ORDER
T. Venkatappa, Judicial Member
1. The assessment was completed under Section 144 of the Income-tax Act, 1961 (‘the Act’)- On account of the best judgment assessment made, the ITO refused to grant continuation of registration as per his order dated 24-7-1984 passed under Section 185(5) of the Act. The said order reads as under :
As a sequel to the best judgment assessment made on the assessee for its failure to comply with the terms of notices under Sections 143(2) and 142(1) for the assessment year 1982-83, after giving notice under Section 186(2) of the Act which was duly served on the partner on 9-7-1984 and as there was no response from the assessee to this notice, the continuation of registration is refused to the assessee for the assessment year under review.
Against the same the assessee appealed to the AAC who upheld the order of the ITO in refusing to grant continuation of registration to the firm. Against the same the assessee has preferred this appeal.
2. The learned counsel for the assessee submitted that even if a best judgment assessment is made, it is not automatic to refuse registration. Registration has to be considered on merits. The power given to the ITO was a discretionary one. He cannot exercise the same arbitrarily. The learned departmental representative submitted that once a best judgment assessment is made the ITO has power to refuse registration to the firm under Section 185(5) and that power has been exercised fairly and reasonably.
3. We have considered the rival submissions. In our view even if a best judgment assessment is made, refusal of registration is not automatic. The ITO will have to consider the question of registration on merits. In Section 185(5) the words ‘may refuse’ have been used but not ‘shall refuse’. Thus only a discretionary power is vested in the ITO. Such a discretion has to be exercised fairly and reasonably. Registration cannot automatically be refused the moment best judgment assessment is made. Proper reasons should be given for refusal of registration. In CIT v. Krishnamma & Co. [1955] 28 ITR 273, the Andhra High Court held that Section 23(4) of the Indian Income-tax Act, 1922 does not purport to prescribe an automatic refusal of registration as under that section discretionary power is conferred on the ITO to refuse registration in case a best judgment assessment is made under that section. In Phookhand Ramsahaiv. CIT [1979] 117 ITR 631, the Madhya Pradesh High Court held that merely on the ground that the ITO had to make a best judgment assessment under Section 23(4) on a firm on account of non-production of books of account renewal of registration cannot be refused and the ITO, if he refuses renewal of registration, has to give reasons for his order. In J.M. Sheth v. CIT [1965] 56 ITR 293, the Madras High Court held that the concluding portion of Section 23(4) does not mean that if a best judgment assessment under that clause is made on a firm for non-production of books, the ITO is bound to cancel registration. In spite of the fact that he has made a best judgment assessment it is incumbent upon the ITO to consider the question of registration on the materials available before him and he cannot refuse registration on the mere ground that a different conclusion would be illogical or not consistent. In C.K. Abdul Khader & Co. v. ITO [1983] 141 ITR 159, the Kerala High Court held that if the assessing authority proceeds on the belief that the penalty of refusal of registration must inevitably follow on the failure of the assessee to do anything as contemplated in Section 144, it cannot be said that the authority has exercised his discretion. The discretion must be exercised not arbitrarily or capriciously but in a lawful manner and consistent with judicial standards on the basis of the materials and circumstances present in a given case.
4. The ratio laid down in the above cases would squarely apply to the instant case, as the ITO in the instant case has refused registration only on the ground that the best judgment assessment has been made. In our view such an order cannot be sustained. It is incumbent on the ITO to consider the question of continuation of registration on the materials available before him. Thus, we cancel the order made under Section 185(5) and direct the ITO to consider the question of allowing continuation of registration to the firm on the materials available.
5. In the result, the appeal is allowed.