1988 (7) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Cancellation of registration of the assessee firm under Section 186(1) of the Income Tax Act.
2. Denial of opportunity for cross-examination of a key witness.
3. Validity of the partnership firm and its constitution.
4. Exercise of discretionary jurisdiction by the Income Tax Officer (ITO).

Issue-wise Detailed Analysis:

1. Cancellation of Registration of the Assessee Firm under Section 186(1):
The primary issue revolves around the ITO's decision to cancel the registration of the assessee firm for the assessment years 1971-72 to 1977-78. The ITO based his decision on the statement of Smt. Radhabai Kothari, a partner, who allegedly stated that Shri Shewcharan Purohit was not a partner in the firm. The ITO interpreted this as evidence that the firm was not genuine. However, the Appellate Assistant Commissioner (AAC) found that the ITO had misinterpreted the statement and had acted arbitrarily and injudiciously. The AAC noted that the ITO ignored other evidence, including the partnership deeds and statements from other partners, which confirmed the genuineness of the firm.

2. Denial of Opportunity for Cross-Examination:
The AAC criticized the ITO for not allowing the assessee firm to cross-examine Smt. Radhabai Kothari, whose statement was crucial to the ITO's decision. The AAC emphasized that it is a fundamental principle of judicial proceedings that a person should be given an opportunity to meet the evidence used against them. The ITO's refusal to provide the assessee firm with a copy of Radhabai Kothari's statement and to allow cross-examination was deemed unjudicious and arbitrary. The AAC held that such evidence could not be used against the assessee firm.

3. Validity of the Partnership Firm and its Constitution:
The AAC examined the constitution of the partnership firm and found that the firm had been granted registration after necessary inquiries in the assessment year 1971-72. Changes in the firm's constitution in 1973 and 1976 were also recognized by the Income Tax Department. The AAC concluded that the ITO had no reasonable basis to doubt the genuineness of the firm, as the distribution of profits and losses among partners was never questioned. The AAC pointed out that the ITO had selectively interpreted Radhabai Kothari's statement and ignored other relevant evidence, including the partnership deeds and statements from other partners.

4. Exercise of Discretionary Jurisdiction by the ITO:
Section 186(1) of the Income Tax Act grants the ITO discretionary jurisdiction to cancel the registration of a firm if it is found to be non-genuine. However, this discretion must be exercised judicially and not arbitrarily. The AAC found that the ITO had exercised his jurisdiction arbitrarily and based his decision on mere suspicion and surmises. The AAC emphasized that the ITO should have considered the overall evidence, including the partnership deeds and the conduct of the partners, before concluding that the firm was not genuine.

Conclusion:
The AAC set aside the ITO's order to cancel the registration of the assessee firm, finding that the ITO had acted arbitrarily and without sufficient evidence. The AAC restored the registration of the firm for the assessment years in question. The appeals filed by the department were dismissed, and the AAC's order was upheld, confirming the genuineness of the partnership firm and the improper exercise of discretionary jurisdiction by the ITO.