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Union of India (Uoi) and anr. Vs. Salankayala Pulleswara Rao - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberAppeal Against Orders Nos. 368 and 369 of 1965 and C.R.P. Nos. 1436 of 1965 and 1118 of 1966
Judge
Reported in[1972]85ITR109(AP)
ActsIndian Partnership Act, 1932 - Sections 46, 48 and 49; Income Tax Act; Sales Tax Act
AppellantUnion of India (Uoi) and anr.
RespondentSalankayala Pulleswara Rao
Appellant AdvocateK. Chalapathi Rao, Adv. for ;T. Anantababu, Adv. and ;Govt. Pleader
Respondent AdvocateK.B. Krishnamurthy, Adv.
Excerpt:
direct taxation - state dues - sections 46, 48 and 49 of indian partnership act, 1932, income tax act and sales tax act - appeal against order rejecting claim of income-tax department and sales tax department for priority in collection of dues - nothing in partnership act provides priority of debts under income-tax act and sales tax act - appeal dismissed. - - 16. in the said view, the appeals and revisions fail and are dismissed with costs......these three sections have to be read together as according statutory recognition to the equitable lien of partners on partnership properties. the principles embodied in these sections, therefore, give a certain impress to the partnership assets. by way of clarification, we may peruse lindley on partnership (reference is to the twelfth edition), at pages 383, 384, 395 and 396. each partner is said to have an equitable lien on the partnership property for the purpose of having it applied in discharge of the debts of the firm and to have a similar lien on the surplus assets for the purpose of having them applied in payment of what may be due to the partners, respectively, after deducting what may be due from them, as partners, to the firm. the author then goes on to say how the lien is to.....
Judgment:

Narasimham, J.

1. These appeals and revisions are preferred against the orders of the subordinate judge, Narsapur, in E.As. Nos. 527/63, 555/63, I.A. No. 65/66 and E.A. No. 390/62 rejecting the claim of the income-tax department and of the sales tax department for priority in the collection of their dues. All these petitions were filed after the final decree in O.S. No. 78 of 1948. The said suit was filed by Munagala Basavaiah and Kutumba Rao, partners, against the legal representative of the deceased partner and another for dissolution of the firm, Sri Jayalakshmi Rice Mill at Undi and for accounts. The main defendants were the legal representatives of the deceased partner, Salankayala Subbiah. The first defendant in the suit was his son, Salankayala Pulleswara Rao. A preliminary decree was passed on April 6, 1951, for accounts declaring the partnership dissolved as from the date of suit, November 29, 1948. A receiver was appointed to realise the assets of the partnership, to discharge the liabilities of the partnership and to prepare a statement of profit and loss of each of the partners in respect of their shares. After the receiver filed his report and after further hearing, a final decree was passed on January 27, 1960, the material clauses thereof being :

1. that the fund now in court amounting to the sum of Rs. 16,276.64 be applied in payment to the first defendant as his share of the partnership assets ;

2. that the second plaintiff do pay first defendant the sum of Rs. 21,086-5-0 with interest thereon at 5 1/2% per annum from this date till payment towards the share of partnership assets ;

3. that the plaintiffs 3 to 5 do from out of the assets of the deceased first plaintiff in their hands pay first defendant Rs. 21,086-5-0 with interest thereon at 5 1/2% per annum from this date till payment towards the share of partnership assets;

4. that the suit rice mill and other appurtenances, movable and immovable, relating to it be sold in public auction and the second plaintiff, the plaintiffs 3 and 4 and the first defendant be entitled to the realisations in the shares of Re. 0-4-3, Re. 0-4-3 and Re. 0-7-6, respectively ;

5. that the liability of the partnership for the decree debt in O. S. No. 133/51 on the file of the Sub-Court, Gudivada, be discharged by the second plaintiff, plaintiffs 3 and 4 and the first defendant in the shares of Re. 0-4-3, Re. 0-4-3 and Re. 0-7-6, respectively ;

6. that the respective parties recovering the amounts under this decree do pay the necessary court-fee before executing this decree.

2. In the course of execution, assets amounting to Rs. 17,101.56 were realised and put in court.

3. It was at that stage that the Income-tax Officer filed claims, E.A. No. 527 of 1963 for income-tax dues payable by Mungala Basavaiah, and Kutumba Rao, Vijayawada, who were assessed to income-tax on a separate business carried on by them in groundnut oil, kernel, paddy and rice as an unregistered firm. E. A. No. 555/63 was filed by the same officer for income-tax dues in respect of a separate rice mill business carried on by the said Basavaiah and Kutumba Rao at Tellaprolu. I. A. No. 65/66 was another claim filed by the Income-tax Officer for income-tax dues payable by Messrs. Mungala Basavaiah and Kutumba Rao who carried on a separate business at Vijayawada. E. A. No. 390/62 was filed by the Deputy Commercial Tax Officer, Gannavaram, in respect of sales tax due by Mungala Basavaiah and Kutumba Rao as partners of Anantha Oil Mills, Tellaprolu. All the claimants, viz., the Income-tax Officers concerned and the Commercial Tax Officer, claimed priority for recovering their dues from the partnership assets deposited in O. S. No. 78/48 on the file of the subordinate judge, Narsapur. The subordinate judge tried E.As. Nos. 527/63, 555/63 and E.A. No. 390/62 jointly and rejected their claims by order dated 8th February, 1965. I.A. No. 65/66 was rejected by the subordinate judge, Narsapur, by order dated 4th March, 1966. The present appeals and revisions are against the said orders of rejection. All these matters are heard together as involving a common question of priority claimed for State dues.

4. From the facts set out, it is manifest that the assets held in court represented the partnership assets realised under orders and decrees of court passed in O. S. No. 78 of 1948. The claim of priority of dues under income-tax and sales tax is based on the ruling of the Full Bench in Manickam Chettiar v. Income-tax Officer, Madura, [1938] 6 I.T.R. 180, 185 (Mad.). That was a case of a simple money creditor attaching certain movable properties of the judgment-debtor and bringing them to sale. The judgment-debtor was an income-tax assessee and certain amounts were due by him to the income-tax department. Before the sale, the Income-tax Officer filed an application in court asking for an order directing payment out to him from the sale proceeds on account of income-tax dues. The Income-tax Officer realised a part of the dues on his application. The power of the court to order such payment came up for discussion before the Full Bench. The order of the court paying out monies for dues to the income-tax department was upheld. Repelling the arguments that there is nothing in the Civil Procedure Code which places the Crown as a preferential creditor, it was said :

'This argument ignores the special position of the Crown, the specialcircumstances and the court's inherent powers. It cannot be denied thatthe Crown had the right of priority in payment of debts due to it. It is aright which has always existed and has been repeatedly recognised in India. If the Crown is entitled, as it is, to prior payment over all unsecured creditors, the position of secured creditors does not arise. I see no reason why the Crown should not be allowed to apply to the court for an order directing its debts to be paid out of money in court belonging to the debtor, without having to file a suit. Of course it must be a debt which is not disputed or is indisputable. In this case the debt represents money due to the Crown under the Income-tax Act and the demand of the Income-tax Officer is not open to question.'

5. This statement of the law cannot obviously govern the facts of the present case. This is a case distinguishable on facts as the State is now seeking a priority over a decree for the distribution of the partnership assets. The Indian Partnership Act has a specified scheme of distribution of assets on dissolution. The relevant sections are Sections 46, 48 and 49 which may be extracted for easy reference :

Section 46 :

'On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.' Section 48 :

'In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :--

(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :--

(i) in paying the debts of the firm to third parties ;

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital ;

(iii) in paying to each partner rateably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners inthe proportions in which they were entitled to share profits.'

Section 49 : 'Where there are joint debts due from the firm, and also separatedebts due from any partner, the property of the firm shall be applied inthe first instance in payment of the debts of the firm, and, if there is anysurplus, then the share of each partner shall be applied in payment of hisseparate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.'

6. These three sections have to be read together as according statutory recognition to the equitable lien of partners on partnership properties. The principles embodied in these sections, therefore, give a certain impress to the partnership assets. By way of clarification, we may peruse Lindley on Partnership (reference is to the twelfth edition), at pages 383, 384, 395 and 396. Each partner is said to have an equitable lien on the partnership property for the purpose of having it applied in discharge of the debts of the firm and to have a similar lien on the surplus assets for the purpose of having them applied in payment of what may be due to the partners, respectively, after deducting what may be due from them, as partners, to the firm. The author then goes on to say how the lien is to be interpreted. The right, lien, quasi-lien, or whatever else it may be called, does not exist for any practical purpose until the affairs of the partnership have to be wound up, or the share of a partner has to be ascertained. Then referring to the property to which Hen attaches, it is stated that after a partnership has been dissolved, the lien is confined to what was partnership property at the tune of the dissolution, and does not extend to what may have been subsequently acquired by the persons who continue to, carry on the business. In this respect, the lien in question differs from the lien of a mortgagee on a varying stock-in-trade assigned to him as a security for his loan.

7. It is then made clear that the lien exists only on partnership assets, and further that the lien exists as against all persons claiming a share in the assets.

8. It is then pointed out that a partner's lien on partnership property is lost by the conversion of such property into the separate property of another partner.

9. From this clarification that the English text book writer affords us, we have to gather that the decrees passed in the partnership suit with regard to the partnership assets have a fundamental difference from a simple decree for money.

10. It seems to me difficult to contend that the scheme of the Act can be disturbed by reading into it a priority which is not expressly provided thereunder. It is manifest that there is nothing in the Partnership Act which provides for a priority of debts due under the Income-tax Act and the Sales Tax Act. I am fortified in my view by the statement of the law by the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd., [1946] 14 I.T.R. 248, 254; [1946] 16 Comp. Cas. 71 (F.C.). In the said case, a company was wound up under orders of the court and official liquidators were appointed. At that stage, a notice of demand was served on the official liquidators for the income-tax dues of the company in liquidation. The official liquidators pointed out to the income-tax department that the proper procedure to be followed was for the income-tax department to lodge a claim in the winding-up in respect of the arrears of tax alleged to be due from the company.

11. Instead of adopting the procedure suggested, the income-tax department decided to adopt the procedure provided by Section 46, Income-tax Act, and accordingly on 8th August, 1944, the income-tax department sent an 'arrear demand' to the official liquidators with the intimation that the demand was recoverable as arrears of land revenue and that a recovery certificate had been forwarded to the Collector of Allahabad. In the said circumstances, the official liquidator moved the High Court complaining against the said order. Rejecting the tenability of the claim, the Federal Court said at page 19 of the judgment :

'We have no hesitation in coming to a conclusion and holding that the Crown is bound by the provisions of the Indian Companies Act, 1913, and is bound, in regard to the provisions relating to the liquidation of companies, 'to a statutory scheme of administration wherein the prerogative right of the Crown to priority no longer exists'. (Lord Wrenbury in Food Controller v. Cork, [1923] A.C. 647, 672 (H.L.)). The Crown is accordingly not entitled, in our judgment, to any prerogative, priority, or preferential rights or treatment, save those expressly conferred and limited by the Act itself, in particular by Section 230 and Sub-section (2) of Section 232.'

12. Obviously, the decision puts the matter in issue beyond all reasonable doubt that the provisions of the Partnership Act under which the decrees have been passed relating to the partnership assets have to be looked to and would form a complete code for working out priorities, if any.

13. In this context I have also to make it clear that the dues under the income-tax and sales tax do not pertain to the partnership which has been dissolved and in respect of the assets of which decrees have been passed.

14. The debts claimable are, therefore, beyond doubt separate debts of Mungala Basavaiah and Mungala Kutumbarao.

15. The learned counsel for the appellants and the petitioners have not, therefore, supported their contentions with reference to any provision of law or of any enactment. On the contrary, the learned counsel for the first defendant has shown clear authority against any such priority or preferential claim. The case relied on by the learned counsel for the income-tax department and by the learned Government Pleader has, therefore, no application. No other points are raised before me.

16. In the said view, the appeals and revisions fail and are dismissed with costs.


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