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Al. Sp. Pl. Ot. Pl. Subramanian Chettiar Vs. the Special Deputy Tahsildar, Income-tax Collections and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberWrit Petn. No. 932 of 1959
Judge
Reported inAIR1963Mad377; [1963]47ITR759(Mad)
ActsIncome Tax Act, 1922 - Sections 23(5) and 44
AppellantAl. Sp. Pl. Ot. Pl. Subramanian Chettiar
RespondentThe Special Deputy Tahsildar, Income-tax Collections and anr.
Appellant AdvocateT.V. Viswanatha Iyer, ;T.V. Ramanathan and ;S. Narayanaswami, Advs.
Respondent AdvocateS. Ranganathan, Adv.
DispositionPetition allowed
Cases ReferredIqtida Khan v. Income
Excerpt:
direct taxation - shifting of tax liability - sections 23 (5) and 44 of income tax act, 1922 - registered firm discontinued and dissolved - partners assessed to tax under section 23 - whether tax liability of one of partners in regard to his share of income of firm be shifted and fastened upon other partner invoking section 44 - in case of registered firm this is of no consequence as partners alone are assessed to tax even if in absence of discontinuance of firm - section provides that partners jointly and severally liable 'for amount of tax payable' - 'tax payable' must be by discontinued firm and not by partners assessed in their individual capacity - language of section seems to indicate clearly that partners of discontinued or dissolved firm liable for tax due by firm - section 44.....order1. the petitioner prays for the issue of a writ, of certiorari or other appropriate writ under article 226 of the constitution to quash the order ofdistraint dated 24/28-91959 issued by the special deputy tahsildar, income-tax collections, rama-nathapuram district at madurai. the special deputy tahsildar has been impleaded as the first respondent and the income-tax officer, karaikudi, as the second respondent.2. the facts giving rise to this writ petition are not in dispute and can be briefly stated. the petitioner was a partner of a firm called 's. m. viswanathan chettiar and others' carrying on the business of exhibition of films, with its place of business at karaikudi. the two other partners of the firm were s. m. viswanathan chettiar and rm. rm. arunachelam chettiar. the.....
Judgment:
ORDER

1. The petitioner prays for the issue of a writ, of certiorari or other appropriate writ under Article 226 of the Constitution to quash the order ofdistraint dated 24/28-91959 issued by the Special Deputy Tahsildar, Income-tax Collections, Rama-nathapuram district at Madurai. The Special Deputy Tahsildar has been impleaded as the first respondent and the Income-tax Officer, Karaikudi, as the second respondent.

2. The facts giving rise to this writ petition are not in dispute and can be briefly stated. The petitioner was a partner of a firm called 'S. M. Viswanathan Chettiar and others' carrying on the business of exhibition of films, with its place of business at Karaikudi. The two other partners of the firm were S. M. Viswanathan Chettiar and Rm. Rm. Arunachelam Chettiar. The Partnership instruments constituting the firm was dated 28-6-1950 and 5-9-1950. The firm was a registered firm, registered under Section 26-A of the Indian Income-tax Act. For the assessment year 1952-53 delating to the previous year ended 30th June 1951, the firm was assessed as a registered firm and the order of assessment by the Income-tax Officer, Karaikudi, is dated 29th December 1952. The total income of the firm was computed and determined at Rs. 92,252, S. M. Viswanathan Chettiar one of the partners had a 7 annas share and his share income was fixed at Rs. 41,134. The share income of the partners including that of the petitioner was taken into account and included in their individual assessment. As the firm was a registered firm there was no demand of tax from the firm as an entity or unit of assessment under the Act. The petitioner was also a partner along with the said Viswanathan Chettiar in another firm called 'P. L. Subramaniam Chettiar and S. M. Viswanathan Chettiar' which also carried on business in the exhibition of pictures. There were two deeds of partnership dated 20th August 1949 and 24th December 1949 embodying the terms of this partnership. This was also a registered firm under the Act.

For the assessment year 1952-53 corresponding to the accounting year ended 31st December 1952 the firm was assessed to tax as a registrered firm by the order of the Income-tax Officer, Karaikudi, dated 29th December 1952. The total income of the firm was determined at Rs. 2617 of which Viswanathan Chettiar's share which consisted of a moiety came to be Rs. 1309. The share income of the two partners was included as taxable income in their respective individual assessments. There was no tax demand on the firm as such. The firm Viswanthan Chettiar and others discontinued its business in the accounting year ended 30th June 1955. The other firm, Subramaniam Chettiar and Viswanathan Chettiar discontinued its business with the accounting year ended 31st March 1952.

3. The petitioner, whose share income from the two firms became part and parcel of his individual assessment paid tax on his total income and it is now admitted that there are no arrears of tax due by him, in respect of his income from the two firms. The partner, S. M. Viswanathan Chettiar, was assessed by the Income-tax Officer, Karaikudi by order dated 29th March 1953 on a total income of Rs. 56434. This included his share income of Rs. 41134 from the firm, Messrs. Viswanathan Chettiar and others and Rs. 1309 from the firm of Subramaniam Chettiar and Viswanathan Chettiar. The tax payable by him was determined at Rs. 21637-9-0. Viswanathan Chettiar paid towards his tax liability Rs. 4151-10-0 and failed to pay the balance of Rs. 17485-15-0. The department could not realise the arrears of tax due from S. M. Viswanathan Chettiar.

4. The Income-tax Officer, Karaikudi, wrote to the petitioner on 25th August 1956 that therewere arrears of tax due and payable by Viswanathan Chettiar, the quondam partner in the two firms, and that the partners of the defunct or discontinued firms were jointly and severally liable to pay the tax due by him, and that the petitioner as one of the partners should pay the said arrears. The petitioner sent a reply on 10th September 1956 stating that he had no moneys owing or due to S. M. Viswanathan Chettiar, and that he was not liable to pay and discharge his arrears of tax. He also wanted to be informed as to the provision of law under which he could be called upon to pay. The officer wrote back on 14th November 1956 referring to Section 44 of the Indian Income-tax Act which in his view would fasten the liability to pay upon the petitioner. There was some further correspondence between the petitioner and the officer, and the officer wrote to the petitioner on 16th July 1958 that in consequence of the dissolution of the two firms and as a result of the application of Section 44 of the Act the petitioner was liable to pay the sum of Rs. 13755-6-0 representing his proportionate liability of the arrears of tax due and payable by S. M. Viswanathan Chettiar. The petitioner was called upon to pay the said amount by the department.

5. The petitioner submitted a reply to this demand on 15th September 1958 raising the contention that there was no liability on the part of a partner of a registered firm to fulfil the tax demand against another partner in respect of the tax due by such partner, and that Section 44 quoted by the officer was inapplicable. The Income-tax Officer repelled this objection as being untenable and threatened by his letter dated 5th November 1958 to take coercive proceedings to collect the arrears. There were further communications between the petitioner and the officer to which however no reference need be made as they only show that the department was persistent in making the demand and that the petitioner was: adamant in resisting it.

6. On 28th September 1959 the Special Deputy Tahsildar for income-tax, the first respondent herein, served a distraint order on the petitioner under Section 8 of the Madras Revenue Recovery Act calling upon him to pay forthwith Rs. 13755-38 nPs. and threatening to levy distraint on his moveables in case of default and non-payment. The petitioner was compelled to pay a sum of Rs. 3500 to avoid the proceedings and he paid the amount under protest. It is this order of distraint which is now being challenged by the petitioner as being illegal and without jurisdiction.

7. The question that arises for consideration is whether on the discontinuance and dissolution of a registered firm the partners of which have been assessed to tax under Section 23 of the Indian Income-tax Act, the tax liability of one of the partners in regard to his share of the income of the firm can be shifted and fastened upon the other partner or partners invoking the aid of Section 44 of the Act.

8. We shall now refer to the relevant provisions of the Act, Section 2(2) :

'Assessee means a person by whom income-tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act, has been taken for the assessment of his income or of the loss sustained by him or of the amount of refund due to him'.

(This provision was substituted by Act XXV of 1953 with effect from 1-4-1952). previously the definition was:

'Assessee means a person by whom income-tax is payable'.

Section 3 is the charging section. It reads:

'Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates..... tax at that rate or rates shall be chargedfor that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually.'

Section 14 deals with exemptions of a general nature. Section 14(2) reads:

'The tax shall not be payable by an assessee (a) if a partner of an unregistered firm, in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in Clause (b) of Sub-section (1) of Section 16 on which the tax has already been paid by the firm; or (aa) if a partner of a registered firm, in respect of that portion of his share in the profits or gains of the firm as is equal to the difference between his share in the total income of the firm and his share in such total income excluding the income-tax, if any, payable by the firm, the shares in either case being computed in the manner laid down in Clause (b) of Sub-section (1) of Section 16.'

Section 14(2)(aa) was inserted by Section 9 of the Finance Act 18 of 1956 with effect from 1-4-1956.

Section 16(1) reads as follows:

'In computing the total income of an assessee--(a) any sums exempted under the first proviso to Sub-section (1) of Section 7, the second and third provisos to Section 8, Sub-sections (2), (3), (4) and (5) of Section 14, Section 15, Section 15-B, Section 15-C and Section 58-F shall be included, and any sum exempted under Section 15-A shall also be included except for the purpose of determining the rates at which income-tax (but not super-tax) is payable by the assessee to whom the exemption is given;

(b) When the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year;

Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of Section 24;.....'

Section 23(5) is as follows:

'Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm had been assessed under Sub-section (1), Sub-section (3) or Sub-section (4), as the case may be :

(a) in the case of a registered firm,(i) the income-tax payable by the firm itself shall be determined; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined;

(Sub-clauses (i) and (ii) were substituted by Section 14 of the Finance Act of 1956 with effect from 1-4-1956. Previously Clause (a) stood thus:

'In the case of registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, includingtherein his share of the income, profits and gams of the previous year, shall be assessed and the sum payable by him on the basis of such assess-ment shall be determined.'). Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Section 24;

Provided further that when any of such partners is a person not resident in the taxable territories, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates at which would be applicable if it were assessed on him personally, and the sum so determined as payable shall be paid by the firm;

Provided also that if at the time of assessment of any partner of a registered firm, the Income-tax Officer is of opinion that the partner is residing in Pakistan, the partner's share of the income, profits and gains of the firm shall be assessed on the firm in the manner laid down in the preceding proviso and the sum so determined as payable shall be paid by the firm.

(This third proviso was added by the Indian Adaptation of Income-tax Profits Tax and Revenue Recovery Acts--Order 1947 G. G. O. 31).

(b) in the case of an unregistered firm, the Income-tax Officer may instead of determining the sum payable by the firm itself, proceed to assess the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, and determine the tax payable by each partner on the basis of such assessment, if, in the Income-tax Officer's opinion, the aggregate amount of the tax including supertax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm arid the partners individually if separately assessed; and where the procedure specified in this clause is applied to any unregistered firm, the provisos to Clause (a) of this sub-section shall apply thereto as they apply in the case of a registered firm.'

Section 23(6) reads thus:

'Whenever the Income-tax Officer makes a determination in accordance with the provisions of Sub-section (5), he shall notify to the firm by an order in writing the amount of the total income on which the determination has been based and the apportionment thereof between the several partners.' Section 29:

'When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest, a notice of demand in the prescribed form specifying the sum so payable.' Section 44:

'Where any business, profession or vocation carried on by a firm or other 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 Ch. IV and for the amount of tax payable and all the provisions of Ch. IV shall so far as may be, apply to any such assessment.' Section 55.

'Charge of super-tax : In addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respectof the total income of the previous year of any individual, Hindu undivided family, company, local authority, unregistered firm or other association of persons, not being a registered firm, or the partners of the firm or members of the association individually, an additional duty of income-tax (in this Act referred to as super tax) at the rate or rates laid down for that year by a Central Act; Provided that where under the provisions of Clause (b) of Sub-section (5) of Section 23 an unregistered firm has been assessed in the manner applica-able to a registered firm super-tax shall be payable by each partner of the firm individually on his share in the income, profits and gains of the firm and not by the firm itself;

Provided further that, where the profits and gains of an unregistered firm or other association of persons not being a company have been assessed to super-tax, super-tax shall not be payable by a partner of the firm or a member of the association, as the case may be, in respect of the amount of such profits and gains which is proportionate to his share.'

It is necessary to observe even at the outset that we are dealing with assessments for the year 1952-53 governed by the then prevailing law. The Finance Act of 1956 has introduced a few changes but they have no bearing on the present case. The scheme of taxation of a registered firm is radically and fundamentally different from that of an unregistered firm. The charging section does not of course make a distinction between the two as the unit of taxation is a firm, registered or unregistered. A registered firm under the Act is one in respect of which a certificate of registration has been granted by the Income-tax Officer under Section 26-A. Broadly stated an unregistered firm is taxed just like an individual. But in a registered firm the partners alone are taxed. It can be stated without any peril of inaccuracy that a registered firm as such is not liable to tax, income-tax or super-tax. An unregistered firm however stands entirely on a different footing and such a firm has to bear the brunt of income-tax and super-tax as if it is an individual.

The machinery of assessment in respect of a registered firm is to have the total income of the firm computed, to ascertain the share income of each of the partners and to include such share income in the other income of each partner and bring to tax the total income of each of the partners. There is no levy of tax on the firm as the income cf the firm is allocated to the partners in proportion to their shares, and such allocated income is included in the individual assessment of the partners. But there is an exception to this state of assessment, where one or some members of the firm happen to be non-resident partners. The second proviso to Section 23(5) enables the authorities to tax the share income of the nonresident partner by assessment on the firm. the rate of taxation applicable to such a non-resident partner is not the rate applicable to the total income of the firm, but that applicable to the partner had he been assessed individually. Not merely is the assessment in such it case made on the firm, but the tax levied is payable by the firm.

The same rule is applicable where the partner or partners reside in Pakistan. This very exception governing a case of a non-resident partner seems to indicate that the share income of a resident partner cannot be assessed on the firm, and that the firm is not liable for the tax levied on such income. It is possible to imply that if the resident-partner defaults or if for any reason tax levied upon that partner cannot be collected from him the amount collectable from him cannot berecovered from the firm, nor from the other partners of the firm individually. In an unregistered firm, however, the partners are not taxed on the profits from the firm unless the firm itself is not taxed (Section 23(5)(b)). Their share in the profits of the unregistered firm are no doubt taken into account in their total incomes for fixing the rate at which they should pay tax on their income. If an unregistered firm as such pays no tax on the ground that its income is below the taxable limit the partners are liable to pay tax on their respective shares included in their other income.

9. If we examine the provisions of Section 14(2) of the Act, the differential treatment of an unregistered firm from a registered firm becomes quite obvious. Section 14(2)(a) deals with a partner of an unregistered firm. The income of the firm is brought to tax on the assessment of the firm as an entity; it would therefore be unjust to tax the partners over again individually for their share income from the firm. It is only to avoid such double taxation that this section has enacted a special provision that tax shall not be payable by an assessee if he is a partner of an unregistered firm, in respect of any portion of his share in the income, profits and gains of the firm. It is also provided therein that the partner's share of profits of an unregistered firm has to be computed in the manner laid down in Section 16(1)(b). The partner's share includes any salary, interest, commission or other remuneration payable to him by the firm, in addition to his share from the firm's profits. Such salary, interest, commission or other remuneration received by a partner from the firm would be exempt from tax in his hands, provided that the necessary conditions of such exemption are fulfilled. This is because under Section 10(4)(b) of the Act any sum paid by way of interest, salary, commission or remuneration by a firm to any of the partners is not deductible from the profits of the firm. If such salary, interest, commission or remuneration were to be excluded from the share income of the partners the result would be double taxation, both in the hands of the firm and its partners. This has been avoided by the provisions of Section 16(1)(b.).

There is also another 'condition in Section 14(2) and that is the exemption would apply only to that portion of a partner's share of profits on which the tax has already been paid by the firm. As stated already, if the income of the firm is below the taxable minimum or if non-payment of the tax results by the firm committing default, the partner's share of the firm's profits, would have to be added to the other income and the benefit conferred bv this section will be lost. The Finance Act of 1956 has introduced Section 14(2)(aa). Previously there was no levy of income-tax or supertax on a registered firm. Now, the registered firm is levied with income-tax in addition to the income-tax and super-tax on the partners on their firm's profits. The amendment is intended to give relief to the partners in respect of the tax paid by the firm.

10. It is true that the definition of 'assessee' under the Act has to receive an elastic interpretation depending upon the context in which the expression is used in the various provisions of the enactment. It is now well understood that there are at least three stages of assessment proceedings : (1) computation of the taxable income; (2) determination of the tax payable; (3) demand of payment of tax found due. Commr. of Income-tax v. Khemchand Ramdas . It would not be inappropriate to say that even a registered firm is assessed; it is necessarily so, as it is only the firm's income that is computed. This is the firststage of assessment, and it is quite an essential stage. In Narayana Chetty v. Income-tax Officer : [1954]26ITR310(Mad) , this Court held that even in the case of a registered firm, it does not cease to be the assessee, though under Section 23(5) of the Act the tax on the assessee's income is apportioned between the several partners of the firm. The learned Judges point out that it is the income of the firm that has got to be assessed under Section 23. This decision was affirmed by the Supreme Court in Narayana Chetti v. Income-tax Officer, Nellore : [1959]35ITR388(SC) . Gajendragadkar, J. at p. 395 (of ITR): (at p. 217 of AIR) observes thus:

'The effect of the relevant provisions of Section 23, therefore, is that for the assessment of the total taxable income it is the affairs of the assessee firm that are investigated and examined and when the total income of the firm is ascertained, it is allocated to its individual partners in proportion to their respective shares. The result of such allocation undoubtedly is to make the partners liable to pay tax in respect of their taxable income thus allocated; but that cannot justify the inference that the firm is not an assessee in the relevant proceedings.'

After the first stage of assessment, namely, the computation of the taxable income a registered firm fades out of the picture. This was certainly the position before the Finance Act of 1956. The operation of Section 23(5) comes in only at the stage of determination of the tax payable. Now arises the question: 'How is the tax payable on the firm's income to be determined?' It is not the simple process of taking the aggregate taxable income of the firm and bringing it to tax. The income has to be distributed between the several partners of the firm and what is brought to lax is not the share income of the partners but that income added to their ether income. This procedure is in marked contrast with the procedure prescribed by the Act for assessing an unregistered firm. There is no determination at all of the tax payable by the registered firm. In a registered firm after the computation of the total income of the firm and the distribution and allocation of the income between the partners, the unit of taxation is the individual partner and the firm ceases to be an assessee in the sense that there is no levy of tax on it. Thereafter the registered firm is displaced and the partners become substitute. This must be the position as otherwise there would be the strange anomaly of two distinct entities of assessment for levy of tax in respect of the same subject-matter.

11. We can sum up as follows : 1. A firm, registered or unregistered, is an entity or unit of assessment. 2. The income, profits and gains of the firm, registered or unregistered, have to be computed before the levy of tax can be determined. 3. The unregistered firm is taxed on its total income. 4. If the unregistered firm is taxed and the tax is paid, the partners cannot be taxed for the share income in their hands, but such income will be added to their other income to determine the rate of taxation of their individual assessment. 5. The Income-tax Officer may instead of taxing the unregistered firm tax each partner of the firm on his total income including therein his share of the income of the firm if in his opinion the aggregate amount of tax including super-tax payable by the partners would be greater than the aggregate amount which would be payable by the firm and the partners individually, 6. The registered firm (before 1956) is not taxed on its total income. 7. The toal income of a registered firm is taxedonly on the partners in proportion to their shares. Their respective shares of the income are added to their other income and the total income of each partner thus arrived at suffers tax at the rate appropriate to such income. 8. The share income of a non-resident partner of a registered resident firm is taxed on and collected from the firm.

12. Mr. S. Ranganathan, learned counsel for the department, contends that the difference between the two types of firms lies only in the procedure adopted for assessment, that the registered firm is as much an assessee as the unregistered firm, and that the primary liability to pay tax is that of the firm even when it is registered, and it is not extignuished or effaced by the process of taxing the partners on their share income and it is only under suspended animation while apportioned between the partners, but it revives with full vigour in case the partners default. This argument is as ingenious as it is untenable. The provisions of the Act militate against it and the decision of the Supreme Court in : [1959]35ITR388(SC) which is strongly relied on does not support it. Section 23(5) of the Act as it stood prior to 1956 quite explicitly stated that the sum payable by the firm itself shall not be determined but the total income of the partner of the firm, including therein his share of the income, profits and gains, shall be assessed. The language of this provision is quite emphatic and prohibitory.

13. In : [1959]35ITR388(SC) , the Supreme Court held that a registered firm does not cease to be an assessee merely because under Section 23(5) as it stood before the amendment in 1956, the Income-tax Officer has to determine the total income of each partner of the firm. Even computation of income Is part of the assessment and it is only in that sense that the Supreme Court held that a registered firm also is an assessee. It is clear from that decision itself that after the allocation of the income to the individual partners in proportion to their respective shares, the person liable to pay the tax is not the entity of the firm but only the individual partners.

14. Section 44 of the Act is parhaps the main plank in the argument of the learned counsel for the department. That section deals with a firm in general, whether it is registered or not under the Act. It provides for the contingency of the discontinuance or the dissolution of the firm. The object is to safeguard the Revenue against nonpayment of tax which may result in a few cases from the cessation of the firm due tq discontinuance or dissolution. The section provides that on the discontinuance or dissolution of a firm carrying on any business, profession or vocation, every person who was at the time of such discontinuance or dissolution a partner of the firm shall be jointly and severally liable to assessment in respect of the income, profits and gains of the firm. Such partner is also made liable for the amount of tax payable on the income of the firm. A firm may be discontinued or dissolved even before any assessment is made; or it may cease to exist after the assessment is made but before the tax is paid. Whatever may be the stage in which the firm disappears by discontinuance or dissolution the quondam members of the firm cannot escape taxation and payment. This section is pressed into service by the learned counsel for the Department and he contends that in the present case the firms discontinued after the assessment to tax but the tax having remained unpaid, the partners, one of whom is the petitioner, are liable to pay the tax.

15. We may now refer to the decision of the Supreme Court in C. A. Abraham v. Income-taxOfficer : [1961]41ITR425(SC) , relied upon by the learned counsel for the department. In that case the Supreme Court observes that Section 44 provides for three consequences: 1. On the discontinuance of the business of a firm, every person who was at the time of its discontinuance a partner is liable in respect of the income, profits and gains of the firm to be assessed jointly and severally. 2. Each partner is liable to pay the amount of tax payable by the firm and (3) the provisions of Ch. IV so far as may be apply lo such assessment. That case dealt with an unregistered firm. The firm became dissolved by reason of the death of one of the partners. After the dissolution of the firm, the Income-tax Officer assessed the suppressed income of the firm for three assessment years and also levied penalty under Section 28 of the Act. The levy of penalty was challenged by the surviving partner on the ground that after the dissolution of the firm no order imposing a penalty can be passed against the firm. The department justified its action by relying upon Section 44 of the Act. Shah, J. delivering the judgment of the Court observed thus at p. 430 (of ITR): (at p. 612 of AIR):

'In effect, the legislature has enacted by Section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms. By a fiction, the firm is deemed to continue after discontinuance for the purpose of assessment under Ch.' IV'.

What underlies Section 44 of the Act is a fictional perpetuation of a non-existing firm. The section makes it impossible for the partners of a business firm to avoid the consequences of the Act by the simple expediency of discontinuance, or dissolution of the firm. But in the case of a registered firm there can be no question of the partners defeating the tax as the tax liability becomes fastened upon them as a result of the assessment under Section 23(5) of the Act. As pointed out by the Supreme Court Section 44 is enacted to ensure continuity in the application of the machinery provided for assessment. The terms of Section 44, express or implied, cannot be interpreted to mean that on the dissolution of a registered firm the individual liability of the partners to pay tax is converted into the liability of the firm rendering the partners jointly and severally liable for the tax due on the total income of the firm. We are unable to say that the Supreme Court has laid down that construction of Section 44.

16. The decision in Iqtida Khan v. Income-tax Officer A Ward, Lucknow : [1961]41ITR165(All) is also relied upon by learned counsel for the department. The facts of that case were as follows. A and B were the partners of a firm with equal shares. A migrated to Pakistan and was declared an evacuee and his half share in the firm vested in the Custodian of Evacuee Property. The assets of the firm were directed to be sold by the competent officer and a division of the sale proceeds was made between the Custodian and the other partner B. B purchased the assets of the firm in the sale which was free from encumbrance for any tax payable in respect of the business of the firm. The firm was a registered firm, and in respect of the assessment year 1951-52 the income-tax payable by A, the evacuee, was demanded from B. Being a registered firm, the assessment was made separately on the two partners, A and B. It was not in dispute that the third proviso to Section 23(5) of the Act dealing withresidents in Pakistan applied. It must be noted that under that proviso the share of the income, profits and gains of the partner residing in Pakistan in the firm's income should be assessed on the firm. By reason of this express provision the tax liability was cast upon the firm. The learned Judges of the Allahabad High Court held that the assessments were made while A was residing at Pakistan, and that his share of the tax was payable by the firm under the third proviso to Section 23(5) of the Act, and that, as a consequence of the order of the competent officer the business was discontinued and B became liable under Section 44 of the Act to pay the amount of tax payable by B which was a liability of the firm under Section 23(5). Tandon J. at p. 168 (of ITR): (at p. 244 of AIR) observes thus:

'This Section (Section 44) provides that in the event of discontinuance of the business of a firm, speaking in the context of a partnership firm, every partner, who was so at the time of the discontinuance, shall be liable for the amount of tax which may be payable in respect of the income, profits, etc. of the firm, the liability of each partner being joint and several. Therefore, the discontinuance of the firm has the result, in view of this section, of placing the obligation to pay the amount of tax jointly and severally on each partner. Admittedly, the petitioner was one of the partners at the relevant date. If, therefore, it can be held that the business of the firm was discontinued at any time subsequently he cannot escape from liability to pay the amount which might otherwise have been payable primarily by Mohtida Khan.'

Section 44 was invoked in that case only because there was a liability on the firm in respect of the tax due and payable by the partners residing in Pakistan.

17. We are of opinion that it is an essential requisite of Section 44 that there should be a liability oil the firm which on its cessation is fastened on the members of the firm jointly and severally. The question that has to be posed before applying Section 44 is 'What would be the position it the firm had not discontinued or become dissolved?' If the answer to that question were to be that the firm is in some way liable as determined by the provisions of the Act that liability cannot be impaired or defeated but should be spread amongst the component members of the firm at the time of the discontinuance. But if on the other hand, there is no statutory liability on the firm as such, there is nothing that can or need pass on to the partners. The section is general as it applies to registered and unregistered firms, and the words used are no doubt sweeping and wide. Income, profits and gains of the firm are assessed on the partners after discontinuance.

In the case of registered firm this is of no consequence as the partners alone are assessed to tax even if there is no discontinuance of the firm. The section provides that the partners are jointly and severally liable 'for the amount of tax payable'. These are crucial words which have to be construed. The 'tax payable' must, we take it, be by the discontinued firm, and not by the partners of that firm, who were assessed in their individual capacity including the income of the firm allocated to them in the ratio of their shares. The language of the section seems to indicate clearly that the partners of a discontinued or dissolved firm are liable for the tax due by the firm. The learned counsel for the department however urges that the tax liability of the partners of a registered firm determined in their individual assessment does not cease to be the liability of the firm and that the tax payable by them is really the tax payableby the firm. We cannot accept this contention as it manifestly runs counter to the provisions of the Act. Befora 1956, Section 23(5) provided that 'the sum payable by the firm shall not be determined'.

18. An assessment to tax of the firm's income in the hands of the partners, marks the termination of the liability of the firm as such. The Income-tax Act contains no provision to resuscitate that liability and to deem it to be that of the firm on its cessation. The Act abounds in fictions, but as yet there is no fiction imputing a liability to the firm to pay tax where no tax has been levied on the firm but only on its partners. Section 44 of the Act is free from any fiction and cannot be read so as to make one partner liable for the tax due by the other partner. There is nothing in that section which creates a new liability on the partners of a registered firm, who have been already assessed to tax so as to make them vicariously liable for tax not levied upon them, and which cannot be levied upon them, having regard to the scheme of the Act.

19. Learned counsel for the department also urges that in effect and in substance the tax liability of each partner is really that of the firm and whatever may be the mode of distribution of that liability under the Act, no partner can avoid tax in respect of any portion of the firm's income. We have no hesitation in rejecting this argument as it is quite obvious that once the income of the firm is computed and each partner is assessed to tax with regard to his share of that income, the liability of the firm to tax is at an end and the only liability is that of the partner, who has been assessed and who suffers the tax.

20. In our opinion, the proceedings of the respondent are entirely without jurisdiction and should be quashed.

21. Learned counsel for the assessee contends that the proceedings are vitiated by lack of proper demand under Section 29 of the Act, but it is unnecessary to consider that objection in the view that we have taken in the matter.

22. The writ petition is allowed and the rulenisi is made absolute. The petitioner will get hiscosts from the respondent. Counsel's fee Rs. 250.


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