1967 (7) TMI 60 - HC - Income Tax

Refusal of registration under section 26A read with section 23(4) of the Indian Income-tax Act to the firm

Summary

Issues Involved:
1. Exercise of discretion by the Income-tax Officer under section 23(4) in refusing registration.
2. Validity of the firm with a Hindu undivided family as a partner.

Issue-wise Detailed Analysis:

1. Exercise of Discretion by the Income-tax Officer under Section 23(4):

The primary contention was whether the Income-tax Officer exercised his discretion properly under section 23(4) of the Income-tax Act, 1922, in refusing registration to the firm. The assessee argued that the reasons for refusal of registration should be cogent and specific to the requirements under section 26A, not merely based on the failure to produce books of accounts, which pertains to the quantum of assessment, not the distribution of profits. The assessee's counsel cited several judgments to support the argument that the discretion to refuse registration should be exercised judiciously and not arbitrarily.

The court acknowledged that section 23(4) provides for two penalties: a best judgment assessment and the discretionary refusal of registration. The reasons for the latter must be justiciable and distinct from those for the former. The court agreed that the reasons provided by the Income-tax Officer in his order were insufficient to establish that the discretion was exercised objectively. However, upon reviewing the orders in the proceedings under section 27, it was evident that the assessee deliberately avoided producing the books of account, which justified the refusal of registration. The court emphasized that the Income-tax Officer should provide clear reasons for refusal in the order itself.

2. Validity of the Firm with a Hindu Undivided Family as a Partner:

The second issue was whether a valid firm could exist if a Hindu undivided family (HUF) was a partner. The Tribunal held that the inclusion of a HUF as a partner invalidated the partnership deed. The assessee argued that even if a HUF was described as a partner, it was the karta (manager) who was the actual partner in law.

The court agreed with the assessee's argument, citing the Supreme Court's decision that a HUF cannot be a partner in a firm; it is the karta who becomes the partner. If the HUF is found to be non-existent, the karta would still be a partner in his individual capacity, and any misdescription would not invalidate the deed. Consequently, the court held that under the deed dated April 3, 1952, a firm of six partners, including Bhowarilal Bothra, came into existence.

Conclusion:

The court concluded that the refusal of registration under section 23(4) was justified due to the assessee's deliberate and contumacious conduct in withholding the books of account. The question referred was answered in the affirmative and against the assessee. The court also clarified that the firm was validly constituted with six partners, including Bhowarilal Bothra in his individual capacity, despite the misdescription of the HUF. The assessee was ordered to pay the costs of the reference.