Mathew and Mathew vs Commissioner of Income Tax

Balakrishna Menon, J.—The Income Tax Appellate Tribunal, Cochin Bench, has referred the following questions for the opinion of this court u/s 256(1) of the Income Tax Act:

"(1) Whether, on the facts and in the circumstances of the case, the declaration in Form No. 12 filed by the assessee on January 21, 1975, praying for continuation of registration for the assessment year 1975-76 could not be considered as valid for the reason that it was filed before the end of the relevant accounting year ?

(2) If the above question is answered in the affirmative, whether, on the facts and in the circumstances of the case, it could be said that there was a defect in such declaration filed by the assessee and that the Income Tax Officer should have given it an opportunity to rectify the same u/s 185(3) of the Income Tax Act, 1961 ?"

The assessee is a firm constituted during the accounting year ending on March 31, 1974, and was granted registration for the assessment year 1974-75, the first year of assessment of the firm. The assessee, on January 21, 1975, filed a declaration in Form No. 12 praying for the continuation of registration for the assessment year 1975-76. The declaration was defective in that it was filed before the closing of the relevant accounting year ending on March 31, 1975. The Income Tax Officer rejected the declaration as invalid and declined to grant continuation of registration to the firm. In appeal at the instance of the assessee, the Appellate Assistant Commissioner found that there was no change in the constitution of the firm during the relevant accounting period and in the view that he took that it was not proper to decline the continuance of registration on a purely technical ground that the declaration had been filed a few days prior to the ending of the accounting year, directed the Income Tax Officer to make a fresh assessment treating the assessee as a registered firm. In appeal, at the instance of the Revenue, the Tribunal, following the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat Vs. Trinity Traders, , held that the declaration submitted before the end of the accounting year is not a valid declaration and in the absence of a valid declaration, the assessee is not entitled to continuance of registration u/s 184(7) of the Income Tax Act. The alternative plea on behalf of the assessee that an opportunity for rectification of the defect in the declaration should have been granted was also rejected in the view that the Tribunal took that the declaration submitted before time is not a declaration at all in law.

There is no dispute that the assessee-firm had got registration for the assessment year 1974-75 and is entitled to continuance of registration for the subsequent period if the requirements of the proviso to Sub-section (7) of Section 184 are satisfied. Sub-section (7) of Section 184 together with its proviso is extracted below :

"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 within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made."

It is clear from Clause (i) of the proviso that the requirement for the continuation of registration under Sub-section (7) is that 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 registration had been granted. Clause (ii) of the proviso, as per which a declaration in the prescribed form and verified in the prescribed manner is to be furnished within the time mentioned therein, prescribes the statutory mode of proof of the requirement of Clause (i) of the proviso. Clause (ii) of the proviso excludes every other mode of proof. But the intent and purpose of Clause (ii) are only to prove the requirements of Clause (i) of the proviso. The earlier requirement of Clause (ii) for filing of the declaration together with the return was altered by the Taxation Laws (Amendment) Act, 1970, that came into force on April 1, 1971. The present requirement of the clause is only the furnishing of the declaration in the form and manner prescribed before the expiry of the time allowed under Sub-sections (1) or (2) of Section 139 for furnishing of the return of income for the subsequent assessment year.

Counsel for the Revenue points out Rule 22 of Part V of the Income Tax Rules, 1962, as per which the declaration under Clause (ii) of the proviso to Sub-section (7) of Section 184 of the Act is to be furnished in Form No. 12. The form requires an affirmation that "there has been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year......"

Counsel strongly urges that there is a clear purpose in the requirement of the affirmation as stated above in the form prescribed under the rule for the information required is that the firm continued without any change throughout the previous year relevant to the year of assessment. If, however, the declaration is furnished before the end of the previous year, counsel submits, that any subsequent change in the constitution of the firm or the shares of the partners will not be covered by such declaration. It is true that as per Sub-section (7) of Section 184, registration granted to a firm will enure for every subsequent assessment year if only 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 registration was granted. What the Income Tax Officer should be satisfied about is that the firm continues without any change throughout the previous year relevant to the year of assessment. Clause (ii) of the proviso prescribes only the outer limit of time within which the declaration is to be furnished. It does not require the Income Tax Officer to reject the declaration furnished before the end of the accounting period. If, as contended by the learned counsel for the Revenue, the declaration, unless it covers the entire accounting period, is no declaration at all, we see no reason why a different standard is prescribed under the Act for an application for registration of the firm. Sub-section (4) of Section 184 requires the application for registration to be made before the end of the previous year. A fresh registration should also relate to the period up to the end of the previous year and if an application for registration is to be filed before the end of the previous year, we see no special reason why a declaration for renewal of registration furnished before the end of the previous year is to be summarily rejected as not in conformity with the requirements of Clause (ii) of the proviso to Sub-section (7) of Section 184 of the Act. As adverted to earlier, the declaration is a mode of proof prescribed by the Act for the satisfaction of the Income Tax Officer that the firm continues without any change in its constitution or the shares of the partners for the whole of the previous year relevant to the year of assessment. Sub-section (3) of Section 185 enjoins on the Income Tax Officer to intimate any defect in the declaration furnished to the assessee-firm and give it an opportunity to rectify the defect within a period of one month from the date of such intimation. If the defect is not rectified within the said period, the Income Tax Officer is required by order in writing to declare that the registration granted to the firm shall not have effect for the relevant assessment year. The assessee-firm is thus entitled to an opportunity for rectification of defects, if any, in the declaration furnished by him and It is only on his failure to rectify the defect that the registration can be declared as not effective for the year of assessment.

The declaration furnished in the present case is defective as it does not relate to the whole of the accounting period and the assessee is entitled to an opportunity under Sub-section (3) of Section 185 for rectification of the defect.

Counsel for the Revenue relies on the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat Vs. Trinity Traders, , in support of the proposition that the declaration if not in strict compliance with the requirements of Sub-section (7) is no declaration at all and the Income Tax Officer is entitled to proceed on the basis that the firm is not registered for the relevant accounting period. The decision of the Gujarat High Court relates to the interpretation of Clause (ii) of the proviso to Sub-section (7) of Section 184, as it stood prior to the amendment effected by the Taxation Laws (Amendment) Act, 1970. The Clause as then stood required the firm to furnish the declaration in the prescribed form and verified in the prescribed manner along with its return of income for the assessment year concerned. A declaration filed before the end of the accounting period was held to be no declaration at all for the following reason stated on page 85 of the report:

"We find that the defect in question is not merely a technical one, because filing a declaration contemplated by Sub-section (7) of Section 184 is not a mere formality. Section 184 was introduced in the scheme of the Act with a view to avoid procedural tangles. A firm was enabled to continue its registration even for the subsequent years provided it was successful once in obtaining registration in a particular year. But this was made conditional on the making of a declaration that the constitution of the firm as well as the shares of its partners continued to remain the same as mentioned in the instrument of partnership, on the strength of which the original registration was given. Therefore, the right of a firm to continue its registration is made conditional upon a declaration of the type mentioned above. If no such declaration is made, then it results in non-compliance with the provisions of the section itself. Under the circumstances, the declaration which is made by the assessee in the middle of the accounting period is found to be no declaration at all."

This decision of the Gujarat High Court does not advert to Sub-section (3) of Section 185 as per which the assessee-firm is entitled to an opportunity for rectification of defects in the declaration furnished. The amendment of Sub-section (7) that came into force on April 1, 1971, removes the requirement of furnishing the declaration along with the return. The Gujarat High Court has taken the view that the requirement of the sub-section as it stood at the relevant time requiring the declaration to be furnished along with the return was mandatory and not even a substantial compliance will satisfy the requirement of the law. We are unable to agree with the reasoning and conclusion of the Gujarat High Court. The purport and reach of Sub-section (7) are for the continuance of registration for every subsequent assessment year provided there is no change in the constitution of the firm or the shares of the partners. The declaration under Clause (ii) of the proviso is the statutory mode of proof of these requirements for the registration to have effect for every succeeding year. The facts to be proved are those stated in Clause (i) of the proviso and any defect in the declaration is capable of rectification as provided for in Sub-section (3) of Section 185. An infirmity in the declaration that it does not cover the whole of the accounting period as required by Form No. 12 cannot be held to be fatal to the declaration itself and the infirmity can be treated only as a defect capable of rectification under Sub-section (3) of Section 185. Counsel relies also on the decision of the Madras High Court in Halima Fancy Stores Vs. Commissioner of Income Tax, . That decision was also concerned with the requirement of the proviso as it then stood to furnish the declaration along with the return. The Madras High Court at page 194 of the report observed :

"The intention of Parliament was to give effect to the registration in the subsequent year also if there was no change in the constitution of the firm or the shares of the partners and, therefore, the factum of change or no change in the constitution of the firm or the shares of the partners is only relevant for the law to operate. The declaration, as such, does not extend the effect of the registration. Even so when Parliament had imposed that condition for the law to operate, we cannot refrain from giving effect to it merely on the ground that in effect there was no change in the constitution of the firm or the shares of the partners. It might be that the declaration is only an evidence that there was no change in the constitution of the firm. But, since the giving effect to the registration for the subsequent year is conditioned upon such filing in Section 184(7) though, in fact, there is no change in the constitution of the firm or the shares of the partners, unless such a declaration is filed, the benefit of continued effect of the registration could not be given. We are also unable to agree with the learned counsel for the assessee that he might file a declaration at any time before the assessment and the provision requiring the declaration to be filed along with the return of income was not mandatory. The section requires the declaration to be filed along with the return of income."

We are in perfect agreement with the view expressed by the Madras High Court that the intention of Parliament was to give effect to the registration for the subsequent year and the declaration is only a mode of proof that there is no change in the constitution of the firm or the shares of the partners. We find it, however, difficult to agree with the reasoning that the furnishing of the declaration along with the return was a mandatory requirement of the law and even an inconsequential breach of such requirement will invalidate the declaration. The Karnataka High Court in the decisions in Madivalappa and Sons Vs. Commissioner of Income Tax, Mysore, and in Shanti Trading Co. Vs. Commissioner of Income Tax, Mysore, , has also taken the view that there is no discretion vested in the Income Tax Officer to grant the benefit of registration to the firm if it does not satisfy the two conditions laid down by the proviso to Sub-section (7) of Section 184 of the Act. The question whether the requirement of the proviso is mandatory or directory or whether it is a defect capable of rectification under Sub-section (3) of Section 185 is not considered by the Karnataka High Court. The Patna and the Allahabad High Courts have taken the view that the requirement of the proviso is not mandatory and a defect in the declaration under Clause (i) of the proviso to Sub-section (7) will not invalidate the declaration itself. Considering the requirement of the proviso as it stood prior to its amendment, the Patna High Court in the decision in Commissioner of Income Tax Vs. Sitaram Bhagwandas, , observed at p. 564:

"If we look to the spirit and substance of the legislative provision in question, it is clear to me that the term ''along with its return of income'' is merely directory and not mandatory. The law must be so construed as to not make it in any way illogical or ridiculous. The spirit of the legislative change was that if the Income Tax Officer while dealing with the assessment of a firm had before him the return filed by the firm and a declaration in due form at the time when he was applying his mind to the return, that is, during assessment proceedings, the assessee was entitled to automatic renewal provided for in Section 184(7). The Income Tax Officer at the time of assessment, if the assessee wants to avail of the benefit of Section 184(7), must be satisfied at the time when he is making the assessment that a return has been duly filed and that the firm is actually continuing without any change in shares of partners or the constitution of the firm as is said by the assessee in the declaration in due form at any time before the assessment is made."

The Patna High Court follows its earlier decision in S.P. Pandey and Brothers Vs. Commissioner of Income Tax, , wherein it is stated (at p. 521):

"The only requirement of the declaration given under the said provision of law is that there is no change in the constitution of the firm or that the shares of the partners as evidenced by the instrument of partnership on the basis of which registration was granted had remained unchanged."

The Allahabad High Court in Addl. Commissioner of Income Tax Vs. Murlidhar Mathura Prasad, , following its earlier decision in Nand Singh Taneja and Sons Vs. Commissioner of Income Tax, , has accepted the view expressed by the Patna High Court in Commissioner of Income Tax Vs. Sitaram Bhagwandas, , as the correct interpretation of Clause (ii) of the proviso to Sub-section (7) of Section 184. The Allahabad High Court observed at p. 395 :

"The essence of Section 184(7) is that once registration has been granted to a firm, it is to have effect for every subsequent year, in case there has been no change in the constitution of the firm or in the shares of its partners. The other requirements are merely to evidence this fact. The requirement that the firm shall furnish a declaration in Form No. 12 is merely to prove the facts in a particular way."

It was accordingly held that the procedural requirements are to be treated only as directory and if there is some defect in the declaration, the assessee is to be given an opportunity for rectification.

As per Clause (ii) of the proviso, the declaration is to be filed before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 for furnishing the return of income. The Income Tax Officer is empowered to condone the delay and allow the firm to furnish the declaration at any time before the assessment is made. This would clearly indicate that the requirement of the proviso read with Rule 22 and Form No. 12 is not mandatory and the assessee firm is entitled to an opportunity for rectification of the defect in the declaration furnished.

Since the declaration furnished in the present case did not relate to the entire accounting period, it can only be treated as defective and the assessee is entitled to an opportunity for rectification of the defect as provided for in Sub-section (3) of Section 185 of the Act. We, therefore, answer question No. 1 in favour of the Revenue and against the assessee. We answer question No. 2 in favour of the assessee and against the Revenue.

A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.