1997 P T D 775
[213 1 T R 273]
[Rajasthan high Court (India)]
Before V. K. Singhal and V. G. Palsikar, JJ
SANTLAL KALYANI & Co.
Versus
COMMISSIONER OF INCOME TAX
D.B. Income-tax Reference Applications Nos. 29 of 1983 and 46 of 1984, decided on 08/04/1994.
(a) Income-tax---
----Firm---Registration---Refusal of registration---Failure of firm to comply with notices issued under Ss.142(1) & 143(2)---No sufficient cause for such failure---Assessment made under S.144---Refusal of registration to firm-- Justified---Indian Income Tax Act, 1961, S.185.
Under the provisions of section 185(5) of the Income Tax Act, 1961, registration can be refused to a firm and in those proceedings, the Income-tax Officer is not required to give a finding that a genuine firm was in existence. The only thing required under the said section is that there must be failure on the part of the assessee to submit the return under section 139(1) or a revised return under subsection (4) or subsection (5) of that section or failure to comply with the terms of a notice issued under subsection (1) of section 142 or failure to comply with the directions issued under subsection (2-Al of that subsection or failure to comply with the terms of a notice issued under subsection (2) of section 143 warranting a best judgment assessment. In such a situation, if the assessee did not receive the notice issued under section 142(1) or section 143(2) or he had no reasonable opportunity to comply with or was prevented by sufficient cause from complying with the terms of a notice issued under section 142(1) or 143(2), then he can apply for cancellation of the best judgment assessment.
The assessee-firm was constituted with four partners by a partnership deed, dated April 10, 1968. Out of the four partners, three were ladies. In July, 1976, two ladies retired from the partnership and in their place two other ladies were taken as partners and a new deed of partnership was executed on August 1, 1976. The assessment of the firm for 1976-77 was completed under section 144 and registration was refused under section 185(1)(b), since there was failure on the part of the assessee in accordance with the provisions of section 143(2)/142(1). It was also taken into consideration that the affidavit, as required in the assessment proceedings of the new partners, was not filed and no confirmations with regard to investments of the new partners were filed. The Commissioner of Income-tax (Appeals) confirmed the order so far as the refusal to grant the registration under section 185(5) was concerned, but in respect of the grounds under section 185(1)(b), the Commissioner of Income-tax (Appeals) was of the view that, it was the responsibility of the Income Tax Officer to establish that the lady partners were benami and the capital contribution did not make them genuine. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals). The assessee sought to raise an additional ground that the Income-tax Officer had erred in making assessment on the appellant in the status of an unregistered firm particularly when he had already made assessment in the cases of the two partners assessed by him taking share from the appellant-firm as registered firm. The Tribunal did not allow this ground to be raised. On a reference:
Held, (i) that the Tribunal was right in law in not permitting the assessee to raise the additional legal grounds; (ii) that the reconsideration on the point of status could not be done.
(iii) that the material facts which are available on record conclusively proved that the assessee was not prevented by sufficient cause from complying with the notices under section 143(2)/142(1).
The orders passed under sections 144 and 146 had been upheld up to the stage of the Tribunal. Hence, the Income-tax Officer was right in refusing to grant registration to the assessee under section 185(5).
Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351 (Bom.); CIT v. Begum Noor Banu Alladin (Late) (1993) 204 ITR 166 (AP); CIT v. Cellulose Products of India Ltd. (1985) f51 ITR 499 (Guj.); CIT v. Faiz Muhammad, Hasim Ali, Taj Muhammad, Noor Muhammad (1986) 160 ITR 396 (Raj.); CIT (Addl.) v. Gurjargravures (P.) Ltd. (1978) 111 ITR I (SC); CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC); CIT v. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC); CIT v. McMillan Co. (1958) 33 ITR 182 (SC); Hukumchand Mills Ltd. v. CIT (1967) 63 ITR 232 (SC) and Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC) ref.
(b) Income-tax
----Appeal to Appellate Tribunal---Powers of Tribunal---Additional ground of appeal ---Discretion of Tribunal to refuse additional ground to be raised---Indian Income Tax Act, 1961, S.254.
The words "pass such orders thereon as it thinks fit" in section 254 confer wide power on the Appellate Tribunal to pass, on the appeal, such orders as it may think fit. The Appellate Tribunal shall also have jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner so -long as these grounds are in respect of the subject-matter of the entire tax proceedings.
B.C Mehta for the Assessee.
D.S Shisodia, Senior Advocate with S. Bhandawat for the Commissioner
JUDGMENT
V.K. SINGHAL, J.---Both the petitions are disposed of by this common order, since the point involved is common. In Reference No.29 of 1983 which arises out of the order, dated November 26, 1981, in respect of the assessment year 1977-78, the Income-tax Tribunal has referred the following two questions under section 256(1) of the Income Tax Act, 1961:
"(1) Whether the Tribunal was right in law in not permitting the assessee to raise additional legal ground?
(2) Whether the Tribunal was right in law in holding that reconsideration on the point of status cannot be done in view of section 185(5) of the Income Tax Act, 1961?"
Reference No.46 of 1984 is in respect of the assessment year 1977 78 arises out of the order of the Tribunal, dated October 19, 1981, and the following question has been referred by the Tribunal.
"Whether the learned Tribunal was right in holding that the Income- tax Officer was right in refusing to grant registration to the assessee under section 185(5) of the Act?"
The brief facts of the case are that the firm was constituted by four partners as per partnership deed, dated April 10, 1968. Out of four partners, three were lady partners and two lady partners, namely, Smt Meghi Devi and Krishan Kanta, retired from the partnership with effect from July 31, 1976, and in their place two new lady partners, namely, Smt. Geeta Devi and Smt. Lila Devi, were taken and a new deed of partnership was executed on August 1, 1976. The assessment for 1976-77 was completed under section 144 and the registration was refused under section 185(1)(b) of the Income- tax Act. The reasoning which was taken by the Income-tax Officer that since there was failure on the part of the assessee in accordance with the provisions of section 143(2)/142(1) the assessment has been completed under section 144, and, as such, the assessee is not entitled to registration under section 185(5). It was also taken into consideration that the affidavit, as required in the assessment proceedings on October 4, 1979, of the new partners was not filed nor the confirmations with regard to investments of the new partners were filed. This was also taken as a ground that the partners are not genuine. The personal attendance of the new partners -was required, but, they were not produced and, therefore, it was considered that they are only dummy partners. The request for examining the said partners on commission through the Income Tax Officer, Calcutta, was not accepted nor the request for issue of commission was considered because it was at the fag end of the proceedings mid the commission could nave been issued only for examination of witnesses and not for partners. In the deed of partnership, it was not provided that the lady partners would be the sleeping partners and, accordingly, the registration was refused. In appeal the Commissioner of Income-tax (Appeals) confirmed the order so far as the refusal to grant the registration under section 185(5) was concerned, but- in respect of the grounds under section 185(1)(b), the Commissioner of Income-tax (Appeals). was of the view that it was the responsibility of the Income Tax Officer to establish that the lady partners were benami and the capital contribution did not make them genuine. The lady partners were income-tax assessees and having the capacity for the amount invested. Accordingly, the order passed under section 185(1)(b) was not sustainable under law.
The matter was challenged by the assessee as well as the Revenue before the Income-tax Appellate Tribunal, where it was found that the assessment order under section 144 and the appeal preferred against the order passed under section 146 were dismissed by the Tribunal on September 10, 1981, as the assessee failed to establish that it was prevented by sufficient cause from making compliance of their notice issued under sections 142(1) and 143(2). The failure on the part of the assessee under section 144 was found established and, therefore, the action of the Income-tax Officer to refuse the registration under section 185(5) was held justified. In respect of the order passed under section 185(1)(b), the order by the Commissioner of Income-tax (Appeals) that the lady partners invested Rs.55,000 and Rs.70,000 as their contribution to the capital, and, therefore, were the genuine partners was upheld.
Reference No.29 of 1983 pertains to the assessment order passed under section 144. The assessee was served with the notice under section 143(2) and section 142(1). The case was adjourned from time to time and on February 28, 1980, it was found that the compliance of notice under section 142(1) has not been made and the case was finally adjourned for Mesh 15, 1980. On this date again an adjournment was sought, it was not found justified, and on account of not producing the books of account the assessment under section 144 was framed. In appeal before the Commissioner of Income-tax (Appeals) the assessee was granter p relief in respect of the various additions made. The appeal against the order under section 146 was dismissed by a separate order. In the second appeal before the Income-tax Appellate Tribunal besides the various additions which were challenged an additional ground was raised on the date of hearing, which was as under..
"The learned Income-tax Officer has erred in making assessment on the appellant in the status of unregistered firm particularly when he had already made assessment in the cases of the two partners assessed by him taking share from the appellant firm as registered firm. The assessment made in the status of unregistered firm is against law and should be cancelled or set aside or modified with suitable directions."
The Income-tax Appellate Tribunal came to the conclusion that no good reasons have been shown as to in what circumstances that ground was not raised the time of filing the appeal. It was found that there was nothing on record to show that there was bona fide omission on the part of the assessee in raising this ground, therefore, the prayer was rejected. It was also observed that since the status of the assessee had been taken as unregistered firm in view of the provisions of section 185(5) on account of default under section 144, therefore, there could be no reconsideration on -the point of status
This Court in CIT v. Faiz Muhammad, Hashim Ali, Taj Muhammad, Noor Muhammad (1986) 160 ITR 396 has observed that the refusal under section 185(5) is not automatic, but confers a discretionary power on the Income-tax Officer to refuse the registration and the discretion is not to be exercised arbitrarily or capriciously, but in a lawful manner on the basis of the material circumstances given in the present case. The default as stated under section 144 have occurred in the present case and, therefore, the discretion which has been exercised by the Income-tax Officer to refuse the registration has to be seen from the point as to whether it was arbitrary or capricious. The conduct of the assessee and the manner in which the details of default have been given leads to the inescapable conclusion that the discretion which has been exercised by the taxing authorities to refuse the registration is in accordance with law.
The order of appeal against the order of the Income-tax officer under section 146, which was rejected was also challenged before the Income-tax Appellate Tribunal and the order of the Commissioner of Income-tax (Appeals) was upheld. Against that order, the assessee moved a miscellaneous application that the appeals were heard without proper notice and this was also rejected. This order has not been challenged.
The arguments of both learned counsel have been heard. So far as the question of refusal under section 185(5) is concerned, the registration can be refused and in those proceedings, the Income-tax Officer is not required to give a finding that a genuine firm was in existence. The only thing required under the said section is that, there must be failure on the part of the assessee to submit the return under section 139(1) or a revised return under subsection (4) or subsection (5) of that section or failure to comply with the terms of a notice issued under subsection (1) of section .142 or failure to comply with the directions issued under subsection (2-A) of that subsection or failure to comply with the terms of a notice issued under subsection (2) of section 143 warranting a best judgment assessment. In such a situation, if the assessee did not receive the notice issued under section 142(1) or section 143(2) or he had no reasonable opportunity to comply with or was prevented by sufficient cause from complying with the terms of the notice issued under section 142(1) or 143(2), then he can apply for cancellation of the best judgment assessment. It is not in dispute that the assessee failed to comply with the notice issued under sections 142(1) and 143(2) and, therefore, the Income-tax Officer had the discretion to refuse the registration on that ground alone. The order passed under sections 144 and 146 has since been upheld up to the stage of the Tribunal and the finding which has been recorded is that the assessee was not prevented by sufficient cause and there was failure on his part to comply with the terms of the notice issued, and, as such, the action of the Income Tax Officer to refuse to register the firm cannot be said to be unjustified. Besides this, a discretionary power has been conferred on the Income-tax Officer and the discretion cannot be said to have been exercised arbitrarily. The material facts which are available on record conclusively proved that the assessee was not prevented by sufficient cause and the finding which has been recorded against the assessee is based on sufficient material on record.
In CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC), it was observed by the apex Court that the scope of power of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do.
In Additional CIT v. Gurjargravures (P.) Ltd. (1978) 111 ITR I (SC), it was observed by the apex Court that since neither the claim for exemption in respect of profits under section 84 was made before the Income-tax officer nor there was any material on record in support thereof, the Tribunal is not competent to hold that the Appellate 'Assistant Commissioner should have entertained the question of relief under section 84 or to direct the income-tax Officer to allow the relief. This decision was considered by the apex Court in Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688, and it was observed that the power of the Appellate Assistant Commissioner is coterminous with that of the Income Tax Officer, and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. Thus, the view which was taken in Kanpur foal Sydicate's case (1964) 53 ITR 225 (SC), referred to above have further been reiterated. The discretion has to be exercised by the Appellate Assistant Commissioner in accordance with law and reason, and further that the said authority must be satisfied that the ground raised is bona fide and there appears to be valid reasons for not taking it earlier. In the case of CIT v McMillan & Co. (1958) 33 ITR 182 (SC) also, it was observed that even if a particular statutory provision mentions by name only the assessing authority and not the appellate authorities as a matter of construction, that power must inhere even in the appellate authorities exercisable by the assessing authority at the appellate stage in the same way as the assessing authority would do in assessment.
The matter with regard to the power of the Tribunal to entertain a new point was considered by the apex Court in Hukumchand Mills Ltd. v. CIT (1967) 63 ITR 232, and it was held that the Tribunal has the power to entertain a new point. The rules framed by the Tribunal for regulating its procedure for entertaining an additional ground were held to be merely self -regulating in character and do not in any way circumscribe or control the power of the Tribunal (under section 33(4)) as an Appellate body under the Income-tax Act. In CIT v. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC), it was observed that all questions, whether of law or of facts, which relate to the assessment of the assessee may be raised before the Tribunal, and the Tribunal was held to be under a duty to grant relief on the principle that right of the assessee to relief is not restricted to the plea raised by him before the Departmental authorities.
The Full Bench of the Bombay High Court in Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351, in the light of the judgment of the apex Court, held that the words "pass such orders thereon as it thinks tit", confer wide power to Appellate Tribunal to pass, on the appeal, such orders as it may think fit. The Appellate Tribunal shall also have jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner so long as these grounds are in respect of the subject-matter of the entire tax proceedings.
The Full Bench of the Andhra Pradesh High Court in CIT v. Late Begum Noor Banu Alladin (1993) 204 ITR 166 has dissented from the view taken by the Full Bench of the Bombay High Court in Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 531 mentioned above and other decisions of the Madras, Kerala, Delhi, Patna, Punjab and Haryana and Allahabad High Courts, and have followed the view taken by the Full Bench of the Gujarat High Court in the case of CIT v. Cellulose Products of India Ltd. (1985) 151 ITR 499 and has held that the jurisdiction of the Tribunal is necessarily restricted to the subject-matter of the dispute before the first appellate authority and the Tribunal cannot allow the assessee or the Department to dispute new items or entertain new claims for deduction for the first time.
On the basis of the various judgments mentioned above, it is evident that the power of the first appellate authority, namely, the Appellate Assistant Commissioner or the Commissioner of Income Tax (Appeals), have to be considered in the light of the decision of the apex Court in the case of CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 referred to above, and the first appellate authority shall have the same power as that of the Income-tax Officer, and has discretion to allow an additional ground to the appellant before it.
The position of the Income-tax Appellate Tribunal in second appeal stands on a different footing. After an assessment is made, the order could be challenged before the first appellate authority by an assessee, and after the said decision, the second appeal can be filed before the Tribunal by the assessee as well as by the Department. The other side has also the right for cross-objection and, thus, in respect of any matter which has been adjudicated upon by the first appellate authority, the Tribunal has full jurisdiction to decide any of such issues and even to permit the raising of a new ground which was not raised at the time of submission of the second appeal. There may be circumstances where the point was not raised before the Income-tax Officer or even before the first appellate authority in respect of any addition or deduction. If the point is purely legal, then on the basis of the evidence on record, a new ground could be raised. For example, if the assessee is entitled to deduction under two sections and the deduction was claimed only under one section, before the Income Tax Appellate Tribunal the new ground could be raised in respect of such deduction that it is allowable under the other sections as well, or alternatively, and since sufficient evidence exists on record, the power could be exercised by the tribunal in entertaining the fresh ground. This power cannot be exercised in respect of a new source of income or, such a point for which either there is no evidence in existence or the evidence is insufficient. Another point which requires consideration is that if the income-tax Officer has decided a particular point, and before the first appellate authority that addition or deduction was not challenged and the matter was challenged before Income-tax Appellate Tribunal, in such a circumstance, it would amount that the appeal is directly entertained by the Income-tax Appellate Tribunal against the order of the Income-tax Officer, on such a point, which has not been considered by the first appellate authority. This is not permissible under law.
Besides the above, even in a case where the Income-tax Appellate Tribunal has the discretion to (sic).
In these circumstances, it is held that the Tribunal has the discretion to permit the assessee to raise additional legal grounds. The discretion which has been exercised in this case cannot be said to be not in accordance with law and does not require any interference. The Tribunal, therefore, was right in law in not permitting the assessee to raise the additional legal grounds.
It is also held that the Tribunal was right in law in holding that the reconsideration on the point of status cannot be done in view of section 185(5) of the Income Tax Act, 1961, since this question does not arise out of the order of the Tribunal, as the first point has already been answered in favour of the Revenue. The answer to this question is, therefore, not given as the said question does not arise out of the order of the Tribunal.
In Reference No.46 of 1984 on the basis of the finding recorded above, it is held that the Tribunal was right in holding that the Income-tax Officer was right in refusing to grant registration to the assessee under section 185(5) of the Act.
Both these references, therefore, are answered in favour of the Revenue and against the assessee.
M.B.A. /1158/F.C. Order accordingly.