JEWAT LADHUBHAI SHAH VS COMMISSIONER OF INCOME-TAX
1997 P T D 552
[213 ITR 399]
[Bombay High Court (India)]
Before: Dr. B. P. Saraf and S.M. Jhunjhunuwala, JJ
JEWAT LADHUBHAI SHAH
versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.5 of 1983, decided on 15/11/1994.
Income tax---
----Firm---Registration---Minor---Cancellation of registration---Scope of S. 186---Finding that minor had signed the partnership deed as a full-fledged partner---Cancellation of registration justified---Indian Income Tax Act, 1961, S. 186.
Subsection (1) of section 186 of the Income Tax Act, 1961, empowers the Income Tax Officer to cancel the registration of a firm if he is satisfied that during the previous year no genuine firm was in existence "as registered". The expression "no genuine firm in existence as registered" appearing in section 186(1) has to be read in the context of sections 184 and 185 of the Act. It cannot be read in isolation nor can the words "as registered" which follows the expression "there was no genuine firm in existence" be ignored. The expression "as registered" qualifies the preceding expression. The existence of a genuine firm, therefore, refers to the genuineness in the context of the Constitution specified in the instrument of partnership because what is registered under section 185 is a firm with the Constitution specified in such instrument.
The assessee was assessed in the status of a registered firm consisting of two partners for the assessment years 1970-71 and 1971-72. It was assessed as a registered firm comprising three partners for the assessment year 1972-73. Subsequently, it came to the notice of the Income-tax Officer that on November 9, 1971, one more partner who was taken in as a full fledged partner and who had signed the deed of partnership as such was a minor. The Income-tax Officer cancelled the registration granted to the assessee-firm for the assessment year 1973-74. This was upheld by the Tribunal. On a reference:
Held, that at the time of registration, the Income Tax Officer was satisfied about the existence of a genuine firm as evidenced by an instrument of partnership with the Constitution specified therein which later turned out to be wrong. Hence, the Income-tax Officer was fully justified in cancelling the registration of the assessee-firm for the assessment year 1973-74 under section 186(1) of the Act and in refusing the continuance of the registration for the assessment years 1974-75 and 1975-76.
CIT v. Kirana Traders (1986) 161 ITR 726 (Kar.); CIT v. United Brothers (1991) 191 ITR 394 (Gauhati) and Mahabir Prasad Kishanlal '& Co. v. CIT (1976) 102 ITR 466 (Gauhati) ref.
P.V. Surte with S.P. Surte and Sunil Mandlol instructed by Messrs P.V. Surte & Co. for the Assessee.
Dr. V. Balasubramaniam with J.P. Devadhar instructed by Mrs. S.Bhattacharya for the Commissioner.
JUDGMENT
Dr. B.P. SARAF, J.---By this reference, at the instance of the assessee, the following two questions of law have been referred to us under section 256(1) of the Income Tax Act, 1961, for our opinion:
"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cancellation of registration under section 186(1) for the assessment year 1973-74 was justified in law?
(2)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the assessment years 197:1 75 and 1975-76, the assessee-firm was not entitled to registration as it was not constituted by a valid deed of partnership and as the registration for the assessment year 1973-74 had been cancelled under section 186(1) of the Income Tax Act, 1961?"
The material facts relevant for determination of the controversy in this case are as follows:
The assessee was assessed in the status of a registered firm consisting of two partners for the assessment years 1970-71 and 1971-72. It was assessed as a registered firm comprising three partners for the assessment year 1972-73. The previous year of the assessee was the Samvat year which ends some time in October/November every year. By a deed of partnership, dated November 9, 1971, one more partner, namely, Shri M.J. Shah, joined the partnership with effect from October 20, 1971. On the strength of the above deed of partnership, registration was granted by the Income-tax Officer to the assessee-firm for the assessment year 1973-74 by his order, dated November 2, 1973. Subsequently, it came to the notice of the Income Tax Officer that on November 9, 1971, when a deed of partnership was executed in terms of section 186(1) of the Income Tax Act, 1961 ("the Act"), Shri M.J. Shah who was taken in as a full-fledged partner and who had signed the deed of partnership as such, was a minor. He became major only on January 17, 1972. On receipt of this information, the Income-tax Officer issued a notice being notice, dated July 14, 1975, requiring the assessee to show cause why the registration granted to it for the assessment year 1973-74 should not be cancelled. In reply to this notice, it was contended by the assessee that Shri M.J. Shah was taken in as a full-fledged partner and the deed of partnership, dated October 20, 1971, was executed under the bona fide belief that Shri M.J. Shah was a major on the date of the execution of the said partnership deed. This contention was not accepted by the Income tax Officer. Accordingly, by this order, dated December 30, 1975, he cancelled the registration granted to the assessee-firm for the assessment year 1973-1974.
For the assessment years 1974-75 and 1975-76 the assessee claimed the benefit of continuance of registration by filing declarations as required under section 184(7). In particular, it was stated that assuming the person concerned was a minor when the deed of partnership was originally executed, he had become a major during these previous years and, therefore, even if there was any irregularity in the case of the assessment year 1973-74, both the deed of partnership as well as the partnership were valid in, the subsequent two years. It was claimed that the firm was entitled to registration for the assessment years 1974-75 and 1975-76. However, the Income-tax Officer took the view that the partnership deed was invalid as it was signed by the minor as a full-fledged partner at the time of the execution of the deed of partnership and that on the basis of such a deed, registration under section 185(1)(a) could not be granted. For this and other reasons given in his orders for the respective years, the Income-tax Officer treated the assessee as an unregistered firm for the assessment years 1974-75 and 1975-76.
The assessee appealed to the Appellate Assistant Commissioner who rejected the appeals and affirmed the orders of the Income-tax Officer. While doing so, he held the partnership-deed to be illegal and invalid. He also held that a firm based on a partnership deed which is tainted by illegality cannot be considered a genuine firm and, therefore, the Income-tax Officer was justified in cancelling the registration already granted under section 186(1) for the assessment year 1973-74. In the appeals for the assessment years 1974-75 and 1975-76 also, it was held that there was no valid partnership in existence during the previous years relevant to the above assessment years. The assessee went in further appeal to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal also rejected the appeals of the assessee for all the three assessment years and affirmed the order of the Income-tax Officer and the Appellate Assistant Commissioner. While doing so, the Tribunal held that during the previous year corresponding to the assessment year 1973-74, there was no genuine firm in existence as registered. The Tribunal also held that the deed of partnership, dated November 9, 1971, on the strength of which registration was sought for by the assessee and granted by the Income-tax Officer for the assessment year 1973-74, being an invalid deed of partnership and the registration granted for that year having been cancelled on the basis of subsequent information, the assessee was not entitled to the benefit of continuation of registration for the two subsequent assessment years. Hence this reference at the instance of the assessee.
There is no dispute about the facts of the case. The uncontroverted position is that the registration was granted by the Income-tax Officer to the assessee under section 185 of the Act for the assessment year 1973-74 on being satisfied that there was during the previous year in existence a genuine firm with the Constitution as specified in the instrument of partnership, dated November 9, 1971. Subsequently, when it came to his notice that the instrument of partnership on the basis of which registration had been granted by hint was invalid inasmuch as one of the persons who was taken as a full fledged partner and who had signed the deed of partnership as such was a minor on that date, he initiated proceedings tinder section 186(1) of the Act, for cancellation of the registration for that assessment year and after giving reasonable opportunity to the assessee-firm of being heard, with the previous approval of the Inspecting Assistant Commissioner, cancelled the registration of the assessee-firth as in his opinion, during the previous year there was no genuine firm in existence.
The contention of learned counsel for the assessee is that in tie instant case, there is no real dispute about the genuineness of the firm. The whole controversy is with regard to the legality of the Constitution of the firm as specified in the instrument of partnership. Counsel, however, does not dispute the position that the firm as constituted by the deed of partnership, dated November 9, 1971, was not a legally valid partnership firm' inasmuch as, admittedly, one of the persons taken in as a full-fledged partner was a minor on that date. However, according to learned counsel, this circumstance is not material for the purpose of grant of registration and/or for cancellation of registration under section 186(1) of the Act. The submission is that the registration cannot be cancelled under section 186(1) on the ground of illegality or invalidity of the deed of partnership if the firm is otherwise a genuine firm. In support of this contention, reliance is placed on the decision of the Karnataka High Court in the case of CIT v. Kirana Traders (1986) 161 ITR 726 and the decisions of the Gauhati High Court in the case of Mahabir Prasad Kishanlal & Co. v. CIT (1976) 102 ITR 466 and in the case of CIT v. United Brothers (1991) 191 ITR 394.
We have considered the submission of learned counsel and perused the decisions referred to above. Section 184 of the Income-tax Act which deals with an application for registration of a partnership firm provides that an application for registration of a firm for the purposes of this Act may be made to the Income-tax Officer on behalf of any firm if (i) the partnership is evidenced by an instrument, and (ii) the individual shares of the partners are specified in that instrument. Subsection (3) thereof requires such an application to be signed by all the partners (not being minors) personally. There is no controversy about the fact that under the Indian Partnership Act, a minor cannot be taken in as a partner of the firm. Under section 30 of the said Act, he can only be admitted to the benefits of the partnership. Section 185 deals with the procedure to be followed by the Income-tax Officer on pt of application for registration. It provides that the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership" and if he is satisfied that there was during the previous year in existence a "genuine firm" with the constitution so specified", he shall pass an order in writing registering the firm for the assessment year. Section 186(1) of the Act which (teals with the cancellation of registration reads as follows:
"186. Cancellation of registration. ---(I) If, where a firm has been registered or its registration has effect under subsection (7) of section 184 for an assessment year, the Income-tax 'Officer is of opinion that there was during the previous year no genuine firm in existence as registered; he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for that assessment year:
Provided that no such cancellation shall be made after the expiry of eight years from the end of the assessment year in respect of which registration has been granted or has effect."
Subsection (1) of section 186 thus empowers the Income-tax Officer to cancel the registration of a firm if he is satisfied that during the previous year no genuine firm was in existence "as registered". Evidently, in the instant case, there was no genuine firm in existence "as registered". The expression "as registered" qualifies the preceding expression. The existence of a genuine firm, therefore, refers to genuineness in the context of the constitution specified in the instrument of partnership because what is registered under section 185 is a firth with the constitution specified in such instrument. No partnership firth can be registered under section 185(1) which is not evidenced by an instrument. In the instant case at the time of registration, the Income-tax Officer was satisfied about the existence of a genuine firm, as evidenced by an instrument of partnership with the constitution specified therein, which later turned out to be wrong. The expression "no genuine firm in existence as registered" appearing in section 186(1) has to be read in the context of sections 184 and 185 of the Act. It cannot be read in isolation nor the words "as registered" which follows the expression "there was no genuine 'firm in existence" be ignored. If we read section 186(1) in this manner it becomes clear that if the Income -tax Officer is of the opinion that during the previous year no genuine firm was in existence with the Constitution as specified in the instrument c partnership, the registration can be cancelled.
We have carefully perused the decision of the Karnataka High Court in CIT v. Kirana Traders (1986) 161 ITR 726. In the above decision, it appears that the true purport and import of the expression "as registered" which follows the expression "during the previous year no genuine firm was in existence" did not receive the proper attention of the Court. The Court merely interpreted the expression "no genuine firm was in existence" without due emphasis on the expression "as registered". This decision, therefore, is not of much assistance to us in deciding the controversy.
We have also considered the decision of the Gauhati High Court in Mahabir Prasad Kishanlal & Co. v. CIT (1976) 102 ITR 466. In that case, the partnership deed had sought to make three minors full-fledged partners. Registration was granted to the firm and renewed for the assessment year 1955-56. In the year 1964, the Income-tax Officer passed an order cancelling the registration for the year 1955-56. This order of cancellation of registration was set aside by the Appellate Assistant Commissioner but restored by the Tribunal. On reference, the High Court approved the order of the Tribunal. It was held that the partnership deed which had sought to make the minors full-fledged partners being contrary to the relevant provisions of the Indian Contract Act and the Indian Partnership Act was invalid and hence the Income-tax Officer had jurisdiction to cancel the registration of the firm. It was observed (at page 472):
"The Income-tax Officer has to grant or renew registration of a firm which is constituted under an instrument of partnership. If the instrument of partnership, on the basis of which the firm is constituted, is found to be invalid in law, the Income-tax Officer has no jurisdiction to register or renew such a firm and, therefore, the Income-tax Officer has jurisdiction to cancel the registration or renewal of registration of a firm under rule 6-B when he finds that the instrument of partnership on the basis of which the firm is constituted is invalid in law..."
We fail to understand how this decision of the Gauhati High Court helps the assessee.
Similarly, the other decision of the Gauhati High Court in CIT v. United Brothers (1991) 191 ITR 394 also does not in any way support the case of the assessee. In this case the expression "no genuine firm in existence as registered" in section 186 of the Act was interpreted to mean that a firm registered under section 184 of the Act is actually not in existence, non est or a fictitious one. In our opinion, in the facts of the present case, this decision rather helps the Revenue.
Having regard to the above discussion, we are of the clear opinion that in the facts and circumstances of the case, the Income-tax Officer was fully justified in cancelling the registration of the assessee-firm for the assessment year 1973-74 under section 186(1) of the Act and in refusing the continuance of the registration for the assessment years 1974-75 and 1975-76.
In the premises, we answer both the questions referred to us in the affirmative, i.e., against the assessee and in favour of the Revenue.
In the facts and circumstances of the case, there shall be no order as to costs.
M.B.A./1182/FCReference answered.