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TMI Blog1991 (7) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... irm for the assessment year 1971-72. The benefit of continuation of registration was granted for the succeeding years, 1972-73 to 1976-77, accepting the declaration in Form No. 12. Subsequently, the Income-tax Officer, by order passed under section 186(1), cancelled the registration of the firm for the years 1971-72 to 1976-77 for the reason that there was no valid instrument of partnership in existence during the year 1971-72. He found that the three partners had not signed the deed dated July 1, 1970, and that the purported signatures of these partners in the deed were supplied by their father, Paul Mathew. In addition, the partner, Kuruvila Paul Mathew, was a minor on the date of execution of the deed, his date of birth being July 11,1952. The Income-tax Officer, therefore, held that the partnership deed was invalid and that there was no genuine firm as registered during the relevant years. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals) who agreed with the findings of the Income-tax Officer. The assessee carried the matter in further appeals before the Income-tax Appellate Tribunal. Before the Tribunal, the assessee contended that reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrument evidencing the partnership and it was not an operative deed in force during the previous year. Hence, the Tribunal held that there was no genuine firm in existence during the previous year as registered. Aggrieved by the decision of the Tribunal, three common questions were suggested by the assessee for reference under section 256 of the Act. The question suggested on behalf of the assessee was modified and simplified as a comprehensive question arising for the years 1971-72 to 1976-77 out of the order of the Tribunal and was referred for our opinion as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that there is no genuine firm in existence as registered and, therefore, the order of cancellation of registration is valid ?" An additional question arose for consideration from the order of the Tribunal as to whether the cancellation of registration is valid when the partners have been assessed for the assessment years, taking into account their shares in the firm. The Tribunal rejected the contention of the assessee that the firm cannot be assessed as an unregistered firm after the partners have been assessed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Such application can be made either during the existence of the firm or after its dissolution before the Assessing Officer having jurisdiction to assess the firm. The application will have to be signed by all the partners other than minors, personally. The application will have to be made before the end of the previous year for the assessment year in respect of which registration is sought, though power is given to the Assessing Officer to entertain belated applications on sufficient cause being shown. The application will have to be accompanied by the original instrument evidencing the partnership together with a copy of the same. Rules 22 to 25 of the Income-tax Rules prescribe the forms and particulars to be included in the application. Where the application is made before the end of the relevant previous year and where there is no change in the constitution of the firm or in the shares of the partners from the previous years, the application is to be submitted in Form No. 11 and it should accompany the original instrument evidencing the partnership. But, where any change in the constitution of the firm or in the shares of the partners have taken place (as was the case here in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. The question referred to the Andhra Pradesh High Court was whether the refusal to register the firm was justified. The High Court held that the partnership firm, in order to get the benefit of registration, must satisfy the requirements of the provisions of the Incometax Act and the Rules and that it was incumbent on all the partners to sign the application personally. The court held (at page 467) : "This position is well established by the authoritative pronouncement of the Supreme Court in Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163, apart from the plain language of the section and the Rules. Since, in the instant case, the application for renewal of registration suffered from that vice, it was properly rejected by the Income-tax Officer." If an application or declaration is defective, an opportunity should be given to rectify the defect. It is so provided in section 185(2). Referring to the said provision, the Supreme Court in CIT v. Amar Singh Gowamal and Sons [1986] 161 ITR 315, observed (at page 319) : "In any view of the matter in the facts of this case and in view of the so-called alleged defects in the application according to the Incometax Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. In the case in hand, the assessee did not dispute the finding that the partnership deed dated July 1, 1970, was not duly executed by the three partners, viz., Abraham Paul Mathew, Babu Paul Mathew and Kuruvila Paul Mathew, by affixing their signatures thereon, that the signatures appearing in the deed and the application are not genuine and that, on July 1, 1970, Kuruvila Paul Mathew was a minor. The contention is that the registration having once been given, the same cannot be cancelled under section 186(1)of the Act. Section 186 authorises the Assessing Officer to cancel the registration of the firm if he is of the, opinion that there was no genuine firm in existence as registered. But, before doing so, he should give a reasonable opportunity of being heard to the assessee. If the firm as registered was never genuine and was wrongly registered, the Assessing Officer can cancel the registration. In Sheonath Prasad Motilal v. ITO [1963] 47 ITR 493 (All), the firm was constituted of three partners originally under an oral agreement and commenced business. An instrument of partnership was subsequently brought into existence after a year which retrospectively governed the relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership may not have existed during the accounting period relevant to the assessment year for which registration is granted is not a ground for holding that no genuine firm was in existence. The Department argued on reference before a Division Bench of the Allahabad High Court that, as one of the partners became a major during the relevant previous year, a change had taken place in the constitution of the firm and a fresh deed should have been drawn up for registration. As this was not done, the continuance of registration was erroneous. The genuineness of the firm was not disputed at any stage in that case. The only question was whether recourse could be had to section 186(1) of the Act for cancellation of the continuance of registration granted to the firm. The court held (at page 221) : "Even assuming that a change in the constitution took place,the genuineness of the firm was not at all affected. The mere fact that a fresh instrument of partnership was not brought into existence could not mean that a firm which was genuine ceased to be so. Since the registration could be cancelled only if there was during the previous year no genuine firm in existence, which was not the sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 and the decision of the Andhra Pradesh High Court in CIT v. Badjanapara Salt Co. [1974] Tax LR 19. Since the Income-tax Officer did not form an opinion that there was during the previous year no genuine firm in existence, he ought not to have cancelled the registration under section 186(1)." From these decisions, it is seen that the power of cancellation of registration has been exercised mainly on the ground that the firm was not genuine and not on the ground of defect in accounting or for non-existence of the partnership in the accounting year. In Mahabir Prasad Kishanlal and Co. v. CIT [1976] 102 ITR 466, a Division Bench of the Gauhati High Court held that, if the deed of partnership is invalid in law offending any of the provisions of the Indian Partnership Act or the Indian Contract Act, the Income-tax Officer can legally hold that registration was obtained Without there being a firm in existence and, therefore, such registration is liable to be cancelled in exercise of his power under rule 6B of the Indian Income-tax Rules, 1922. In that case, the firm consisted of eight partners out of whom three were minors. The minors entered into the partnership through their fath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or is incompetent to enter into a partnership, the partnership was held to be contrary to the relevant provisions of the Indian Contract Act and the Indian Partnership Act. The partnership deed was held to be invalid. Hence, it was held that the Income-tax Officer, in exercising his power of cancellation, was justified in being satisfied that there was no genuine partnership in existence. The court held (at page 471): "If such a deed of partnership is invalid in law offending any of the provisions of the Indian Contract Act or the Indian Partnership Act, 1932, the Income-tax Officer may legally hold that the registration was obtained without there being a firm in existence and such registration is liable to be cancelled in exercise of powers under rule 6B." In CIT v. Sri Ramakrishna Motor Transport [1983] 144 ITR 797, the Andhra Pradesh High Court held that where a minor was admitted as a full-fledged partner, cancellation of registration under section 186 was valid. That decision noted the distinction between genuineness and validity as pointed out by a Bench decision of the same High Court in CIT v. Balaji Pictures [1983] 144 ITR 807 and pointed out that some of the High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, if there is a firm in existence as shown in the instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Further, the discretion conferred on him under section 26A is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence." If, in law, the constitution of the partnership is void, the firm can be said to be not in existence. The ambit of the power of cancellation of registration under section 186 of the Income-tax Act has been discussed by a Full Bench of this court in CIT v. Phair Laboratories [1985] 154 ITR 141. In that case, the assessee-firm consisted of seven partners as evidenced by an instrument dated December 10, 1963. At the time of execution of the document, one of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise of the power under section 186. But, while explaining the legal position, the Full Bench observed (at pp. 146, 147): "A firm which does not produce a valid instrument evidencing the partnership does not qualify for registration. If the instrument shows that during the previous year relevant to the assessment year when registration was sought or granted, the partnership consisted of a minor who was admitted as a full partner, and not merely to its benefits as permitted under section 30 of the Indian Partnership Act, 1932, such instrument is not valid for the purpose of registration under the Act and any registration granted on that basis is liable to be cancelled. See CIT v. Dwarkadas Khetan and Co. [1961] 41 ITR 528 (SC). It is however not necessary that a firm should have come into existence on the basis of a written instrument. A firm which was created by word of mouth, but the constitution of which has subsequently been reduced to writing, can very well qualify for registration. All that is required is that there should be a valid instrument of partnership at the relevant time, i.e., during the year previous to the assessment year when registration is sought. The partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , firstly, to find out whether the firm shown in the document presented for registration is a genuine one or not ; and, secondly, whether the firm, as evidenced by the deed of partnership, has legal existence. If, in a given case, the Income-tax Officer comes to the conclusion that the firm is not genuine on factual considerations or has no legal existence because the partnership firm is void in law, then, in either event, it will be open to the Income-tax Officer to refuse registration to the firm. It would, therefore, be seen that the Supreme Court dealt with the two aspects of genuineness as well as legal existence as forming an inseparable part of the enquiry into the question regarding the grant of registration. If a partnership firm is found to be invalid, having been constituted contrary to the provisions of any statute, it is not clear how such a partnership firm, which has no legal existence, can be considered to be factually existing for purposes of genuineness. A firm which is not a firm in the eye of law and has no legal existence cannot be said to have factual existence. A partnership firm, the constitution of which is found to be void and is, therefore, legally non-ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm." Therefore, the fact that the partners have already been assessed for the assessment years 1973-74 to 1976-77, taking into account their share in the firm, will not be a ground for holding that the firm cannot be assessed as an unregistered firm after cancellation of the registration. There cannot be an estoppel against that. Under section 185(2) of the Act, it is obligatory after April 1, 1971, for the Income-tax Officer to intimate the defect in the application submitted for registration of the firm and also to give an opportunity to the him to cure the defect. That alone will ensure "fairness" in action. If notice for cancellation was given under section 186, the assessee could have submitted a proper application for the subsequent years ; that is, for the period in which all the partners have become major, they could have submitted a proper application signed by all the partners and also could have cured the defect. This procedure is not seen adopted by the assessing authority in this case. We are of the view that such procedure should be followed. Then alone, there will be a full, proper and effective consideration of the matter which will result in a proper final ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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