Sahu Rajeshwar Nath v. Income-Tax Officer C-Ward, Meerut, And Another.

Pathak, J.:— This special appeal arises out of a petition under article 226 of the Constitution.

2. The appellant, Sahu Rajeshwar Nath, was a partner in a firm carrying on business under the name and style of Regal Dehydrating Company, Meerut. In the petition he alleged that he had sold his share to one Ram Chander on January 15, 1945. It appears that the firm was assessed to income-tax for the assessment year 1945-46 on December 9, 1952. Subsequently, the appellant was required by the Naib Tahsildar (Collection) to pay up the amount of income-tax, and the appellant says that it was then for the first time that he came to know that the firm had been assessed. It is said that no notice was given to him of the assessment proceedings against the firm or of the assessment order made consequent to those proceedings. The appellant challenges the demand of income-tax made upon him on the ground that he was not a partner when the assessment was made and that having sold his interest in the partnership firm he was not liable to any income tax liability assessed after such transfer, and the demand made upon him was without jurisdiction.

3. The respondents admit that the appellant had executed the sale deed on January 15, 1945, in favour of Ram Chander but asserts that nevertheless he continued to be a partner of the firm, and that he was liable to pay the income-tax assessed upon the firm.

4. The petition was dismissed on the ground that disputed questions of fact were involved in its decision and that in any event every partner was liable jointly and severally in respect of the tax due from the firm.

5. From the affidavits filed by the parties, it is apparent that the respondents do not admit that the interest of the appellant was transferred to Ram Chander. Reference has been made to the fact that a partnership deed dated March 5, 1945, recites that Ram Chander left the partnership firm at the end of the firm's accounting period ending Diwali, 1944, but it was not comprehensible—

“…. how Sri Ram Chandra could go out of partnership with effect from Kartik B. 15 St. 2001, as disclosed in the partnership deed when he was shown having been admitted to the partnership, long after Kartik B. 15 St. 2001.”

6. This appears from the order of the Income-tax Officer under section 26A of the Indian Income-tax Act which has been annexed to the appellant's affidavit and upon which the respondents now place reliance. There is considerable controversy between the parties whether the appellant did indeed transfer his interest to Ram Chander. It is clear that a dispute upon facts does arise in this case, and it is one which cannot be resolved in the present appeal having regard to the contents of the affidavits.

7. But, even were we to assume in favour of the appellant that he had indeed transferred his interest in the partnership firm in favour of Ram Chander, we are of the opinion that upon the mere transfer of such interest the appellant did not cease to be a partner of that firm. That that is so is clear from the provisions of section 29 of the Partnership Act, which provides as follows:

“(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners, to receive the share of the assets of the firm to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.”

8. When a partner transfers his interest in the firm to a stranger, the firm as constituted continues in existence, and the transferee is not entitled to be substituted in place of the transferring partner. He is not entitled to interfere in the conduct of the business or to require accounts or to inspect the books of the firm, all of which rights belong to the transferring partner. He is merely entitled to receive the share of profits of the transferring partner and he cannot question the account of profits settled between the partners. In other words, the share of profits in the business done by the firm after the transfer of the interest which would belong to the transferring partner must now be paid over to the transferee. The accrual of profits subsequent to the transfer implies, in the absence of anything else, that the firm is continuing its business. A share in those profits can only belong to the transferring partner if he can be said to continue as a partner. Moreover, upon dissolution of the firm or the transferring partner's ceasing to be a partner the transferee, is entitled to receive the share of the assets of the firm to which the transferring partner would be entitled. That again postulates that the transferring partner continues to be a partner of the firm even after transfer of his interest, but if he ceases to be such subsequently or the firm is dissolved his share in the assets must be made over to the transferee. We would, therefore, hold that the appellant continued to be a partner of the firm notwithstanding the transfer of his interest to Earn Chander. There is no clear averment by the appellant that he ceased to be a partner. The contention before us that he did not remain a partner was based upon the assumption that the transfer of his interest to Ram Chander resulted in law in the termination of his membership of the firm. We have no hesitation in rejecting this contention. In the absence of a provision to the contrary in the partnership deed, a partner who transfers his share in the partnership firm does not thereby cease to be a partner of the firm. The appeal before us must, therefore, be decided on the basis that the appellant did not cease to be a partner of the firm.

9. If the appellant continued as a member of the firm, he was a partner of the firm when the assessment order was made upon the firm and when a notice of demand was issued upon it for payment of the income-tax assessed. Learned counsel for the appellant contends that, in order to proceed to recover the tax liability of a firm against an individual partner, a separate notice of demand must be served upon that partner. It seems to us that that is not necessary at all. It is true that under the income-tax law a firm is treated as an entity distinct from its partners, but that is so only for the purposes of assessment. The procedure relating to assessment concludes when an assessment order has been made and the tax liability consequent upon that assessment has been determined. When a notice of demand is issued requiring the payment of the tax liability, the stage of assessment has been left behind, and with it the distinction between the firm and its partners. Section 29, under which the notice of demand is issued, indicates in terms that the assessment proceeding has been concluded and that tax is due in consequence of the assessment order. It provides that when tax is due in consequence of an order passed under the Act the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax a notice of demand specifying the sum so payable. Therefore, when a notice of demand is issued by the Income-tax Officer in the name of the firm it is a demand upon the partners of the firm who are liable to meet it in the same manner as a demand made in respect of any other liability of the firm. The liability of the partners of the firm is joint and several, and it is open to a creditor of the firm to proceed to recover a debt of the firm from any one or more of the partners. In Simon's Income Tax (2nd edition), volume 1, page 337, paragraph 510, the law is thus stated:

“The tax assessed in the firm name is a partnership debt for which all who were partners at the time when the debt was incurred, or who have held themselves out to the Revenue to be such, are jointly liable. This means that any or all of those persons may be sued for the whole of the tax due (when the assessment becomes final) without reference to their respective shares under the partnership agreement”: see also Stevens v. Britten [1954] 3 All E.R 385..

10. Reliance has been placed for the appellant on a number of decisions, but they are decisions given in cases where the firm was dissolved and the question arose whether, after the dissolution of the firm, proceedings could be taken to recover the tax liability assessed against the firm without a notice of demand served upon the partners.

11. Learned counsel for the appellant finally contends that the appellant was not shown as a partner in the partnership deed in force at the time when the assessment proceedings were taken and that consequently no proceedings could have been taken against the appellant without an opportunity to him to show cause why he should not be treated as a partner in the firm, and in support of this argument he relies upon Pt. Deo Sharma v. Commissioner of Income-tax [1961] 41 I.T.R 235.. This point was never raised before the learned single judge and we cannot allow it to be raised at this stage.

12. We, therefore, hold that the appellant was liable to pay the tax liability assessed upon the firm, and that the respondents were entitled to proceed against him for recovery of the tax liability.

13. The result is that the appeal fails and is dismissed with costs which we assess at Rs. 200.

14. Appeal dismissed.