T.V. Rajagopala Rao, Judicial Member -
(1.) THIS is an appeal directed against the order of the AAC, E-D Range, Hyderabad, dated 21-4-1981 confirming the ITO's order dated 29-11-1979, refusing registration to the assessee's firm and confirming the finding that the assessee-firm is not genuine and holding it as unregistered firm for the assessment year 1978-79.
(2.) Facts relevant for the disposal of the appeal before us are as follows : The assessee is a firm of 5 partners among whom Smt. P. Chenchamma and Smt. B. Rama Lakshmma are two. They constituted as a partnership under the terms of the deed dated 22-9-1977. For the assessment year 1978-79 the firm applied for registration under Section 185 of the Income-tax Act, 1961 ('the Act'), by filing an application in Form No. 11A accompanied by the partnership deed dated 22-9-1977. During the course of assessment proceedings of her son, Madduletaiah, who is one of the partners of the assessee-firm, Smt P. Chenchamma admitted that she is a benamidar of her son, Madduletaiah. So also Smt. B. Rama Lakshmma admitted to be a benamidar of her husband Sri Rama-subbaiah, who retired from partnership in the preceding assessment year, in the course of assessment of Shri Ramasubbaiah. Declaration in Form No. 12A intimating that the above two partners are benamidars for their son and husband, respectively, was not furnished to the ITO along with the return or within the time prescribed as per the requirements of Rule 24A of the Income-tax Rules. Rule 24A as far as is relevant for our purposes is as follows :
24A. (1) Communication regarding partner who is a benamidar.-The communication required to be made by any partner of a firm under Clause (b) of the Explanation below Sub-section (1) of Section 185 shall be in Form No. 12A.
(2) The communication referred to in Sub-rule (1) shall be made,-
(a) in a case where the firm has not been registered under Section 184, before the end of the previous year for the assessment year in respect of which registration of the firm is sought :
Provided that where the registration is sought for the assessment year commencing on the 1st day of April, 1976 the communication may be made before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for that assessment year ;
It can be seen from the above rule, Form No. 12A should be submitted before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 of the Act, whether fixed originally or on, extension for furnishing the return of income. Admittedly, Form No. 12A was not submitted before the prescribed time stated in the proviso to Rule 24A(2). However, the assessee-firm addressed a letter dated 24-9-1979 addressed to the ITO in this regard which is as follows :
Sub :-Filing of Form No. 12A-Time Requested.
Ref:-Asst. of M/s Batchu Nagisetti, P. Maddulataiah, Betamcherla for 1978-79 asst.
The assessee could not file Form 12A along with deed of partnership or along with the return of income because the assessee was under the impression that he need not file any Form 12A because the partner in the firm is a benami of HUF. The assessee is prepared to file Form 12A even now if opportunity is given for filing the same condoning the delay, if any.
Thanking you, Sir,
Yours faithfully,Sd/-for M/s B. Nagisetty, P. Maddulataiah
It may here itself be stated that the assessment was completed by the ITO on 29-11-1979. The letter extracted above in which a request was made to allow the assessee-firm to file Form No. 12A was addressed to the ITO at least two months before the completion of the assessment. Section 185(1), Explanation, which came into force with effect from 1-4-1971 is as follows :
Explanation : For the purposes of this section and Section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar-
(a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child, or
(b) of any person, not being a partner of the firm and any of the other partners knew or had reason to believe that the first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the ITO in the prescribed manner.
The question which arises for consideration is whether the true meaning or ambit of the words 'in the prescribed manner' also admit prescribing a time-limit. In other words, whether the time-limit prescribed under Rule 24A is in conformity with Section 185 or overstepped the mandate given under the section. Fortunately, this point is not res integra and it is decided by both the Hon'ble Supreme Court as well as the Madras and Kerala High Courts in STO v. K.I. Abraham  20 STC 367 (SC), Second ITO v. M.C.T. Trust  102 ITR 138 (Mad.), M.Ct. Muthiah Chettiar Family Trust v. Fourth JTO  86 ITR 282, (Mad.), CIT v. Shree Padmanabhaswami Temple Trust  120 ITR 42(Ker.). It is enough if we consider the last of the decisions. The question that came up before the Kerala High Court revolves round the true meaning of Section 11(2)(a) of the Act which at that relevant time stood as follows :
Such person specifies, by notice in writing given to the Income-tax Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years ;
Their Lordships of the Kerala High Court were considering the validity of the provision of time-limit set out in para 2 of Form No. 10 prescribed by Rule 17 of the Income-tax Rules and in that connection they construed the expression 'in the prescribed manner'. They held that the expression 'in the prescribed manner' is indequate to take in any time element. The headnote which reflects the true ratio laid down by the Kerala High Court is as follows :
Section 11(2) of the Income-tax Act, 1961, allows certain income to be not included in the total income of the previous year subject to certain conditions being satisfied. One of the conditions is that the assessee specifies by notice in writing to the ITO 'in the prescribed manner' the purpose for which the income is being accumulated and the period for which the income is being accumulated. Rule 17 of the Income-tax Rules, 1962, as such does not provide for any period of time within which the amounts set apart for charitable purpose is to be invested in any Government security or any post office savings bank or in any financial corporation, etc. This would be outside the province of the rule, as Section 11 itself authorises only prescribing the manner of specifying by notice to the ITO the purpose for which the income is being accumulated, etc. The expression 'in the prescribed manner' is inadequate and incompetent to take in the time element. Therefore, the provision of a time element in para 2 of Form No. 10 prescribed by Rule 17 of the Rules is beyond the provision of Section 11 and Rule 17 :
Held, on the facts of the case, that the Appellate Tribunal was justified in holding that the investments made by the assessee, a temple trust whose objects were cliaritable and religious, after the expiry of the period mentioned in para 2 of Form No. 10 prescribed by Rule 17 of the Rules had to be considered for the purpose of Section 11(2) of the Act and, therefore, the income was exempt from taxation." (pp. 42-43)
While holding that the expression 'in the prescribed manner' is inadequate and incompetent to take in the time element, the Kerala High Court followed the decision of the Supreme Court in Abraham's case (supra). Therefore, following the ratio of the above decisions more particularly the Supreme Court as well as the Kerala High Court, we hold that the time element prescribed under Rule 24A is against the spirit or scope of Section 185(1), Explanation, already extracted above. Therefore, we wish to follow the Section 185(1), Explanation, rather than Rule 24A. We found that the ITO gave importance to Rule 24A and held that there is no provision to entertain the communication in Form No. 12A after the due date of filing. He further held that there is no discretion provided to the ITO to entertain any communication in Form No. 12A which is belated, i.e., which is not in accordance with Rule 24A. In our opinion, this part of the order or the decision of the ITO is against the law and the ratio of the above said authorities.
(3.) IN our opinion, the ITO should have granted permission to the ITO to file Form No. 12A as requested in the assessee's letter dated 24-9-1979 especially when the said letter was addressed very much ahead of the completion of the assessment on 29-11-1979. By refusing such request the ITO, in our opinion, refused to exercise the lawful jurisdiction vested in him and by his refusal the legal right of the assessee-firm was affected.;