2004 (8) TMI 19 - HC - Income Tax

Section 186(2) - before cancelling the registration of a firm, the Income-tax Officer has to give a notice of not less than 14 days intimating the intention to cancel its registration and has also to afford a reasonable opportunity of being heard. The Income-tax Officer does not assume the jurisdiction for cancelling the registration of a firm upon issue of a notice. The requirement of giving 14 days notice and affording a reasonable opportunity of being heard, is only to inform the assessee regarding the proposed cancellation of the registration - there is no dispute that no notice was given as required under sub-section (2) - Tribunal has committed an error in annulling the order passed by the Income-tax Officer and directing for continuation of the registration - Tribunal instead of annulling the proceedings, ought to have directed the Income-tax Officer to give a notice of 14 days and pass appropriate orders

Summary

Issues involved:
1. Interpretation of section 186(2) of the Income-tax Act, 1961 regarding cancellation of firm registration.
2. Validity of cancellation of firm registration due to non-compliance with notice requirements.
3. Jurisdiction of Income-tax Officer in cancelling firm registration without giving requisite notice.
4. Correctness of Tribunal's decision to annul Income-tax Officer's order and direct continuation of registration.
5. Applicability of principles of natural justice in tax assessment proceedings.

Analysis:

The case involved a question of law referred by the Income-tax Appellate Tribunal, Allahabad, regarding the cancellation of a firm's registration for the assessment year 1965-66. The respondent-assessee, a firm, failed to comply with the notice under section 143(2) of the Income-tax Act, leading the Income-tax Officer to assess the firm under section 144 and cancel its registration for that year. The Appellate Assistant Commissioner directed the Income-tax Officer to provide the necessary 14 days' notice before deciding on the registration continuation. The Tribunal, however, held that without the prescribed notice, the cancellation could not be upheld and directed the Income-tax Officer to allow the continuation of registration.

The key contention raised was the interpretation of section 186(2) of the Act, which mandates the Income-tax Officer to give not less than 14 days' notice before cancelling a firm's registration. The court emphasized that the notice requirement is essential to inform the assessee of the intention to cancel registration and provide a reasonable opportunity to be heard. The absence of notice may affect the legality of the order but not the jurisdiction of the Income-tax Officer, rendering the order not void ab initio. Therefore, the proceedings should have recommenced after providing the necessary notice instead of annulling the order.

The court criticized the Tribunal's decision to annul the Income-tax Officer's order and direct the continuation of registration, stating that the correct approach would have been to uphold the Appellate Assistant Commissioner's directive to provide the notice and proceed lawfully. By answering the question in the negative, the court ruled in favor of the Revenue, highlighting the importance of following procedural requirements and principles of natural justice in tax assessment proceedings.