1969 (5) TMI 9 - HC - Income Tax

Natural justice - cancellation of registration was done without giving any reasonable opportunity to the firm - it is clear violation of principle of natural justice - cancellation order are quashed

Summary

Issues Involved:
1. Misjoinder of parties.
2. Cancellation of registration of the partnership firm.
3. Issuance of notices under section 148 of the Income-tax Act, 1961.

Detailed Analysis:

1. Misjoinder of Parties:
The department raised a preliminary objection regarding the joinder of the firm and the Hindu undivided family (HUF) as petitioners. It was argued that separate applications should be filed where interests are not identical. However, the court overruled this objection, stating that the right to relief arose from the same transaction of cancellation of registration and the notice under section 148 of the Act. The court held that the HUF and the firm were inseparably mixed up in the matter of the burden of taxation. Additionally, since the objection regarding misjoinder was not raised at the earliest stage, it could not be entertained at the time of hearing.

2. Cancellation of Registration of the Partnership Firm:
The primary issue was whether the cancellation of registration was done without giving reasonable opportunity to the firm, thereby violating the principles of natural justice. The court noted that the proceedings for cancellation were taken up under rule 6B of the old Income-tax Act, 1922. The Income-tax Officer (ITO) cancelled the registration based on various grounds, including the execution of powers-of-attorney by Jivan Ram Goenka, conversion of a bank account, and non-disclosure of income from another firm. However, the court found that the firm was not given a reasonable opportunity to explain these grounds, especially since the senior partner was undergoing a major operation at the time. The court emphasized that the ITO proceeded with undue haste, which was against the principles of natural justice. Consequently, the cancellation orders for the assessment years 1948-49 to 1953-54 were quashed, and the matter was remanded to the ITO for reconsideration after giving reasonable opportunity to the firm.

For the assessment year 1947-48, the court noted that the registration was granted by the appellate authority, and it was not within the ITO's power to cancel this registration. Therefore, the cancellation order for 1947-48 was set aside, and the registration was allowed to stand.

3. Issuance of Notices under Section 148 of the Income-tax Act, 1961:
The court examined whether the notices issued under section 148 were sustainable. It was argued that the conditions precedent for issuing such notices were non-existent. The court noted that the notices were issued three years after the cancellation of registration, and the ITO's reasons for issuing the notices did not indicate any non-disclosure of material facts by the assessee. The court referred to the Supreme Court's decision in Calcutta Discount Co. Ltd. v. Income-tax Officer, which held that the expression "material facts" refers only to primary facts, and the duty of the assessee is to disclose these primary facts. The court found that the ITO's reasons for issuing the notices were based on the cancellation of registration and did not establish non-disclosure of material facts. Consequently, the notices did not fall within the ambit of section 147(a) of the Act.

The court also considered whether the notices could be deemed to be issued under section 147(b). It concluded that the ITO's information regarding the sister concern was the basis for the notices, bringing them within the ambit of section 147(b). However, since the notices were issued beyond the period of limitation prescribed under section 149(1)(b), they were barred by limitation.

Conclusion:
The court quashed the cancellation orders for the assessment years 1948-49 to 1953-54 and remanded the matter to the ITO for reconsideration. The cancellation order for the assessment year 1947-48 was set aside, and the registration was allowed to stand. The notices issued under section 148 were quashed, and the ITO was directed to forbear from giving effect to them.