Citation Codes

Equivalent Citations

citation codes

Case Number

Writ Appeal No. 77 of 1956

Advocates

For the Appellant: C. Mallikarjuna Rao, Advocate.
For the Respondent: V. Vedantachari, Advocate.

Judges

Subba Rao, C.J
Mohd. Ahmed Ansari, J.

Acts

Sub-section 4 of Section 22 or Sub-section 2 of Section 23
Section 28(1)(c) of the Indian Income-tax Act
SECTION 44 INCOME TAX ACT
Sub-section (1) of Section 14,
provisions of Section 23.4.
Section 28(1)(c),

See more information ...

Smart Summary

Structured Summary of the Legal Opinion

Factual and Procedural Background

The appellant was a partner in the registered firm of Messrs Talluri Suryanarayana and others, which carried on the business of milling paddy from 17 January 1945 until it discontinued business on 28 December 1947. On 7 August 1950 the firm filed a return disclosing an income of Rs. 2,389 for the assessment year 1947–1948; that return was signed by the partner Talluri Suryanarayana.

During scrutiny, the assessee admitted that some cash credits in the accounts represented the firm's own income and the Income-tax Officer found other unexplained credit items. The assessment was computed on a total income of Rs. 50,776. A notice was issued under Section 28(1)(c) of the Indian Income-tax Act for admitted concealment of income. By order dated 31 August 1953 a penalty of Rs. 9,300 was levied on the firm and the order and notice of demand were served on the partner T. Suryanarayana, who represented the firm.

Because the firm had discontinued business, the Income-tax Officer sought to realise the penalty proportionately from all the partners. Objections by some partners, including the appellant, were rejected. All partners except the appellant paid their shares. The Income-tax Officer then proceeded to recover the unpaid share of the penalty from the appellant. The appellant's principal contention was that the Income-tax Officer lacked jurisdiction to impose a penalty on the partners of a dissolved firm and to collect it from any one of them.

The court noted Section 44 of the Income-tax Act (quoted in the opinion), which provides that where a firm has been discontinued every person who was at the time of discontinuance a partner shall, in respect of the income, profits and gains of the firm, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable, and that all provisions of Chapter IV shall, so far as may be, apply to any such assessment.

Legal Issues Presented

Whether, under Section 44 of the Income-tax Act, the Income-tax Officer had jurisdiction to impose and collect a penalty under Section 28(1)(c) on partners of a firm which had been discontinued.
Whether the earlier decisions construing Section 25-A (concerning divided Hindu undivided families) that held penalty could not be imposed after disruption are applicable to Section 44 situations.
Whether the requirement of mens rea prevents imposition of penalty on an erstwhile partner for defaults attributable to another partner where the firm has been discontinued.

Arguments of the Parties

Appellant's Arguments

The Income-tax Officer had no jurisdiction to impose a penalty on the partners of a dissolved firm and to collect the same from any one partner because Section 44 does not provide for levying or collecting penalties from erstwhile partners.
Reliance was placed on Division Bench authority (Commissioner of Income-tax Bihar and Orissa v. Sani-char Sah Bhim Sail) and the decision in Raju Chettiar v. Collector of Madras, which construed Section 25-A of the Act and held that penalty could not be imposed on divided members of a Hindu undivided family once the family as an assessee had ceased to exist.
An argument was advanced that mens rea (a guilty mind) is a necessary ingredient for penalisation and therefore an erstwhile partner should not be liable for defaults made by another partner after discontinuance.

The opinion does not contain a distinct, detailed statement of the respondent's (Revenue's) formal arguments separate from the court's own analysis; the court's reasoning addresses and rebuts the appellant's points.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax Bihar and Orissa v. Sani-char Sah Bhim Sail, 1955-27 ITR 307 (AIR 1955 Pat 103)	The decision construed Section 25-A(2) (provisions for assessment of a divided Hindu undivided family) and held that the Income-tax Officer could not validly initiate or impose a penalty under Section 28(1)(c) where the Hindu undivided family no longer existed at the time proceedings or penalty were imposed.	The court considered this authority relied on by the appellant but held it distinguishable: Section 25-A and Section 44 are not in pari materia and the Patna decision turned on the particular machinery and wording of Section 25-A. Therefore that decision does not govern the interpretation of Section 44.
Raju Chettiar v. Collector of Madras, 1956-29 ITR 241 (AIR 1956 Mad 396)	The Madras Division Bench followed the Patna decision and held that where an assessee ceased to exist by the time an order under Section 28(1) was passed, there was no machinery in the Act to impose the penalty after the assessee had ceased to exist; thus the imposition was illegal.	The court noted this decision but treated it as following the Patna reasoning based on Section 25-A; the court distinguished it from the present case because Section 44 expressly makes all provisions of Chapter IV applicable "so far as may be" to assessments under Section 44, thereby permitting application of Section 28.

Court's Reasoning and Analysis

The court began by comparing the language and legislative purpose of Section 44 with Section 25-A. It observed that Section 25-A addresses assessment and liability of divided Hindu undivided families and prescribes machinery for apportioning tax liability; that section did not, in the view of earlier courts, provide for imposing penalty on divided members because it lacked necessary machinery.

By contrast, Section 44 (governing discontinued firms) expressly states that every person who was a partner at the time of discontinuance shall be jointly and severally liable to assessment under Chapter IV and that "all the provisions of Chapter IV shall, so far as may be, apply to any such assessment." The court examined whether Section 28 (which appears in Chapter IV and imposes penalties for concealment of income and related defaults) is a provision "relating to any such assessment" made under Section 44.

The court analyzed the nature of Section 28, noting that it penalises defaults made in the process of assessment (concealment of income, improper distribution of profits, defaults in furnishing returns or complying with notices). Because Section 28 is part of Chapter IV and relates to assessment procedure, the court concluded it can properly be said to apply to assessments made under Section 44.

Addressing the mens rea argument, the court rejected the proposition that mens rea is an inflexible requirement for any penal liability. It noted that where the statute excludes mens rea or provides a different scheme of liability, penal consequences may attach without proof of a guilty mind. Section 44's provision for joint assessment and liability was held to bring erstwhile partners within the meaning of "person" in Section 28 for penal purposes.

On the contention that there was no machinery to impose and collect penalties from former partners, the court interpreted the saving phrase "so far as may be" in Section 44 as permitting application of Chapter IV provisions (including Section 28) to the extent appropriate in a given situation. The court held there was no lacuna in Section 44 comparable to that in Section 25-A and therefore that Section 28 applied to assessments under Section 44.

Consequently the Income-tax Officer had jurisdiction to proceed against the partners of a discontinued firm for the collection of their shares of a penalty levied on the firm.

Holding and Implications

Holding: The appeal is DISMISSED. The court held that Section 28(1)(c) is attracted to assessments made under Section 44 and that the Income-tax Officer has jurisdiction to impose and recover the share of a penalty from partners of a discontinued firm. The appeal "fails and is dismissed with costs." The order awards costs and an advocate's fee of Rs. 100.

Implications:

Direct effect: The decision affirms that where a firm has been discontinued, Section 44 brings erstwhile partners within the scope of Chapter IV; therefore penalties under Section 28 can be imposed and collected from such partners jointly and severally.
Statutory interpretation: The court distinguished prior decisions under Section 25-A and held that the differing wording of Section 44 (notably the clause making Chapter IV applicable "so far as may be") permits application of Section 28; the earlier authorities construing Section 25-A were therefore not controlling for Section 44 situations.
No broader or novel remedial mechanism beyond this case is expressly announced in the opinion; the immediate consequence is the validation of the Revenue's jurisdiction to recover the penalty share from the appellant in this matter.

Result recorded in the judgment: "10. Appeal dismissed."

Show full summary ...

Mareddi Krishna Reddy v. Income-Tax Officer, Tenali .

Subba Rao, C.J:— This is an appeal against the judgment of our learned brother Satyanarayana Raju, J.

2. The facts may be briefly stated. The appellant was a partner of the registered firm of Messrs Talluri Suryanarayana and others. The firm carried on the business of milling paddy from 17th January, 1945 to 28th December, 1947, after which it discontinued the business. On 7th August, 1950, the firm filed a return disclosing an income of Rs. 2,389, for the assessment year 1947-1948. That was signed by the partner Talluri Suryanarayana. During the scrutiny of the accounts, the assessee admitted that some cash credits found in the accounts represented the firm's own income and the Income-tax Officer also found that for some other credit items the assessee had no explanation. The assessment was computed on a total income of Rs. 50,776. Thereafter, a notice was issued under Section 28(1)(c) of the Indian Income-tax Act for the admitted concealment of income by the Arm. On 31st August, 1953, a penalty of Rs. 9,300 was levied on the firm and the said order and the notice of demand were duly served on the partner T. Suryanarayana, who represented the firm. As the firm discontinued the business, the amount of penalty was sought to be realised proportionately from all the partners. The objections raised by some of the partners including the appellant were rejected. All the partners, except the appellant, paid their proportionate share of the penalty. The income-tax Officer is now proceeding to recover the share of the penalty from the appellant. The main contention of the learned counsel is that the Income-tax Officer had no jurisdiction to impose a penalty on the partners of a dissolved firm and to collect the same from any one of them. Section 44 of the Income-tax Act governs the situation. It reads:

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

3. This section was enacted to meet the difficulty of assessing the income and for levying tax in the case of discontinuance of a firm or dissolution of an association of persons. By reason of this section, the erstwhile partners would be jointly and severally assessed and made liable for the tax. The argument is that the section only makes the partners liable jointly and severally for assessment and for the amount of tax and does not provide for levying and collecting any penalty from the said partners and, therefore, there is no provision where under penalty can be levied on the partner of a discontinued firm. In support of this contention, reliance is placed on the judgment of a Division Bench of the Patna High Court in Commissioner of Income-tax Bihar and Orissa v. Sani-char Sah Bhim Sail 1955-27 ITR 307: ((S) AIR 1955 Pat 103 (A). That decision turned upon the provisions of Section 25-A(2) of the Act. Section 25-A was introduced to provide for the contingency of a division in a joint family by enacting that profits could be computed as if the said family continued to exist at the time of the assessment and by enabling the tax payable by the joint family either jointly or severally. The question arose whether, by reason of that section, penalty could be imposed on a Hindu undivided family which had become disrupted. The relevant provision governing the case of a divided Hindu family is section 25-A(2) which reads:

“Where such an order has been passed, or where any person has succeeded to a business, profession or vocation formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last day on which it carried on such business, profession or vocation, the Income-tax Officer shall make an assessment of the total income received by or on behalf of the Joint family as such, as if no partition had taken place, and each member or group of members shall. In addition to any income-tax for which he or it may be separately liable and notwithstanding anything contained in Sub-section (1) of Section 14, be liable for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it; and the Income-tax Officer shall make assessment accordingly on the various members and groups of the members in accordance with the provisions of Section 23.”

4. It will be seen from the aforesaid provision that Section 25-A only refers to the assessment of a Hindu undivided family which had become divided in the course of the assessment year. It does not empower the Income-tax Officer to impose a penalty on the divided members of a Hindu family. Adverting to Section 28(1)(c), which enables penalty to be imposed on an assessee under certain circumstances, Ramaswami, J., observed at page 313 (of ITR): (at p. 105 of AIR):—

“It is clear in these circumstances that the Hindu undivided family was not existing on the date the Income-tax Officer started the proceeding under Section 28(1)(c) and also on the date the Income-tax Officer imposed penalty. In my opinion, the proceeding initiated by the Income-tax Officer under Section 28(1)(c) of the Act is legally invalid since the Hindu undivided family was non-existent on that date.”

5. Dealing with the argument based upon Section 25-A of the Act, the learned Judge observed:

“The section does not, in my opinion, lay down the machinery for the imposition of penalty on a Hindu undivided family which has become disrupted……….It is clear that there is a gap in the provisions of the Act; but it is not the function of the Court to fill up the gap.”

6. A Division Bench of the Madras High Court in Raju Chettiar v. Collector of Madras 1956-29 ITR 241 : (AIR 1956 Mad 396 (B), followed the said decision and applied it to a case where, at the time notice was issued under Section 28, the family was undivided but became divided at the time the order of penalty was made. The learned Judge, in holding that the imposition of penalty was illegal, observed at page 244 (of ITR): (at p. 397 of AIR):

“Under Section 28(1) of the Act, any person in whose case it is held that the requirements of that section have been satisfied, is liable to be penalised. A Hindu undivided family is within the scope of the expression ‘person,’ see Section 22(9) of the Act. It was that person, the Hindu undivided family, that was the assessee. Section 28(3) requires that the assessee should be heard before an order is passed under Section 28(1). That assessee had ceased to exist when the order under Section 28(1) was passed in this case. We are referring to this aspect only to emphasise that there is no machinery provided by the Act to impose the penalty under Section 28(1) after the assessee had ceased to exist.”

7. The question is whether the said decisions on the interpretation of Section 25-A would govern Section 44 of the Act. The wording of the two sections is not in pari materia. They differ in essential respects. Section 25-A provides for the assessment of a Hindu undivided family after partition and says that the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such as if no partition had taken place and that each member or group of members shall be liable for a share of the tax of the income so assessed according to the portion of the joint family property allotted to him or to it. The proviso further adds that all the members shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family as such. The section, therefore, prescribes for the assessment of a joint family which was divided, apportions the liability between the erstwhile members and imposes a joint and several liability for its collections. Section 44 in an abbreviated form provides for the joint and several liability of the partners of a discontinued firm and for the assessment and payment of the tax. But this section adds the following words, which are not present in Section 25-A, “all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.” Is Section 28 a provision relating to any such assessment? Section 28 is one of the sections in Chapter IV. It imposes a penalty for the concealment of income or the improper distribution of profits. The defaults made in furnishing a return of the total income, in complying with a notice under Sub-section 4 of Section 22 or Sub-section 2 of Section 23 and in concealing the particulars of income or deliberately furnishing inadequate particulars of such income are penalised under that section. The default enumerated therein relates to the process of assessment. Section 28, therefore, is a provision enacted for facilitating the proper assessment of taxable income and can properly be said to apply to an assessment made under Chapter IV. We cannot say that there is a lacuna in Section 44 such as that found in Section 25-A of the Act.

8. It is argued by the learned counsel that a person can be penalised only if he has mens rea and, therefore, one of the members of a quondam partnership cannot be punished if the firm has been discontinued for a default made by another partner. It is not an inflexible rule of law that mens rea is a necessary ingredient of every default. One of the exceptions to that rule is where an Act excludes the said factor. Section 44 specifically provides for joint assessment in the case of discontinuance of a firm. The position, therefore, is that, despite the discontinuance, all the partners would be jointly liable for assessment. If Section 28 applies, the word “person” in that section whose default attracts the penal consequences takes in partners jointly liable for the assessment.

9. Nor can we accept the argument that the Act has not prescribed a machinery for imposing penalty on and for collecting the same from the erstwhile partners of a discontinued firm. As we have pointed out, the words in the last limb of Section 44 making applicable all the provisions of Chapter IV attract those of Section 28. The words “so far as may be” in the last clause of Section 44 far from supporting the assessee's contention permits the application of Section 28 to the extent applicable to a given situation. We, therefore, hold that Section 28 is attracted to the assessment made under Section 44. In this view the Income-tax Officer has jurisdiction to proceed against the partners for collecting the share of the penalty imposed on the firm. In the result, the appeal fails and is dismissed with costs. Advocate's fee Rs. 100.

M.K.S

10. Appeal dismissed.

Mareddi Krishna Reddy v. Income-Tax Officer, Tenali .

Structured Summary of the Legal Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Mareddi Krishna Reddy v. Income-Tax Officer, Tenali .

Comments