Gopal Stores vs Commissioner of Income Tax

D.N. Baruah, J.—At the instance of the assessee, the following questions have been referred u/s 256(1) of the Income Tax Act, 1961 (for short, "the Act"), for the opinion of this court :

"(1) Whether, on the facts and in the circumstances of the case and on a proper construction of the provisions contained in Section 186(2) of the Income Tax Act, 1961, the Tribunal was justified in law in upholding the order of cancellation of registration of the assessee-firm made by the Income Tax Officer ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal, without reversing the findings of facts recorded by the Commissioner of Income Tax (Appeals), was justified in law in restoring the order of cancellation of registration of the assessee-firm made by the Income Tax Officer u/s 186 of the Income Tax Act ?"

The assessee, a firm registered under the Partnership Act, filed its return of income for the assessment year 1982-83, on October 6, 1982. In September, 1983, the assessee-firm was directed by the Income Tax Officer to comply with the notices issued u/s 143(2) of the Act on various dates, viz., September 3, 1983, October 18, 1983, and January 12, 1984. The assessee sought adjournments on all dates except on October 18, 1983. The Income Tax Officer, thereafter, issued notice u/s 142(1). The assessee-firm was further directed on various dates by the Income Tax Officer to comply with the notices issued under Sections 143(2) and 142(1) of the Act. The assessee sought adjournments on all the dates except on January 24, 1985. Thereafter, on February 22, 1985, the Income Tax Officer issued a letter to the assessee as regards the consignment received by the assessee-firm from Rangapara Railway Station and ABC Limited, Rangapara, and the assessee was directed to produce books of account in respect of those transactions on February 22, 1985. The Income Tax Officer, on March 1, 1985, intimated the assessee that the assessment was being completed u/s 144 of the Act and notice u/s 186(2) was issued directing the assessee-firm to show cause on March 18, 1985, as to why the registration of the firm should not be cancelled. On March 12, 1985, the assessee-firm submitted a letter to the Income Tax Officer in pursuance of the show-cause notice. Thereafter, on March 18, 1985, the representative of the assessee-firm appeared before the Income Tax Officer and informed him that the accountant of the firm while travelling from Tezpur to Rangapara lost the books of account and lodged an ejahar with the GRPF, Rangapara.

The assessee-firm took up the matter before the Commissioner of Income Tax (Appeals) and submitted that the books of account for the assessment year were lost and could not be recovered. A complaint was, however, lodged with the police at Rangapara. The Commissioner of Income Tax (Appeals), after considering the submissions of the assessee-firm, held that the failure to produce the books of account and other documents was not deliberate or without sufficient reasons and, therefore, the cancellation of registration was not justified. Accordingly, the order passed by the Income Tax Officer u/s 186(2) of the Act was cancelled and he directed the Income Tax Officer to allow continuation of registration and to dispose of the matter u/s 184(7) of the Act.

The Revenue preferred an appeal before the Income Tax Appellate Tribunal, Gauhati, challenging the order passed by the Commissioner of Income Tax (Appeals) and submitted that there had been deliberate default on the part of the assessee-firm to comply with the requirement of different notices issued by the Income Tax Officer. After hearing both sides and on perusal of the order and other connected papers, the Tribunal held that the firm committed default as specified in Section 144 of the Act and, therefore, the Income Tax Officer need not consider the genuineness of the firm and the best judgment assessment would also involve cancellation of registration, as the provision was mandatory. The Income Tax Appellate Tribunal further held that the Commissioner of Income Tax (Appeals) was not justified in giving the above direction to the Income Tax Officer and, therefore, allowed the appeal. The Appellate Tribunal also considered the order dated November 28, 1985, rendered by the Commissioner of Income Tax (Appeals) in the quantum appeal against the assessment order made u/s 144 of the Act.

On an application filed by the assessee-firm, the above two questions have been referred to this court for opinion.

We have heard Mr. R. Gogoi, learned counsel appearing on behalf of the applicant, and Mr. D.K. Talukdar, learned standing counsel for the Income Tax Department.

The contention of Mr. Gogoi was that the order of the Income Tax Officer cancelling the registration was bad in law being based on misappreciation of facts and contrary to law. The assessee-firm was never in default in payment of tax in the year under assessment, inasmuch as adjournments were sought on various valid grounds. The books of account were in the custody of the assessee-firm. The accountant of the assessee-firm lost the books of account on the way back from Tezpur to Rangapara. FIR was lodged before the GRPF, Rangapara. This was informed to the Income Tax Officer. Besides, the accountant also had sworn an affidavit in this connection. Under the said facts and circumstances, adjournments ought to have been given to enable the firm to take steps ; however, the Income Tax Officer passed the best judgment and cancelled the registration u/s 186(2) of the Act. Mr. Talukdar, however, argued at some length in support of the orders of the Income Tax Officer and the Income Tax Appellate Tribunal.

u/s 142 of the Act, the Income Tax Officer may serve on any person who has made a return u/s 139 of the Act or upon whom a notice under Sub-section (2) of Section 139 has been served, a notice requiring him to produce or cause to be produced such accounts or documents as the Income Tax Officer may require or to furnish information in the manner prescribed.

u/s 144 of the Act if any person fails to make the return required by any notice given under Sub-section (2) of Section 139 or has not made any return or a revised return under Sub-section (4), the Income Tax Officer, after taking into consideration all relevant materials gathered by him, shall make an 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. Under this section, the Income Tax Officer is to make an assessment to the best of his judgment against a person, who is in default as regards supply of information, but while giving the judgment he must not act dishonestly or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of a proper figure of assessment and for this purpose he must be able to take into consideration the local knowledge and repute in regard to the assessee''s circumstances and his own knowledge of previous returns, assessments and all other matters which he thinks will assist him in arriving at a fair and proper estimate. This section enumerates the defaults which give rise to the jurisdiction of the Income Tax Officer to give a best judgment assessment. It must, however, be borne in mind that before proceeding to make a best judgment assessment, the Income Tax Officer must have a basis for such determination. Besides, before arriving at a best judgment by the Income Tax Officer, reasonable opportunity of hearing must be given to the assessee to persuade the Income Tax Officer to come to a definite finding.

Section 186 of the Act deals with the cancellation of registration. Under Sub-section (2) of Section 186, 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 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 14 days'' notice intimating his intention to cancel its registration and after giving a reasonable opportunity of being heard. Sub-section (2) of Section 186 of the Act embodies the provisions of the latter part of the main paragraph of Sub-section (4) of Section 23 of the 1922 Act, and the proviso to that Sub-section. The cancellation of registration as per Section 186(2) is discretionary. Section 186(2) does not compel the Income Tax Officer to deprive the assessee of the benefit of registration. It would be wrong to assume that the default by the assessee mentioned in Section 144 of the Act would lead to two-fold penal consequences : (i) best judgment assessment, and (ii) in the case of a firm, cancellation of existing registration. It is, therefore, incumbent upon the Income Tax Officer to consider the question of registration on the ground that a different conclusion would be illogical or not self-consistent. What consideration would weigh with the officer in the matter of his decision regarding registration cannot, of course, be laid down comprehensively. It will be sufficient 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.

The Income Tax Officer can exercise his power under Sub-section (2) of Section 186 for cancellation of registration only : (i) after giving the firm not less than 14 days notice intimating his intention to cancel its registration ; and (ii) after giving a reasonable opportunity of being heard.

In the instant case, the assessee-firm was directed by the Income Tax Officer to comply with the notice u/s 143(2) of the Act. The assessee prayed for adjournment on various dates. A notice u/s 142(1) was issued by the Income Tax Officer to the assessee-firm and, thereafter, the assessee was further directed by the Income Tax Officer to comply with the notice under Sections 142(1) and 143(2) of the Act. On all dates except on January 24, 1985, there was non-compliance and the assessee went on seeking adjournments on various dates. The assessee was directed to produce the books of account to verify the transaction. This was also not complied with by the assessee and he requested for further time. Thereafter, the Income Tax Officer intimated the assessee that the assessment was being completed u/s 144 of the Act. Another notice u/s 186(2) was also issued directing the assessee-firm to show cause as to why the registration of the firm should not be cancelled.

In order to answer the question referred to above, it is to be seen under what circumstances the registration of the assessee-firm was cancelled.

In Commissioner of Income Tax Vs. Standard Mercantile Co., the Patna High Court had the occasion to deal with a similar matter. The court observed thus (at page 143) :

" . . . . the unambiguous finding of the Tribunal recorded in paragraph 12 was that there was default on the part of the assessee. The further finding was that there was no substance in the plea put forth by the assessee that books of account have been lost by theft. From these two findings, the conclusion is inescapable that there was wilful default on the part of the assessee. Those being the findings, in the instant case, the authorities were bound to cancel the registration of the assessee-firm for the assessment years in question. The observation of the Tribunal in paragraph 15 of its order gives an inkling that the Tribunal was conscious of the fact that this was an apt case where benefit of registration should be denied and, therefore, to water down its clear finding in paragraph 12, observed that the question of signature and handwriting had to be left out for the purpose of deciding the question of cancellation of registration. With respect, this was a swashbuckling effort. The Tribunal was absolutely unjustified in holding that this was not an apt case for taking action u/s 186(2) of the Income Tax Act."

Similarly, in Antiquarts Vs. Commissioner of Income Tax, , the Kerala High Court also dealt with a similar question. In the said case, in response to a notice issued on June 2, 1969, calling upon the assessee, a registered firm, to file a return within thirty days, the assessee filed an application for extension of time till October 2, 1969. Another application for extension of time till March 31, 1970, was submitted on the ground that one of the partners had gone abroad for a business purpose and that consultation with him was necessary. The Income Tax Officer issued a notice u/s 142(1) for production of accounts on December 4, 1969, but the accounts were not submitted. The assessee denied receipt of the notice. There was a further application for extension of time for furnishing of returns till March 26, 1970, and this was rejected. The Income Tax Officer issued a notice dated February 2, 1970, that he proposed to make a best judgment assessment because no returns had been filed. By its reply the assessee requested for time till the middle of March, 1970, for submitting the return, the reason again being that a partner had gone abroad and not returned. The Income Tax Officer made a best judgment assessment on the assessee for the assessment year 1969-70 and cancelled the registration of the firm. The court held that though the cancellation of registration u/s 186(2) of the Act was not automatic and had to be ordered after the exercise of judicial discretion, on the facts of the case, the cancellation of registration of the firm followed the exercise of the judicial mind of the Income Tax Officer and was not vitiated by being arbitrary or capricious. The best judgment assessment was also justified u/s 144 of the Act.

The Kerala High Court in this case held thus (at page 175) :

"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."

From the decisions cited above, it will appear that the Income Tax Officer has full power and authority either to refuse registration or to cancel registration, but before doing so, the Income Tax Officer shall have to exercise his mind on the facts and circumstances of the case and such decision should not be arbitrary or capricious.

Looking to the facts and circumstances of the present case, it appears that the assessee-firm went on seeking adjournments one after another without taking any steps for production of books of account. No effort was ever made to produce the documents before the Income Tax Officer to show that the documents were actually lost as claimed and the assessee having failed to comply with the requirement of the notices, the Income Tax Officer was compelled to pass the best judgment assessment and in consequence thereof cancelled the registration of the firm u/s 186 of the Act. This was done by the Income Tax Officer after complying with all the requirements of Section 186(2) of the Act.

Considering all these, we are of the opinion that the Tribunal was justified in upholding the order of cancellation of registration of the assessee-firm passed by the Income Tax Officer and also justified in restoring the order of cancellation of registration of the assessee-firm made by the Income Tax Officer.

In view of the above, the questions are answered in the affirmative and in favour of the Revenue and against the assessee-firm.