Antiquarts vs Commissioner of Income Tax

Gopalan Nambiyar, C.J.—These two references in respect of the assessment year 1969-70 are at the instance of the assessee. ITR No. 7 of 1976 is against the order cancelling the registration u/s 186(2) of the I.T. Act, 1961, and ITR No 8 of 1976 is against the order refusing to reopen the best of judgment assessment.

In ITR No. 7 of 1976, the question of law referred at the instance of the assessee is :

"Whether, on the facts and circumstances of the case, the cancellation of registration of the assessee-firm u/s 186(2) of the I.T. Act, 1961, for the assessment year 1969-70 is justified in law ?"

In ITR No. 8 of 1976 the question referred is :

"Whether, on the facts and circumstances of the case, the order of the Tribunal sustaining the order passed u/s 146 of the I.T. Act, 1961, for the assessment year 1969-70 is justified and valid in law ?"

The facts and the circumstances leading to the assessment and cancellation of the registration have been set out by the Income Tax Appellate Tribunal in its order. We shall refer to the order in ITR No. 7 of 1976.

A notice u/s 139(2) of the Act was issued on June 2, 1969, calling upon the assessee to file a return within thirty days of receipt of the notice. The same was received by the assessee on June 20, 1969. The assessee filed an application on July 19, 1969, signed by one of the partners requesting time for filing the return till October 31, 1969, on the ground that the accounts had not been finalised. The application was received on July 21, 1969. The record does not show whether the extension of time was granted or not. However, another application dated October 31, 1969, signed by another partner was filed praying for extension of time till January 31, 1970, on the ground that the accounts of Bombay and Bangalore branches have not been finalised. Time was granted till November 30, 1969, and communicated by letter dated November 3, 1969, received by the assessee on November 10, 1969. On November 29, 1969, another application was filed for extension of time till January 31, 1970, on the ground that one of the partners had gone abroad for a business purpose and will take a month to return and that consultation with him was necessary. The ITO issued notice u/s 142(1) on December 4, 1969, calling for the production of accounts and fixing the hearing to December 15, 1969. The receipt of this notice is denied by the assessee. An application dated January 31, 1970, was made praying for extension of time for submitting the return till March 26, 1970, the reason being the same as was alleged in the application dated November 29, 1969. This was rejected, and the assessee was informed by a letter dated February 2, 1970, served on February 7, 1970. The ITO issued a notice dated February 2, 1970, that as no return of income had been filed u/s 139(2) of the Act, he proposed to complete the assessment u/s 144 and also to cancel the registration. This was served on the assessee on February 10, 1970. By its reply dated February 20, 1970, the assessee requested the ITO to grant time till the middle of March, 1970, for submitting the return, the reason being again that the partner had gone abroad and had not yet returned. The officer completed the assessment u/s 144 on February 25, 1970, and, on the same day, he passed the order cancelling the registration u/s 186 of the Act. The assessee, thereafter, filed an application u/s 146 on March 26, 1970. The same was taken up on April 29, 1970. There was no appearance on behalf of the assessee. An authorisation was received in favour of one G. Subramoniam along with a covering letter from the assessee that he was unable to produce the accounts on that day. As Subramoniam had to attend to some domestic function, an adjournment was prayed for. This was declined, and the application u/s 146 was rejected. It was on these facts that the order cancelling the registration and the best of judgment assessment followed.

Counsel for the assessee invited our attention to Section 186(2) and Section 144 of the I.T. Act, which are as follows:

"144. Best judgment assessment.--If any person-

(a) fails to make the return required by any notice given under Sub-section (2) of Section 139 and has not made a return or a revised return under Sub-section (4) or Sub-section (5) of that section, or

(b) fails to comply with all the terms of a notice issued under Sub-section (1) of Section 142 or fails to comply with a direction issued under Sub-section (2A) of that section, or

(c) having made a return, fails to comply with all the terms of a notice issued under Sub-section (2) of Section 143, the Income Tax Officer, after taking into account all relevant material which the Income Tax Officer has gathered, shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment."

"186(2). If, where a firm has been registered or its registration has effect under Sub-section (7) of Section 184 for any assessment year, there is, on the part of the firm, any such failure in respect of the assessment year as is mentioned in Section 144, the Income Tax Officer may cancel the registration of the firm for the assessment year, after giving the firm not less than fourteen days'' notice intimating his intention to cancel its registration and after giving it a reasonable opportunity of being heard." Based on the change in the language of the section, counsel emphasised that while u/s 186(2), the cancellation of registration was only discretionary and need not necessarily follow automatically from the failure of the type mentioned in Section 144, such failure would automatically justify a best of judgment assessment u/s 144 of the Act. The use of the expressions "may" and "shall" in the sections was stressed. This aspect of the matter was further emphasised with respect to a Division Bench judgment of this court to which one of us (myself) was a party in Trivandrum Tobacco Combines v. CIT [1961] 63 ITR 813 . The same was rendered with respect to the relevant provisions of the Indian I.T. Act, 1922. After noticing the relevant provisions, the Division Bench of this court extracted the following quotation from the decision in J. M. Sheth Vs. Commissioner of Income Tax, Madras, :

"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 ITO has a discretion not to refuse registration or cancel registration even in spite of the default of the assessees. Significantly, the statute uses the words ''shall make the assessment to the best of his judgment'' in the first part of the section. If the words ''shall'' and ''may'' are found in two different limbs of the same section, there cannot be a better legislative pointer to indicate that the first is obligatory and the second is discretionary. 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 consequence : (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 ITO 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."

The facts in the Madras decision and in the Kerala decision were essentially different and both the decisions only emphasise that cancellation of registration is not automatic, but was one to be ordered after the exercise of judicial discretion. On the facts noticed by the Income Tax Appellate Tribunal, we are by no means satisfied that in these cases cancellation of registration followed without the exercising of judicial, mind of the officer or was otherwise vitiated by being arbitrary or capricious. Strictly, we see no question of law which can really be said to arise out of the order of the Tribunal. Even assuming that the conclusion on the facts is to be regarded as a question of law, we are satisfied that the view taken by the Tribunal in regard to the said question of law is correct and calls for no interference.

ITR No. 8 of 1976 : On the facts which we have stated in regard to ITR No. 7 of 1976, we are satisfied that the rejection of accounts and the best of judgment assessment for failure to file a return was justified u/s 144 of the Act. The view taken by the Tribunal was correct.

In the result, we answer the question in ITR No. 7 of 1976 in the affirmative, i.e., in favour of the revenue and against the assessee, and the question in ITR No. 8 of 1976 in the affirmative, i.e., in favour of the revenue and against the assessee. We make no order as to costs.