The Judgment of the Court was delivered by

K.L Roy, J.:— This reference under section 66(1) of the Income-Tax Act, 1922 (hereinafter referred to as the Act), arises out of the following facts.

2. A firm in the name and style of Askaran Kissenlal was doing business in jute from the year 1946. There were originally three partners in the firm, namely, (1) Askaran Bothra, (2) Hansraj Bothra and (3) Mulchand Bothra. The firm was reconstituted under a deed of partnership dated the 3rd April, 1952, whereby (1) Hiralal Jain, (2) Hulaschand Jain and (3) Bhowarilal Kissenlal, a Hindu undivided family consisting of Bhowarilal and Kissenlal with Bhowarilal as the karta, were admitted as partners as from the 3rd April, 1952. Bhowarilal and Kissenlal were the two sons of the original partner, Mulchand, who had other sons, and at the time of the execution of the deed, Kissenlal was a minor. Hiralal and Hulaschand were not related to the original partners and they introduced Rs. 1,41,500 and Rs. 1,44,145 respectively as their capital in the business. The aforesaid deed recited, inter alia, that the parties of the first, second and third parts (the original partners) consented for the extension of business and capital, and admitted (1) Bhowarilal Kissenlal, (2) Hiralal Jain and (3) Hulaschand Jain as co-partners under the terms and conditions of the partnership. Clause 7 of the deed defines the shares of the partners in the profits and losses of the firm and such share of each of the six partners is shown as 0-2-8 pies in the rupee. The deed was executed, amongst others, by Bhowarilal Bothra for and on behalf of Bhowarilal Kissenlal. For the assessment year 1955–56, the corresponding previous year being 2011 R. N., the assessment of Income-Tax of the firm was completed under section 23(4) due to the non-compliance by the assessee with the statutory notice under section 22(4) of the Act. The Income-Tax Officer had required the assessee to produce its books of account for the three preceding accounting years 2008, 2009 and 2010 R.N But, in spite of several adjournments granted by the Income-Tax Officer to enable the assessee to produce such books, the assessee ultimately failed to do so and the assessment was completed on the 30th August, 1967, under section 23(4). The assessee applied to the Income-Tax Officer under section 27 of the Act for setting aside the best judgment assessment under section 23(4) and for making a fresh assessment. The Income-Tax Officer in rejecting the application, pointed out that the notice under section 22(4) for the production of the three preceding years' account books was first served on the assessee on 27th July, 1957, as the Income-Tax Officer was of the opinion that the examination of these books was essential in connection with the assessment proceedings for the year 1955–56 for the various reasons given in the assessment order. The Income-Tax Officer mentioned the various dates on which adjournments were given at the request of the assessee to enable it to produce the aforesaid books. But, ultimately, on the failure of the assessee to comply with the aforesaid notice in spite of the adjournments granted, the best judgment assessment was made on 30th August, 1957. The Income-Tax Officer was of the opinion that, having regard to the repeated opportunities allowed to the assessee for compliance with the requirements of the notice under section 22(4) and other requisitions made during the course of the assessment proceedings, the assessee had actually no intention at all of producing the books and furnishing other documents and evidence. The assessee's appeal against the aforesaid order under section 27 was also dismissed by the Appellate Assistant Commissioner. In his order, the Appellate Assistant Commissioner observed that, as in the meanwhile the Income-Tax Officer had detected various manipulations in the accounts, the assessee had thought it expedient to withhold the books. The Appellate Assistant Commissioner also gave the assessee an opportunity of producing the books before him, but he was informed that since Askaran, the partner who used to deal with the accounts was dead, these books were no longer traceable and could not then be produced. The Appellate Assistant Commissioner observed that in the present case there was ample necessity for examining the books as there were several accounts in the names of parties where the balance as shown in the balance-sheet and as actually revealed by the books differed by several lakhs of rupees. As these balances were alleged to have been brought forward from the preceding years, the books of those years required examination. The Appellate Assistant Commissioner had no doubt in his mind that the assessee-firm had failed deliberately to comply with the terms of the section 22(4) notice and did not produce the books which were necessary for the purpose of the correct determination of the income for that assessment and for the production of which ample opportunity was allowed to the assessee by the Income-Tax Officer. The assessee's appeal to the Tribunal against the aforesaid order of the Appellate Assistant Commissioner also failed. The Tribunal agreed with the findings of the Appellate Assistant Commissioner that the assessee's default in not producing the earlier year's books was clearly established in view of the evidence available on the record and that the assessee firm was deliberately withholding those books because it suited them to do so. The assessee made an application for registration under section 26A of the Act for the assessment year 1955-56. It would be material here to mention that the firm had been granted registration from 1952–53 to 1954-55. So the application was in effect an application for renewal of registration. There was no dispute that the assessee-firm had been distributing its profits as per its books according to the shares prescribed in the partnership deed.

3. The Income-Tax Officer, however, found the following facts:

(1) That the constitution of the firm as notified to the banks with which the firm had accounts only showed the original three partners, namely, Askaran Bothra, Mulchand Bothra and Hansraj Bothra, as partners against the six partners claimed in the partnership deed.

(2) That Hiralal Jain and Hulaschand Jain could not explain the source of the capital which they had introduced when they were admitted to the partnership.

(3) That in several civil suits to which the assessee-firm was a party, the firm was shown to have only three partners.

(4) That Bhowarilal Kissenlal, a Hindu undivided family consisting of Bhowarilal and Kissenlal, had been shown as a partner with 0-2-8 pies share. The Income-Tax Officer refused to accept the explanation of the assessee that there was a partial partition in the family of Mulchand Bothra as a result of which Mulchand had paid Rs. 25,000 to Bhowarilal and Kissenlal and this amount was utilised for the introduction of the Hindu undivided family of Bhowarilal Kissenlal as a partner in the firm. He held that there was no such Hindu undivided family in existence.

4. Accordingly, the Income-Tax Officer held that no genuine firm had come into existence under the aforesaid deed, dated April 3, 1952. The Income-Tax Officer further observed that the assessee-firm had deliberately withheld its books of account for the three preceding years which were requisitioned under section 22(4) of the Act. The production of these books was necessary in order to examine the various contentions of the assessee. The Income-Tax Officer, therefore, held that, under the provisions of section 23(4) also, the assessee's application for registration stood to be rejected.

5. The assessee's appeal to the Appellate Assistant Commissioner against the order of refusal of registration was also dismissed. The Appellate Assistant Commissioner refused to accept any of the contentions of the assessee and substantially agreed with the reasons of the Income-Tax Officer for holding that no genuine firm had come into existence under the deed of partnership dated April 3, 1952. So far as the refusal of registration by the Income-Tax Officer under section 23(4) was concerned the Appellate Assistant Commissioner observed that the assessee itself had admitted before him in the appeal against the assessment order that income had been understated. According to the Appellate Assistant Commissioner, as it was not known how this understated income was distributed, it could not be said that the profits of the firm had been distributed in accordance with the shares of the partners as provided in the deed. Further, he held that the Income-Tax Officer had exercised the discretion vested in him under section 23(4) properly in this case and the application had been rightly rejected.

6. On further appeal to the Tribunal against the aforesaid order of the Appellate Assistant Commissioner, it was, inter alia, contended by the assessee, that though Bhowarilal might have described himself as the karta of an Hindu undivided family, which was held not to have come into existence, Bhowarilal would be a partner in his personal capacity. It was also contended that the Income-Tax Officer was not justified in refusing registration under section 23(4). The Tribunal did not attach any importance to some of the reasons given by the Income-Tax Officer for holding that the firm as constituted under the aforesaid deed was not genuine, namely, that no intimation was given to the banks of the change in the constitution of the firm or the fact that two of the three new partners had failed to explain the source of their contribution to the firm, nor the fact that in suits filed in the courts, the firm had been shown as being constituted of three partners only. The Tribunal, however, held that as the Hindu undivided family of Bhowarilal Kissenlal had been shown as a partner in the partnership deed that would by itself make the deed invalid as a Hindu undivided family could not be a partner in a firm. The Tribunal was not satisfied that Bhowarilal and Kissenlal did form a Hindu undivided family by themselves and, therefore, the fact that the Hindu undivided family of Bhowarilal Kissenlal was shown as a partner was enough to invalidate the partnership. The Tribunal further held that the order of the Income-Tax Officer must be upheld on the ground that it was within his competence to refuse registration under section 23(4) in the circumstances of the case. In view of the contumacious conduct of the assessee the Income-Tax authorities were fully justified in refusing to grant the benefit of registration. The Tribunal was of the opinion that the Income-Tax Officer had definitely applied his mind to the question as to whether the firm merited refusal of registration on the ground of its default under section 22(4) and came to the conclusion that it did merit such a course. Accordingly, the Tribunal dismissed the assessee's appeal.

7. At the instance of the assessee the Tribunal has referred the following question of law to this court:

“Whether, on the facts and in the circumstances of the case, the refusal of registration under section 26A read with section 23(4) of the Indian Income-Tax Act to the firm for the assessment year 1955–56 was in accordande with law?”

8. Mr. S. Mitra, the learned counsel appearing on behalf of the assessee, submitted that he had to meet two points, namely:

(i) that the Income-Tax Officer exercised his discretion under section 23(4) properly in refusing registration, and

(ii) that no valid firm came into existence for having a Hindu undivided family as a partner.

9. So far as the first point is concerned, Mr. Mitra's submissions were as follows:

Section 23(4) provides for two kinds of penalties. On default of compliance with the notice under section 22(2) or section 22(4) or section 23(2) or in default of filing a return as required under section 22(3), a best judgment assessment necessarily follows as it is mandatory on the Income-Tax Officer to make such an assessment. But the exercise of the further power given to the Income-Tax Officer to impose a second penalty. namely, in the case of a firm, to refuse registration or cancel registration already granted, is discretionary and the reasons for the exercise of such power are justiciable. The Income-Tax Officer must give his reasons for such refusal. The reasons given for making a best judgment assessment would not be sufficient in such a case. The Income-Tax Officer would have to give such reasons as would justify the refusal of registration. Such reasons must be cogent for the purpose of determining whether registration should be granted or refused. In other words the reasons must be such as would sustain a refusal of registration under section 26A. The failure of the assessee in this case to produce its books of accounts of the preceding year were not germane to the ground for refusal of registration, as such failure went to the determination of the quantum of the assessment and not to the distribution of the profits in terms of the partnership deed. The material considered by the Income-Tax Officer was not enough for him to have exercised his jurisdiction objectively. This is a penal provision and the discretion should be exercised against the assessee only in exceptional circumstances. Mr. Mitra relied on the following authorities for his proposition.

10. The Commissioner Of Income-Tax Madras…Applicant; v. Krishnamma & Co., Gudur…. [1955] 28 I.T.R 273., where Subba Rao C.J, as he then was, observed at page 278-79 as follows:

“Under section 26A of the Act, if the Income-Tax Officer is satisfied that the firm is in existence as shown in the partnership deed and the application has been properly made, he is bound to register it. He can only refuse it if he is not satisfied in regard to the aforesaid particulars. But section 23(4) gives him an overriding power to refuse registration, notwithstanding the fact that the conditions laid down in rule 4 have been complied with, if he assesses the firm under section 23(4) of the Act… We, therefore, proceed on the basis that the partnership deed originally filed, was valid and that the conditions laid down in rule 4 were satisfied. If so, the Income-Tax Officer was bound to register the same unless he exercised his powers under section 23(4) of the Act.”

11. In J.M Sheth v. Commissioner Of Income-Tax, Madras. [1965J 56 I.T.R 293., the following observations of the Madras High Court at page 296 were relied on:

“It is clear that failure to make a return or a revised return, or failure to comply with all the terms of the notice under section 22(4) would necessarily attract the Income-Tax Officer's jurisdiction to make an assessment to the best of his judgment. It might be said that defaulting assessees are visited with the penalty of a best judgment assessment. But such a penalty only flows from the conduct of the assessee himself. In the face of a contumacious default on the part of the assessee, the Income-Tax Officer vested with the statutory duty of making assessment has no alternative but to proceed to determine the assessment in as good a manner as possible, indulging of course in some guess work within the limits of honesty. Refusal to register, however, does not appear to be an inevitable statutory consequence resulting from the defaults enumerated in section 23(4). The use of the words “may refuse” in section 23(4) would rather indicate that the Income-Tax Officer has a discretion not to refuse registration or cancel registration even in spite of the default of the assessees………. We have no doubt that the statute does not compel the officer to deprive the assessee of the benefit of registration under the last part of section 23(4). In other words, it would be wrong to assume that the defaults listed in section 23(4) of the Act would lead to a two-fold penal consequence (1) a best judgment assessment, and (2) in the case of firms, refusal to register or cancellation of the existing registration, if any. It is, therefore, incumbent upon the Income-Tax Officer to consider the question of registration on the materials available before him instead of refusing registration on the ground that a different conclusion would be illogical or not seli-consistent. What consideration should weigh with the officer in the matter of his decision regarding registration cannot of course be laid down exhaustively or comprehensively. Suffice it to say that the matter is purely one of discretion to be exercised by the officer and, therefore, he should exercise it not arbitrarily or capriciously but in a manner consistent with judicial standards. This, in our opinion, is the true scope of section 23(4) of the Act.”

12. A decision of this court in Prabhat Mill Stores Co. Ltd. v. Commissioner of Income-Tax was also referred to by Mr. Mitra and the following passage at page 205 was relied on:

“It is clear from these provisions that when defaults are committed by an assessee either in respect of section 22(2) or of section 22(4) it is mandatory that the Income-Tax Officer has to make the assessments to the best of his judgment. This section also confers a power on the Income-Tax Officer to refuse registration not automatically but in his discretion. The Commissioner Of Income-Tax Madras…Applicant; v. Krishnamma & Co., Gudur…. Section 30 of the Act gives to the assessee-firm an express right of appeal against an order of refusal Under section 23(4). The discretion to be exercised by the Income-Tax Officer is a judicial discretion and in an appeal against that discretion the appellate authority has certain well recognized duties. In the case of an order made in the exercise of discretion the appellate authority ought to examine the circumstances in which the discretion was exercised and may disturb the order appealed against in a proper case.”

13. It is submitted by Mr. Mitra that the reasons given by the Income-Tax Officer in his order under section 26A were reasons for the imposition of the first penalty, namely, a best judgment assessment. He had given no reason for imposing the second penalty, namely, the refusal of registration, reasons showing that the non-compliance with the notice under section 22(4) had affected the merits of the question.

14. So far as the second point was concerned, Mr. Mitra submitted that Bhowarilal was the signatory to the deed; as such, he was the person who was a party to the deed. It must, therefore, be held that he was the person who had been taken in as a partner. Though he purported to sign for and on behalf of the Hindu undivided family of Bhowarilal Kissenlal, that was merely a description. Similarly, the description of the fourth party to the deed as Bhowarilal Kissenlal, a Hindu undivided family, was also a case of misdescription. He referred to the decision of the Supreme Court in Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profils Tax, where it was observed at page 492 that when two kartas of two Hindu undivided families enter into a partnership agreement, the partnership is popularly described as one between the two undivided families but in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners.

15. Mr. Balai Pal, learned counsel for the department, did not challenge the first part of the submission of Mr. Mitra on question No. 1. He agreed that the action of the Income-Tax Officer in refusing registration under section 23(4) might be justiciable but he joined issue with the further submission of Mr. Mitra that the reason given by the Income-Tax Officer for refusing registration under section 23(4) would also be cogent for the purpose of refusing registration under section 26A. He argued that section 23(4) was de hors section 26A and so the reasons which would attract refusal of registration under section 26A could have no relation to the reasons for refusal of registration under section 23(4). Under the latter section, the Income-Tax Officer would have the discretion to refuse registration on the failure of the assessee-firm to comply with the notices under section 22(2), 22(4) or 23(2) even though the firm was a genuine firm and was otherwise entitled to registration under section 26A. He relied on the following observation of the Supreme Court in Y. Narayana Chetty v. Income-Tax Officer, Nellore:

“The cancellation of registration under section 23(4) is in the nature of a penalty and the penalty can be imposed against a firm if it is guilty of any of the defaults mentioned in the said sub-section. It would be noticed that where registration is cancelled under section 23(4), there is no doubt that the application for registration had been properly granted. The basis of an order under section 23(4) is not that the firm which had been registered was a fictitious one, but that, though the registered firm was genuine, by its failure to comply with the requirements of law, it had incurred the penalty of having its registration cancelled. That is the effect of the provisions of section 23(4).”

16. Mr. Pal referred to the orders in proceedings under section 27 before the Income-Tax Officer, the Appellate Assistant Commissioner and the Tribunal and pointed out that there was deliberate and persistent default on the part of the assessee to produce the books of account requisitioned under section 22(4) and the Tribunal had characterised such conduct as contumacious. He also pointed out that in Krishnamma's case, relied on by Mr. Mitra, the court had observed that even if the partnership deed was valid and the conditions of rule 4 were satisfied, the Income-Tax Officer was bound to grant registration unless he exercised his powers under section 23(4). In Prabhat Mills case [1966] 59 I.T.R 197., also relied on by Mr. Mitra, this court had observed as follows at page 207:

“To our mind in an appeal against an order of refusal under section 23(4) the relevant considerations are defaults with respect to provisions mentioned therein and contumacy in connection therewith.”

17. Mr. Pal submitted that in view of the Tribunal's finding that not only had there been default in compliance with the notice under section 22(4) but also that such default was deliberate and amounted to contumacious conduct on the part of the assessee, the refusal of registration by the Income-Tax Officer must be sustained and the question answered against the assessee.

18. So far as the second point was concerned, Mr. Pal submitted that a Hindu undivided family has been made a party to the partnership deed and described as a partner, and as it had been found that there has been no such Hindu undivided family in existence, the authorities were justified in holding that no valid firm had come into existence under the deed.

19. In view of the authorities cited by Mr. Pal, it must be held that the only relevant consideration for deciding whether the action of the Income-Tax Officer in refusing registration under section 23(4) was justified are (1) whether there had been a default on the part of the assessee as contemplated in that section and (2) whether such default was of such a nature as to merit the penalty of denial of registration. Whether the firm was genuine or not or whether it was otherwise entitled to registration under section 26A would not be germane for testing the propriety of the Income-Tax Officer's action in refusing registration under section 23(4). We agree with Mr. Mitra that the reasons given by the Income-Tax Officer in his order refusing registration do not constitute sufficient material to establish that he had exercised the discretion objectively. But the Income-Tax Officer and on appeal both the Appellate Assistant Commissioner and the Tribunal had referred to their respective orders in the proceedings under section 27 for sustaining the refusal of registration under section 23(4). All these orders had also been made annexures as part of the statement of the case. A perusal of those orders leaves no room for doubt that the assessee was deliberately avoiding the production of its books of account of the earlier years in order to prevent the Income-Tax Officer from making a searching investigation into its business affairs. Even the opportunity given by the Appellate Assistant Commissioner, at the time of the hearing of the section 27 appeal, to the assessee for producing the books was not availed of on some frivolous pretext. It must, therefore, be held that the Income-Tax Officer was justified in refusing registration to the assessee firm for the assessment year under reference and the Tribunal was right in sustaining such refusal. We would like to point out that the Income-Tax Officer would do well to give his reasons for refusing registration in the order of refusal itself instead of leaving this court to find out such reasons from various other proceedings in connection with the assessment. The Income-Tax Officer's order in the present case was most unsatisfactory.

20. In view of our above finding it is not strictly necessary for us to express any opinion on the second branch of Mr. Mitra's argument. The question referred also seems to indicate that our advice is being sought only on the issue as to whether the refusal of registration under section 23(4) was justified. However, as the matter has been fully argued and as we are informed that the assessee might be prejudiced in the subsequent years when there had been no default as contemplated under section 23(4) on the basis of the Tribunal's finding that the partnership deed dated the 3rd April, 1952, was invalid, we would give our decision also on this matter. We agree with Mr. Mitra that where in a deed of partnership a Hindu undivided family is described as a partner, it is the karta, who executes the deed as representing the family, who becomes the partner in law. A Hindu undivided family as such cannot be a partner. The decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax is an authority for this proposition. We also agree that if the alleged Hindu undivided family is found to be non-existent, then the representative character of Bhowarilal went and Bhowarilal would become a partner in his individual capacity. His description in the deed as the karta of the Hindu undivided family would be a case of misdescription or even wrong description which would not invalidate the deed. It must, therefore, be held that under the deed dated the 3rd April, 1952, a firm of six partners came into existence, the 4th partner being Bhowarilal Bothra. In view of our decision on the first issue the question referred to us must be answered in the affirmative and against the assessee.

21. The assessee is to pay costs of this reference.

Banerjee, J.:— I agree.