Paul Mathew and Co. vs Commissioner of Income Tax and Another

K.S. Radhakrishnan, J.—The legality of the cancellation of registration of a firm u/s 186(1) of the IT Act, 1961, is under challenge in this appeal. Learned single Judge repelled the challenge and aggrieved by the same the assessee has preferred this appeal [Judgement reported as Paul Mathew & Co. v. CIT (2005) 196 CTR (Ker) 504.]

The assessee-firm consists of five partners consisting of the father and the sons. Registration of the firm was originally granted u/s 185(1) on 29th Feb., 1972 on the basis of an application for registration in Form No. 11A filed on 31st March, 1971 along with a certified copy of the deed of partnership. Later ITO on examination of the details of the partners on 30th July, 1979 and 31st July, 1979 respectively noticed that Paul Mathew (father) has forged signatures of three other partners by name Roy P. Mathews, Abraham Paul Mathews and Babu Paul Mathews in the deed of partnership dt. 1st July, 1970. Further it was also noticed that Roy P. Mathews was made a full fledged partner with liability for losses, even though he was a minor at the relevant date since his date of birth was 11th July, 1952 thereby violating the provisions of the Indian Partnership Act. Further the officer also noticed that application for registration in Form No. 11A filed on 31st March, 1971 was a forged document since application was not signed by all the partners personally. Consequently the registration granted on 29th Feb., 1972 was cancelled by the officer by his order 22nd March, 1980. Assessee took up the matter in appeal before CIT(A) which was dismissed. The Tribunal on appeal confirmed the order of CIT(A). On a reference the Court was called upon to answer the question whether there is a genuine firm as registered in existence and whether the orders of cancellation is valid or not. This Court in Paul Mathews & Co. v. CIT (1991) 98 CTR (Ker) 12 : (1992) 195 ITR 716 disposed of the matter stating as follows:

Under Section 185(2) of the Act, it is obligatory after 1st April, 1971 for the ITO to intimate defect in the application submitted for registration of the firm and also to give in opportunity to the firm to cure the defect. That alone will ensure "fairness" in action. If notice for cancellation was given u/s 186, the assessee could have submitted a proper application for the subsequent years; that is, for the period in which all the partners have become major, they could have submitted a proper application signed by all the partners and also cured the defect. This procedure is not seen adopted by the assessing authority in this case. We are of the view that such procedure should be followed. Then alone there will be a full, proper and effective consideration of the matter which will result in a proper final order being passed in the case. Such a situation has not arisen herein. In the absence of such pre-requisites or preliminary steps, any order passed can only be considered as provisional or tentative but not final or conclusive or binding. We, therefore, decline to answer the question referred to this Court but direct the concerned officer to afford an opportunity to the assessee to explain and, thereafter, pass final orders.

Tribunal, on the basis of the directions of this Court, set aside its order dt. 24th June, 1982 and directed the AO to give an opportunity to the assessee to explain and file proper applications and to pass appropriate orders in accordance with law.

The assessing authority then directed the assessee to cure the defects and to explain the position vide letters dt. 29th Oct., 1993, 13th Dec., 1993 and 2nd June, 1994. Assessee filed written explanations dt. 3rd Dec., 1993, 29th Dec., 1993 and 23rd June, 1994 along with applications for registration in Form Nos. 11, 11A and 12 signed by all the partners. It also filed an instrument of partnership evidencing the existence of the firm during the accounting period 1970-71 relevant to the asst. yr. 1971-72. Assessee in the process of curing the defects wanted to substitute the original forged documents by a new one with signature of all the partners. Further it was also pointed out that registration was already granted to the firm and not to the partnership deed and hence the assessee could cure the defects.

The assessing authority did not accept the stand of the assessee. He took the view that there was no genuine firm as registered in existence during the previous year ended on 31st March, 1971 and consequently registration granted to the assessee-firm was cancelled u/s 186(1) of the IT Act, 1961. Similar orders have been passed for the asst. yrs. 1972-73 to 1976-77. Aggrieved by the order assessee took up the matter before the CIT(A). CIT(A) concurred with the view of the assessing authority and dismissed the appeal against which the original petition was preferred. The learned single Judge held that there cannot be a retrospective registration of the firm for the asst. yr. 1972-73 and subsequent years on the basis of the partnership deed dt. 3rd Dec., 1993 and accordingly dismissed the original petition.

Counsel appearing for the assessee Sri P. Balakrishnan, submitted that the authorities below have failed to appreciate the purport of the judgment of this Court in (1991) 98 CTR (Ker) 12 : (1992) 195 ITR 716 (supra) and contended that the authorities should not have cancelled the registration u/s 186 of the Act for the asst. yrs. 1971-72 to 1976-77. Counsel submitted that after the remand, the petitioner had cured the defects, and the same would relate back to the original date and hence cancellation of registration was illegal and unjust. Counsel also placed reliance on the judgment of this Court in Crl. M.C. 857 of 1990 and submitted that this Court had quashed the criminal proceedings initiated by the ITO against Paul Mathews for the offence under Sections 193, 196, 200, 420, 466, 468 and 476 of the Indian Penal Code.

Senior counsel appearing for the Revenue Sri P.K. Raveendranatha Menon contended that there is no illegality in the order passed by the ITO. Counsel submitted, this Court has answered the reference and directed the authorities concerned to give an opportunity to the assessee to explain and not to cure the defects. Counsel submitted since the partnership deed was forged one, there is no question of curing the defects. A forged document cannot be acted upon. The mere fact that the partners have subsequently executed a partnership deed would not make valid a document which was invalid ab initio. Counsel made reference to the decision of the apex Court in Commissioner of Income Tax, Bombay Vs. Dwarkadas Khetan and Co., and contended that the partnership deed in which a minor was admitted as full partner was not valid and could not be registered u/s 26A of the IT Act. It was held in that case that Section 30 of the IT Act clearly lays down that a minor cannot become a partner, though with the consent of the adult partners he may be admitted to the benefits of partnership. Reference was also made to the decision of the apex Court in N.T. Patel and Company Vs. Commissioner of Income Tax, Madras, . It has been held that registration u/s 26A of the Act confers on the partners a benefit which the partners would not be entitled to but for Section 26A. Further the right can be claimed only in accordance with the statute which confers it and a person seeking relief under that section must bring himself strictly within the terms of that section. Further it is also held that unless the instrument of partnership specifies the individual shares of the partners, the instrument of partnership would not conform to the requirements of Section 26A.

The fact that the signature of three partners were forged by the father is not disputed. When there is no agreement among the partners as on 1st July, 1970, to constitute a partnership as evidenced by an instrument, and the instrument being invalid on account of forgery, there could not have been a valid or genuine partnership entitled for registration. A forged deed of partnership is invalid instrument and there is also no question of giving life to a forged document. Forged document always remains a forged document, and. there is no question of curing the defects. The power of the assessing authority u/s 185(2) is limited only to allow an assessee to rectify the defects in the application for registration and not to make an invalid instrument valid. Assessing authority has no power to allow an assessee to infuse life into a forged partnership deed which is still-born. A forged document is always a forged document and no legal right flows out of that document. A forged document cannot be made a genuine document by subsequently subscribing the signatures of the partners. Partners have subsequently affixed their own signatures only on 23rd June, 1994 and therefore rights and liabilities would flow only from that date. Facts would evidently show that during the asst. yrs. 1971 72 to 1976-77 there was no validly constituted partnership firm since admittedly the signatures of all the partners except one were forged and a minor was also made a partner by forging his signature.

Contention was raised by the counsel for the assessee that these defects ought to have been pointed out by the AO in the event of which the assessee would have cured the defects. We are of the view, the assessee cannot claim any capital out of a forgery committed by it. Assessing authority cannot be found fault with for not making timely detection of the forgery committed by the party, It is the duty of the assessee to file a proper instrument of partnership duly signed by all the partners. AO came to know about the defects only on 30th July, 1979 and 31st July, 1979. Assessing authority has not committed any error and that the forgery has been committed not by the AO but by the father who had forged signature of the other partners. So far as the Partnership Act is concerned the fact that the partners are father and sons makes no difference. The essential elements of a partnership are that there must be an agreement entered into by all the persons concerned, such agreement must be to share the profits of a business and the business must be carried on by all or any of the persons concerned, acting for all. The first element of partnership referred to earlier is the relation between the persons who have agreed to share the profits of the business carried on by all or any of the partners. All the partners except one had not subscribed their signatures to the original instrument of partnership. That being the factual position we find no infirmity in the judgment of the learned single Judge in upholding the order passed by the CIT(A).

This writ appeal therefore lacks merits and the same would stand dismissed.