1994 (10) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Granting registration to the assessee firm.
2. Validity of the firm's business operations under the Karnataka Excise Act.
3. Applicability of Section 185(1)(b) and Section 186(1) of the Income Tax Act.
4. Distinction between a genuine firm and an illegal firm.
5. Compliance with procedural requirements for registration and cancellation.

Detailed Analysis:

1. Granting Registration to the Assessee Firm:
The primary issue in this appeal is the question of granting registration to the assessee firm for the assessment year 1987-88. The assessee, a firm constituted in 1971, had been granted registration from year to year, and Form No. 12 had been filed for the continuation of registration. The Assessing Officer, however, made the assessment in the status of an Unregistered Firm (URF) and declined registration for this year, which was upheld by the Commissioner of Income-tax (Appeals).

2. Validity of the Firm's Business Operations Under the Karnataka Excise Act:
The firm's main source of income during the relevant year was toddy business, conducted on the basis of a license granted to an employee, Puttaraju. The Assessing Officer held that the firm's business was illegal under the Karnataka Excise Act, as the business was carried out contrary to Excise regulations. The Commissioner (Appeals) agreed, referencing the Full Bench decision of the Rajasthan High Court in Motilal Chunnilal v. CIT. However, the Tribunal noted that the Karnataka Excise Act allows a license to extend to servants and other persons employed by the licensee, suggesting that the firm's operations might not have been illegal.

3. Applicability of Section 185(1)(b) and Section 186(1) of the Income Tax Act:
The Tribunal observed that the order of the primary authority was purportedly passed under Section 185(1)(b), which applies to cases where registration is to be granted at inception. However, since the firm was already registered, the correct provision for examining the cancellation of registration is Section 186(1). The Tribunal emphasized that registration can only be canceled if there is no genuine firm in existence during the previous year, a condition that the Assessing Officer did not find.

4. Distinction Between a Genuine Firm and an Illegal Firm:
The Tribunal highlighted the distinction between a firm being "genuine" and "illegal." A firm valid at inception may become void due to illegal activities. However, in this case, the firm was originally legal and genuine, as evidenced by its registration until the assessment year 1986-87. The Tribunal noted that the authorities below did not find the firm to be not genuine, only that it was illegal, which does not satisfy the condition for cancellation under Section 186(1).

5. Compliance with Procedural Requirements for Registration and Cancellation:
The Tribunal noted that the assessee had complied with the procedural requirements by filing Form No. 12. Furthermore, the Tribunal found that the Assessing Officer had provided a reasonable opportunity of being heard to the assessee, as required under Section 186(1). However, it was crucial that the Assessing Officer did not find the firm to be not genuine, which is a necessary condition for canceling registration.

Conclusion:
The Tribunal concluded that the assessee firm was entitled to registration as there was no finding that the firm was not genuine. The Tribunal reversed the orders of the authorities below and directed that the assessment be made against the assessee in the status of a registered firm. The appeal by the assessee was allowed.