1. These writ petitions are for prohibition prohibiting the respondents herein from taking recovery proceedings against the petitioner under the provisions of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), relating to the assessment years 1962-63 and 1963-64 seeking to recover a sum of Rs. 1,25,858 in pursuance of the demand dated January 29, 1975.
2. The short facts are as follows : The father of the petitioner was a partner in three firms, (1) M/s. S. S. Sannanna Chettiar & Sons, (2) M/s. Shanmugasundaram Textiles, and (3) M/s. Mari Chettiar & Co. The petitioner retired from the firm of M/s. S. S. Sannanna Chettiar & Sons on April 19, 1963. The business of the said firm was continued under a new and different partnership arrangement. In other words, there was a change in the constitution of the firm of M/s. S. S. Sannanna Chettiar & Sons as per the provisions of Section 187(2)(a) of the Act. After the petitioner retired from the partnership, the business was carried on by two of the other partners along with two other persons who were taken in as partners. The latter partnership came to be dissolved with effect from April 12, 1972.
3. For the assessment years 1962-63 and 1963-64, during which period the petitioner was a partner in the firm, the assessments were completed only on March 25, 1967, and March 29, 1968, respectively, under Section 189(3) of the Act. The profits of the firm for these assessment years were allocated amongst the partners who constituted the firm before the retirement of the petitioner on April 19, 1963. On February 23, 1972, the first respondent sent a communication stating that in respect of the arrears due by the firm, M/s. Sannanna Chettiar & Sons, for these assessment years, the petitioner would be jointly and severally liable to pay over the arrears as a partner at the time of the dissolution. On February 25, 1972, the petitioner sent a reply stating that on and from April 19, 1963, he ceased to be a partner and, thereafter, there was a change in the constitution. It was further stated that he was not a partner at the time of the dissolution of thepartnership on April 12, 1972, and that the proceedings for recovery must be taken against the persons who were the partners of the newly constituted firm.
4. On March 3, 1972, the first respondent sent a communication stating that the stand taken by the petitioner was not correct, that since the arrears related to the year 1963-64, and inasmuch as he has retired only on April 19, 1963, he would be liable as a defaulter, and that proceedings would, therefore, be taken under Section 226(3). On March 15, 1972, the petitioner sent a reply denying his liability. On January 29, 1975, the second respondent sent a communication that a sum of Rs. 1,27,562 was due by M/s. Sannanna Chettiar & Sons for the assessment years 1962-63, 1963-64, 1964-65 and 1968-69. On April 28, 1976, the petitioner sent a reply to the second respondent herein stating that up to the date on which the petitioner was a partner, he had paid all the taxes due and payable in respect of his share, and, consequently, he could riot be treated as a defaulter. It is under these circumstances, the present writ petition has been preferred for the relief above stated.
5. Mr. K. Srinivasan, learned counsel for the petitioner, urges that the proceedings are entirely illegal in that the petitioner could not be considered as a defaulter and he cannot be subject to recovery proceedings. It is his submission that when a change in the constitution of the firm took place by the petitioner ceasing to be a partner on his retirement on April 19, 1963, and the business was taken over by certain other partners, the joint and several liability came to an end or terminated. Such a joint and several liability could be fastened or attached to the partners of the firm as evidenced by the deed dated June 6, 1963, under which the assets and liabilities of the old firm were taken over. The language employed under Section 189(3) at 'the time of such dissolution or discontinuance' is significant and can refer to and relate to a partner who is 'a partner on the date of dissolution'. Learned counsel, in support of his arguments, cites the decisions in ITO v. C. F. George : 105ITR144(Ker) [FB] ; P.P. Kanniah Chetty v. ITO : 105ITR622(Mad) and P. Balchand v. TRO : 95ITR321(KAR) . Learned counsel submits that all that he is interested in is that no recovery proceedings under the Act should be taken against the petitioner. On the contrary, if a liability could be fastened under the general law, as and when such liability is sought to be imposed against him, he would meet the same.
6. Mr. J. Jayaraman, learned counsel appearing for the revenue, would submit that the petitioner by his letter dated March 15, 1972, accepted the joint and several liability of the partners. Pursuant to that letter, he has made certain payments towards the discharge of the liability of the firm for the arrears of the tax for the assessment years 1962-63 and 1963-64.During that relevant period, he was a partner of the firm and, hence, he could not escape liability. The petitioner is not correct in his submission that the liability of the firm relating to the period prior to the change in the constitution will have to be met by those members who were partners at the time of dissolution. Hence, the recovery proceedings are perfectly valid in law. In any event, it is submitted that the liability of the petitioner under Section 25 of the Partnership Act would not cease and the same should be preserved to the revenue, should the court come to the conclusion that the petitioner is not liable to be proceeded under the Act.
7. In order to appreciate the respective contentions, let us refer to the relevant sections of the Act which have a bearing. Section 185(1) of the Act, relating to procedure on receipt of application, reads :
'(1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and-
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;
(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.
8. Explanation.--For the purposes of this section and 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar-
(a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child, or
(b) of any person, not being a partner of the firm, and any of the other partners knew or had reason to believe that the first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the Income-tax Officer in the prescribed manner.'
9. Section 187, relating to change in constitution of a firm, reads :
'187. (1) .......
(2) For the purposes of this section, there is a change in the constitution of the firm-
(a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; ......'
10. A reading of the above sections would clearly disclose that a vital distinction has been made between a change in the constitution of the firm and dissolution. They are treated differently. This is a case in which thefirm had been continued. In other words, there was a change in the constitution, which took place on June 6, 1963, which was duly intimated to the first respondent under Section 185(1) of the Act. In fact, on February 19, 1969, the first respondent passed the order stating that due to the change in the constitution of the firm, the firm has filed the application for registration on June 6, 1964, on the strength of the partnership deed dated June 6, 1963, and the registration applied for is granted. Therefore, the firm of Messrs. S.S. Sannanna Chettiar & Sons is a reconstituted firm. It stood dissolved only on April 12, 1972. At the time of such dissolution, the petitioner was not a partner. Under these circumstances, the question is whether he would be liable? In this context, Section 189(3) requires to be looked at. Section 189(3) and Explanation read thus :
'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, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum.
Explanation.--The amount of tax referred to in this sub-section shall also include that part of the share of each partner in the income of the firm before its discontinuance or dissolution which the firm could have retained under Sub-section (4) of Section 182 but which has not been so retained.'
11. A careful reading of this section would clearly show that the words 'at the time of such discontinuance or dissolution' would only refer to the dissolution under Section 189(1). Therefore, the petitioner cannot be considered to be a 'defaulter' within the meaning of the Act. In this context, we have also to note the important fact that the firm alone is the assessee at the relevant period for the relevant assessment years of 1962-63 and 1963-64, which are the years in question in these writ petitions and there was no individual assessment on the respective partners.
12. In ITO v. C.V. George : 105ITR144(Ker) , a Full Bench of the Kerala High Court considered the question where the firm was assessed to income-tax, whether such tax could be recovered from the partners of the firm. It was held (head note):
'A certificate issued for recovery of tax from a firm cannot be utilised to take coercive steps against the partners of the firm and it is not permissible to take steps against the partners of a firm for collection of tax imposed on the firm as such. When there has been only assessment on the firm, the firm alone is considered as an assessee. When tax is demanded from that firm and it is not paid, the assessee in default is the firm and not its individual partners according to the scheme of the Income-tax Act, which envisages separate assessments being made on the firm as such and on thepartners separately. Any liability for income-tax imposed on a firm as such under the Act cannot be treated as the liability of the individual partners of the firm arising under the Act by importing the general principles of partnership law as the scheme of the Income-tax Act visualises proceedings being taken against the firm or the partners, only if a liability is imposed under the provisions of the Act against the firm or the partners thereof. The provisions of Section 25 of the Partnership Act cannot be imported into the Income-tax Act.'
13. In so doing the Full Bench at page 148, referring to the facts of ITO v. Radha Krishan : 66ITR590(SC) , held :
'The firm consisted of four partners A, B, C and D. The firm had been registered under Section 26A of the Indian Income-tax Act, 1922. A represented his Hindu undivided family in the partnership and his share was 8 annas. In assessing A under Section 23(5)(a) for the year the income-of A from the firm was added to the other income of the Hindu undivided family and assessments were made on the total income. The tax liability attributable to the share of A in the income of the firm for the years in question was not satisfied. A demand for such tax was, therefore, made on D, a partner of the firm. D challenged the procedure by moving the High Court under Article 226 of the Constitution. The High Court allowed the petition and on further appeal to the Supreme Court by counsel for the revenue, the Supreme Court held that the tax liability attributable to A's share of income of the firm could not be recovered from D pursuant to the assessment already made on A. The following passage from the judgment : 66ITR590(SC) is apposite :
'Undoubtedly, contractual obligations of a firm are enforceable jointly and severally against the partners. Bat the liability to pay income-tax is statutory ; it does not arise out of any contract, and its incidence must be determined by the statute. If the statute which imposes liability has not made it enforceable jointly and severally against the partners, no such implication can arise merely because contractual liabilities of a firm may be jointly and severally enforced against the partners.'
The provisions of Section 25 of the Partnership Act cannot be imported into the Income-tax Act, 1961, unless there is any provision to that effect in the Income-tax Act or at least there was such a necessary implication arising from the provisions thereof. We are unable to discern any such provision in the Income-tax Act.
The reasoning in the judgment of the Supreme Court must apply onall fours to the case before us ; the liability of the partner to pay the taximposed on the firm is sought to be made out by counsel on behalf of therevenue on the basis of the provision in Section 25 of the Indian Partnership Act.'
14. It is this passage which is very much relied upon by Mr. K. Srinivasan, learned counsel for the petitioner, under the general law of partnership. The fallacy in this extreme argument is ITO v. Radha Krishan : 66ITR590(SC) , a case which arose under Section 26A of the Indian Income-tax Act of 1922. In fact, the Full Bench itself notes at page 151 and says:
'The Indian Income-tax Act, 1922, contained a provision specially incorporating Rule 50 of Order XXI of the Civil Procedure Code. It was in the light of that specific provision that the Supreme Court in the decision in Income-tax Officer v. Radha Krishan : 66ITR590(SC) , already referred to, upheld the proceedings taken against the partners of the firm. Such a provision is significantly absent in the Act. This has been noticed in the judgment under appeal and the absence of such a provision makes all the difference. It is, therefore, not possible for steps being taken against the partners of a firm for collection of tax imposed on the firm as such.'
15. Even otherwise, we do not understand this decision to be an authority for this extreme proposition that the liability of the petitioner under Section 25 of the Partnership Act also would not arise because the liability to pay arrears is not a contractual obligation. All that was held in ITO v. Radha Krishan : 66ITR590(SC) was that where the tax liability of partner 'A' is sought to be recovered from partner 'B', Section 25 of the Partnership Act would be of no assistance to the revenue. The situation would be entirely different where the liability of the firm is enforced as against the individual partner. In other words, the ruling of the Full Bench is only with regard to the right of the revenue to proceed under the I.T. Act by invoking Section 25. It nowhere lays down that the right available to the revenue, under Section 25 of the Partnership Act, against a partner of the firm is in any way obliterated.
16. In P. Balchand v. TRO : 95ITR321(KAR) , it was held (head-note):
'Where the Income-tax Officer issues a certificate under Section 222 of the Income-tax Act, 1961, to the Tax Recovery Officer to recover the amount of tax specified and the certificate shows the assessee in default as a firm, which was unregistered, the Tax Recovery Officer cannot seek to recover the amount from a partner of the firm under the provisions of the Act of 1961. Though there cannot be any dispute about the liability of a partner to pay the tax assessed on the firm, the mere existence of a liability to pay tax is not sufficient to recover the tax. There should be a machinery provision to enforce that liability. It is only from the defaulter shown in the certificate that the Tax Recovery Officer can recover the tax.'
17. These two decisions support the petitioner to the limited extent that recovery proceedings under the Act cannot be sustained. Merely because an undertaking had been given to avoid coercive proceedings, we cannot hold that the petitioner would be legally liable.
18. Therefore, we have no hesitation in allowing this writ petition. However, we make it clear that the allowing of the writ petition does not prevent the revenue to proceed against the petitioner for recovery of arrears of the tax due from the firm for the years in question by invoking Section 25 of the Partnership Act. In our opinion, that section does create a joint and several liability. That right is preserved to the revenue. In the peculiar circumstances, we make no orders as to costs.