Where continuation of registration of firm was refused due to delay in submission of Form 11A, which was caused for the reason of giving away the new partnership deed to a bank to obtain overdraft facility, the same was appealable.
The Income Tax Officer not only refused to condone the delay but also refused to grant continuation of registration for assessment year 1987-88 and also treated the assessee firm as unregistered under his orders dated 31-12-1987. Continuation of registration should have been granted to the assessee firm and from an order refusing grant of registration, an appeal lies under section 246. Further, under sub-section (3) of section 185, the benefit of registration once granted can be extended to subsequent assessment years, provided the firm filed a declaration under section 184(7).
Distinction between registered and unregistered firm has been dispensed with by the Finance Act, 1992.
Assessing officer was not justified in passing orders under section 185(1)(b) as he had chosen not to condone the delay in filing Form No.11A in view instruction contained in CBDT Circular.
The CBDT Circular 1966, dt. 31-1-1966 has given clear instructions not to pass orders under section 185(1)(b) if the assessing officer chooses not to condone the delay in filing Form No. 11A. The impugned order passed by the assessing officer was wholly opposed to the instructions of the CBDT Circular and for that reason, the order of the assessing officer should not be allowed to stand. The delay in filing Form No.11A also deserved to be condoned, since the delay was only 3 months 19 days and the explanation offered by the assessee as to the cause of the delay appeared to be true.
1. This is an appeal filed by the Department which is directed against the order of the Dy. Commissioner of Income-tax (Appeals), Visakhapatnam dated 8-8-1988 relating to assessment year 1987-88. The assessee is a registered firm. It came into existence from 1-4-1980. Up to the end of 31-3-1986 the firm consisted of three partners namely Sri Haji Ismail, Smt. Bibi Bai (mother of No. 1) and -Sri Ali Mohammed (son of No. 1) No. 3 who is the son of No. 1 wanted to retire from the firm on 31-3-1986 with a view to start a new business. A deed of retirement dated 21 -5-1986 was entered into by No. 3 above. No. 3 above along with others entered into a new partnership under the deed dated 14-5-1986 with effect from 1-4-1986. Hazi Ismail and Bibi Bai continued the assessee firm. For getting continuation of registration they have to submit Form No. 11A on or before 31-3-1987. However, the application under Section 11A was actually filed on 20-7-1987 with a delay of 3 months 19 days. They have filed a petition dated 15-7-1987 to condone the delay caused in filing Form No. 11 A. They filed a return for asst.
year 1983-84 on 22-7-1987 disclosing an income of Rs. 49,740. It is the contention of the assessee in the delay of excuse petition, that it was prevented by sufficient cause from making the application before the end of the previous year. The assessee firm had set up two grounds as constituting the cause for the delay. After its execution on 14-5-1986, the partnership deed was given to the bankers of the assessee firm viz.
Canara Bank, in order to obtain an overdraft account called hundi loan.
The retiring partner viz. Sri Ali Mohammed also tried to obtain a hundi loan from the same bankers for his proprietary business. After prolonged negotiations for about four months, the partnership deed was returned without any loan sanctioned. The said partnership was returned to Ali Mohammed who was new to the income-tax procedure and therefore, he kept away the information from his father that the partnership deed was returned to him four months back. Sri Hazi Ismail also forgot filing of Form No. 11 A. When they approached their auditors for filing income-tax returns for 1986-87, everything was known and the retiring partner gave the deed to Sri Hazi Ismail. In those circumstances, partly due to the fact that the partnership deed was kept with the bankers and partly due to the forgetfulness, the assessee firm was not able to furnish Form No. 11A within the time allowed i.e., on or before 31-3-1987. However, there is no wanton delay on the part of the assessee firm. The ITO had obtained a letter dated 23-12-1987 from the Manager of the Canara Bank, Vizianagaram in which it was stated that no partnership deed was ever filed by the assessee firm during the financial year 1986-87 and therefore, the question of returning the said deed does not arise. It was further stated in the said letter that there was no request for any sort of credit facility from the assessee till date. The ITO examined Sri Hazi Ismail also. In answer to a specific question, why the two reasons for which the delay is sought to be condoned should not be rejected, Sri Hazi Ismail answered the following in his examination:- I have approached my bankers for purpose of granting loan with the deed, but I was informed that the loan can be given only after making some fixed deposit to cover the loan asked for. Then I forgotten the deed with the bankers - that was the reason for the delay of 4 months after which it was collected by my son who retired from the partnership firm, later it was forgotten by me and at the time of filing the return I was reminded by my auditors.
The ITO in his elaborate orders dated 31-12-1987 held that he was unable to accept the reasons offered by the assessee as they are neither convincing nor impressing and on the other hand the reasons offered, were found to be false. In order to obtain the benefits of registration, the assessee must have complied with the requirements of the provisions as well as the rules of the Income-tax Act strictly. The ITO relied upon Sri Ramamohan Motor Service v. CIT [l973] 89 ITR 274 (SC) wherein it was purported to have been held that in order to get the benefits of registration not only mere substantial compliance with the rules is not sufficient but the assessee has to strictly comply with the provisions of the Act and the Rules. He found that the reasons for condonation of delay were not proved to be convincing and there was no sufficient cause for the delay in filing the application and ultimately the ITO refused continuation of registration under Section 184(4). The ITO relied upon the following decisions in support of his stand:- and he had treated the assessee firm as unregistered for assessment year 1987-88.
2. Aggrieved against the orders of the ITO dated 31-12-1987, the assessee went in appeal before the Dy. Commissioner (Appeals), Visakhapatnam. Even before the DC (Appeals), the two reasons for condoning the delay put forward before the ITO remained the same. The DC (Appeals) held that the delay of 3 months 19 days in filing Form No.11A was condonable delay and he justified his stand by stating as follows in his orders:- I have carefully considered the ITO's reasons for rejecting registration and the contentions of the Counsel for the appellant against it. I do not know under what circumstances the banking authorities denied to have received the original deed of partnership when it is common knowledge that they insist on a xeroxed copy of a deed of partnership along with the original for opening and operating accounts or for availing of O.D. facilities. Besides when I consider that the period of delay was only for 3 months and 19 days I find sufficient reason even to attribute it to business inexperience. Under these circumstances, I am of the opinion that the appellant-firm was prevented by sufficient reason for committing a delay of 3 months and 19 days in filing an application in Form No. 11A and direct the ITO to grant registration to the appellant firm.
Thus, in fact the DC (Appeals) held that in absence of AH Mohammed son of Hazi Ismail from the firm, Sri Hazi Ismail became inexperience in the business since everything used to be looked after by Ali Mohammed previously. Because of the business inexperience, Hazi Ismail failed to obtain the partnership deed and also failed to file Form No. 11A in time. As against the orders of the DC (Appeals) dated 8-8-1988, the revenue preferred the second appeal.
3. According to the revenue, the refusal to grant continuation of registration by the ITO is sufficiently substantiated by the records in this case and the DC (Appeals) ought to have held that this is a fit case where registration should be refused. We have heard Sri S.C.Jaini, learned representative for the Department and Sri M.J. Swamy and Sri D. Manmohan, learned advocates for the assessee. Sri Jaini contended that the ITO gave a finding after discussing the explanation as well as the evidence secured on record, that the reasons for condonation of delay are found to be false and it is a justifiable finding. The DC (Appeals) proceeded on his own presumption instead of going by the evidence on record. He is not correct in considering that the delay of 3 months 19 days is a short delay which can be condoned.
The condonation of delay should not be automatic. In order to explain the delay, the assessee is expected to give his reasons and unless those reasons were examined and found to be sufficient to condone the delay, the delay should not be condoned. It is also contended that for getting the benefits of registration, strict compliance of provisions and rules under the I.T. Act are to be observed and mere substantial compliance of the same would not be sufficient. The learned DR relied upon the Hon'ble Supreme Court decision in Sri Ramamohan Motor Service's case (supra) and Bengal Decorators v. CIT [1978] 113 ITR 805 (Cal.). The learned DR particularly relies upon the following ratio of the Hon'ble Supreme Court Decision in the above case which is found noted in the head note at page 275:- Before a person can claim the benefit of Section 26A he must strictly comply with the requirements of that section; and in view of Sub-section (2) of that section he is also required to comply with the requirements of the relevant rules. Substantial compliance with the rules is not sufficient.
The Calcutta High Court in the second cited case held the following as per the head note at page 805 of Bengal Decorator's case (supra): Where a firm consisted of two partners and one of the partners was legally presumed to be dead from the date of his disappearance and an administrator penetente lite was appointed to represent the estate of the deceased partner and there was no provision in the partnership deed that the partnership will not be dissolved on the death of a partner, there was a change in the constitution of the firm and the firm was not entitled to continuation of registration under Section 184(7) of the Income-tax Act, 1961.
An application for registration of a firm must strictly comply with the requirements of rule 22(5) of the Income-tax Rules, 1962.
Therefore, the DR submitted ultimately that the orders of the DC (Appeals) are liable to be set aside and those of the ITO are to be restored in view of the fact that the findings given by the ITO are all well based on evidence secured into the record and under any circumstances the delay of 3 months 19 days should not have been condoned and continuation of registration should not have been granted.
4. The learned advocates for the assessee, on the other hand contended that the two decisions relied upon by the learned DR are distinguishable on facts and the ratio cannot, therefore, be applied to the facts of the case. In Sri Ramamohan Motor Service's case (supra) one of the partners who entered into the partnership deed being a minor, was found to be a invalid document. The rectificatory document was not also entered into within time. It was found by the Hon'ble Supreme Court that the application for initial registration was also found to be an invalid application. Thus, their Lordships of the Apex Court found that the assessee firm was not entitled to initial registration. Automatically it was also found that the renewal of registration for other years should also be held to be invalid. Now in this case there is no invalidity in the partnership deed dated 14-5-1986. The only thing is that there was delay in submitting the partnership deed along with Form No. 11A seeking continuation of registration. The delay was said to be condoned by filing application for condonation of delay. Under the circumstances the question is whether there was substantial compliance with the provisions of Section 184(4) which is as follows:- 184(4). The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought: Provided that the Assessing Officer may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year.
As can be seen from the above under the proviso the ITO is quite competent to excuse the delay if any caused in filing the application contemplated under Section 184(4). No doubt it should be shown that the assessee was prevented by sufficient cause from making the application before the end of the previous year. Now two reasons were assigned for excusing the delay viz., that the partnership deed dated 14-5-1986 was held up with the Manager of the Canara Bank, Vizianagaram with whom the assessee negotiated for obtaining an overdraft; secondly the partnership deed was returned not to Hazi Ismail but to his son Ali Mohammed who already went out of the business, to start a new business of his own. When Ali Mohammed used to be the partner of the firm that is up to asst. year 1986-87, it is only Sri Ali Mohammed who used to look after the business of the assessee firm. Sri Hazi Ismail never used to take interest in the affairs of the firm and especially either in maintaining account or in getting the income-tax returns etc.
prepared and filed. Therefore, it is but natural that Sri Hazi Ismail forgot to file Form No. 11 A. When he approached his auditors for filing income-tax return, on being educated on this aspect, he filed Form No. 11A along with a delay excuse petition. The learned advocates contended that there was no allegation that the partnership deed dated 14-5-1986 was brought into existence. They have pointed out that the ITO passed his order under Section 185(1)(6) which applies only to a firm which was not genuine and not to a firm which was genuine. The proper order should have been passed under Section 184(4) but not under Section 185(1)(b). In this connection the learned advocates drew my attention to the Madras High Court decision in CIT v. Ganesh Fire Works Industries [1984] 147 ITR 781 at page 790, In that case in a firm constituted by partners to which registration was already granted, one of the partners died. No accounts were made up as on the date of death but accounts were closed up on the last day of the accounting year.
There was no business carried after the death of the partner. The application for continuation of registration was filed for the entire year. The ITO instead of returning defective application, refused continuation of registration. The question before the Madras High Court was whether in those circumstances, continuation can be granted. The Madras High Court held that the procedure for grant of registration under Income-tax Act, 1961 was not as strict as it was used to be while administering Section 26A of the Indian I.T. Act, 1922 especially after the amendment of Sub-sections (2) and (3) of Section 185 by Tax Law (Amendment) Act, 1970. They found the significance of Sub-sections (2) and (3) of Section 185 as follows:- We may observe that these two provisions in Section 185, viz., Sub-section (2) and Sub-section (3), either in their present form or before they were amended by the Taxation Laws (Amendment) Act, 1970, were deliberately introduced in the statute book following widespread criticism by the learned judges of the High Courts of the harsh way in which the registration procedure was administered under the comparable provision of Section 26A of the Indian I.T. Act, 1922. The experience of the learned judges hearing tax references under the 1922 Act was that the I.T. Department were merely seizing upon technical or venial defects in the applications for registration or for renewal of registration for the purpose of denying to the assessee-firms the privileges to which they would otherwise have been entitled if only such defects had been pointed out and rectified in time. To cite only one instance of judicial criticism of the harsh administration of the law relating to registration of firms under the Income-lax Act, witness the following observations of Jagadisan J., in V.M. Periasamy Chettiar & Co. v. CIT [1964] 52 ITR 134 (Mad.) at p. 136: We must also observe that the department is over-punctilious in considering applications for registration of firms and is not averse to refuse registration quite readily in a facile manner.
Section 185(2) and (3) of the I.T. Act, 1961, is a welcome parliamentary reaction to judicial observations of this kind. At this time of the day, therefore, it would be too much to urge that the ITO is not under a duty bound to give a helping hand to assessees, who even with expert professional advice, might falter here and there in filing the applications, which the ITO might not quite regard as being in order. In those cases, not only normal courtesy, but the dictates of the statutory requirements would make for a return of the (defective) applications with an express reference to the defects contained in the applications and an opportunity given to the assessee-firms to rectify the defects. Such a procedure had not been gone through in this case. As we observed, since the defect was a minimal one, the Tribunal was justified in reading the declaration as if it did not contain even that defect and in proceeding to grant continuance of registration on that basis.
The CBDT in Circular No. 4~D (xxv-25) of 1966 dt. 31-1-1966, the text of which is extracted at Page 3599 of Chaturvedi and Pithisaria's Income-tax Law, 3rd Edition, 4th Volume, clarified certain aspects regarding grant of initial registration of firms and also granting of continuation of registration. The following is part of the said Circular extracted from Page 3599 of the learned author's book adverted to above. The first question to which answer was provided by the CBDT in the said Circular was as follows:- If a firm fails to file a declaration for continuation of registration along with the return of income as provided for in Section 184(7), under what section of the Act will the Income-tax Officer pass an order refusing to treat the firm as a registered firm (i) If a firm fails to file an application for registration within the time allowed under Section 184(4), should the order refusing registration be passed under the proviso to Section 184(4) or under Section 185(1)(6) of the Act The following answer is furnished to be the correct for the above query by the CBDT'.
Under Section 184(4) of the Income-tax Act, an application for registration of a firm has to be made before the end of the previous year relevant to the assessment year in respect of which registration is sought. The proviso to that section empowers the Income-tax Officer to condone the delay in a case where he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year. The power available to the Income-tax Officer under the proviso is discretionary, and in the interest of natural justice, it is necessary that the firm should be given a reasonable opportunity of being heard before the application is rejected as time-barred. After giving a hearing as aforesaid, the Income-tax Officer should pass an order under the said proviso in every case, whether he allows, or refuses to entertain, an application which is time-barred. In this connection, it may be mentioned that the Income-tax Officer can pass an order under Section 185(1)(6) of the Act only in cases where he is satisfied that there was no genuine firm in existence during the previous year; the provisions of that section will not apply in a case where the Income-tax Officer refuses to condone the delay in the filing of an application for registration and as such does not consider the application on its merits.
5. The above would make the legal position abundantly clear. It clearly states that when the ITO refuses to condone the delay in filing Form No. 11 A, the order should not be passed under Section 185(1)(b). This view is the same on the view expressed by the Madras High Court from which we have already quoted. It is now exiomatic to say that the CBDT Circular would be binding against the ITO and in support of the said position we may cite the decision of the Andhra Pradesh High Court in CIT v. T.V. Ramanaiah & Sons [1986] 157 ITR 300. In the said decision speaking about the binding nature of the CBDT Circulars it is stated in the head note of the decision at pages 300 and 301 as follows:- Wherever instructions given by the Central Board of Direct Taxes to relieve hardship are issued in exercise of the powers vested in the Central Board of Direct Taxes under Section 119 of the Act, it is certainly open to this court to compel the Income-tax Officer to follow the instructions of the Central Board of Direct Taxes. This is not to say that this court is bound by the instructions of the Central Board of Direct Taxes. All that is required to be said is that, so far as the officials of the Income-tax Department are concerned, it is not open to them to say that they would not follow the instructions of the Central Board of Direct Taxes and carry matters in appeals and references.
Therefore, it is argued that the order of the ITO passed under Section 185(1)(b) is wrong under law since the sine qua non for re-opening the said section viz., that the firm is a bogus firm and did not carry any business whatsoever was never present and it was never the finding of the ITO also in this case. It is also clear that the proper section under which the order refusing the continuation of registration should have been passed, was under Section 184(4). As against this submission of the learned counsel for the assessee, the learned DR argued that the Manager of Canara Bank did not issue receipt of having kept the partnership deed with him, before its being returned to the son of Hazi Ismail and so the allegation of the assessee that the partnership deed was not in his custody for sometime, but was in the custody of the Canara Bank Officials should be held to be an allegation which is not proved. So also the allegation that Ali Mohmmed, son of Hazi Ismail kept the partnership deed after its being returned by the Canara Bank Manager was also not substantiated by any evidence. In view of the above facts not being substantiated it must be held that the lower authorities were perfectly justified in coming to the conclusion that the assessee failed to prove that there was reasonable cause for the delay in filing Form No. 11A after due date and that there were no valid reasons for condoning the delay in filing Form No. 11A late. It is also contended that quoting of wrong section will not invalidate the order refusing condonation of delay and the learned DR cited in A.S.S.S.S. Chandrasekaran & Bros. v. CIT [1974] 96 ITR 711 (Mad.) in which it is held that as against the order of the ITO refusing to condone the delay in filing Form No. 11 A, no appeal lies to the AAC.On the strength of the decision it is contended that the appeal itself is incompetent. In reply, the learned advocates for the assessee relied upon the decision of the Mysore High Court in Sree Ramakrishna Mining Co. v. C/7'[1967] 64 ITR 197 in which in the head-note at page 198 of the decision it was held that:- registration of partnership cannot be refused under Section 26A if there is a genuine partnership and one exists in the eye of the law.
The refusal of registration is possible only when there is no genuine partnership or the partnership is illegal....
It is also contended by the learned advocates for the assessee that if the ultimate order of the ITO is refusal to condone the delay cause in filing Form No. 11 A, then only the Madras High Court decision in A.S.S.S.S. Chandrasekaran & Bros? case (supra) would apply; but if the ITO did not stop by merely refusing to condone the delay caused in filing Form No. 11 A, but also passes a further order cancelling continuation of registration to the firm, or order under Section 185(1)(), the said order is certainly appealable and the Madras High Court decision does not apply to the facts of the case. In effect they wanted to argue that inasmuch as in this case, the ITO refused continuation of registration under Section 185(1)(6), the ratio of the Madras High Court cannot be pressed into service by the revenue. I have gone through the Madras High Court's decision. I agree with the contention of the learned advocates for the assessee. In that case, application for registration was filed which was rejected as time-barred by observing that as satisfactory explanation for the delay in filing the application had been offered. Against the said order of the ITO refusing to condone the delay, an appeal was filed before the AAC and a further appeal was also filed before the Tribunal. Both of them were rejected, confirming the orders of the lower authorities, the Madras High Court held that from the order of the ITO merely refusing to condone the delay under the proviso to Section 184(4) no appeal lies to the AAC. However, in this case, the ITO not only refused to condone the delay but also refused to grant continuation of registration for asst. year 1987-88 and also treated the assessee firm as unregistered under his orders dt. 31-12-1987. According to the assessee, continuation of registration should have been granted to the assessee firm and from an order refusing grant of registration, an appeal lies under Section 246. Further, under Sub-section (3) of Section 185, the benefit of registration once granted can be extended to subsequent asst. years, provided the firm filed a declaration under Section 184(7). If such declaration is not in order, it should be returned to the assessee intimating the defect and also should give an opportunity to rectify the defect within a period of one month from the date of intimation. If the said declaration is not rectified within a period of one month, then the ITO can refuse to extend the benefits of continuation of registration to the said firm. Against the order passed under Sub-section (3) of Section 185, appeal lies to the AAC under the provisions of Section 246(g). Therefore in this case, since the benefits of continuation was denied to the assessee and since the assessee was consequently treated as unregistered firm and since the ITO did not stop by merely refusing to condone the delay in his impugned orders, I hold that the appeal is quite competent and the ratio of the Madras High Court in A.S.S.S.S, Chandrasekaran's case (supra) docs not apply to the facts of the case. The CBDT had given clear instructions not to pass orders under Section 185(1)(b) if the ITO chooses not to condone the delay in filing Form No. 11 A. The impugned order passed by the ITO in this case is wholly opposed to the instructions of the CBDT Circular cited above and for that reasons, the order of the ITO should not be allowed to stand. I therefore set aside the orders of the lower authorities. I also condone the delay in filing Form No. 11A since the delay was only three months 19 days and to my mind, the explanation offered by the assessee as to the cause of the delay wrings to be true. I therefore set aside the orders of the lower authorities and after condoning the delay in presenting Form No. 11A direct the ITO to consider Form No. 11A on merits and grant continuation of registration if the assessee is entitled to it as per law.