COMMISSIONER OF INCOME TAX v. PHAIR LABORATORIES
[Citation -1984-LL-0717-1]

Citation 1984-LL-0717-1
Appellant Name COMMISSIONER OF INCOME TAX
Respondent Name PHAIR LABORATORIES
Court ITAT
Relevant Act Income-tax
Date of Order 17/07/1984
Assessment Year 1965-66, 1966-67, 1967-68, 1968-69, 1969-70, 1970-71, 1971-72, 1972-73
Judgment View Judgment
Keyword Tags cancellation of registration • opportunity of being heard • reasonable opportunity • partnership act • form no. 12 • benamidar
Bot Summary: JUDGMENT JUDGMENT The judgment of the court was delivered by KOCHU THOMMEN J.- The following question has been, at the instance of the Revenue, referred to this court by the Income-tax Appellate Tribunal, Cochin Bench: Whether, on this facts and in the circumstances of the case, the cancellation of registration for the assessment year 1966-67 and cancellation of continuation of registration for the assessment years 1967-68 to 1972-73 was without jurisdiction and improper When these cases were first heard by a Division Bench, a doubt arose as to the ambit of the power under s. 186 of the I. T. ,Act, 1961, and they were accordingly referred to a Full Bench. Such registration for any assessment year shall have effect ,for every subsequent assessment year provided the conditions laid down in the proviso to sub-s. are satisfied and an application is presented in that behalf in Form No. 12 as required by rule 24. One of the important conditions for continuation of registration is that no change has taken place 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 has been obtained. In any such case, it is the duty of the Officer to refuse registration or continuation of registration after satisfying himself as to the necessary facts. In a case where registration has been already granted and the Officer is opinion that there was during the previous year no genuine firm in existence as registered , he is empowered to cancel the 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 s. 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. Undoubtedly Cyriac had no disqualification to be a full partner at any time during the year previous to the assessment year 1966-67 when registration was sought and granted on the basis of an instrument containing the names of all the partners and their particulars as well as the full details regarding their individual shares.


JUDGMENT JUDGMENT judgment of court was delivered by KOCHU THOMMEN J.- following question has been, at instance of Revenue, referred to this court by Income-tax Appellate Tribunal, Cochin Bench: " Whether, on this facts and in circumstances of case, cancellation of registration for assessment year 1966-67 and cancellation of continuation of registration for assessment years 1967-68 to 1972-73 was without jurisdiction and improper? " When these cases were first heard by Division Bench, doubt arose as to ambit of power under s. 186 of I. T. ,Act, 1961 (the " Act "), and they were accordingly referred to Full Bench. assessee is firm of seven partners. partnership is evidenced by instrument dated December 10, 1963. object of firm is to carry on business of manufacture and sale of pharmaceutical products. At time of execution of document, C. V. Cyriac, party No. 6, was aged only seventeen years and was, therefore, minor represented by his father and guardian, who is party No. 1. Cyriac reached age of majority on July 26, 1964. For assessment year 1964-65, assessee-firm filed " nil " return on basis of which assessment for year was completed. For assessment years 1965-66 and 1966-67, assessee filed applications in Form No. 11 for registration of firm. It is not disputed that application for assessment year 1966-67 had been signed by all partners, including Cyriac, who had attained age of majority in year previous to assessment year 1965- 66. Revenue has no case that firm had not in actual fact existed during relevant accounting years or that its real object was different from its avowed object or that it was sham or pretence or not intended by parties to govern their rights and liabilities inter se in relation to their business. It must be noticed that for assessment year 1966-67, assessee did not apply for continuation of registration, but for fresh registration. By orders dated November 7, 1966, and November 9, 1967, registration was granted for both assessment years and assessment proceedings were completed on that basis. For subsequent assessment years 1967-68 to 1972-73, assessee applied for continuation of registration and same was granted in respect of those years. However, ITO intiated proceedings under s. 186 for cancellation of registration on ground that Cyriac was minor at time of execution of instrument of partnership. Holding that no genuine firm existed for reason that instrument of partnership showed that minor was made full partner, Officer by his orders dated March 17, 1976, cancelled registration for assessment years 1965-66 and 1966- 67 and continuation thereof for subsequent years 1967-68 to 1972-73. Aggrieved by these orders, assessee appealed to AAC, who by his order dated July 28, 1976, rejected appeals and confirmed orders of Officer. assessee thereupon appealed to Tribunal which by its order dated June 21, 1977, accepted contentions of assessee, allowed appeals and set aside orders of ITO relating to assessment years 1966-67 to 1972-73. assessee did not press its appeal for assessment year 1965-66. Counsel for Revenue summits that at time of registration of firm, ITO had overlooked fact that instrument evidencing partnership was invalid for reason that minor had been admitted as full partner in violation of principle embodied in s. 11 of Indian Contract Act, 1872 (Act 9 of 1872), and s. 30 of Indian Partnership Act, 1932. No registration, he says, could have been granted on strength of such instrument. Such firm is not genuine firm. He, therefore, contends that law does not countenance continuance of invalid registration founded on invalid instrument of partnership and, accordingly, Officer was entitled to cancel registration. Counsel for assessee, on other hand, contends that registration was validly granted. application for registration was made in compliance with all requirements of s. 184. On basis of proper enquiry in terms of s. 185, ITO was fully satisfied as to genuineness of firm. It was on basis of such satisfaction that he granted registration. Such registration is not liable to be cancelled. Section 186 does not confer power on ITO to cancel registration which had been validly granted. In absence of any ground to show that no genuine firm existed during relevant previous year, Officer exceeded his powers in cancelling registration. These are respective contentions of parties. We shall now consider relevant provisions. Section 184 provides that application for registration has to be accompanied by instrument evidencing partnership and in which individual shares of partners are specified. application has to be made to ITO in prescribed form, that is Form No. 11, as provided under r. 22 of I. T. Rules, 1962 (the " Rules" ). It shall be signed by all partners and they are required to make declaration as to relevant facts. form together with instrument evidencing partnership and certified copy thereof must be produced before Officer. These document together constitute application. application shall be made before end of previous year relevant to assessment year in respect of which registration is sought. ITO, however, has discretion to condone delay in filing application. It is on basis of such application that registration is granted under s. 184. Such registration for any assessment year shall have effect ,for every subsequent assessment year provided conditions laid down in proviso to sub-s. (7) are satisfied and application is presented in that behalf in Form No. 12 as required by rule 24. One of important conditions for continuation of registration is that no change has taken place in constitution of firm or shares of partners as evidenced by instrument of partnership on basis of which registration has been obtained. Where, however, any such change has already taken place, firm in entitled to apply for fresh registration in accordance with provisions of this section. Section 185 concerns procedure to be adopted on receipt of application. It says that ITO shall inquire into genuineness of firm and its constitutions as specified in instrument of partnership. It is only upon his satisfaction that firm is genuine that he shall grant registration. If he is not so satisfied, it is his duty to refuse registration. firm will not be regarded as genuine if any partner of firm was at any time during relevant previous year benamidar in manner described under Explanation to section. If Officer considers that application is not in order, he shall intimate defect to firm and give at opportunity to rectify same within period of one month from date of such intimation. If defect is not rectified within that period, Officer shall reject application. same opportunity to correct defect has to be afforded to firm in respect of declaration under s. 184 (7) for giving effect to registration for subsequent year. On registration of firm, ITO will record certificate to that effect on instrument of partnership as stated under subs. (4). Section 186 confers power on Officer to registration. It reads: " 186. (1) If, where firm has been registered, or its registration has effect under sub-section (7) of s. 184 for assessment year, ITO is of opinion that there was during previous year no genuine firm in existence as registered, he may, after giving firm reasonable opportunity of being heard and with previous approval of Inspecting Assistant Commissioner, cancel registration of firm for that assessment year: Provided that no such cancellation shall be made after expiry of eight years from end of assessment year in respect of which registration has been granted or has effect..... Where registration of firm is cancelled for any assessment year, Income-tax Officer shall amend assessments of firm and its partners for that assessment year on footing that firm unregistered firm....... " This section empowers Officer to cancel registration if he is of opinion that during previous year there was no " genuine firm " in existence as registered. Before he passes any such order, reasonable opportunity of being heard has to be given to firm and previous approval of IAC has to be obtained. Upon cancellation of registration, Officer has to amend assessments of firm and its partners for relevant assessment year on basis that firm is unregistered firm. However, no cancellation can be made after expiration of eight years from end of assessment year in respect of which registration has been granted or continued. firm shall not be regarded as genuine if anyone of partners was in relation to whole or any part of his share in income or property of firm, benamidar during previous year, or that firm was only sham and constitution of which was not intended to govern mutual business relationship of parties. In any such case, it is duty of Officer to refuse registration or continuation of registration after satisfying himself as to necessary facts. In case where registration has been already granted and Officer is opinion that there was during previous year " no genuine firm in existence as registered " , he is empowered to cancel registration. Before power is exercised, Officer must satisfy himself that firm, as registered on basis of its constitution, evidenced by instrument of Partnership, did not exist during relevant year. words " no genuine firm in existence as registered, " appearing in s. 186 (1), refer to absence of state of affairs during previous year on basis of which registration was granted to firm. firm which does not produce valid instrument evidencing partnership does not qualify for registration. If instrument shows that during previous year relevant to assessment year when registration was sought or granted, partnership consisted of minor who was admitted as full partner, and not merely to its benefits as permitted under s. 30 of Indian Partnership Act, 1932, such instrument is not valid for purpose of registration under Act and any registration granted on that basis is liable to be cancelled. See CIT v. Dwarkadas Khetan & Co. [1961] 41 ITR 528 (SC). It is however not necessary that firm should have come into existence on basis of written instrument. firm which was created by word of mouth, but constitution of which has subsequently been reduced to writing, can very well qualify for registration. All that is required is there should be valid instrument of partnership at relevant time, i.e., during year previous to assessment year when registration is sought. partnership business should have been carried on in accordance with terms of instrument which as operative during accounting year: See R. C. Mitter and Sons v. CIT [1959] 36 ITR 194 (SC). It is not necessary that instrument had been signed by all partners, provided those who did not sign it assented to it in unmistakable terms by presenting application in proper form duly signed by them jointly with others who are signatories to instrument: Jagan Nath Pyare Lal v. CIT [1973] 92 ITR 207 (Punj); CIT v. C. Dwarkadas and Co. [1971] 80 ITR 283 (Bom); Bulchand v. CIT, AIR 1930 Sind 301 and In re Ramlal, AIR 1931 Cal 682. It must be stated that, in present case, there is no dispute that in actual fact firm existed during relevant previous year. sole contention of Revenue, as seen above, is that instrument on basis of which registration was granted was invalid in so far as minor had been admitted as full partner. There is no doubt that if that contention were right, instrument would be invalid for purpose of registration. That, however, is not case here. From facts stated above, it is clear that though Cyriac was minor on date of execution of deed, that is on December 10, 1963, he became major on July 26, 1964, which was during year previous to assessment year 1965-66. Undoubtedly, therefore, Cyriac had no disqualification to be full partner at any time during year previous to assessment year 1966-67 when registration was sought and granted on basis of instrument containing names of all partners and their particulars as well as full details regarding their individual shares. instrument was accompanied by application in form No. 11, signed by all partners, including Cyriac, thereby indicating that Cyriac accepted all terms of instrument and signifying his consent to be full partner. Similar applications in Form No. 12 had been made for continuation of registration. perusal of these documents with reference to relevant dates would have convinced any reasonable authority that none of partners was minor at relevant time. Revenue has no case that anyone of partners suffered from any disqualification other than minority anyone of partners suffered from any disqualification other than minority of Cyriac. Officer who granted registration was apparently fully satisfied as to existence during relevant previous year of genuine partnership consisting of well qualified major partners with their shares clearly specified in instrument. mere fact that Cyriac was not major on date of execution of deed cannot stand in way of registration if he had become major, as he did, prior to relevant accounting year. We are of view that on facts found, partnership was validity registered and that its registration fully qualifies for being given effect to in subsequent assessment years in terms of s. 184(7) so long as conditions mentioned under proviso to that sub-section remain satisfied. In circumstances, we are also of view, that on basis of facts found, orders of ITO cancelling registration were not reasonably supported by any material warranting exercise of power under s. 186. Accordingly, we answer question in affirmative, that is, in favour of assessee and against Revenue. We direct parties to bear their respective costs in these tax referred cases. copy of this judgment under seal of High Court and signature of Registrar shall be forwarded to Income-tax Appellate Tribunal, Cochin Bench. *** COMMISSIONER OF INCOME TAX v. PHAIR LABORATORIES
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