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Addl. Commissioner Of Income-Tax v. Murlidhar Mathura Prasad.
Factual and Procedural Background
The assessee is a partnership firm which filed a return for the assessment year 1965-66 on 3rd August 1965, showing an income of Rs. 28,918. The Income Tax Officer (ITO) later noticed on 5th February 1970 that the return was not accompanied by the declaration required under section 184(7) of the Income Tax Act, 1961, despite no change in the constitution of the firm or shares of its partners. The ITO issued a notice proposing to assess the firm as an association of persons. The firm filed a fresh return with the required declaration on 6th March 1970. The ITO refused renewal of registration on the ground that the declaration should have been filed with the original return and assessed the firm as an association of persons. The Appellate Assistant Commissioner upheld this view. The assessee appealed to the Tribunal, which held that since registration had been granted for the two previous years and the declaration was filed before the assessment order, the assessee was entitled to continuation of registration. The Tribunal remanded the case to the ITO to act after the assessee complied with section 185(2) of the Act. The Commissioner of Income Tax (CIT) referred two legal questions to the court for opinion regarding the correctness of the Tribunal's directions and the assessee's entitlement to continuation of registration under section 184(7).
Legal Issues Presented
- Whether the Tribunal was legally correct in directing the Income-tax Officer to allow continuation of registration after requiring the assessee to comply with section 185(2) of the Income-tax Act, 1961?
- Whether the assessee is entitled to the benefit of continuation of registration under section 184(7) of the Income-tax Act, 1961?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Nand Singh Taneja and Sons v. CIT, [1973] 91 ITR 202 (All) | A declaration in Form No. 12 filed prior to the return of income cannot be rejected as premature or invalid. | The court agreed that the declaration is not invalid if filed before the return and should not be rejected merely on timing grounds. |
| Madivalappa & Sons v. CIT, [1970] 77 ITR 235 (Mys) | Held that declaration must accompany the return of income (contrary view). | The court noted no discussion on the point in this case and did not agree with its reasoning. |
| Shanti Trading Co. v. CIT, [1973] 87 ITR 38 (Mys) | Reiterated the view that declaration must accompany the return. | The court found this view to focus narrowly on the proviso language without considering allied provisions. |
| CIT v. Sitaram Bhagwandas, [1976] 102 ITR 560 (Patna HC) | Held that the requirement that the declaration accompany the return is directory, not mandatory. | The court expressed respectful agreement with this view, supporting the directory nature of the requirement. |
| Lakshmiratan Engineering Works Ltd. v. Assistant Commissioner (Judicial), [1968] 21 STC 155 (Supreme Court) | Procedural requirements (such as documents accompanying others) are directory and can be complied with later. | The court cited this precedent to support the view that procedural filing requirements are not mandatory. |
| Chatarbhuj Chogalal v. CIT, [1956] 30 ITR 22 (All) | Requirement of fee payment accompanying an application is directory. | The court cited this to illustrate that procedural requirements should not be interpreted as mandatory. |
Court's Reasoning and Analysis
The court analyzed the statutory provisions concerning registration of firms under sections 184 and 185 of the Income-tax Act, 1961. Section 184(7) provides that once registration is granted, it continues for subsequent years if there is no change in the firm's constitution or shares, evidenced by a declaration filed with the return of income. The court examined whether the requirement that the declaration be filed "along with" the return is mandatory or directory. It concluded that this is a procedural requirement and not of the essence or substance. The legislative intent is to ensure clear evidence of no change in the firm’s constitution, but procedural defects or timing issues can be rectified under section 185(2). The court distinguished between substantive conditions and procedural formalities, emphasizing that procedural requirements should be treated as directory to avoid penalizing the assessee for technicalities. The court relied on precedents to affirm that declarations filed before assessment, even if not physically accompanying the return, are valid. The Taxation Laws (Amendment) Act, 1970 clarified these principles by allowing declarations to be filed within prescribed time limits and enabling condonation of delay, indicating the earlier ambiguity was resolved in favor of flexibility. The court found the Tribunal’s approach justified, noting that the assessee had complied with the substantive requirements and was given opportunity to rectify any formal defects.
Holding and Implications
The court held that the assessee is entitled to continuation of registration under section 184(7) of the Income-tax Act, 1961, and the Tribunal was correct in directing the ITO to allow such continuation after compliance with section 185(2).
The direct effect of this decision is that the assessee’s registration as a firm continues validly despite the declaration not being filed simultaneously with the original return, provided it is filed before assessment and the assessee rectifies any formal defects. The court awarded costs of Rs. 200 to the assessee. No new precedent was established beyond affirming the directory nature of procedural requirements in this context.
Satish Chandra, C.J:— The assessee is a partnership firm. For the assessment year 1965-66, it, on 3rd August, 1965, filed a return showing, an income of Rs. 28,918. On 5th February, 1970, the ITO noticed that the said return was not accompanied by the declaration under s. 184(7) of the I.T Act, 1961, and that there has been no change in the constitution of the firm or the shares of its partners. He issued a notice to the assessee calling upon it to show cause why the firm may not be assessed as an association of persons. In reply, the firm filed a fresh return showing the same amount as income, and with the said return it filed a declaration in Form No. 12 under s. 184(7) of the Act.
2. The ITO refused renewal of registration on the ground that the firm had not been granted continuation of registration in the last two preceding years, and the declaration in Form No. 12 ought to have been filed along with the return. He assessed the firm in the status of an association of persons. On appeal, the A AC held that the return which was filed on 6th March, 1970, was not a valid one. It could not be treated as a revised return, because it had not been filed due to discovery of any omission or wrong statement in the original return. The declaration in Form No. 12 ought to have been filed along with the return filed on 3rd August, 1965, as is expressly required by s. 184(7). The assessment in the status of an association of persons was upheld.
3. The assessee took up the matter to the Tribunal. The Tribunal observed that the assessee-firm had been granted registration if or the two previous years. Since the declaration in Form No. 12 was filed before the assessment order was passed, it was in order, and the assessee was entitled to continuation of registration. The Tribunal, therefore, sent the case back to the ITO for doing the needful, after the assessee had, within a month, complied with the terms of s. 185(2) of the Act.
4. At the instance of the CIT, the i Tribunal has referred the following questions of law for our opinion
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in directing the Income-tax Office to allow continuation of registration after asking the assessee to comply with the terms of section 185(2) of the Income-tax Act, 1961?
(2) Whether, on the facts and circumstances of the case, the assessee is entitled to the benefit of continuation of registration under section 184(7) of the Income-tax Act, 1961?”
5. Section 184 of the Act deals with registration as also with the regis tration having effect for subsequent years. Sub-section (7) of si. 184 says that where registration is granted to any firm for any assessment year, it shall have effect for every subsequent year, and the proviso thereto states 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 registration was granted;
(ii) the firm furnishes, along with its return of incomp for the assessment year concerned, a declaration to that effect in the prescribed form and verified in the prescribed manner.
6. Sub-section (8) of s. 184 requires that where any such change has taken place, the firm shall apply for fresh regfetration.
7. Under sub-s. (2) of s. 185, the ITO cannot reject an application merely on the ground that there are some defects in it. He is to give the firm an opportunity to rectify the defects.
8. The question is whether the phrase “the firm furnishes, aldng with its return of income………a declaration to that effect” occurring in icl. (ii) of the proviso to s. 184(7) of the Act is mandatory in nature, so that if there is even a single day's difference in the filing of the two things, the ITO is bound to refuse registration.
9. Section 186(2) authorises the ITO to cancel the registration of a firm where renewal of registration has been granted under s. 184(7) “if there is any such failure on the part of the firm as is mentioned in s. 144”. One of the failures is failure to file the return. So, acting under s. 186(2), the ITO has the discretion to cancel renewal of registration in a case where the firm did not file any return of income. These actions require a specific order of cancellation. Such an order of cancellation is appealable under s. 246.
10. The point is that the ITO has not been authorised to ignore the declaration furnished by the firm under s. 184(7) merely because the firm had not furnished the return of income. In Nand Singh Taneja and Sons v. CIT, [1973] 91 ITR 202 (All), a Bench of this court held that a declaration in Form No. 12 filed prior to the filing of the return of income could not be rejected as premature or invalid. It did not agree with the contrary opinion expressed by the Mysore High Court in Madivalappa & Sons v. CIT, [1970] 77 ITR 235 and observed that there was no discussion on the point in that case. The assessee did not dispute the position that the filing of the return with the declaration was a necessary condition. The view taken by the Mysore High Court in the aforesaid case was reiterated in Shanti Trading Co. v. CIT, [1973] 87 ITR 38 (Mys). In this case, the Mysore High Court looked at the language of the proviso without considering the effect of the allied provisions.
11. The essence of s. 184(7) is that once registration has-been granted to a firm, it is to have effect for every subsequent year, in case there has been no change in the constitution of the firm or in the shares of its partners. The other requirements are merely to evidence this fact. The requirement that the firm shall furnish a declaration in Form No. 12 is merely to prove the facts in a particular way. The requirement that the declaration shall be filed along with the return of income is not of the substance or the essence. It is a procedural requirement.
12. The legislative intent appears to be that while dealing with the assessment of a firm, the ITO should have clear-cut evidence that the essential fact that there has been no change in the constitution of the firm or in the shares of the partners has been proved satisfactorily in the required manner. The procedural requirements hence are to be treated as directory. If there is some defect in the declaration form, the assessee is to be given an opportunity for rectifying it (See sec. 185(2)). It cannot be ignored or rejected straightaway. Similarly, the requirement that the declaration should be filed along with the return of income is directory, because the ITO is enabled to assess the firm provided the return is filed up to the time he makes the assessment.
13. The problem may be looked at from a slightly different view-point. The firm could have filed a return within the time prescribed by sub-s. (1) or sub-s. (2) of s. 139. It could also file a return within four years from the end of the assessment year under s. 139(4). It could file a revised return under s. 139(5). If the firm had four years to file a return under s. 139(4) or a revised return under s. 139(5), and yet it could validly file the declaration in Form No. 12 along with such returns and it was entitled to continuation of the registration, it does not then stand to reason that an assessee who is prompt and files a return before the time prescribed under sub-s. (1) or sub-s. (2) of s. 139 should suffer merely because the declaration was not filed physically along with it. This is a pure technicality.
14. The Taxation Laws (Amendment) Act, 1970, which came into force on 1st April, 1971, repealed and re-enacted s. 184(7). Now, the equirement that the declaration should accompany the return has been givlen up. The declaration has to be filed before the expiry of the time allowed under sub-s. (1) or sub-s. (2) of s. 139 for furnishing the return of income, in addition, the ITO has been authorised to condone the delay and to allow the firm to furnish that declaration at any time before the assessment is rhade; This made the position, which was a little ambiguous previously, clear. After amendment a definite time limit was fixed, and so the officer was empower ed to condone the delay. This would suggest that previously when no specific time limit was fixed, there was no need to provide for condonation of delay. It was thought enough that the declaration could be filed up to the time of the assessment. In CIT v. Sitaram Bhagwandas, [1976] 102 ITR 560, the Patna High Court took the view that the requirement that the declaration should accompany the return was directory. There are in respectful agreement with it.
15. Such procedural requirements, that a particular document should be accompanied by another, have been treated as directory. The Supreme Court in Lakshmiratan Engineering Works Ltd. v. Assistant Commissioner (Judicial), [1968] 21 STC 155, held that the requirement of the Sales Tax
16. Rules that “the memorandum of appeal shall be accompanied by……a challan showing deposit in the Treasury of the tax admitted by the appellant to be due……” was directory, and that the challan could be filed up to the time the appeal was taken up for consideration. A Bench of this court in Chatarbhuj Chogalal v. CIT, [1956] 30 ITR 22 (All) held that the requirement of s. 66(1) of the Indian I.T Act that the application shall be accompanied by a fee of Rs. 100 did not mean a literal stitching up of the fee with the application for reference. The provision was held to be directory.
17. In our opinion, the Tribunal was justified in taking the view that the assessee was entitled to continuation of registration because it had filed the requisite declaration before the assessment was made. Neither the statement nor the Tribunal's order indicates the nature of the defects in the declaration. Section 185(2) enables the assessee tp rectify formal defects, if any. We presume that there may have been some such defects and hence the Tribunal was justified in directing the assessee to rectify the defects within the meaning of s. 185(2).
18. We, therefore, answer both the questions referred to us in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs which are assessed at Rs. 200.
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