K.B.N Singh, J.:— In this reference under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Patna Bench, has referred the under-mentioned question of law for decision of this court:

“Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in refusing the renewal of registration of the firm under section 26A while exercising the discretion vested in him under section 23(4) of the Act of which a reference was made in the order under section 26A?”

2. The assessee is a partnership firm, which derives income from business in grains. The partnership was registered under section 26A of the Act in the years previous to the year 1958–59. It had applied for the renewal of the registration as a partnership firm in time for the year 1958–59 also. At the time of the inspection of the books of accounts by the Income-tax Officer, it transpired that the sales tax authorities had seized certain books of accounts of the firm from the possession of the firm and, accordingly, a notice under section 22(4) of the Act, calling upon the assessee to produce the seized books of accounts, was duly served, which was not complied with. Thereafter, summonses were issued under section 37 of the Act, in pursuance of which Babulal Bajaj, a partner of the firm, appeared and his statements were taken wherein he stated that the seized books were burnt. The Income-tax Officer did not rely on the said statement of Babulal Bajaj and as the seized books were not produced for inspection and scrutiny, best judgment assessment under section 23(4) of the Act was made by the Income-tax Officer and he also refused renewal of the registration of the firm.

3. The assessee filed an appeal before the Appellate Assistant Commissioner, who held that since the genuineness of the firm as well as the allocation of shares were not in doubt, and as it was registered in earlier years, it was unreasonable to reject registration in the year in question. The Appellate Assistant Commissioner was of the opinion that, although the discretion lay with the Income-tax Officer to refuse registration under section 23(4) of the Act, in refusing registration he should not have been influenced by the fact that the assessment was under section 23(4) of the Act and the relevant considerations were about the genuineness of the firm and allocation of shares and profits; etc. He also held that no statutory notice of fourteen days was given before the cancellation of the registration. He accordingly allowed the renewal of registration as the genuineness of the firm and allocation of profits were not doubted. On appeal by the income-tax department, before the Appellate Tribunal, the order of the Appellate Assistant Commissioner was reversed and that of the assessing officer was restored and it was observed that the Income-tax Officer properly exercised the discretion vested in him under section 23(4) of the Act in refusing registration and, although the order seems to have been passed under section 26A, it was really an order under section 23(4) of the Act, when its contents are taken into consideration.

4. Aggrieved by the aforesaid order, the assessee filed an application for a reference under section 66(1) of the Act and the Appellate Tribunal, being satisfied that a question of law arises, has referred the aforesaid question.

5. Mr. Brajeshwar Prasad Sinha, appearing on behalf of the assessee, has urged that, although the Income-tax Officer, under section 23(4) of the Act, has power to cancel registration, the discretion has to be exercised on judicial considerations. He also urged that, in the instant case, section 23(4) was not attracted to refuse registration. The assessee was summoned and he stated that the books were burnt. There being nothing to rebut it, the books being non est, there could be no question of producing them and there was no question of non-compliance, and this should not be a ground for refusal of registration even if there was some suspicion about it. He also urged that really it was an order under section 26A and, therefore, it is clearly illegal.

6. Under section 26A of the Act, a partnership firm has been given privilege of registration in order to enable it to get the benefit of lower rate of assessment than those which would be applicable to the whole income of the firm when charged as a unit of assessment and reads thus:

“26A. (1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.

(2) The application shall be made by such person or persons and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed.”

7. The manner of disposal of such a case is prescribed by rules 2 to 6 of the Income-tax Rules, framed under section 59 of the Act, and the rule relevant for our consideration is rule 4, which runs thus:

“4. (1) If, on receipt of the application referred to in rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely:— …

(2) If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the applicants…”

8. It will be useful, in this connection, to refer to section 23(4) of the Act, which runs thus:

“23. (4) If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a revised return under sub-section (3) of the same section, or fails to comply with all the terms of a notice issued under sub-section (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of this section, the Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel its registration if it is already registered:

Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income-tax Officer to the firm intimating his intention to cancel its registration.”

9. On an analysis of the provisions of section 26A of the Act and the Rules on the subject, it is apparent that if the Income-tax Officer is satisfied that the firm is in existence as shown in the partnership deed and a proper application is made, he is bound to register it. He can only refuse to register if he is not satisfied with regard to the matter. On the other hand, under section 23(4) of the Act, the Income-tax Officer, for non-compliance with the provisions of sub-sections (2), (3) and (4) of section 22, or of the notice issued under sub-section (2) of section 23, besides making best judgment assessment, in case of a firm, may refuse to register it or cancel its registration, if already registered. But in the case of cancellation of registration, he shall give a fourteen days' notice, as required by the proviso to subsection (4) of section 23 of the Act. The power of the Income-tax Officer to cancel registration under section 26A of the Act can be exercised in case he comes to the conclusion that the firm was non est and the registration was obtained on account of misrepresentation or deception. This power is inherent in the power of granting registration.

10. The scope of the aforesaid two provisions came to be considered in the case of Y. Narayana Chetty v. Income-tax Officer, Nellore [1959] 35 I.T.R 388, 397, in a somewhat different context, and the following observations of their Lordships of the Supreme Court may be usefully referred to:

“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). On the other hand, rule 6B deals with cases where the Income-tax Officer is satisfied that a certificate of registration has been granted under rule 4 or under rule 6A without there being a genuine firm in existence, that is to say, an application for registration had been made in the name of a firm which really did not exist; and on that ground the Income-tax Officer proposes to set right the matter by cancelling the certificate which should never have been granted to the alleged firm. That being the effect of rule 6B it is impossible to accede to the argument that the provisions of this rule are inconsistent with the provisions of section 23(4) of the Act. If the Income-tax Officer is empowered under section 26A read with the relevant rules to grant or refuse the request of the firm for registration, it would normally be open to him to cancel such registration, if he discovers that registration had been erroneously granted to a firm which did not exist. Rule 6B has been made to clarify this position and to confer on the Income-tax Officer in express and specific terms such authority to review his own decision in the matter of the registration of the firm when he discovers that his earlier decision proceeded on a wrong assumption about the existence of the firm.”

11. It is not disputed that a notice under section 22(4) of the Act was issued fixing 15th July, 1960, asking the assessee to produce the seized books of accounts. The assessee applied for time and thereafter 29th August, 1960, was fixed for production of the required books of accounts. The assessee did not produce the books marked 10, 11 and 12 of Messrs. Durga Prasad Chandi Prasad and books of Messrs. Shree Gopal Oil Mills and Soap Factory which were seized by the sales tax authorities. The assessee was then asked to produce these books on 13th September, 1960. It was on this date that the assessee applied for two weeks' time on the plea that the partner was out, which was rejected, and the case was adjourned to 17th September, 1960, when the assessee came forward with an explanation that the books, after they were released by the sales tax department, were destroyed, as they included only jottings. It appears from the order of the assessing officer, which is a part of the statement of the case, that the assessee was again asked to produce the books, but they were not produced and thereafter a notice under section 22(4) of the Act was served asking the firm to produce the same, otherwise the application for registration would be rejected and the assessment would be made under section 23(4) of the Act. Another opportunity was given to the assessee on the 20th January, 1962, to produce the books by 8th February, 1962, and the working partner of the assessee, Shree Babulal Bajaj, was also summoned under section 37. The assessee did not choose to produce the books and it was stated that the books were destroyed. Before the assessing officer reliance was placed on this statement of the working partner of the assessee, which was rejected by the assessing officer and the following extract from his order may usefully be quoted:

“No strong reliance can be placed on the statement of the assessee. The books seized were the books of accounts and the assessee is an old income-tax assessee, he cannot brush aside the importance of the books as children play with dolls and destroy the same, even when the income-tax assessment was pending. The assessee did not prefer an appeal against the sales tax order, but meekly and silently accepted the same. The assessee has filed the sales tax order as early as 1958, so it was none of the business to destroy the same. Even the scant bare facts discussed in the sales tax order shows that it is to the advantage of the assessee not to produce these books. These facts have been discussed in detail, at other relevant places in this assessment order. So I hold that the assessee has deliberately chosen not to produce these books called for under section 22(4) of the Income-tax Act. Hence, the assessment is completed under section 23(4) and the renewal of registration is refused and the assessment is completed in the status of unregistered firm.”

12. The assessing officer further observed that the books seized and not produced related to the period from 26th June, 1957, to the 29th September, 1957, and the suppressed turnover, noted in those books, amounted to Rs. 1,07,936 and the average per day worked out at Rs. 950. On that basis the Income-tax Officer enhanced the turnover by Rs. 1,07,936. In this background the assessing officer further observed:

“It is significant to note that the assessee did not prefer any appeal against the order. As discussed earlier, it can be safely presumed that the non-production of books, in spite of specific opportunities being given, lead to the one and the only conclusion that it was deliberate intent, lest some further bigger suppression and concealments are found out. The large scale omissions detected by the sales tax authorities covering over Rs. 1,00,000 for a period between June 26, 1957, to September 25, 1957, of just three months, indicate the volume of transaction that the assessee had out of the regular books of accounts. While the sales tax authorities considered it fit to base their estimate on simple proportion, which the assessee accepted ungrudgingly, it would appear that the turnover for the whole year might have been much in excess of what is determined on such proportionate basis. It is an accepted fact that the periods between June and September being the rainy season is rather a dull period for the nature of business carried on by the assessee. Further, it is also a known fact that when sales are deliberately kept outside the regular books of accounts to a very large extent, the commission is generally in such item where the profit margin is high….”

13. It is thus apparent that the assessing officer has given adequate reason for not relying on the assessee's explanation that the books were destroyed which has been accepted and affirmed by the Tribunal. The Tribunal also allowed the appeal of the income-tax department against the order of the Appellate Assistant Commissioner and restored the best judgment assessment order of the Income-tax Officer., Thus, there is no substance in the submission of the learned counsel that there was no material before the assessing officer to discredit the explanation of the assessee regarding the destruction of the books. The order of the assessing officer has been filed as annexure “A” and forms part of the statement of the case. It is obvious that the assessing officer has given sufficient reasons for refusal of the renewal of registration, which have been accepted by the Tribunal, and the order of refusal of renewal of registration is not automatic, merely because of the best judgment assessment under section 23(4) of the Act. It is true that the assessing officer, in the proceeding under section 26A, for the assessment year 1958–59, has observed as follows:

“The assessee had filed an application for renewal of registration on June 26, 1958, for 1958–59 assessment year. The registration has been rejected vide my assessment order for 1958–59 of date. The application is, therefore filed.”

14. From the aforesaid discussions, it is apparent that it is really a case of refusal of registration under section 23(4) of the Act for not complying with notice under section 22(4) and non-production of seized books of accounts. Mr. Sinha, for the assessee, relied on a decision in Commissioner of Income-tax v. V. Krishnamma & Co. The facts of that case were entirely different. In that case, the ground given by the Income-tax Officer for refusing registration under section 26A of the Act was as follows:

“At any rate, I am unable to register the firm now inasmuch as the assessment of the firm is made under section 23(4) of the Act.”

15. Quite clearly, in the aforesaid case there was no judicial exercise of discretion and no tenable reason was given for the refusal of registration.

16. Similar is the position with regard to another decision, relied upon by the learned counsel, in the case of Trivandrum Tobacco Combines v. Commissioner of Income-tax [1967] 63 I.T.R 813, 815 Ker... In that case, while refusing registration, the assessing officer observed as follows:

“Even if the assessee was a firm, in view of the fact that the assessment is completed under section 23(4), I would have refused registration under section 26A.”

17. In this case also, no reason was given and it was not contended before their Lordships that the Income-tax Officer was justified in refusing the registration under section 26A of the Act. It was in this context that, while answering the question in favour of the assessee, their Lordships of the Kerala High Court observed as follows:

“What is material is not what the Income-tax Officer would have done but what he did, and that seems to be not a refusal of registration in exercise of the discretion vested in him under section 23(4), but a refusal under section 26A of the Act…….”

18. Learned counsel then relied on the decision in the case of/. M. Sheik v. Commissioner of Income-tax. It is difficult to see how that decision is of any assistance to the learned counsel. The following observation from the aforesaid decision may be quoted:

“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 self-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.”

19. In the instant case, from the foregoing discussions it must be held that the Income-tax Officer was justified in refusing renewal of the registration under section 26A of the Act, while exercising his discretion under section 23(4) of the Act and the question must be answered in the affirmative and against the assessee, who must pay a cost of Rs. 200 (two hundred) to the department.

Misra, C.J:— I agree.