2005 (5) TMI 49 - HC - Income Tax

Cancellation of registration validity - Held that there is no difference between eligibility for grant of registration and the ground for cancellation of registration. If a firm is not entitled to registration either on account of the fact that it has no legal existence or is not genuine or is bogus, then grant of renewal of registration is wrong, and for the very same reason, the registration renewed can be cancelled under section 186(1) of the Act. Since admittedly the assessee did not carry on business and does not intend to carry on business and has in fact closed the business by selling plant and machinery and assets, there is no firm existing in the eye of law and the renewal of registration originally granted was rightly withdrawn by the Assessing Officer under section 186(1) - Tribunal was justified in holding that the cancellation of registration was valid

Issues:
Validity of cancellation of registration under the Income-tax Act.

Analysis:
The case involved a reference to the High Court under section 256(1) of the Income-tax Act, 1961, regarding the cancellation of registration granted to an assessee-firm for the assessment year 1989-90. The main question referred to the court was whether the cancellation of registration was valid under the provisions of the Income-tax Act. The Tribunal consolidated the issues raised by the assessee into this single question for decision. The Tribunal's decision was based on the fact that the assessee did not carry on any business during the relevant accounting year, instead selling plant and machinery and returning income from capital gains. The Tribunal found discrepancies in the profit and loss account, indicating manipulation and lack of business activities. The Tribunal concluded that the cancellation of registration was justified based on the absence of business operations by the assessee.

The cancellation of registration under section 186(1) of the Act was challenged by the assessee, arguing that the firm's existence should determine the validity of registration. The assessee contended that even without business activities, the firm's legal existence warranted the continuation of registration. However, the Department argued that a firm must carry on business to maintain its legal existence, citing provisions of the Partnership Act. The Department emphasized that the firm's closure due to the sale of assets meant it no longer legally existed for business purposes. The court considered previous decisions, including one by the Andhra Pradesh High Court, which highlighted the importance of genuine existence for registration. The court also referred to a Supreme Court decision emphasizing the need for a firm to have legal existence for registration purposes.

Ultimately, the court held that there was no distinction between eligibility for registration and grounds for cancellation. Since the assessee had ceased business operations, sold assets, and had no intention of resuming business, the firm was deemed not to exist legally. Therefore, the cancellation of registration based on the lack of genuine business activities was upheld. The court ruled in favor of the Department, affirming the cancellation of registration under section 186(1) of the Income-tax Act. The judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench for further action.

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