had complied with the requirements under S. 184 (7) of the Act, the registration granted to the firm for the earlier assessment year will be effective for the assessment year 1981-82. According to the Appellate Tribunal, in such circumstances, the order passed by the Income Tax Officer refusing registration to the firm under S. 185 (5) of the Act should be construed as cancellation of registration under S. 186 (2) of the Act. After construing the relevant provisions of S. 184, 185 and 186 of the Act, the Appellate Tribunal held that on a harmonious construction of the provisions of S. 185 (5) and S. 186 (2) of the Act, it should be held that S. 185 (5) of the Act will not apply in a case where registration is continued under S. 184 (7) of the Act and S. 185 (5) applies only to cases of initial registration. In other words, S. 185 (5) of the Act can be applied only in the case of an application made for the first time. S. 186 (2) of the Act was held to be a specific provision operating in the case of an earlier registration having effect under S. 184 (7) of the Act. We are of the view that the above view of the Appellate Tribunal is justified on a proper reading of S. 185 (5) read with S. 184 (7) and S. 186 (2) of the Act. In a case where the firm has been granted continuance of registration, if subsequently a best judgment assessment of the firm is made or warranted under S. 144 of the Act, the assessing authority can only cancel the registration in exercise of his powers under S. 186 (2) of the Act. It is not a case where the assessing authority can refuse registration under S. 185 (5) of the Act. We are of the view that the Income Tax Officer has no power to refuse registration to a firm in a case where continuance of registration is granted in exercise of the powers under S. 184 (7) of the Act. We hold that S: 185 (5) of the Act applies only at the initial stage of granting or recognising registration. In cases where continuance of registration of the firm is granted, if a best judgment assessment under S. 144 of the Act is made or warranted, thereafter the Income Tax Officer can invoke the powers under S. 186 (2) of the Act. We are fortified in this view by the Bench decision of the Allahabad High Court in Addl. Commissioner of Income Tax v. Radha Kishan Banwarilal (116 I. T. R. 970 ). Having held that S. 186 (2) of the Act applied to the instant case, the Income Tax Appellate Tribunal held that even in the case of a best judgment assessment made under S. 144 of the Act, the refusal or cancellation of the registration is not automatic or mandatory and as to whether the penal consequence should be imposed in a given case would depend upon the facts and circumstances obtained in that case. Reliance was placed on the decision of this Court in C. K. Abdulkhader & Co. v. l. T. O. (141 I. T. R. 159 ). THE Appellate Tribunal further held that in the present case the Accountant of the assessee, who was in service for a long time, had undergone an operation and the assessee could not make alternative arrangements and the assessee had also suffered heavy losses in the business and their survival in the business was very much in doubt, the eldest son of the managing-partner died in an accident on 14-7-1981 and these aspects deserve a sympathetic view and so viewed the circumstances of the case do not justify the cancellation of registration. We are of the view that the Appellate Tribunal was justified in holding that even in the case of a default in the nature of S. 144, a best judgment assessment may be warranted, but refusal or cancellation of registration is not automatic. As to whether the penal consequence should follow or should be imposed in a given case, would depend upon the facts and circumstances of the case. We are of the view that the decision in C. K. Abdulkhader and Co. case (141 ITR 159) lays down the correct law. In the light of the principles laid down in the said decision, as the final fact finding authority, the Appellate Tribunal referred to the peculiar facts that were present in the instant case which disabled the assessee from preparing the accounts and filing the returns in time. It was held that the peculiar facts stated in its order dated 31-10-1984 deserve a sympathetic view and justify the plea that there was sufficient cause for the default. In such circumstances, as the final fact finding authority, the Appellate Tribunal held that the circumstances disclosed and adverted to by it, in Para. 10 of the order, did not justify the cancellation of registration.