KRISHNA MERCERISERS VS COMMISSIONER OF INCOME-TAX
2000 P T D 2707
[237 I T R 223]
[Madras High Court (India)]
Before Mrs. T. Meenakumari, J
Sri KRISHNA MERCERISERS
versus
COMMISSIONER OF INCOME-TAX and another
Writ Petition No.7463 and W. M. P. No.10628 of 1989, decided on 03/08/1998.
Income-tax---
----Firm---Registration---Continuation of registration---Application filed before end of relevant accounting year---Firm entitled to opportunity to rectify defect---Income Tax Act, 1961, S.185.
The purport and reach of subsection (7) of section, 185 of the Income Tax Act, 1961 are for the continuance of registration for every subsequent assessment year provided there is no change in the constitution of the firm or the shares of the partners. The declaration under clause (ii) of the proviso is the statutory mode of proof of these requirements for the registration to have effect for every succeeding year. The facts to be proved are those stated in clause (i) of the proviso and any defect in the declaration is capable of rectification as provided for in subsection (3) of section 185. An infirmity in the declaration that it does not cover the whole of the account period as required by Form NO-12 cannot be held to be fatal to the declaration itself and the infirmity can be treated only as a defect capable of rectification under subsection (3) of section 185:
Held, that the declaration filed for continuation of registration in Form No. 12 was only defective as it was filed before the end of the relevant accounting year and the assessee-firm was entitled to an opportunity for rectification of the defect as provided for under subsection (3) of section 185.
Mathew and Mathew v. CIT (1986) 161 ITR 9 (Ken.); CIT v. Sitaram Bhagwandas (1976) 102 ITR 560 (Pat.); Nand Singh Taneja & Sons v. CIT (1973) 91 ITR 202 (All.) and CIT (Addl.) v. Murlidhar Mathura Prasad (1979) 118 ITR 392 (All.) fol.
CIT v. Trinity Traders (1974) 97 ITR 81 (Guj.) and Halima Fancy Stores v. CIT (1976) 104 ITR 190 (Mad.) ref.
R. Venkataraman for Mrs. Chitra Venkataraman for Petitioner.
S. V. Subramaniam for C. V. Rajan for Respondents.
JUDGMENT
This writ petition is filed by one of the partners of the petitioner firm. It is alleged that the firm is carrying on business in mercerising and is liable to be assessed to income-tax under the Income Tax Act, 1961. It is also stated that from the year 1971-72 onwards, the petitioner-firm was assessed to income-tax as a registered firm by the Assessing Officer. The petitioner firm filed the return of income for the assessment year 1987-88. It is also averred that the petitioner-firm also filed Form No.12 prescribed as per the Income-tax Rules, 1962, for continuation of the registration of the firm for the assessment year on July 29, 1987. By assessment order under section 143(1) of the Act, dated November 20, 1987, the second respondent, accepting the return which included the claim of status of the assessee as a registered firm, without granting' any opportunity to the petitioner, passed the assessment order, assessing the petitioner as an unregistered firm on the ground that the declaration in Form No. 12 vas made by the partners of the petitioner-firm on February 20, 1987, before the end of the previous year, i.e., March 31, 1987, 'and was not valid for renewal of registration. It is further averred that the above decision was arrived at by the concerned officer on the basis of the decision of the Gujarat High Court in CIT v. Trinity Traders (1974) 97 ITR 81. It is also stated that the objections have been filed under section 143(2) to the above assessment order made under section 143(1)(a) of the Act. In the objections the petitioner has stated that rejection of Form No. 12 was not valid and no opportunity was granted to the petitioner to cure the defect in the declaration form as provided for under section 185(3) of the Act. It is also contended that according to the above provisions, the second respondent was statutorily bound to grant opportunity to the petitioner where the declaration furnished by the petitioner-firm in pursuance of subsection (7) of section 184. was not in order. It is also contended that on January 11, 1988, the second respondent, without affording a personal hearing to the petitioner, stated that the points raised by the petitioner in Form No.6-A were not maintainable, that the declaration in Form No.12 was not defective, but it was only invalid and hence no opportunity of hearing need be given. It is also contended that the decision relied on by the second respondent in CIT v. Trinity Traders (1974) 97 ITR 81 (Guj.), was concerned with the facts and law relating to the assessment year 1967-68 which was prior to the amendment of section 185(3) by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, that the case of the petitioner was a bona fide mistake and the decision of the Gujarat High Court cited above, is not applicable, that the second respondent was statutorily obliged under section 185(3) to intimate the defect and grant one month's time to rectify the same before passing the assessment order for the assessment year 1987-88 under consideration instead of treating the Form No. 12 filed as invalid. It is also brought to the notice of this Court that the partnership was continued as a registered firm from the assessment year 1971-72 onwards.
Learned senior counsel for the Department Mr. S. V. Subramaniam, has vehemently contended that there is no need to give opportunity to the petitioner herein as in the opinion of the Department, the declaration in Form No. 12 was not defective but it was only invalid Hence, the assessment has been done as if it is an unregistered firm. It is further argued that nothing prevented the petitioner from filing the declaration after March 31, instead of filing it before the end of the financial year. It is also argued that the petitioner is entitled to invoke the provisions of section 185(3) only if the officers feel there is a typographical error or there is a defect in the form. Learned senior counsel has further contended that the Department is right in not invoking the provisions of section 185(3) as they felt that the declaration in Form No.12 was invalid but not a defective one. He argued that the decision cited by the Department clearly applies to the facts of the case and hence the action of the respondent is not questionable in the writ petition.
On the other hand, learned senior counsel for the petitioner has argued that the case cited by the authorities in CIT v. Trinity Traders (1974) 97 ITR 81 (Guj), is concerned with the facts and law relating to the assessment year 1967-68 which was prior to the amendment of section 185(3). Hence, the authorities were not right in relying upon the said case for deciding the issue on hand. He also contended that whenever there is a defect in the form the assessee could be asked to rectify the same by the authorities by invoking the provisions of sections 184(7), 185(2) and 185(3) of the Income-tax Act, 1961, read with rule 22 of the Income-tax Rules. Sections 184(7), 185(2) and 185(3) read as follows:
"184(7). Where registration is granted or is deemed to have been granted to any firm for any assessment year, it shall have effect for every subsequent assessment year:
Provided that--
(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and
(ii) the firm furnishes, before the expiry of the time allowed under subsection (1) of section 139 for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Assessing Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.
185. Procedure on receipt of application. -...
(2) Where the Assessing Officer considers that the application for registration is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation and if the defect is not rectified within that period, the Assessing Officer shall, by order in writing, reject the application.
(3) Where the Assessing Officer considers that the declaration furnished by a firm in pursuance of subsection (7) of section 184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration within a period of long month from the date of such intimation; and if the defect is not p rectified within that period, the Assessing Officer shall, by order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year. "
Learned senior counsel for the petitioner relied upon a number of decisions to substantiate that whenever there is a defect in the form, the assessee could be asked to rectify the same by the authorities by invoking the above said provisions. One such decision is Mathew and Mathew v. CIT (1986) 161 ITR 9 (Ker.), wherein it has been held that filing of declaration in Form No. 12 for continuance of registration is only a statutory mode of proof of the requirement and the requirement is not mandatory. It was further held that the infirmity in the declaration that it was filed prior to the end of the accounting year is not fatal to the declaration and it is only defective. The firm is entitled to an opportunity for rectification of defect,
In this case also, there is no dispute that the assessee-firm had got registration for the assessment year 1987-88 and is entitled to continuance of registration for the subsequent period if the requirements of the proviso to subsection (7) of section 184 are satisfied. It is clear from clause (i) of the proviso that the requirement for the continuation of registration under, subsection (7) is that there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which registration had been granted. Clause (ii) of the proviso, as per which a declaration in the prescribed form and verified in the prescribed manner is to be furnished within the time mentioned therein, prescribes the statutory mode of proof of the requirement of clause (i) of the proviso. Clause (ii) of the proviso excludes every other mode of proof. But the intent and purpose of clause (ii) are only to prove the requirements of clause (i) of the proviso. The earlier requirement of clause (ii) for filing of the declaration together with the return was altered by the Taxation Laws (Amendment) Act. 1970, that came into force on April 1, 1971. The present requirement of the clause is only the furnishing of the declaration in the form and manner prescribed before the expiry of the time allowed under subsection (1) or (2) or section 139 for furnishing of the return of income for the subsequent assessment year. It is true that as per subsection (7) of section 184, registration granted to a firm will endure for every subsequent assessment year only if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which registration was granted. It could be seen that as per proviso to subsection (7) of section 184, declaration is made for the satisfaction of the Income-tax Officer that the firm continues without any change throughout the previous year relevant to the year of assessment. Subsection (3) of section 185 enjoins on the Income-tax Officer to intimate any defect in the declaration furnished to the assessee-firm and give it an opportunity to rectify the defect within a period of one month from the date of such intimation. If the defect is not rectified within the said period, the Income-tax Officer is required by order in writing to declare that the registration granted to the firm shall not have effect for the relevant assessment year. The assessee-firm is thus, entitled to an opportunity for rectification of defects, if any, in the declaration furnished by him and it is only on his failure to rectify the defect that the registration can be declared as not effective for the year of assessment. It has been held in Mathew and Mathew v. CIT (1986) 161 ITR 9 (Ker.), that the decision of the Gujarat High Court in CIT v. Trinity Traders (1974) 97 ITR 81, does not advert to subsection (3) of section 185 as per which the assessee-firm is entitled to an opportunity for rectification of defects in the declaration furnished. The amendment of subsection (7) that came into force on April 1, 1971, removes the requirement of furnishing the declaration along with the return. The Gujarat High Court has taken the view that the requirement of the subsection as it stood at the relevant time requiring the declaration to be 'furnished along with the return was mandatory and not even a substantial compliance will satisfy the requirement of the law. The Kerala High Court did not agree with the reasoning and conclusions of the Gujarat High Court. The purport and reach of' subsection (7) are for the continuance of registration for every subsequent assessment year provided there is no change in the constitution of the firm or the shares of the partners. The declaration under clause (ii) of the proviso is the statutory mode of proof of these requirements for the registration to have effect for every succeeding year. The facts to be proved are those stated in clause (i) of the proviso and any defect in the declaration is capable of rectification as provided for in subsection (3) of section 185. An infirmity in the declaration that it does not cover the whole of the accounting period as required by Form No. 12 cannot be held to be fatal to the declaration itself and the infirmity can be treated only as a defect capable of rectification under subsection (3) of section 185. Counsel relies also on the decision of the Madras High Court in Halima Fancy Stores v. CIT (1976) 104 ITR 190. That decision was also concerned with the requirement of the proviso as it then stood to furnish the declaration along with the return. The Madras High Court at page 194 of the report observed:
"The intention of Parliament was to give effect to the registration in the subsequent year also if there was no change in the constitution of the firm or the shares of the partners and, therefore, the factum of change or no change in the constitution of the firm or the shares of the partners is only relevant for the law to operate: The declaration, as such, does not extend the effect of the registration. Even so when Parliament had imposed that condition for the law to operate, we cannot refrain from giving effect to it merely on the ground that in effect there was no change in the constitution of the firm or the share of the partners. It might be that the declaration is only an evidence that there was no change in the constitution of the firm. But, since the giving effect to the registration for the subsequent year is conditioned upon such filing in section 184(7) though, in fact, there is no change in the constitution of the firm or the shares of the partners, unless such a declaration is filed, the benefit of continued effect of the registration could not be given. We are also unable to agree with the learned counsel for the assessee that he might file a declaration at any time before the assessment and the provision requiring the declaration to be filed along with the return of income was not mandatory. The section requires the declaration to be filed along with the return of income. "
The Kerala High Court agreed with the view expressed by the Madras High Court that the intention of Parliament was to give effect to the registration for the subsequent year and the declaration is only a mode of proof that there is no change in the constitution of the firm or the shares of the partners. The Kerala High Court, however, found it difficult to agree with the reasoning that the furnishing of the declaration along with the return was a mandatory requirement of the law and even an inconsequential breach of such requirement will invalidate the declaration. It has also been held that as per clause (ii) of the proviso to subsection (7) of section 184, the declaration is to be filed before the expiry pf the time allowed under subsection (1) or subsection (2) of section 139 for furnishing the return of income. The Income-tax Officer is empowered to condone the delay and allow the firm to furnish the declaration at any time before the assessment is made. This would clearly indicate that the requirement of the proviso read with rule 22 and Form No. 12 is not mandatory and the assessee-firm is entitled to an opportunity for rectification of the defect in the declaration furnished. It was further held that the declaration furnished did not relate to the entire accounting period, it can only be treated as defective and the assessee is entitled to an opportunity for rectification of the defect as provided for in subsection (3) of section 185 'of the Act. The Kerala High Court decided question No. l in favour of the Revenue and against the assessee and question No.2 in favour of the assessee and against the Revenue by holding that the declaration filed for continuation of registration in Form No. 12 was only defective as it was filed before the end of the relevant accounting year and the assessee-firm was entitled to an opportunity for rectification of the defect as provided for under subsection (3) of section 185. The Kerala High Court has relied upon the decision of the Patna High Court in CIT v. Sitaram Bhagwandas (1976) 102 ITR 560 and the Allahabad High Court in Nand Singh Taneja & Sons v. CIT (1973) 91 ITR 202 and Addl. CIT v. Murlidhar Mathura Prasad (1979) 118 ITR 392 (All). The Patna and Allahabad High Courts have taken the view that the requirement of the proviso is not mandatory and a defect in the declaration under clause (i) of the proviso to subsection (7) will not invalidate the declaration itself. The Allahabad High Court in Addl. CIT v., Murlidhar Mathura Prasad (1979) 118 ITR 392, following its earlier decision in Nand Singh Taneja & Sons v. CIT (1973) 91 ITR 202, has accepted the view expressed by the Patna High Court in CIT v. Sitaram Bhagwandas (1976) 102 ITR 560. Based on the above judgments, the Allahabad High Court has held that the procedural requirements are to be treated only as directory and if there is some defect in the declaration, the assessee is to be given an opportunity for rectification.
In view of the above, it could be held that the declaration filed for continuation of registration in Form No. 12 was only defective as it was filed before the end of the relevant accounting year and the assessee-firm is entitled to an opportunity for rectification of the defect as provided for under subsection (3) of section 185. The authorities herein are not right in rejecting the declaration as invalid. Instead, they should have treated it as a defective declaration. Hence, the respondents are directed to afford an opportunity to the assessee to rectify the defect. The writ petition is allowed. No costs. Consequently, W.M.P. No. 10628 of 1989 is dismissed.
M.B.A./10/FC
Petition allowed.