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  • Rastogi
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  • Section 256(1) of the I.T. Act, 1961 (hereafter "the Act").
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Rastogi
Acts
  • Section 256(1) of the I.T. Act, 1961 (hereafter "the Act").
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Smart Summary

Structured Summary of the Opinion — Reference under Section 256(1), I.T. Act (Assessment Year 1973-74)

Factual and Procedural Background

The reference arises under Section 256(1) of the Income-tax Act, 1961, concerning the assessment year 1973-74 (previous year ending 31 March 1973). The Income-tax Appellate Tribunal, Allahabad Bench, referred three questions for the court's opinion at the instance of the Commissioner of Income-tax.

The respondent (assessee) was a partnership firm, M/s. Commercial Finance Corporation, in which one partner originally was Sri Ram Babu as karta of his HUF. A partial partition of that HUF took place in 1963, and Sri Ram Babu was taken to have retired from the firm in 1963 with two of his minor sons (Dhirlalit and Sanjaya) admitted to the benefits of partnership. A fresh instrument of partnership was executed in 1964 and amended in 1966 and 1970; the 1970 deed admitted another minor son, Rahul, to the benefits of the partnership.

Dhirlalit attained majority on 7 July 1972. A fresh deed of partnership and an agreement between the partners and the guardian of the two minors (Sanjaya and Rahul) were both executed on 1 December 1972. The firm filed an application for fresh registration in Form No. 11 on 27 March 1973 and annexed the original partnership deed to that application; the agreement concerning the guardian's consent was filed later, on 25 July 1974.

The ITO refused registration on the view that there was no valid deed of partnership on which registration could be granted, treating the agreement filed in July 1974 as not forming part of the partnership instrument and also considering the application defective and incapable of condonation. The assessee appealed to the AAC (unsuccessfully) and then to the Tribunal, which allowed the appeal and directed registration; the Tribunal found the agreement to form part of the partnership deed, treated the late filing as a rectifiable defect, and condoned the delay. The reference to this court raises three specific questions concerning (1) whether the agreement filed late could be read as part of the partnership instrument, (2) whether a Form No. 11 application accompanied by a deed lacking guardian consent is only a defective application capable of later remedy, and (3) whether the Tribunal was justified in holding the firm constituted by a valid partnership deed entitled to registration.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the second agreement dated December 1, 1972, filed as late as on July 25, 1974, could be read as part of the instrument of partnership filed on March 27, 1973?
  2. Whether the application in Form No. 11 accompanied by a partnership deed which did not contemplate any stipulation to the effect that the guardian of the minors had agreed to their admission in the partnership can be called only a defective application and the defects for which could be remedied later on?
  3. Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the assessee-firm was constituted by a valid partnership deed and that it was entitled to the benefits of registration?

Arguments of the Parties

Revenue / ITO's Position

  • The ITO took the view (following this Court's decision in Addl. CIT v. Uttam Kumar Promod Kumar [1974] 97 ITR 730) that there was no valid deed of partnership on the basis of which registration could be granted.
  • The ITO did not accept that the agreement executed on 1 December 1972 and filed on 25 July 1974 formed part of the partnership deed and therefore considered that the guardian of the minors had not expressed consent to their admission in the partnership.
  • Even if the documents formed part of the same transaction, the ITO considered the application for registration defective and incomplete and held that he had no power to condone the delay; consequently he rejected the application for a fresh registration.

Assessee / Tribunal's Position

  • The Tribunal (agreeing with the assessee) found that the agreement dated 1 December 1972 formed part of the partnership deed and satisfied the requirements laid down by this Court in Uttam Kumar Promod Kumar [1974] 97 ITR 730.
  • Filing the agreement after the close of the relevant previous year made the application defective and incomplete, but that defect was rectifiable; the ITO should have called upon the assessee to remove the defect or explain it and had the power to condone the delay.
  • In the present case the agreement was filed before the ITO passed the order refusing registration; the Tribunal therefore condoned the delay and directed registration, requiring the ITO to give effect to its order in respect of the firm and the partners.
  • The assessee's counsel (Sri R. K. Gulati) relied on authorities including Ganga Motor Service v. CIT, Kanhaiya Lal Moti Lal v. CIT, and Alankar Jewellers v. CIT to support the contention that defects in the application (including defects in the accompanying partnership deed) are rectifiable and that Section 185(2) mandates intimation and opportunity to rectify.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Addl. CIT v. Uttam Kumar Promod Kumar [1974] 97 ITR 730 Standards for what constitutes a valid instrument of partnership in the context of registration under the Act. The ITO relied on this decision to contend there was no valid partnership deed; the Tribunal found that the facts satisfied the requirements laid down in this case and this Court accepted the Tribunal's factual finding that the agreement met those requirements.
Ganga Motor Service v. CIT [1977] 106 ITR 132 (Pat) Interpretation of Section 185(2): where an application for registration is defective, the ITO must intimate the defect and give an opportunity to rectify; such enabling provision is not to be narrowly construed and includes rectifying defects in the copy of the deed. The Court relied on this authority to support the proposition that omission of a certified copy (or similar defect) does not justify outright rejection if the ITO fails to give the statutory opportunity to rectify.
Kanhaiya Lal Moti Lal v. CIT [1969] 72 ITR 507 (All) Authority relied upon for the principle that defects in documents accompanying registration applications can be rectified under Section 185(2). Relied upon by counsel and cited in the opinion to support the broader interpretation of Section 185(2) allowing rectification of defects in the application and accompanying documents.
Alankar Jewellers v. CIT [1979] 116 ITR 89 (Patna) Held that the word "application" in Section 185(2) includes documents required to be enclosed (including the partnership deed) and that the ITO must intimate defects and allow one month to rectify. This decision was invoked to show the mandatory nature of issuing notice to rectify defects in the application and to treat the partnership deed as part of the application that can be corrected within the statutory opportunity.

Court's Reasoning and Analysis

The court proceeded from the Tribunal's primary factual findings: the application for registration (Form No. 11) was filed within the relevant accounting period with the original partnership deed annexed on 27 March 1973, and the agreement executed on 1 December 1972 was filed subsequently on 25 July 1974. The Tribunal found as a pure question of fact that the later-filed agreement formed part of the partnership deed and satisfied the criteria in Uttam Kumar Promod Kumar.

The court treated that factual finding as binding and noted that the Revenue never contended that the agreement was not genuine. On that basis, the court held that the mere delay in filing the agreement would not disentitle the assessee to registration because the absence of the agreement at the time of filing made the application merely defective and incomplete rather than vitiating it entirely.

With respect to the ITO's power and duty under Section 185(2) of the Act, the court relied on precedent (including Ganga Motor Service and Alankar Jewellers) to emphasize that when an application is defective the ITO must intimate the defect and allow an opportunity to rectify; this provision is not to be narrowly construed and extends to defects in documents accompanying the application (such as the partnership deed or its certified copy). Therefore, the ITO's failure to issue such a notice deprived the assessee of the statutorily mandated opportunity to rectify.

The court further observed that in the instant case the agreement was filed by the assessee before the ITO passed any order refusing registration, and the ITO did not doubt the genuineness of the agreement. The Tribunal had condoned the delay after considering the facts; the court found that exercise of discretion by the Tribunal to condone the delay was not unjustified. Consequently, the agreement could be read with the instrument filed earlier and the assessee became entitled to registration.

Holding and Implications

HOLDING: All three questions referred under Section 256(1) are answered in the affirmative in favour of the assessee and against the department. The court agreed with the Tribunal that the agreement dated 1 December 1972 (filed on 25 July 1974) could be read as part of the partnership instrument filed on 27 March 1973; that the omission rendered the application defective but rectifiable; and that the assessee-firm was constituted by a valid partnership deed and entitled to registration.

Direct consequences and implications:

  • The assessee is entitled to registration, and the ITO is directed to give effect to the Tribunal's order in respect of the firm and the partners.
  • The court awarded costs to the assessee in the sum of Rs. 250.

The opinion does not purport to lay down a novel principle beyond applying existing authorities on the interpretation of Section 185(2) and on what constitutes a valid partnership instrument; the decision resolves the questions on the specific facts before the court by affirming the Tribunal's factual findings and its exercise of discretion to condone delay.

Show full summary ...

    Commissioner Of Income Tax v. Commercial Finance Corporation

    1. This is a reference under Section 256(1) of the I.T. Act, 1961 (hereafter "the Act"). The assessment year involved is 1973-74, the accounting period being the financial year ending March 31, 1973. The following questions have been referred for the opinion of this court by the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad (hereafter "the Tribunal") at the instance of Commissioner of Income-tax :

    "1. Whether, on the facts and in the circumstances of the case, the second agreement dated December 1, 1972, filed as late as on July 25, 1974, could be read as part of the instrument of partnership filed on March 27, 1973 ?

    2. Whether the application in Form No. 11 accompanied by a partnership deed which did not contemplate any stipulation to the effect that the guardian of the minors had agreed to their admission in the partnership can be called only a defective application and the defects for which could be remedied later on ?

    3. Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the assessee-firm was constituted by a valid partnership deed and that it was entitled to the benefits of registration.?"

    2. The facts found, briefly stated, are : The respondent-assessee, M/s. Commercial Finance Corporation, Allahabad, was a partnership firm of which one of the partners was Sri Ram Babu as karta of his HUF. A partial partition took place in that HUF in 1963. It was accepted by the ITO by an order under Section 171 of the Act dated November 30, 1964. Accordingly, Sri Ram Babu retired from the firm in 1963, and in his place his two minor sons, Dhirlalit and Sanjaya, were admitted to the benefits of the partnership. A fresh instrument of partnership was drawn up on March 19, 1964. The deed was amended thereafter in 1966 and again in 1970. In the latter deed, Rahul, another minor son of Ram Babu, was admitted to the benefits of the partnership. Dhirlalit became major on July 7, 1972, and a fresh deed of partnership was executed on December 1, 1976, that is, during the previous year relevant to the year under consideration. On the same date another agreement was executed betweeen the partners of the firm on the one hand and the guardian of the two minors, that is, Sanjaya and Rahul on the other, whereby the latter gave his consent to the admission of his minor sons to the benefits of the partnership.

    3. The assessee-firm made an application in Form No. 11 on March 27, 1973, for the grant of a fresh registration. The original partnership deed was filed with that application. The agreement was, however, filed on July 25, 1974. The ITO, following the decision of this court in Addl. CIT v. Uttam Kumar Promod Kumar [1974] 97 ITR 730, took the view that there was no valid deed of partnership on the basis of which the assessee could be granted registration. He did not consider the agreement executed on December 1, 1972, as a part of the partnership deed and thus in his opinion the guardian of the minors had not expressed his consent to their admission to the benefits of the partnership. He was also of the opinion that in case these two documents formed part of the same transaction even then registration could not be granted because the application for registration was defective and incomplete and he had no power to condone the delay. In the result the assessee's application for the grant of a fresh registration was rejected.

    4. Aggrieved, the assessee filed an appeal before the AAC which failed and then filed a further appeal before the Tribunal.

    5. The Tribunal, agreeing with the assessee, held that the agreement dated December 1, 1972, was a part of the partnership deed and satisfied the requirements laid down for the constitution of a valid partnership in such cases by this court in Uttam Kumar Promod Kumar [1974] 97 ITR 730 and thus in its opinion the ITO was not justified in refusing to grant registration to the firm. It was correct that the agreement was filed after the close of the relevant previous year. That only made the application for registration defective and incomplete and for that the ITO should have called upon the assessee to remove the defect or to explain the reason for the defect. The ITO did not do so. Further, he had power to condone the delay as well. In the present case, however, the agreement was filed before the order refusing registration was passed by the ITO. In the circumstances of the present case, the Appellate Tribunal was of the opinion that the assessee-firm was constituted under a valid partnership deed and it was entitled to registration. Consequently, registration was allowed to the assessee and the ITO has been directed to give effect to this order in the case of the firm as also those of the partners.

    6. Question Nos. 1 and 3 can be taken up together. As noted above, the facts found by the Tribunal are that the application for registration in Form No. 11 was moved within the relevant accounting period as required by law. The partnership deed dated December 1, 1972, in original was annexed to that application. The agreement which had also been executed on the same date was filed subsequently. It has been held that this agreement formed a part of the partnership deed itself. It satisfied the requirements which had been laid down by this court in the case of Uttam Kumar Promod Kumar [1974] 97 ITR 730. In other words, the Tribunal has found that the partnership was evidenced by a valid instrument of partnership and the consent of the guardian had been duly given for the admission of his minor sons to the benefits of the partnership. It is a pure finding of fact that the agreement formed part of the partnership deed which is binding on this court. It was never the case of the Revenue that this agreement was not a genuine document. That being so, the mere fact that it was filed with some delay would not disentitle the assessee to the relief of registration. It has been found by the Tribunal and we agree with it that the absence of this agreement merely made the application for registration defective and incomplete. That application became complete and competent after this agreement was filed. As for the power to condone the delay, the view taken by the ITO was evidently erroneous. He could condone the delay if he was satisfied that there was sufficient reason for the same. After considering the facts of the case the Tribunal has condoned the delay. The discretion exercised cannot be said to be unjustified and, in our opinion, it has been rightly held that the agreement dated December 1, 1972, filed on July 25, 1974, could be read with the instrument of partnership filed on March 27, 1973, and that the assessee was entitled to the grant of registration.

    7. Now, coming to question No. 2, as noted above, the agreement dated December 1, 1972, was filed on July 25, 1974, that is, after the end of the relevant accounting period. The question is whether it was a defect in the making of the application for registration and could it be rectified. In our opinion, it was merely a defect which certainly could be rectified and the view taken by the Tribunal is absolutely correct. In Ganga Motor Service v. CIT [1977] 106 ITR 132 (Pat), one of the reasons given by the ITO for rejecting an application for registration was that a certified copy of the instrument of partnership had not been filed along with the application for registration. Section 185(2) of the Act provides that if the application for registration is defective, the ITO shall intimate the defect to the firm and give it an opportunity to rectify the defect. Repelling the contention of the Revenue that this opportunity was meant to remove a defect in the application itself and that only a defect of clerical nature, as without substance, it was held that the enabling provision for allowing an opportunity to the assessee for rectifying the defect and making the application in order does not admit of any narrow construction. It will include rectifying defect in the copy of the deed of partnership accompanying the application for registration. The decision of this court in Kanhaiya Lal Moti Lal v. CIT [1969] 72 ITR 507 (All) was relied upon. Our attention was also invited by the learned counsel for the assessee, Sri R. K. Gulati, to another decision of the Patna High Court in Alankar Jewellers v. CIT [1979] 116 ITR 89. There the petitioner-firm had applied for registration for the assessment year 1971-72, under Section 184(1) of the Act in the prescribed form. The application for registration was signed by all the partners, But it was not accompanied by either the original deed of partnership or a certified copy of the partnership deed. The ITO refused to grant registration to the firm on the ground that the application was not accompanied by the original partnership deed, but no notice was issued to the firm as required under Section 185(2) of the Act. That order was upheld by the Commissioner in revision. On a petition under Articles 226 and 227 of the Constitution challenging the validity of those orders, the court held that on a perusal of Section 185(2) of the Act it is clear that if an application for registration of a firm is not in order, the ITO shall intimate the firm to remove the defect in the application and also allow an opportunity to the firm to rectify such defect within a period of one month from the date of such intimation. The word "application" occurring in this section includes the documents which are required to be enclosed therewith and the partnership deed which shall accompany the application for registration is a part of the application. Therefore, it is mandatory on the part of the ITO to intimate the firm to rectify the defect in the application for the grant of registration and an opportunity should be given to the firm to rectify such defect within one month from the date of such intimation.

    8. In the instant case, the ITO did not give any such notice to the assessee to rectify the defect in the application for grant of registration. Thus, no opportunity was given to the assessee to rectify the defect. However, before the ITO could pass any order on the application for grant of registration, the assessee of its own filed the aforesaid agreement. The ITO could not, in these circumstances, ignore the agreement particularly when he did not doubt its genuineness. The Tribunal was thus right in holding that the application for registration was merely defective which defect could be rectified and was so rectified by the assessee before the ITO passed any order on that application.

    9. Accordingly, we answer all the three questions in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs which we assess at Rs. 250.

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    Commissioner Of Income Tax v. Commercial Finance Corporation
    (Apr 20, 1982)