1. This petition raises a question as to the proper construction of Section 44 of the Income-tax Act. The question comes to be raised under the following circumstances. The petitioner was a partner with three others in the firm of E. Loeffler and Co. which was constituted on 10-6-1947. Among the three other partners was a man by the name of Iyer. This firm was dissolved on 11-9-1950 and the deed of dissolution provided for the business of the firm being continued by Iyer and under that deed Iyer succeeded to the firm and carried on the business of that firm. The firm was a registered firm and it was assessed for the assessment year 1949-50 and the shares of the profits of the four partners were allocated to each one of them under the provisions of the Income-tax Act and each of the partners was assessed to tax on his share of the profits. The petitioner and the other three partners paid the tax which they were liable to pay in respect of their respective assessments. Iyer failed to do so and the Income-tax Officer served a notice upon the petitioner that the petitioner was liable to pay the tax of Iyer which was in arrears under Section 44 of the Income-tax Act and threatened coercive measures if the petitioner failed to pay the tax. The petitioner has come on this writ contending that the liability of Iyer cannot be imposed upon him and that the threat held out by the Income-tax Officer was not in conformity with law and the Income-tax Officer should be prevented from putting into execution that threat.
2. What is urged by Mr. Joshi on behalf of the Department is that this is a case which falls within the ambit of Section 44. Mr. Joshi says that, when we look t the marginal note of that section, it says: 'Liability in case of discontinued firm or association', and the firm of Loeffler and Co. was discontinued on 11-9-1950 and every partner is jointly and severally liable to assessment and for the amount of tax payable; and therefore, Iyer having failed to pay the tax, the petitioner is jointly and severally liable in respect of that tax. It is true that the original firm of Loeffler and Co. was dissolved and a new entity came into existence. But it is equally true that the business carried on by the old firm was not discontinued, but was carried on by the successor of that firm Iyer. Now, when we look at the section itself, apart from the marginal note, what the section says is:
'Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved',
'every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall',
and then comes the liability which is imposed upon him to pay tax jointly and severally with every other partner. Now, the first important aspect of this section which should be noticed is that, when the section refers to a firm, it does not speak of the discontinuance of that firm, but it speaks of the discontinuance of the business of the firm. The distinction between the two expressions is vital. A firm may be discontinued; a firm may be dissolved; a new firm may come into existence in the eye of the law; but the Legislature ignores that change and what it emphasizes is the discontinuance of the business of the firm. In other words, although a new firm may come into existence, if the business of the old firm is not discontinued, but the new firm continues to carry on that business, then Section 44 would have no application. It is clear and obvious that the section cannot be controlled by the marginal note. A Court may only look at the marginal note in order to understand the drift of the section itself. But where the language used in the section is clear, that language cannot possibly be controlled because in the marginal note the Legislature has used a different language. It is also clear that what the Taxing Department is seeking to do is to impose a vicarious liability upon the petitioner of the liability to pay tax which is upon Iyer, and any provision in a taxing statute imposing a vicarious liability must be strictly construed in favour of the assessee. It is, therefore, for Mr. Joshi to point out to us the relevant provision of the Act under which this vicarious liability can be imposed upon the petitioner. It is clear from the authorities that the concept of succession and the concept of discontinuance, as far as a firm is concerned, are two entirely distinct concepts in taxing law. If a firm or an individual succeeds to another firm, it is a case of succession and not of discontinuance. If the business of a firm comes to an end, then it is a case of discontinuance of the business and not of succession. If any authority was needed for this proposition, we may hark back to the Privy Council which, in Polson's case, Commr. of Income-tax, Bombay v. P.E. Polson reported in , stated as far back as 1945 that the law with regard to discontinuance was clear and well settled in India. At page 388 (of ITR): (at p. 139 of AIR) the Privy Council, after citing certain Indian authorities, state:
'.....and it had been uniformly decided that these words (namely, discontinuity and discontinuance) did not cover mere change of ownership but refer only to a complete cessation of the business. Their Lordships entertain no doubt of the correctness of these decisions which appear to be in accord with the plain meaning of the section and to be in line with similar decisions upon the English Income-tax Acts.'
There is also a judgment of the Madras High Court reported in Karuppiah Pillai v. Commr. of Income-tax, Madras : 9ITR1(Mad) , which also look the view that Section 44 of the Indian Income-tax Act only applies when there has been a discontinuance of a business, and that when a partner retires and the other partner continues the business, the section applicable in Section 26(2) and not Section 44. There is a recent judgment of the Patna High Court in Kaniram Ganpatrai v. Commr. of Income-tax : 23ITR314(Patna) , where the learned Judges of that Court say at page 325: (of ITR): (at p. 274 of AIR):
'For the purpose of assessment, there is a well marked distinction between discontinuance and succession - a distinction which is recognised in the English Law of Income-tax and adopted and provided for in the Indian Income-tax Act. The conception of succession, therefore, excludes the conception of discontinuance.'
3. Apart from our decision turning on the clear language used by the Legislature in Section 44, if we look at the scheme of the Act the position is equally clear. The case of succession is dealt with in Section 26(2) and that section provides for the allocation of liability to pay tax between the person succeeding and the person succeeded and then there is the proviso to that section and the effect of the proviso is that, if the person succeeded cannot be assessed either for the year in which the succession took place or in the year preceding that year because he cannot be found, then the assessment can be made on the successor, and even when the person succeeded has been assessed but does not discharge his liability to pay tax, tax may be recovered from the successor both with regard to the year in which the succession took place and the year previous to that. Therefore, the proviso to this Sub-section casts a liability upon the successor to the business when the person succeeded does not discharge his liability. In other words, applying this proviso to the facts of this case, if the petitioner had failed to pay tax for which he was assessed, then the liability would have been upon Iyer who is the successor to the business. But what the taxing Department is seeking to do is to recover the tax from the person succeeded because the successor has failed to pay the tax; and to complete the picture, we might look at the second proviso to Section 26(1) which deals with a situation to which neither the expression 'discontinuance' nor 'succession' can be applied - a situation in which there is merely a change in the constitution of a firm without there either being a succession or a discontinuance. In such a case, when a tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment. Therefore, although the tax is with regard to income earned prior to the change in the constitution and although the liability under the first proviso is upon the partner who was a partner of the firm in the year of account, the second proviso makes the firm newly constituted at the date of assessment and the partners of that firm liable to pay the tax if tax is not recovered from the partner of the old firm; so that the three provisions to which reference has been made deal with every aspect in the change of a firm. Section 26(1) and the second proviso deal with a case of a change in the constitution of a firm; Section 26(2) deals with a case of succession; and Section 44 deals with a case of discontinuance. Mr. Joshi contends that inasmuch as Section 26(2) has not application to the facts of this case, the only section under which liability can be imposed upon the petitioner in Section 44. That is indeed a curious argument coming from counsel for the Taxing Department. Surely we cannot stretch the language of Section 44 or put a construction upon it which it will not bear merely in order to enable the Taxing Department to recover the tax from the petitioner which someone else was liable to pay and which someone else has failed to pay. It is for the Taxing Department to come to us and tell us under which provision of the law this liability is sought to be imposed upon the petitioner. If there is no provision, liability cannot be fastened upon the petitioner.
4. In view of our decision we do not think it necessary to permit Mr. Palkhivala to urge the other grounds on which he has challenged the notice issued by the Income-tax Officer.
5. The result is, the petition must succeed and the rule will be made absolute and there will be an order against the I.T.O. in terms of prayer (b) of the petition. Respondent to pay the costs of the petition.
6. 'Petition allowed.