Commissioner of Income Tax vs Udai Mohan and Co.

This appeal has been filed by the revenue against the judgment of the learned Tribunal dated 17-8-2004. The appeal was admitted on 17-11-2005, by framing the following substantial question of law:

Whether in the facts and circumstances of the case, the Tribunal was justified in affirming order passed by Commissioner (Appeals) setting aside the order passed by the assessing officer u/s 185(5) refusing to grant registration to the respondent firm and treating the assessee firm as URF?

The necessary facts are, that the assessing officer passed the order Annexure 1, u/s 185(5) of the Income Tax Act, 1961 refusing to grant registration to the firm for the assessment year 1991-92, and has ordered the status of the assessee to be taken as URF (unregistered firm). Against this order, appeal was filed by the assessee, which was allowed, and the assessing officer was directed to allow the claim of registration to the appellant firm. Against this order, appeal was filed by the revenue, which was allowed, and order of the assessing officer, refusing registration was restored.

It was found in this order dt. 30-3-2001, that from the material available on record, there is nothing to conclusively prove, that the firm was prevented by sufficient cause to comply with the notice under Sections 142(1) and 143(2). In this order, assessee was not represented thus, the order was passed ex parte.

It appears, that thereafter the assessee filed the miscellaneous application, which was allowed vide order dated 21-10-2003, and the appeals were restored to original number, and were again heard on merits, and have been decided vide judgment dated 17-8-2004, Annexure 4. In this order Annexure 4, the learned Tribunal dismissed the appeal of the revenue, being Appeal No. 2773; which related to the order of Commissioner (Appeals)cancelling the order of the assessing officer passed u/s 185(5) of the Act. Since the present appeal related to this controversy only, we need not to go into the aspect covered by the other Appeal No. 1962, decided by the learned Tribunal. Thus, the learned Tribunal upheld setting aside of cancellation of registration, against which, the revenue is aggrieved.

The learned Tribunal perused the record and found, that the assessing officer, in the assessment order, passed u/s 144, has found, that the assessee had not fully complied with the notice, sent to it, by the Income Tax Officer, and it has been found, that there is a difference between non-compliance, and not proper compliance. It has been found, that if the assessee had complied with, and the Income Tax Officer was not satisfied with the compliance, it cannot be said that there was non-compliance of the notice, then it has been noticed, that in para 2 of the assessment order, the Income Tax Officer has observed, that the notice was not fully complied with, however, the partners of the assessee, along with the Authorised Representative appeared on the subsequent dates, and that the assessee had filed the partnership deed and other relevant documents along with the return. In such circumstances, it was found, that it appears, that Income Tax Officer had not applied judicial mind, while passing order u/s 185(5), because the order is very cursory and devoid of any reasons, which may give an impression, that the Income Tax Officer had applied judicial mind, before arriving at a particular decision, for not granting the registration to the firm. In view of the learned Tribunal, it is the assessing officer, who did not allow registration with a view to penalize it. It has also been found, that in reply to notice, assessee clearly gave out, that in absence of books of accounts, no reply can be filed. This was found to be no reasonable reason for coming to the conclusion, that the assessee had not complied with the direction of the Income Tax Officer. Reliance has been placed upon the judgment of this Court, in Commissioner of Income Tax Vs. Faiz Mohd., Hasim Ali, Taj Mohd., Noor Mohd., and after relying on other judgments, including that of Andhra Pradesh High Court, it was held, that the assessing officer has exercised discretion without applying judicial mind, and hence the cancellation of the registration by the assessing officer was upheld.

Before proceeding further, we may gainfully quote the relevant provision of Section 185(5), which reads as under:

Notwithstanding anything contained in this section, where, in respect of any assessment year there is, on the part of a firm, any such failure as is mentioned in Section 144, the assessing officer may refuse to register the firm for the assessment year.

Thus, from the reading of this provision, it is clear that it is only an enabling provision, vesting in the assessing officer, power to refuse to register the firm, for the assessment year, in the event of eventualities, contemplated by this provision coming into existence. But then, it is required to be grasped, that the provision is not mandatory, so as not to leave any discretion with the assessing officer, not to refuse registration. Obviously, therefore, mere existence of the eventualities contemplated by Section 185(5) have the effect only of conferring a power on the assessing officer, to refuse registration, but then, a large question still survives, as to whether in a given case, the assessing officer should exercise this power, i.e. to refuse registration, or proceed with the assessment, without refusing registration.

Obviously, it is a judicial discretion, to be exercised on relevant consideration and parameters, which obviously excludes the element of any prejudicial or preconceived attitude, or an attitude to simply penalize the assessee, for some ignorable lapse, here and there.

Learned Counsel for the revenue placed a strong reliance on Division Bench judgment of this Court, in Santlal Kalyani & Co. v. CIT (1995) 213 ITR 273 (Raj), wherein it was held that:

The only thing required under the said Section is that, there must be failure on the part of the assessee to submit the return u/s 139(1) or a revised return under Sub-section (4) or Sub-section (5) of that Section or failure to comply with the terms of a notice issued under Sub-section (1) of Section 142 or failure to comply with the directions issued under Sub-section (2A) of that Sub-section or failure to comply with the terms of a notice issued under Sub-section (2) of Section 143 warranting a best judgment assessment. In such a situation, if the assessee did not receive the notice issued u/s 142(1) or Section 143(2) or he had no reasonable opportunity to comply with or was prevented by sufficient cause from complying with the terms of the notice issued u/s 142(1) or 143(2), then he can apply for cancellation of the best judgment assessment. It is not in dispute that the assessee failed to comply with the notice issued under Sections 142(1) and 143(2) and, therefore, the Income Tax Officer had the discretion to refuse the registration on that ground alone.

On that basis, it is submitted, that since in the present case, the assessee had failed to comply with the notice u/s 142(1), the order was rightly passed by the assessing officer.

In our view, this would not be the correct reading of the judgment, for the simple reason, that the above submission is not in line with what has been held in the above judgment, that existence of these eventualities, confers jurisdiction on the assessing officer, to proceed u/s 185(5) but then, this judgment, no where lays down, that in each and every case, the registration has to be refused, rather it has been held in this judgment also, that the officer had the discretion to refuse the registration, on that ground alone. We may hasten to make it clear that we should not be understood to mean, that apart from the existence of one of the eventualities contemplated u/s 185(5), something more is required to exist, to clothe the authority with the jurisdiction to decline registration, what we mean to hold is, that notwithstanding existence of the eventualities, the provision does confer discretion on the authority, and provision does not provide refusal of registration, as an automatic consequence of the existence of the eventualities. The difference is required to be better appreciated and applied.

If the present case is considered on these lines, it is more than clear, that in the present case, the assessee, in response to the notice, did submit reply and projected his difficulty. What is significant to note is, that it is not shown to us, that the difficulty projected by the assessee, by way of reply, was turned down, as being not reliable, or not sufficient, rather simply by noticing the fact, about the assessee having submitted reply, the order u/s 185(5) was passed, and assessment was made u/s 144, which in our view, has rightly been set aside by the learned Tribunal.

The question so framed, is accordingly answered in favour of the assessee, and against the revenue. Consequently the appeal having no force, is dismissed.