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TMI Blog1967 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the original partners and they introduced Rs. 1,41,500 and Rs. 1,44,145 respectively as their capital in the business. The aforesaid deed recited, inter alia, that the parties of the first, second and third parts (the original partners) consented for the extension of business and capital, and admitted (1) Bhowarilal Kissenlal, (2) Hiralal Jain and (3) Hulaschand Jain as co-partners under the terms and conditions of the partnership. Clause 7 of the deed defines the shares of the partners in the profits and losses of the firm and such share of each of the six partners is shown as 0-2-8 pies in the rupee. The deed was executed, amongst others, by Bhowarilal Bothra for and on behalf of Bhowarilal Kissenlal. For the assessment year 1955-56, the corresponding previous year being 2011 R. N., the assessment of income-tax of the firm was completed under section 23(4) due to the non-compliance by the assessee with the statutory notice under section 22(4) of the Act. The Income-tax Officer had required the assessee to produce its books of account for the three preceding accounting years 2008, 2009 and 2010 R. N. But, in spite of several adjournments granted by the Income-tax Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everal lakhs of rupees. As these balances were alleged to have been brought forward from the preceding years, the books of those years required examination. The Appellate Assistant Commissioner had no doubt in his mind that the assessee-firm had failed deliberately to comply with the terms of the section 22(4) notice and did not produce the books which were necessary for the purpose of the correct determination of the income for that assessment and for the production of which ample opportunity was allowed to the assessee by the Income-tax Officer. The assessee's appeal to the Tribunal against the aforesaid order of the Appellate Assistant Commissioner also failed. The Tribunal agreed with the findings of the Appellate Assistant Commissioner that the assessee's default in not producing the earlier year's books was clearly established in view of the evidence available on the record and that the assessee firm was deliberately withholding those books because it suited them to do so. The assessee made an application for registration under section 26A of the Act for the assessment year 1955-56. It would be material here to mention that the firm had been granted registration from 1952-5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 3,1952. So far as the refusal of registration by the Income-tax Officer under section 23(4) was concerned the Appellate Assistant Commissioner observed that the assessee itself had admitted before him in the appeal against the assessment order that income had been understated. According to the Appellate Assistant Commissioner, as it was not known how this understated income was distributed, it could not be said that the profits of the firm had been distributed in accordance with the shares of the partners as provided in the deed. Further, he held that the Income-tax Officer had exercised the discretion vested in him under section 23(4) properly in this case and the application had been. On further appeal to the Tribunal against the aforesaid order of the Appellate Assistant Commissioner, it was, inter alia, contended by the assessee, that though Bhowarilal might have described himself as the karta of an Hindu undivided family, which was held not to have come into existence, Bhowarilal would be a partner in his personal capacity. It was also contended that the Income-tax Officer was not justified in refusing registration under section 23(4). The Tribunal did not attach any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions were as follows : Section 23(4) provides for two kinds of penalties. On default of compliance with the notice under section 22(2) or section 22(4) or section 23(2) or in default of filing a return as required under section 22(3), a best judgment assessment necessarily follows as it is mandatory on the Income-tax Officer to make such an assessment. But the exercise of the further power given to the Income-tax Officer to impose a second penalty, namely, in the case of a firm, to refuse registration or cancel registration already granted, is discretionary and the reasons for the exercise of such power are justiciable. The Income-tax Officer must give his reasons for such refusal. The reasons given for making a best judgment assessment would not be sufficient in such a case. The Income-tax Officer would have to give such reasons as would justify the refusal of registration. Such reasons must be cogent for the purpose of determining whether registration should be granted or refused. In other words the reasons must be such as would sustain a refusal of registration under section 26A. The failure of the assessee in this case to produce its books of accounts of the preceding ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting from the defaults enumerated in section 23(4). The use of the words " may refuse " in section 23(4) would rather indicate that the Income-tax Officer has a discretion not to refuse registration or cancel registration even in spite of the default of the assessees .......... We have no doubt that the statute does not compel the officer to deprive the assessee of the benefit of registration under, the last part of section 23(4). In other words, it would be wrong to assume that the defaults listed in section 23(4) of the Act would lead to a two-fold penal consequence : (1) a best judgment assessment, and (2) in the case of firms, refusal to register or cancellation of the existing registration, if any. It is, therefore, incumbent upon the Income-tax Officer to consider the question of registration on the materials available before him instead of refusing registration on the ground that a different conclusion would be illogical or not self-consistent. What consideration should weigh with the officer in the matter of his decision regarding registration cannot of course be laid down exhaustively or comprehensively. Suffice it to say that the matter is purely one of discretion to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax, where it was observed at page 492 that when two kartas of two Hindu undivided families enter into a partnership agreement, the partnership is popularly described as one between the two undivided families but in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners. Mr. Balai Pal, learned counsel for the department, did not challenge the first part of the submission of Mr. Mitra on question No. 1. He agreed that the action of the Income-tax Officer in refusing registration under section 23(4) might be justiciable but he joined issue with the further submission of Mr. Mitra that the reason given by the Income-tax Officer for refusing registration under section 23(4) would also be cogent for the purpose of refusing registration under section 26A. He argued that section 23(4) was de hors section 26A and so the reasons which would attract refusal of registration under section 26A could have no relation to the reasons for refusal of registration under section 23(4). Under the latter section, the Income-tax Officer would have the discretion to refuse registration on the failure of the assessee-firm to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undivided family has been made a party to the partnership deed and described as a partner, and as it had been found that there has been no such Hindu undivided family in existence, the authorities were justified in holding that no valid firm had come into existence under the deed. In view of the authorities cited by Mr. Pal, it must be held that the only relevant consideration for deciding whether the action of the Income-tax Officer in refusing registration tinder section 23(4) was justified are (1) whether there had been a default on the part of the assessee as contemplated in that section and (2) whether such default was of such a nature as to merit the penalty of denial of registration. Whether the firm was genuine or not or whether it was otherwise entitled to registration under section 26A would not be germane for testing the propriety of the Income-tax Officer's action in refusing registration under section 23(4). We agree with Mr. Mitra that the reasons given by the Income-tax Officer in his order refusing registration do not constitute sufficient material to establish that he had exercised the discretion objectively. But the Income-tax Officer and on appeal both the App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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