2008 (7) TMI 225 - HC - Income Tax

Whether Tribunal was justified in affirming order passed by CIT (A) setting aside the order passed by the AO u/s 185(5) refusing to grant registration to the respondent-firm & treating the assessee firm as URF (unregistered Firm) - if the assessee had complied with the notice u/s 142 (1), and the ITO was not satisfied with the compliance, it cannot be said that there was non compliance of the notice therefore, order u/s 185 (5) & assessment made u/s 144 has rightly been set aside by ITAT

Summary

Issues involved:
1. Justification of the Tribunal in affirming the order passed by CIT (Appeals) setting aside the order passed by the Assessing Officer under Section 185(5) refusing to grant registration to the respondent-firm and treating the assessee firm as URF.

Detailed Analysis:
The High Court of Rajasthan heard an appeal filed by the Revenue against the Tribunal's judgment dated 17.8.2004. The substantial question of law framed was whether the Tribunal was justified in affirming the order passed by CIT (Appeals) setting aside the Assessing Officer's order under Section 185(5) refusing registration to the firm for the assessment year 1991-1992. The assessing officer had refused registration to the firm, designating it as an Unregistered Firm (URF). The appeal by the assessee against this decision was allowed by CIT (Appeals), directing the AO to grant registration. Subsequently, the Revenue filed an appeal, which was allowed, restoring the order refusing registration.

The Tribunal found that the Assessing Officer did not allow registration with a view to penalize the firm. It was observed that the assessing officer's order lacked reasoning and did not reflect a judicial application of mind. The Tribunal upheld the setting aside of the cancellation of registration, concluding that the assessing officer had exercised discretion without applying judicial mind. The High Court referred to relevant legal provisions and previous judgments to support its decision.

Furthermore, the High Court emphasized that the provision under Section 185(5) grants the assessing officer the power to refuse registration in specific circumstances but does not mandate such refusal. The exercise of this power is subject to judicial discretion based on relevant considerations and parameters, excluding any prejudicial or penalizing attitude towards the assessee for minor lapses.

A Division Bench Judgment cited by the Revenue was analyzed, clarifying that the existence of failures mentioned in the provision does not automatically mandate refusal of registration. The judgment highlighted that the assessing officer has discretion in deciding whether to refuse registration based on the circumstances of each case. The High Court found that the assessing officer's decision in the present case was not in line with the legal principles established by the cited judgment.

In conclusion, the High Court ruled in favor of the assessee, dismissing the appeal by the Revenue as it lacked merit. The Court's decision was based on the assessing officer's failure to provide sufficient reasoning for refusing registration and not considering the difficulties faced by the assessee in complying with the notice.

Overall, the judgment focused on the assessing officer's obligation to apply judicial mind, exercise discretion judiciously, and consider the circumstances of each case before refusing registration to a firm under Section 185(5) of the Income Tax Act, 1961.