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Tax Recovery Officer (income-tax) and Ramakrishna Shenoy Vs. Dilip Construction Co. and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberCivil Revision Nos. 39 and 40 of 1983
Judge
Reported in(1983)36CTR(MP)104; [1984]148ITR599(MP)
ActsIncome Tax Act, 1961 - Sections 182(4), 189(3) and 222(1) - Schedule - Rules 2, 11, 16 and 31
AppellantTax Recovery Officer (income-tax) and Ramakrishna Shenoy
RespondentDilip Construction Co. and anr.
Appellant AdvocateB.K. Rawat and ;Gulab Sohane, Advs.
Respondent AdvocateS.C. Pande, Adv.
Cases ReferredGulabchand Sheolal Firm v. Don
Excerpt:
.....of the executing court in this behalf are well founded. ito [1984]148itr608(all) (appendix) (infra), a division bench of the allahabad high court has laid down that recovery of tax assessed on a partner can be made from the firm at the time of making the assessment only when it cannot be recovered from him (partner). it has further been said in that decision that after the firm is dissolved, the tax liability of individual partners cannot be satisfied from the assets of the firm in the absence of provision similar to second proviso to section 187{1) in section 189(3). no decision to the contrary, however, was cited. section 281(1) has the effect of declaring a charge or transfer void as against any claim in respect of any tax or any other sum payable by the assessee when other..........it has been correctly found that it is void only to the extent of arrears of tax due from the firm dilip construction company.8. on these findings, civil revision no. 39 of 1983, filed by the tro, baroda, must be dismissed.9. i have earlier stated the facts regarding the other revision filed by ramkrishna shenoy (civil revision no. 40 of 1983). it appears that after he got the amount attached out of the amount payable by the bhilai steel plant to his judgment-debtor, m/s. dilip construction company, he took no further steps towards realisation of that amount. the amount, however, remained under attachment. the subsequent execution application filed by him should, therefore, be deemed to be an application only for directing payment of the amount in the hands of garnishee. by the.....
Judgment:

B.C. Varma, J.

1. This order shall also govern the disposal of Civil Revision No. 40 of 1983 (Ramkrishna Shenoy v. Dilip Construction Company and Anr.).

2. One Dilip Construction Company, Baroda (non-applicant No. 1), had to recover certain dues from Bhilai Steel Plant (non-applicant No. 2). It ultimately secured two awards in its favour and against the Bhilai Steel Plant for Rs. 7,71,512 and Rs. 5,15,722 for two different claims. The awards were put into execution by Dilip Construction Company in the Court of District Judge, Durg. Dilip Construction Company which was a partnership firm was, however, dissolved on September 28, 1980. The firm and its partners individually were in all to pay a huge amount of Rs. 12,00,000 odd as income-tax. On September 28, 1980, the Tax Recovery Officer, Baroda, issued a prohibitory order to the Bhilai Steel Plant as also to the District Judge, Durg, in exercise of its powers under Rule 31 of the Second Schedule to the I.T. Act, 1961. The amount sought to be recovered was stated to be Rs. 11,16,927. The Bhilai Steel Plant all the same deposited a sum of Rs. 12,20,017 on May 6, 1982, in the court. Meanwhile, the non-applicants Nos. 3 to 7 filed suits at Baroda for recovery of certain amounts against Dilip Construction Company. The claims were not opposed and consent decrees were obtained. At the same time, the decrees so obtained also created a charge upon the amount payable by the Bhilai Steel Plant to the Dilip Construction Company. These decree-holders (non-applicants Nos. 3 to 7) got those decrees transferred to Durg for execution. They filed executions to enforce the charge against the amount deposited by the Bhilai Steel Plant for payment to the Dilip Construction Company. Applications for rateable distributions were also filed by those decree-holders.

3. Yet another claimant was Ramkrishna Shenoy, the applicant in the other Civil Revision No. 40 of 1983. He has to recover a sum of Rs. 10,996 05 from Dilip Construction Company for which he had obtained a decree. The decree was put into execution and a prohibitory order was obtained against the Bhilai Steel Plant which was directed not to pay that amount to the Dilip Construction Company. On February 18, 1969, that execution application was got dismissed but the prohibitory order/attachment of the amount remained in force. Ramkrishna Shenoy then filed another execution application for realisation of the amount for which the prohibitoryorder was in force. That execution application has, however, been dismissed by the impugned order, dated December 14, 1982, as barred by time.

4. By order, dated March 23, 1983, the Court of Additional District Judge, Durg, which was hearing the applications for execution and for rateable distributions, dismissed the application for rateable distribution. That order was challenged before this court in Civil Revision No. 791 of 1982, and by the order, dated July 29, 1982, passed in that civil revision, the order of the executing court was set aside and the matter was sent back for decision after hearing the objections raised by the TRO and the Bhilai Steel Plant. The matter on remand was actually taken upon the file of the District Judge, Durg, and was heard and decided by the impugned order, dated December 14, 1982. It has been held that the income-tax dues were only against the firm, Dilip Construction Company, and the recovery was sought against that firm and, therefore, prohibitory orders issued against the partners individually were invalid. Consequently, it was held that the decrees obtained by non-applicants Nos. 3 to 7 could well be enforced although a charge was created thereunder and Section 281 of the I.T. Act would not invalidate those decrees as the prohibitory orders were valid only against the dues to the firm. It was, consequenlty, held that the I.T. Department has priority over the claim of the decree-holders (non-applicants Nos. 3 to 7) only to the extent of tax dues from M/s. Dilip Construction Company and not against the individual partners. Further direction in the impugned order, therefore, is that after making payment to the TRO on account of tax dues against M/s. Dilip Construction Company, balance amount alone will be available to the various decree-holders for rateable distribution and the amount was directed to be kept under attachment and custody of the court for that purpose. The claim for rateable distribution was left to be considered. Civil Revision No. 39 of 1983 has been preferred by the TRO, Baroda, while Civil Revision No. 40 of 1983 by Ramkrishna Shenoy, whose claim for recovery of the amount has been dismissed as barred by time.

5. The I.T. Department claims that the entire amount for which the TRO issued a prohibitory order must be made available to it and should be allowed to be appropriated towards the dues against the firm and against the partners individually. It was argued that after the issuance of the prohibitory order, the court has no jurisdiction to issue any process against that amount at the instance of other claimants against the assessee, namely, the Dilip Construction Company, to whom the amount belonged. It was also argued that the charge created under various decrees in favour of non-applicants Nos. 3 to 7 is void and that the tax dues against the firm should be recovered from the partners and vice versa. Section 222(1) of the I.T. Actpermits the ITO to forward to the TRO a certificate under his signature specifying the amount of arrears due from the assessee when the assessee is in default or is deemed to be in default in making payment of tax. This section further provides that on receipt of such certificate from ITO, the TRO shall proceed to recover from the assessee the amount so specified in the certificate by attachment of movable or immovable property of the assessee or by his arrest and detention in prison or by appointing a receiver for the management of assessee's movable and immovable properties. The procedure to be adopted by the TRO is regulated by rules laid down in the Second Schedule. Rule 2 of these rules requires the TRO to issue a notice requiring the defaulter to pay the amount specified in the certificate within 15 days from the date of service of the notice. Under Rule 4, the TRO is entitled upon failure of the assessee to pay the amount as demanded by notice under Rule 2, to attach the defaulter's movable or immovable properties or to arrest and detain him in prison or to appoint a receiver for management of his movable or immovable properties. Rule 11 permits the TRO to investigate claims made to the property attached in execution of the certificate by any other person. According to Rule 16, after the notice under Rule 2 is served upon a defaulter, he or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the TRO. Another noticeable provision is contained in Rule 31, according to which, where the property to be attached is in the custody of any court or public officer, the attachment shall be made by a notice to such court or officer, requesting that such property, and any interest or dividend becoming payable thereon, may be held subject to the further orders of the TRO by whom the notice is issued. This rule further provides that where the property attached is in custody of a court, any question of title or priority arising between the ITO and any other person, not being the defaulter, claiming to be interested in such property by virtue of any assignment, attachment or otherwise, shall be determined by such court. From these provisions, it will appear that after the assessee-defaulter is served with a notice under Rule 2 of the Second Schedule, a civil court is not entitled to issue any process against any property of the defaulter in execution of a decree for payment of money. This is so by force of Rule 16(1). [See TRO v. V. A. Ramaswami : [1978]114ITR408(Mad) and Union of India v. Ganesh Lal Bajaj : [1978]115ITR791(Mad) ]. This, however, relates only to the property of the defaulter-assessee and to no other property because the notice under Rule 2 contemplates notice only to the defaulter and the property to be attached under Rule 4 is the property of the defaulter. In the case in hand, the prohibitory order issued under Rule 31 attached the entire amount which was due and payable only to the firm, Dilip Construction Company. This entire amount payable to thefirm undoubtedly is the asset of the firm itself. The prohibitory order issued under Rule 31, however, clearly stated that it was for realisation of the arrears of income-tax dues against the firm as also dues against the individual partners. All the same, the property in the custody of court or the public officer which is permitted to be attached under Rule 31 is the property of the defaulter-assessee and not of any other person. Therefore, the prohibitory order issued under Rule 31 shall be effective only to the extent of the amount of tax to be recovered from the firm. It will have no effect and shall bear no consequence relating to the dues against the individuals because no part of that amount belonged to the individual partners. The findings of the executing court in this behalf are well founded.

6. To meet the above situation, Shri B. K. Rawat, learned standing counsel for the Department, argued with reference to Sections 189(3) and 182(4) of the I.T. Act that the tax dues against the individual partners can be recovered from the firm. Chapter XVI of the I.T. Act, which includes Sections 182 and 189, provides for the assessment of firms. Section 182(4) permits a registered firm to retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent. thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him, and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained. Sub-section (3) of Section 189 provides that every person who was at the time of such discontinuance or dissolution a partner of the firm and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable. Section 182(4) is a provision which appears in the I.T. Act, 1961. There was no similar provision in the 1922 Act. According to this provision, if a partner of a firm commits default in payment of the tax, the firm is made liable to pay that tax. The liability of the firm, however, in such a case, is limited to the amount which the firm is entitled to retain in terms of this provision irrespective of the fact whether any such amount is actually retained or not. The general rule, however, is that the tax levied on a partner of a registered firm cannot be recovered from the firm and this sub-section and prov. (ii) to Sub-section (1) constitutes an exception. According to Section 189(3), the entire tax due by the firm may be recovered from any one partner and this joint and several liability of the partners is not confined to a case where an assessment has been made after the discontinuance or dissolution of the firm. One thing, however, is clear that Sub-section (3) of Section 189 refers to the tax payable by the firm and not to the tax assessed on the partners personally. In my opinion, these provisions do not render any assistance to the applicant. There isnothing on record to ascertain the share of each partner in the income of the firm, Dilip Construction Company. It is also not clear what amount of tax is payable by each partner in respect of his share of income in the firm. There is further no evidence to show that the tax levied cannot be recovered from those partners. Shri Rawat, however, pointed out that on June 11, 1982, an affidavit was filed by the TRO stating that the partners have no visible source of income. That affidavit, however, is not enough. The applicant should have placed tangible material on record to infer that the tax levied against the partners of the firm could not be recovered from them. In the absence of any such material, it is not possible to give to the applicant the benefit of Section 182(4). In Manohar Lal Ahuja v. ITO : [1984]148ITR608(All) (Appendix) (infra), a Division Bench of the Allahabad High Court has laid down that recovery of tax assessed on a partner can be made from the firm at the time of making the assessment only when it cannot be recovered from him (partner). It has further been said in that decision that after the firm is dissolved, the tax liability of individual partners cannot be satisfied from the assets of the firm in the absence of provision similar to second proviso to Section 187{1) in Section 189(3). No decision to the contrary, however, was cited. I am, therefore, of the opinion that, in the present case, the tax recovery against the individual partners could not be enforced against the assets of the firm, Dilip Construction Company, i.e., the amounts due to it from the Bhilai Steel Plant.

7. The next argument is that the charge created under the decrees in favour of non-applicants Nos. 3 to 7 is in violation of Section 281 of the I.T. Act and, therefore, cannot be enforced. It was argued that the intention was to defraud the Revenue. Section 281(1) has the effect of declaring a charge or transfer void as against any claim in respect of any tax or any other sum payable by the assessee when other conditions laid down in that section are satisfied. The executing court has, therefore, rightly held that the charge created under those decrees to be void to the extent of legitimate claim of the I.T. Department which claim extends only to the arrears of tax due from the firm. Neither the firm nor those decree-holders have objected to that finding. I am not prepared to go any further and hold, as argued by the learned counsel for the applicant, that the charge is void altogether. In my opinion, it has been correctly found that it is void only to the extent of arrears of tax due from the firm Dilip Construction Company.

8. On these findings, Civil Revision No. 39 of 1983, filed by the TRO, Baroda, must be dismissed.

9. I have earlier stated the facts regarding the other revision filed by Ramkrishna Shenoy (Civil Revision No. 40 of 1983). It appears that after he got the amount attached out of the amount payable by the Bhilai Steel Plant to his judgment-debtor, M/s. Dilip Construction Company, he took no further steps towards realisation of that amount. The amount, however, remained under attachment. The subsequent execution application filed by him should, therefore, be deemed to be an application only for directing payment of the amount in the hands of garnishee. By the subsequent application, all that he did was to draw the court's attention to the earlier proceedings and for a direction for payment of the amount kept under attachment to him. When notice of this application was issued to the garnishee (the Bhilai Steel Plant), a reply, dated September 24, 1982, was filed stating that the entire amount was deposited in court on May 6, 1982. Nobody objected to payment of this amount to decree-holder, Ramkrishna Shenoy. The subsequent application filed, therefore, was in continuance of the initial execution application and, in my opinion, the execution court has gone wrong in treating it as a fresh execution application and, consequently, holding it to be barred by limitation. Instead, the application was made only for a direction to pay the amount attached in terms of Rule 46A of Order 21 of the CPC. The garnishee (the Bhilai Steel Plant) had stated that the amount was deposited in court and, therefore, nothing was required to be done except directing the payment of amount to the decree-holder, Ramkrishna Shenoy. Shri S.C. Pandey, who intervened on behalf of the various decree-holders who obtained decrees against the Dilip Construction Company, argued that the subsequent application filed by the applicant must be treated as a fresh application and mere continuance of attachment will make no difference. He relied upon a decision in Gulabchand Sheolal Firm v. Don' garmal Harakchand Firm AIR 1936 Nag 277. That decision, in my opinion, is no authority on the facts of the case in hand. There certain immovable property was attached and the proceedings were taken to put the property to sale. On the date of hearing, it appears that the executing court noticed that the sale notice was not served and, therefore, struck off the execution application as wholly infructuous. This was done at the instance of the decree-holder. Under these circumstances, the execution application was held dismissed and not adjourned. In the present case the question is different. The action here is required to be taken in accordance with Rule 46A of Order 21 of the CPC, which only requires a direction to the garnishee in whose hands the amount has been attached calling upon him to pay the amount into the court or appear and show cause why he could not do so. Before the executing court, neither the garnishee nor the judgment-debtor/Dilip Construction Company objected to this course. Theinterveners also did not appear before that court to object to that application. I am, therefore, of the opinion that the amount attached must be permitted to be realised by the decree-holder/applicant. Of course, out of the amount deposited by the garnishee (the Bhilai Steel Plant), the I,T. Department shall have a priority for the dues against the firm. Out of the remaining amount, the applicant shall have to be paid the amount which was attached earlier. The other application for rateable distribution shall thereafter be considered in respect of the balance amount deposited by the Bhilai Steel Plant for payment to Dilip Construction Company.

10. For the aforesaid reasons, part of the impugned order by, which the applicant's application for realisation of the amount has been dismissed, has to be set aside and this revision (Civil Revision No. 40 of 1983) must be allowed.

11. The ultimate result is that Civil Revision No. 39 of 1983 is dismissed, but without any order as to costs. Civil Revision No. 40 of 1983 succeeds and is allowed with costs. It is further directed that out of the amount deposited by the Bhilai Steel Plant, and after payment of dues to the I.T. Department against the judgment-debtor, M/s. Dilip Construction Company, the decree-holder shall be entitled to the payment of the amount which was earlier attached by him in execution of his decree. Counsel's fee Rs. 100, if certified. The costs shall be paid by the non-applicant No. 1, i.e., M/s. Dilip Construction Company.


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