1967 (6) TMI 2 - HC - Income Tax

Whether the Tribunal was correct in holding that the ITO had failed to exercise the discretion vested in him u/s 23(4), before refusing registration and/or renewal of registration of the assessee-firm and in granting registration to the assessee-firm - Held, yes

Summary

Issues Involved:
1. Whether the Income-tax Officer exercised discretion under section 23(4) before refusing registration and/or renewal of registration of the assessee-firm.
2. The validity of the order refusing registration under section 26A.

Issue-wise Detailed Analysis:

1. Exercise of Discretion under Section 23(4):
The court examined whether the Income-tax Officer exercised the discretion vested in him under section 23(4) before refusing registration to the assessee-firm. The Income-tax Officer had made a best judgment assessment under section 23(4) due to the assessee's failure to file a return of income or apply for an extension. The order rejecting the applications for registration and renewal stated: "As no return has been filed and no partners' accounts have been furnished, the correctness of the statements made in the application cannot be verified. Further, the assessment is being completed under section 23(4) and under the discretion vested in this section, I refuse to renew registration and consider the very application for registration as improper, as the facts stated therein cannot be verified."

The Tribunal had initially held that the Income-tax Officer did not specifically exercise his discretion under section 23(4), and thus, the refusal of registration was not valid under that section. However, the High Court disagreed, stating that the Income-tax Officer's order explicitly mentioned the exercise of discretion under section 23(4). The court emphasized that the true nature of the order must be determined by reading it as a whole, considering both its substance and form. The court concluded that the Income-tax Officer had indeed exercised his discretion under section 23(4) when refusing registration.

2. Validity of the Order under Section 26A:
The court also analyzed whether the order refusing registration under section 26A was valid. Section 26A allows the Income-tax Officer to refuse registration if he is not satisfied that the firm is constituted as shown in the partnership deed or if the application is not properly made. The Tribunal had found that the grounds for refusal stated in the order were not relevant under section 26A, and thus, the refusal was invalid under that section.

The court agreed that the order was invalid under section 26A because the grounds mentioned (failure to file a return and partners' accounts) were not legitimate reasons for refusing registration under section 26A. However, the court also noted that the order was simultaneously made under section 23(4), which grants the Income-tax Officer discretionary power to refuse registration if the conditions of that section are met. The court concluded that the Income-tax Officer's order was an exercise of power under both sections 26A and 23(4).

Conclusion:
The High Court held that the Income-tax Officer did exercise his discretion under section 23(4) before refusing registration to the assessee-firm. The Tribunal was in error in granting registration on the ground that the order was only under section 26A and not under section 23(4). The court emphasized that the order was made under both sections, and the Tribunal should consider whether the discretion under section 23(4) was properly exercised. The assessee was ordered to pay the costs of the reference to the Commissioner.