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PETITIONER: COMMISSIONER OF INCOME TAX, KANPUR

       Vs.

RESPONDENT: NITYA NAND DEVKINANDAN

DATE OF JUDGMENT:       08/07/1997

BENCH: S.C. AGARWAL, D.P.WADHWA.

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T                  THE 8TH DAY OF JULY, 1997 Present:               Hon’ble Mr. Justice S.C. Agrawal               Hon’ble Mr. Justice D.P. Wadhwa Ranbir Chandra, Lakshmi Iyangari, B.K. Prasad, Advs. for the appellant Ms. Purnima Bhat and E.C. Agrawala, Advs. for the Respondent The following Judgment of the Court was delivered: S.C. AGRAWAL, J.:      These appeals  by certificate granted under Section 261 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) are  directed against  the judgment  of the  Allahabad High Court  dated November  5, 1980  in Income Tax Reference No. 301 of 1977 relating to the assessment years 1972-73 and 1973-74. In  the  said  Reference  case  the  following  two questions were referred for opinion of the High Court by the Income Tax  Appellate Tribunal  (hereinafter referred  to as ‘the Tribunal’):      1. Whether  on the facts and in the      circumstances  of   the  case,  the      Tribunal was  right in holding that      since, strictly speaking, there are      no  orders   passed  under  Section      184(7)  as  such,  the  benefit  of      continuance of  registration  being      granted     year     after     year      automatically on  the fulfilment of      certain year  automatically on  the      fulfilment  of  certain  conditions      laid down  in the said section, the      Commissioner of  Income Tax  had no      jurisdiction  under   section  263,      Income Tax Act to cancel the same.      2. Whether  on the facts and in the      circumstances  of   the  case,  the      Tribunal  was  correct  in  holding      that the  renewal  of  registration      could  not   be  cancelled  by  the      Commissioner of Income tax invoking

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    the  provisions   of  section  263,      Income Tax  Act on  the ground that      there is a difference in the profit      sharing ratio shown in Form No. 11-      4  and   those  mentioned   in  the      partnership  deed,  the  shares  in      fact having  been  divided  on  the      basis of  the deed  in the  account      books in  the assessment year 1967-      68  when   registration  was   duly      granted and  the same  was  renewed      year after year.      Question No.  1 was  answered by the High Court against the Revenue  and in  favour of  the assessee. In view of the answer given  to  question  No.1  the  High  Court  did  not consider it  necessary to  answer  the  second  question  on ground that it has become academic and the said question was returned unanswered.      The  respondent   (hereinafter  referred   to  as  ‘the assessee-firm’) is  a partnership  firm  which  was  allowed registration under Section 185 of the Act for the assessment year 1967-68.  Thereafter the assessee-firm was continued to be treated  as a  registered firm  right upto the assessment year 1973-74.  On a  perusal of  the assessment  records the Commissioner of  Income Tax (hereinafter referred to as ‘the Commissioner’) found  that on  November 3,  1966,  when  the assessee-firm submitted the application for registration for the  assessment   year  1967-68  in  Form  11-A,  there  was discrepancy  regarding  shares  of  difference  partners  as mentioned in  the partnership  deed and  the shares  of  the partner shown  in the  application for  registration made in Form 11-A  and that  in each  of the  years relevant  to the assessment years 1967-68 to 1973-74 the account books of the assessee-firm showed  that the  profits in  the firm had not been distributed amongst its partners in accordance with the shares mentioned  in Form  No. 11-A.  Being of the view that various orders  passed by  the Income Tax Officer whereunder the  assessee-firm   was  granted   registration   for   the assessment year  1967-68 and was treated to be continuing as a registered  firm for  the subsequent years, were erroneous and  prejudicial   to  the  interest  of  the  Revenue,  the Commissioner issued  as show  cause notice under Section 263 of the  Act requiring  the assessee-firm to show cause as to why the  registration granted  to it under Section 184(7) of the Act in respect of the assessment years 1972-73 and 1973- 74 should  not be  cancelled. In respect of earlier years no action was  proposed by the Commissioner for the reason that the action  taken by  the Income  Tax Officer  in respect of those years  fell beyond  the period  of limitation  of  two years laid down in Section 263 of the Act. The assessee-firm appeared  before  the  Commissioner  and  showed  cause  and maintained that  throughout the  profits  has  been  divided amongst the  partners in accordance with the shares as shown in the partnership deed and that there was a mistake in Form 11-A filed  by the assessee-firm for seeking registration of the firm  for the assessment year 1967-68. The Commissioner, however, concluded  that the registration for the year 1967- 68 as  also the renewals in subsequent years were granted on wrong assumption and that treating the firm as continuing to be  registered  was  prejudicial  to  the  interest  of  the Revenue. The  Commissioner, therefore,  in exercise  of  his powers under  Section 263  of the Act, cancelled the renewal of  registration   granted  to  the  assessee-firm  for  the assessment years 1972-73 and 1973-74 and directed the Income Tax Officer  to reframe  the assessments for each of the two

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years in  accordance with  law.  The  appeal  filed  by  the assessee-firm against the said order of the Commissioner was allowed by  the   Tribunal on  the view  that  according  to Section 184(7)  registration  of  the  firm  was  to  remain effective for  the years  subsequent  to  the  year  1967-68 automatically, provided the conditions laid down in the said Section were  fulfilled and  that the  said Section does not contemplate passing  of  an  order  either  for  renewal  or continuance of  registration of  the firm  and there  was no order in  regard to  initial registration  continuing to  be effective in  the subsequent years which could be revised by the Commissioner  under Section  263 of  the Act.  On merits also the  Tribunal rule  that profits of the firm in various years has  been divided  amongst its  partners in accordance with the  shares mentioned  in the  partnership deed  on the basis of  which the  firm was  granted registration  for the assessment year  1967-68 and  neither  registration  of  the assessee-firm for  that year  nor its  being continued to be treated as  registered for subsequent years could be said to be  erroneous   merely  for   the  reason   that  there  was discrepancy in  the shares  of the  partners as mentioned in the application  made in  Form 11-A  for registration of the firm for  the assessment year 1967-68. The High Court, while answering question  No. 1 in favour of the assessee-firm and against the  Revenue, has  affirmed the view of the Tribunal that in  the matter  of continuation  of the registration of the assessee-firm no order had been passed by the Income Tax Officer which  could be the subject matter of revision under Section 263 of the Act. Hence this appeal.      At  the   relevant  time   provision  with   regard  to registration of  firms were  contained in Section 184 to 186 of  the   Act.  Section   184  dealt  with  application  for registration,  Section   185  prescribed  the  procedure  on receipt of  the  application  and  Section  186  dealt  with cancellation of  registration. As regard continuation of the registration of  the firm  which had  earlier  been  granted registration the  relevant provisions were contained in sub- Section (7)  of Section  184 and  in sub-Section (3) and (4) Section 185 which read as under :-      "Section 184(7):      Where registration  is  granted  to      any firm  for any  assessment year,      it  shall  have  effect  for  every      subsequent assessment year;      Provided that -      (i)  there  is  no  change  in  the      constitution of  the  firm  or  the      shares of the partners as evidenced      by the instrument of partnership on      the basis of which the registration      was granted; and      (ii) the firm furnishes, before the      expiry of  the time  allowed  under      sub-section (1)  or sub-section (2)      of  Section   139  (whether   fixed      originally  or  on  extension)  for      furnishing the return of income for      such subsequent  assessment year, a      declaration to  that effect, in the      prescribed form and verified in the      prescribed  manner,   so,  however,      that where  the Income  Tax Officer      is  satisfied  that  the  firm  was      prevented by  sufficient cause from      furnishing the declaration with the

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    time so  allowed, he  may allow the      firm to  furnish the declaration at      any time  before the  assessment is      made.      Section 185.  Procedure on  receipt      of application.-      (1) & (2) Omitted      (3) Where  the Income  Tax  Officer      considers  that   the   declaration      furnished by a firm in pursuance of      sub-section (7)  of section  184 is      not in order, he shall intimate the      defect to  the firm  and give it an      opportunity to  rectify the  defect      in the  declaration within a period      of one  month from the date of such      intimation; and  if the  defect  is      not rectified  within that  period,      the Income  Tax Officer  shall,  by      order in  writing, declare that the      registration granted  to  the  firm      shall  not   have  effect  for  the      relevant assessment year.      (4) Where  a firm is registered for      any assessment year, the Income Tax      Officer shall  record a certificate      on the instrument of partnership or      on   the    certificate   on    the      instrument of partnership or on the      certified copy  submitted  in  lieu      of the  original instrument, as the      case may be, to the effect that the      firm has been registered under this      Act, for  that assessment year; and      where  a   declaration  under  sub-      section  (7)   of  section  184  is      furnished  by  the  firm,  for  the      relevant   subsequent    assessment      year.                Omitted."      The  scheme   of  the  aforesaid  provisions  regarding continuation of the registration differs from the provisions contained in Section 26A of Income Tax Act, 1922 relating to the registration  of firms.  Under Section 26A of the Income Tax Act,  1922 the registration of a firm was valid only for one year  and for  the purpose of renewal of registration an application was  required to be made every year. The process of  renewal  of  registration  was  no  different  from  the original registration. By Section 184 and 185 of the Act the requirement  of   making  an   application  for  renewal  of registration every  year was dispensed with. Sub-Section (7) of Section 184 provided that where the registration has been granted to  any firm  for any  assessment year it shall have effect for  every subsequent  assessment year  provided  the following conditions were satisfied : [i] there  is no  change in  the constitution of the firm or the share  of the partners as evidenced by the instrument of partnership on  the basis  of  which  the  registration  was granted; and [ii] a  declaration in  the prescribed  form and verified in the prescribed manner is furnished, before the expiry of the time allowed  under sub-section  (1) or  sub-Section (2)  of Section 139  for furnishing  the return  of income  for such subsequent assessment year.      Sub-Section (3)  and (4)  of Section 185 prescribed the

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procedure to  be followed  by the Income Tax Officer in case where a  declaration was  furnished in  pursuance of Section 184(7). Sub-Section (3) of Section 185 laid down that if the Income Tax  Officer was of the view that the declaration was not in  order, he was required to intimate the defect in the declaration within  a period  of one  month from the date of such intimation;  and if the defect was not rectified within that period,  the Income  Tax Officer  would,  by  order  in writing, declare  that the  registration granted to the firm shall not have effect for the relevant assessment year. Sub- Section (4)  of Section 185 prescribed that in cases where a declaration  was   found  to   be  in  accordance  with  the requirements of  sub-Section (7)  of Section  184 the Income Tax Officer  would record a certificate on the instrument of partnership or  on the  certified copy  submitted in lieu of the original  instrument, as  the case may be, to the effect that the  firm is  registered under the Act for the relevant subsequent assessment year.      The order  passed by  the Income Tax Officer under sub- section (3)  of Section 185k declaring that the registration granted to  the firm  shall not have effect for the relevant assessment year, was appealable under Section 246 (j) of the Act. No  appeal lay  against the  action taken by the Income Tax Officer  under  sub-section  (4)  of  Section  185.  The question is  whether the correctness of such action could be examined by  the Commissioner  in exercise of his revisional power under Section 263 of the Act. In the impugned judgment the Allahabad  High Court has taken the view that the matter of continuance  of registration  under Section 185(4) of the Act no order is passed by the Income Tax Officer and he only appends a  certificate on the instrument of partnership that the firm stands registered and that such an action of Income Tax Officer  cannot be  regarded  as  passing  of  an  order against which  revision would  lie under  Section 263 of the Act. The  High Court  has placed  reliance  on  the  earlier judgment of the said Court in Ashwani Kumar Maksudan Lal vs. Addl. Commissioner  of Income  Tax. 83  ITR 854.  That was a case of  an order  passed by  the Income  Tax Officer  under Section 185(3) whereby it was directed that the registration of the  firm could  not be continued for the reason that the declaration was  not  in  order.  Under  the  provisions  of Section 246  in force  at that time no appeal lay against an order passed  under Section 185(3). The High Court held that the said order was revisable. In that case the Court was not dealing with  the  question  whether  action  under  Section 185(4) was revisable under Section 263 of the Act.      On behalf  of the  Revenue reliance  was placed  on the following observation  of the  Andhra Pradesh  High Court in Addl. Commissioner  of Income Tax, A.P. vs. Chekka Ayyanna & Ors., [1977] 106 ITR 313 :      "A close reading of Section 184(7),      proviso (ii),  in conjunction  with      Section  185(4)   would  show  that      notwithstanding the  condonation of      delay by  the  Income  Tax  Officer      when he  is satisfied that the firm      was prevented  by sufficient  cause      from filing  the declaration within      the time  allowed, nevertheless, he      would have  to pass  an order under      Section 185(4)  to the  effect that      the firm  has been registered under      the   Act   for   that   assessment      year;...." [p.319]      The High Court has, however, expressed its inability to

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agree with  the said  view that scribing for the certificate under Section  185(4)  of  the  Act  that  the  firm  stands registered for the subsequent years, results in an order.      This matter  has also been considered by the High Court of Punjab  & Haryana  in  Commissioner  of  Income  Tax  vs. Jagadhri Electric  Supply &  Industrial Co.,  [1983] 140 ITR 490. In  that case,  the Income  Tax Officer had treated the registration of  the firm as continuing under Section 185(4) of the  Act and  the question  for consideration was whether there was  an order  by the  Income Tax  Officer within  the meaning of Section 263 of the Act. The High Court has held:      "The ITO  has to  apply his mind to      the question whether thedeclaration      furnished by  the  assessee  is  in      accordance with  the provisions  of      the  Act   and  the   Rules  framed      thereunder  or   not,  and,   after      satisfying himself,  the  necessary      order, in  the nature of a grant of      the certificate, is to be recorded.      Even if  it may  be taken  to be  a      formal order  but all  the same, it      is necessary  to record some order,      as has  been actually  done by  the      ITO in  the present  case and which      has  been   reproduced  be  in  the      proceeding under the Act, and would      be covered  under Section 263(1) of      the   Act,   provided   the   other      condition ar  also fulfilled. There      is another approach as well. If the      order   thus    passed    or    the      certificate so  granted by  the ITO      is  of   such  a  nature  that,  if      erroneous, is  likely to  prejudice      the interests  of the Revenue, then      the provisions of Section 263(1) of      the Act will be attracted. In other      word, it is the nature of the order      which    will     determine     the      applicability of Section 263 of the      Act." [p.499]      We are  in agreement  with the  aforesaid view taken by the High Court of Punjab & Haryana and are unable to endorse the view  taken by  the Allahabad High Court in the impugned judgment. For  the purpose of treating the registration of a firm as  continuing for  a subsequent  assessment  year  the Income Tax  Officer is  required to  apply his  mind to  the declaration that is  by the firm under Section 184(7) and to examine whether  the declaration  is in  accordance with the provisions of  the Act  and the  rules framed thereunder and after satisfying himself that it is so, he has to record the certificate on  the instrument  of  partnership  or  on  the certified copy  submitted in lieu of the original instrument to that  effect that  the registration shall have effect for the relevant  assessment year. In cases where the Income Tax Officer finds that the declaration is not in accordance with the provisions  of the  Act and  the rules framed thereunder has to pass an order declaring that the registration granted to the  firm in any assessment year shall have at that stage the Income  Tax Officer  has to  apply his  mind and  take a decision whether  to record  a certificate of continuance of the registration or declare that the registration has ceased to continue.  The  action  of  the  Income  Tax  Officer  in declaring that  the  registration  has  ceased  to  continue

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operates to the prejudice of the assessee-firm falling under Section 185(3)  and it  could be assailed in an appeal under Section 246(j)  of the  Act. The  action of  the Income  Tax Officer in  recording a  certificate for  continuance of the registration of  the firm  in the  relevant assessment  year falling under  Section 185(4)  has  a  bearing  on  the  tax liability of  the assessee-firm and if such a certificate is wrong recorded  that action  is likely  to be prejudicial to the Revenue.  Since such  action is  based on  the  decision taken by  the Income  Tax Officer  after  finding  that  the declaration furnished  by the firm is in accordance with the provisions of  the Act  and the  rules framed thereunder the action taken  by the  Income Tax  Officer in  recording  the certificate regarding continuance of the registration in the relevant assessment  year has  to be  regarded as  an  order which is  subject to  the  revisional  jurisdiction  of  the Commissioner  under   Section  263   of  the  Act.  We  are, therefore, unable to agree with the answer given by the High Court to  question No.1.  In our  opinion the  said question must be  answered in  the negative,  i.e., in  favour of the Revenue and  against the  assessee. In view of question No.1 being  thus   answered  question   No.  2   requires  to  be considered. Since the High Court has not considered the said question the matter has to be remitted to the High Court for considering question No. 2 referred to it by the Tribunal.      In the  result, the  appeal are  allowed, the  impugned judgment of  the High  Court is set aside and question No. 1 that was  referred to  the High  Court by  the  Tribunal  is answered in the negative, i.e., in favour of the Revenue and against the  assessee. The  matter is  remitted to  the High Court for considering question No. 2. No orders as to costs.