Skip to content


Rajareddy Mallaram Vs. Commissioner of Income-tax, Hyderabad - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 7 of 1958
Judge
Reported inAIR1961AP7; [1960]39ITR636(AP)
ActsIncome-tax Act, 1922 - Sections 22, 22(4), 25A(2), 44, 44(1) and 63; Finance Act, 1958
AppellantRajareddy Mallaram
RespondentCommissioner of Income-tax, Hyderabad
Appellant AdvocateC. Mallikharjuna Rao, Adv.
Respondent AdvocateC. Kondaiah, Standing Counsel for Income-tax Department
Excerpt:
direct taxation - pre-dissolution income - sections 22 and 44 of income tax act, 1922 - notice issued to petitioner ( member of dissolved firm) under section 34 to file return - on failure to file return, another notice issued to him under section 22 (4) for submission of accounts - on appeal appellate assistant commissioner (aac) quashed notice issued under section 22 (4) - income-tax appellate tribunal set aside order of aac - appeal before high court - dissolved association cannot be assessed - assessment to be made of those who were members of association - no notice issued under section 22 to appellant severally or jointly with other members of association - assessment not made in conformity with section 44 - held, appellant not liable for tax assessed. - motor vehicles act (59 of.....anantanarayana ayyar, j.1. the income tax appellate tribunal, hyderabad bench has referred the following questions of law to this court under section 66(1) of the, indian income tax act:-'(i) on the facts and in the circumstances, of this case, was the order of assessment made by the income tax officer under section 23(4) on 30-9-1953 bad in law?(ii) if the answer to the above question is in the negative, was not the applicant liable for the amount of tax payable, as determined in that order of assessment, by reason of section 44 of the income tax act'?2. the relevant facts of the case are as follows; three persons, namely, (i) baba gowd, (ii) pir-kit venkata raj reddy and (iii) raj reddy mallaram formed an association called 'nizamabad group liquor shops' (hereinafter referred to for the.....
Judgment:

Anantanarayana Ayyar, J.

1. The Income Tax Appellate Tribunal, Hyderabad Bench has referred the following questions of law to this court under Section 66(1) of the, Indian Income Tax Act:-

'(i) On the facts and in the circumstances, of this case, was the order of assessment made by the Income Tax Officer under Section 23(4) on 30-9-1953 bad in law?

(ii) If the answer to the above question is in the negative, was not the applicant liable for the amount of tax payable, as determined in that order of assessment, by reason of Section 44 of the Income Tax Act'?

2. The relevant facts of the case are as follows; Three persons, namely, (i) Baba Gowd, (ii) Pir-kit Venkata Raj Reddy and (iii) Raj Reddy Mallaram formed an association called 'Nizamabad Group Liquor Shops' (hereinafter referred to for the sake of convenience as 'Association') for the year 1358 Fasli and did business of liquor contract. The Association became dissolved at the end of 1358 Fasli. The Association ceased to exist altogether and the business done by it has been discontinued. On the facts concerned in this case, there does not seem to be any need to draw a distinction between 'discontinuance' and 'dissolution', so far as the Association is concerned. The Income Tax Officer took cognisance of the matter and issued notice under Section 34 of the Act to Baba Gowd, one of the members of he Association on 2-3-1953 after obtaining the ap-proval of the Commissioner of Income Tax.

The said notice was served on Baba Gowd on 11-3-1953 and the return was due on or before 16-4-1953. Baba Gowd did not file any return. The income Tax Officer sent a notice under Section 22(4) on 11-7-1933, asking the Association to submit the ac-count of the Nizamabad Group Liquor Shop. Baba Cowd did not file a return but sent a reply dated 20-7-1953 stating that the books of account were in :he possession of Pirkit Venkat Raj Reddy. The Income Tax Officer made enquiries and learnt that Pirkit Venkat Raj Reddy was dead and issued another notice to Baba Gowd dated 20-8-1953 to file a return. Baba Gowd did not file any return within the time allowed. The Income-tax Officer made, an order of assessment under Section 23(4) of the Indian Income-tax Act on 30-9-1953, describing the assessee as 'The Nizamabad Group Liquor Shops C/o. Sri Baba Gowd Mutta Gowd, Excise Contractor, Nizamabad' and treating that assessee as an association of persons under the Income Tax Act.

3. The Income-tax Officer's attempts to collect the tax from Baba Gowd proved futile. So, he (I.T.O.) issued a notice of demand to Rajah Reddy Mallaram on 13-3-1954. The latter obtained a copy of the order of assessment and filed an application under Section 27 of the Indian Income-tax Act for cancellation of the assessment. The Income-tax Officer received the application on 7-4-1954, and rejected it on two grounds, namely, (i) that it was out of time and (ii) that it was misconceived. Rajah Reddy Mallaram filed an appeal before the Appellate Assistant Commissioner. The latter held that the application had been filed before the Income-tax Officer within time. He allowed the appeal and directed the Income-tax Officer 'to cancel the order under Section 23(4) and make a fresh assessment as provided by Section 27 by giving an opportunity to the appellant to file a return and to produce the books of account of the dissolved Association of persons'.

4. The Income-tax Officer took the matter on appeal to the Income-tax Appellate Tribunal. The latter allowed the appeal holding that the Appellate Assistant Commissioner was in error in thinking that a notice of demand for the tax payable could be issued only against Baba Gowd, who had been associated with the proceedings leading to the order of assessment and not against Raja Reddy Mallaram. The Tribunal observed:-

'that the Appellate Assistant Commissioner was also in error in his view that the applicant (Raja Reddy Mallaram) should have been given a fresh opportunity of filing a return and producing the boots of account before the amount of tax payable could be recovered from him'.

5. The tribunal took the view that since a valid order of assessment under Section 23(4) of the Income-tax Act had already been made, there was no occasion or necessity for any such fresh notice being issued to Raja Reddy Mallaram or any fresh order of assessment being made and that the order of assessment under Section 23(4) was binding not only against Baba Gowd but also against Raja Reddy Mallaram who was also a member of the original Association which had done the business.

6. The arguments before us proceeded on the undisputed basis that the Association had become dissolved at the end of 1358 Fasli that is, even before the assessment proceedings were started.

7. Section 44 of the Indian Income-tax Act as it stood and was in force at the relevant time ran as follows:

'44. 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, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall so far as may be, apply to any such assessment'. Section 14(3) of the Excess Profits Tax Act runs ag follows; '14(3) Where two or more persons were carrying on the business jointly in the chargeable accounting period, the assessment shall be made upon them jointly and, in the case of a partnership, may, be made in the partnership name'.

Section 44 of the Income Tax Act as adapted for the purpose of the Excess Profits Tax Act is extracted later in this judgment.

8. It is obvious that, after discontinuance of partnership (or dissolution of an association), liability to assessment of the Income-tax shall be jointly and severally under Chapter IV of the Income-tax Act and that liability to assessment under the Excess Profits Tax Act shall be jointly and severally under Section 14 of the Excess Profits Tax Act. The assessment under the Excess Profits Tax Act before dissolution of an association or discontinuance of a partnership shall be made jointly upon the persons who are members of the association or partnership, in substance, though it may be in the name of the association or partnership, that is, so far as the name was concerned. So, the assessees regarding the Excess Profits Tax Act are in substance the persons who carry on the business that is, members of the partnership, after discontinuance and before discontinuance.

9. In Commissioner of Income Tax West Bengal v. A. W. Figgis and Co., : [1953]24ITR405(SC) , it was observed by the Supreme Court as follows:

'The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position'.

10. In A.G. Pandu Rao v. Collector of Madras : [1954]26ITR99(Mad) , it was held by the Madras High Court as follows;

'Section 44 of the Indian Income Tax Act, 1922 with certain modifications, has been made applicable to proceedings under the Excess Profits Tax Act, 1940, and the result of it is to attract to a dissolved firm, the procedure applicable to an undissolved firm. If, therefore, by the date of the issue of the notice under Section 13 of. the Excess Profits Tax Act, 1940, a firm has become dissolved, the machinery provided by Sections 13 and 14 can be availed of and the partners even after dissolution continue to be jointly and severally liable to assessment under Section 14 and for the amount of tax payable after determination. As Section 63 of the Income Tax Act is also made applicable to proceedings under the Excess Profits Tax Act, notice under Section 13 may be issued to, and served on, any member of the firm'.

The relevant observations in the judgment are as follows:

'.....Amongst such sections, which are made applicable, Sections 44 and 63 are important Section 25-A of the Income-tax Act has not been made applicable to proceedings under the Excess Profits Tax Act ..... But no such difficulty arises in the case of a dissolved partnership, as Section 44 of the Income-tax Act, which is made applicable to Excess Profits Tax Act by Section 21 of the said Act, and which was modified by the Central Board of Revenue under its rule-making power provides that .....The result of Section 44 as amended by the Central Board of Revenue is to attract the procedure applicable to an undissolved firm to a dissolved firm, and therefore, if two or three persons carry on business as a firm, the assessment could be made on the partnership in the partnerhip name and the persons who carried on business during the chargeable accounting period will be liable to pay the tax as provided by Sub-section (2) of Section 14 read with Section 44 of the Income-tax Act as modified by the Central Board of Revenue.

As Section 63 of the Income-tax Act is also made applicable to proceedings under the Excess Profits Tax Act, if, during the chargeable accounting period, the firm carried on business as an undissolved firm and even if it became subsequently dissolved, by virtue of the provisions of Section 44, the assessment could be made as if it were an undissolved firm. ..... So far as the assessment in the present case is concerned, even assuming that by the date notice under Section 13 was issued, the firm became dissolved, the machinery provided under the Act for the service of notice under Section 63 can be availed of by serving notice on the partner. Notice, therefore, to a partner is treated as notice to all'.

In that ease, it was also observed:-

'In fact, the assessment under the Income Tax Act made before and after dissolution were accepted without dispute by the present petitioners, though notice was served under the Income Tax Act for the assessment and also for payment under Section 29 only upon Gannu Rao (one of the three partners)'.

11. If the principles laid down in that decision were applicable to the present case, the notice served on Baba Gowd under Section 22(4) of the Income-tax Act would be proper service of notice as against all the partners including Raj Rcddy Mallaram and the assessment, (which was made treating association of persons as assessee) would be valid and binding on all the partners including Raj Reddy Mallaram. In the Assessment Order, the name of the assessee is written as follows:

'The Nizamabad Group Liquor Shops, C/o, Sri Baba Gowd S/o. Mutta Gowd'.

12. It is conceded by the learned Advocate for Raj Reddy Mallaram that the Madras decision, if applicable and applied, would be in support of the case of the Department and against the case of his client (Raj Reddy Mallaram). But, he contends that it is not applicable. He has strongly relied on other decisions, which are referred to below:

13. In Bose v. Manindra Lal Goswami : [1958]33ITR435(Cal) with regard to a partner of an un-registered firm it was held by a Bench of the Calcutta High Court as follows:

'A, B and C were the partners of an unregistered firm. Dyes and Chemical Agency, which did business from 1-4-1940 upto 31-3-1944. The Income-tax Officer, being of opinion that the firm's income for the assessment year 1943-44, had escaped assessment, issued a notice to A under Section 34 of the Indian Income-tax Act, 1922, on 25-11-1944. He was described as 'A, partner of Dyes and Chemical Agency', the income which had been discovered to have escaped assessment was described as 'your income', and he was required to submit a return of 'your total income and total world income', assessable for the year ending 31-3-1944. A similar notice was addressed to B but no notice was issued to C. B submitted a return disclosing a loss which was not accepted and the Income-tax Officer determined the total income of the firm and made an assessment on the firm and on the basis of that assessment proceedings for recovery of tax were initiated:

Held, that the notice under Section 34 as issued on A and B could not form the basis of a valid assessment of the firm or the firm's income and A and B could not be proceeded against for recovery of the tax due under that assessment assuming that Section 44 of the Income-tax Act applies, after the dissolution of a firm, whether it be a registered firm or an unregistered firm, an assessment to income-tax of its predissolution income can only be made on the persons who were the partners of the firm at the time of the dissolution jointly and severally, and cannot be made on the firm'.

14. Regarding the decision of the Madras High Court in : [1954]26ITR99(Mad) their Lordships of the Calcutta High Court observed as follows:

'The decision relates to Sections 13 and 14 of the Excess Profits Tax Act, read with Section 44 of the Income Tax Act, as adapted by the Central Board of Revenue and it is extremely unfortunate that the learned Judge should have been told that the law applicable to cases of excess profits tax was the same as that under the Indian Income Tax Act. Apparently on that statement being made without protest from the respondent, the learned Judge did not consider it necessary to compare the provisions of the two Acts. If such a comparison is made, it will be found at once that, taken as a decision on Sections 13 and 14 of the Excess Profits Tax Act, as applied to the assessment of the pre-dissolution profits of the business of a dissolved firm, there is no reason whatever to think that the decision was not correct. The relevant provisions of the Indian Income-tax Act are noticeably different and the mistake was to seek to apply a decision under the Excess Profits Tax Act to the present case'.

15. Their Lordships then extracted Section 44 of the Indian Income-tax Act, as adapted for the purposes of excess profits tax, which reads as follows:

'Where any business carried on by a firm or association of persons has been discontinued, every person who was at the time of such discontinuance a partner of such firm or a member of such association, shall, in respect of the profits, of the firm or association, be jointly and severally liable to assessment under Section 14 of the Excess Profits Tax Act, 1940, and for the amount of tax payable, and all the provisions of the said Act shall, so far as may be, apply, to any such assessment'.

16. Their Lordships then observed as follows: 'It will thus be seen that in the case of excess profits tax, there is no difference in the method of assessment prescribed for the assessment of the profits of a running business and that prescribed for the assessment of the past profits of a business carried on by a firm, since dissolved. In the case of a running business too, the assessment is to be made on the persons, carrying on the business jointly. In the case of the business of a firm which has been dissolved, it is to be made on the partners jointly and severally; and since Section 44 of the Act is made applicable to the assessment of pre-dissolu-tion profits of the business of a dissolved firm, such assessment can obviously be made in the partnership name ........ These observations made by the learned Judge in : [1954]26ITR99(Mad) are clearly warranted by the special language of Section 14(3) of the Excess Profits Tax Act, read with Section 44 of the Income-tax Act, as recast by the Central Board of Revenue. They have no bearing whatsoever to a case of the assessment of income-tax on the predissolution income of a dissolved firm under the provisions of Section 44 of the Act as it stands in the statute itself.

17. The above decision was passed on 3-6-1957 on appeal from the decision by a single Judge of the Calcutta High Court, which was pronounced of 19-12-1955 in Manindra L. Goswami v. Income Tax Officer : [1956]30ITR550(Cal) . In the latter decision, the learned Judge differed from the decision in : [1954]26ITR99(Mad) , observing as follows:

'Where however the firm is discontinued after assessment, Section 44 clearly makes the partners individually or jointly liable to pay the dues. But if the assessment is to take place after discontinuance, it is the partners who are to be assessed and not the firm, although the tax due would be calculated as if there was no discontinuance ..... I respectfully beg to differ from the Madras decision in : [1954]26ITR99(Mad) , mentioned above. In my opinion the position is that an unregistered firm when it has been discontinued can no longer be assessed as such'.

18. The decision in : [1954]26ITR99(Mad) , came up for consideration before a Bench of the Madras High Court in Kumaraswami Chettiar v. Second Additional Income Tax Officer : AIR1957Mad441 . In that case, an association of four persons did abkari business from 7-10-1944 and dissolved their association after the close of that account year. Notice under Section 34 of the Act was served on one of the partners, viz. Kumaraswami Chettiar, in March 1950 i. e., long after the dissolution of the association. That member returned the notice saying that the business was being managed by one Saliar Row-ther. The Income Tax Officer thereupon served the notice on Saliar Rowther and made a final assessment, which was later confirmed in appeal.

In pursuance of the assessment, a notice of demand was issued against the persons who were the members of the association, including Saliar Row-ther and Kumaraswamy Chettiar. Saliar Rowther paid certain sums but not the entire amount due from all the members put together. For the balance due, the Income-tax Officer issued a demand notice to Kumaraswamy Chettiar.

The latter applied for a writ quashing the order of the Income-tax Officer. In that decision, the question with which we are now concerned did not arise and was not decided. In that case, the validity of the assessment was not questioned. It also appeared that a notice of demand was served on all the partners and the contention raised by the petitioner was that the notice served on him did not conform to the requirements of Rule 20, and not that he was entitled to be served with a separate notice of demand. But, their Lordships made some observations, which are relevant to the present question now before us, as follows:

'There is no substance in this contention. There has been a valid notice of demand served in accordance with the Act on the association represented by its principal officer. There is no necessity for a further notice of demand under Section 29 on the petitioner (Kumaraswamy Chettiar) who was also in law an assessec; vide the definition of 'assessee' in Section 2(2) of the Act'.

Their Lordships also observed as follows regarding the decision in : [1956]30ITR550(Cal) .

'Learned Counsel for the petitioner relied upon the decision of a single Judge of the Calcutta High Court reported in : [1956]30ITR550(Cal) . But that decision has no bearing on the facts of this case. In that case, there does not appear to have been a notice of demand served on any one representing the partnership which had been dissolved. In the absence of any such demand, it was held that proceedings for the recovery of the tax from individual partner without serving even a demand notice on the partners individually were not valid'.

19. From the facts of that case, in : AIR1957Mad441 , it would appeal that assessment was made of the dissolved association as assessee but it does not appear that any question was raised in that case about the validity ot such assessment. The point decided by the Calcutta High Court in : [1956]30ITR550(Cal) that, after the discontinuance of a firm, the firm as such cannot be assessed (as an assessee) and that the proper procedure is to assess the partners jointly or severally was not raised before or considered by the Madras High Court in : AIR1957Mad441 . This decision of the Madras High Court was made before the appellate judgment of the Calcutta High Court in : [1958]33ITR435(Cal) was passed.

20. In Murali Krishna Rice Mill v. Addl. Income Tax Officer : [1959]36ITR239(AP) the following questions were raised before one of us regarding a dissolved firm:

(i) that after its dissolution the firm as such cannot be assessed and that the proper procedure is to assess the partners jointly or severally:

(ii) that the notice of demand served on the managing partner of the assessee is illegal and ultra vires of the powers of the assessing authority.

21. But these questions were not decided in that case as there was no need to do so the case being decided on the other points. It was observed in that decision that there could be two possible views on the construction of Section 44 of the Income-tax Act one view being expressed by the Madras High Court in : [1954]26ITR99(Mad) . and the other view by the Calcutta High Court in another decision.

22. In Lakshminaraian Bhadani v. Commis-soner of Income Tax, : [1951]20ITR594(SC) , a question arose before the Supreme Court as to whether proceedings regarding assessment oi a Hindu joint family could be considered to be properly initiated in law after partition, when the Income-tax Officer issued a notice in the name of the joint Hindu family in 1944 regarding income of the joint family in 1939-40 on a person who was originally believed to be the karta before the partition of the family. The joint family had become divided after the close of the year of income i.e, 1939-40 and before the Income-tax Officer issued a notice, therein, their Lordships observed as follows:-

'(i) that as the Income-tax Officer was proceeding to assess the income of the family as in 1939-40, the proceedings were validly initiated and it was not necessary to issue the notice under Section 34 read with Section 22 to every member of the family;

(ii) that under Section 25-A, the Income-tax Officer had to make an assessment of the total income of the family as if no partition had taken place, calculate the amount of tax payable thereon as if it was payable by one unit and apportion the amount payable by the unit amongst the members of the family according to the portion of the joint family property allotted to each of them'.

23. That decision was justified on the basis ot the specific provisions in Section 25-A(2) which read:-

'Where such an order has been passed (under Section 25-A(1).....) the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall.....be liable for a share of the tax on the income so assessed according to the portion of the joint family properly allotted to him or it.....'

24. The principle laid down in this decision would be applicable to the association, if Section 44, which is applicable to the association, were to the same effect as Section 25-A(2) in the relevant aspect. In fact, Section 44 of the Income-tax Act, in its present form, as introduced by the Finance Act of 1958 with effect from 1-4-1958, runs as follows:-

'44(1) Where any business, profession or vocation carried on by a firm or other association ot persons has been discontinued or where a firm or other association of persons is dissolved, the Income-tax Officer shall make as assessment of the total income of the firm or other association of persons as such as if no such discontinuance or dissolution had taken place.

(2) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal in the course of any proceedings under this Act in respect of any such firm or other association of persons as is referred to in Sub-section (1) is satisfied that the firm or other association is guilty of any of the acts specified in Clause (a), or Clause (b) or Clause (c) of Sub-section (1) of Section 28, he or it may impose or direct the imposition of a penalty in accordance with the provisions of that section.

(3) Every person who was at the time of such discontinuance or dissolution a parlner of the firm or a member of the association, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable, and all the provisions of Chapter IV, so far as may be, shall apply to any such assessment or imposition of penalty'.

25. It will be observed that the provisions in Section 44(1) are substantially the same as the provisions in Section 25-A(2). Consequently, if assessment were to he made under the present Section 44(1), assessment on the association would be valid and notice need not he sent to every member of the Association and it would be sufficient if notice were sent as required in Section 63 of the Act accordingly (i.e. to the principal officer of the association). But the assessment was made on 30-9-1953 and the relevant law in force at that time was Section 44 as already extracted in an earlier portion of this judgment. The question is as to how the assessment ought to have been made under Section 44, as it then stood (on 30-9-1953).

26. In Commissioner of Income Tax v. Raya-lascema Oil Mills : [1959]37ITR208(AP) and : AIR1960AP23 the question arose as to whether the word 'assessment' in Section 44 comprehends penalty. At pages 216-217 (of ITR); (at p. 26 of AIR) it was observed as follows:

'It is because the acceptance of the theory that the word ''assessment' comprehends penalty was beset with difficulties, and the Madras High court has pointed out that there was a lacuna in Section 44, the Legislature amended Section 44 recasting that section and inserting the word 'penalty' and thereby authorising the Department to levy 'penalty' even under Section 44. The section, as amended, runs thus: It is worthy of note that Clause (2), of the amended Section 44 specifically deals with the imposition of penalty as distinct from the assessment spoken to in Clause (1). Again, in Clause (3) it is stated that the provisions of Chapter IV shall apply to assessment or imposition of penalty. This also indicates that the Legislature thought that prior to the amendment, the word 'assessment' was incapable of being construed as including penalty'.

By adopting a similar line of reasoning, it appears reasonable to infer that the Legislature thought that prior to the amendment the provision in Section 44 was incapable of being construed as enabling an assessment to be made of the total income of a dissolved association of persons to be made as if no such dissolution had taken place.

27. The distinction made in : [1958]33ITR435(Cal) , by Full Bench of the Calcutta High Court regarding the decision of the Madras High Court in : [1954]26ITR99(Mad) , is convincing and is based on the special features of Sections 13 and 14 of the Excess Profits Tax Act, which are substantially different in relevant material aspects from the provisions of the Income-tax Act regarding a partnership, which was concerned in that case. The learned Judge of the Madras High Court has himself observed as follows:

'Unlike the machinery provided under the Income-tax Act enabling a firm to get itself registered with a view to have the Tax liability apportioned between the sharers under Section 23(5) of the Act, there is no provision in the Excess Profits Tax Act to register a firm and to apportion the tax liability between tho partners of the firm as under Section 23(5) of the Act ..... It, therefore, follows that, assuming that by the date of the issue of the notice under Section 13, the firm became dissolved, still, the machinery provided by Sections 13 and 14 of the Excess Profits Tax Act could be availed of and the partners. even after dissolution continue to be jointly and severally liable to assessment under Section 14 of the Act and for the amount of tax payable after determination'.

28. The reason why the partners even after dissolution continue to be jointly and severally liable to assessment under Section 14 of the Act is because they were (in substance and reality) jointly liable under Section 14 of the Excess Profits Tax Act before dissolution, though the assessment 'may' (but need not necessarily) be made in the name of the partnership and they continue to be jointly liable to assessment under Section 44 of the Income-tax Act. (as adapted for the purpose of Excess Profits Tax Act) while being also severally liable to assessment. The view expressed in : [1958]33ITR435(Cal) , that the decision in : [1954]26ITR99(Mad) , was applicable to cases under the Excess Profits Tax Act. but is not applicable to cases under Section 44 of the Income-tax Act is sound and acceptable.

29. This point, which has been decided in : [1958]33ITR435(Cal) , has not been commented on, though that decision has been referred to by the Full Bench of this Court in : AIR1960AP23 , in connection with another point.

30. Therefore, we accept the principle of the decision in : [1958]33ITR435(Cal) , and hold that assessment to income-tax of the pre-dissolution income of the association can only be made on the persons who were members of the association at the time of the dissolution (as assessees) so as to be jointly and severally liable and cannot be made on the firm as assessee.

31. As assessment has to be made of ex-members of the dissolved association as assessees and assessment cannot be made of the association as a unit, notice to each member is necessary, so that there might be an assessment binding on him and valid as against him. In Narayana Chetty v. Income Tax Officer, 1949 35 ITR 388 : AIR 1959 SC 213, it was held by the Supreme Court as follows:

'The notice prescribed in Section 34 of the Income-tax Act for the purpose of initiating re-assessment proceedings is not a mere procedural requirement: the service of the prescribed notice on the assessee is a condition precedent to the validity of any re-assessment made under Section 34. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void'.

32. In Navinchandra Mafatlal v. Commissioner of Income Tax : [1955]27ITR245(Bom) , also, it has been held that notice under Section 24 is a condition precedent to making of a valid order in that Section. Similarly a notice under Section 22 to a person is a condition precedent for passing a valid order of assessment relating to him under Section 23(4) of the Act.

33. On behalf of Raj Reddy Mallaram, reliance has been sought to be placed on the decision in Velu Gopalan v. Income Tax Officer : [1960]38ITR141(Ker) , but it is not helpful to decide the present case, as that decision related to an assessment which was made before the dissolution of the firm.

We find as follows:

(i) On the facts and in the circumstances of this case, the order of assessment made by the Income-tax Officer under Section 23(4) on 30-9-1953 is bad in law,

(a) absolutely, because he made the assessment of the association and not of those who were members of the association at the time of the dissolution jointly and severally; and

(b) particularly as against any member on whom notices under Sections 34 and 22(4) were not served, because of such failure to serve notices on him. The assessment is not binding on the petitioner, as no notice under Section 22 was issued to him and as he was not assessed severally or jointly with others referred to above.

(ii) The applicant is not liable for the amount of tax payable as determined in the order of assessment dated 30-9-1953 as that assessment was not made in conformity with Section 44 of the Income Tax Act.

34. In the result, we answer question No. 1 in the affirmative and find that question No. 2 does not arise in view of our finding on question No. 1.

35. We award costs to Raja Reddy Mallaram tobe paid by the other party Advocate's feeRs. 250/-.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //