1. On 15th August, 1950, Ponnuswami Gramani, the petitioner, entered into a partnership with one Kurshidulla Sahib for carrying on a business in hides and skins. The name of the firm was Ponnuswami Gramani and Kurshidulla and Co., and its place of business was in Periamet, Madras. By an instrument dated 29th January, 1952, the partnership was dissolved with effect from 15th January, 1952., Notice of the dissolution was given to the Registrar of Firms, Madras, and also by advertisement in a Tamil newspaper. By the terms of the instrument of dissolution, Ponnuswami Gramani relinquished all his interests in the partnership in favour of Kurshidulla Sahib who took over all its assets and liabilities. Kurshidulla continued to do business in the same commodities.
2. On 31st March, 1953, that is to say, long after the deed of dissolution had been executed, the Deputy Commercial Tax Officer, Moore Market Division, Madras, assessed the firm of Ponnuswami Gramani and Kurshidulla and Co. to sales tax for the year 1950-51 in a sum of Rs. 2,551-8-5. Similarly on 26th March, 1955, he assessed the firm to sales tax for the year 1951-52 in a sum of Rs. 7,053-11-5.
3. The petitioner represented to the Sales Tax Authorities that in view of the fact that the firm had been dissolved in 1952 sales tax should be assessed on and collected only from Kurshidulla Sahib. His objections however were overruled, and the appeal he preferred to the Special Commercial Tax Officer was dismissed.
4. On 6th January, 1959, the Special Deputy Tahsildar for sales tax collections served a notice on the petitioner threatening to attach and sell his properties' in case he failed to pay the arrears claimed within 3 days thereafter. The Village Munsif of Puzhal also served a notice on the petitioner the same day under the Madras Revenue Recovery Act, 1864. The petitioner has, therefore, come to this Court for the issue of an appropriate writ to prohibit the Collector of Chingleput, the Special Deputy Tahsildar and the Village Munsif from taking any steps to recover the amounts claimed from him. It should be added that out of the amounts claimed by the department, the petitioner has paid in all Rs. 1,200 out of which Rs. 1,000 was paid during the pendency of these writ proceedings and without prejudice to his contentions.
5. Mr. Balasubramanyam, the learned advocate for the petitioner, argued the matter very elaborately and very carefully. His contentions may be summarised as follows:—
(1) The Madras General Sales Tax Act treats a firm as a taxable entity. Section 3 of the Act declares that every dealer shall pay for each year a tax on his total turnover in the manner thereinafter laid down. The explanation to clause (b) of section 2 makes it clear that a firm which carries on business is a dealer for the purposes of the Act. Rules 19 and 20 of the Madras General Sales Tax Rules emphasise the point. For certain purposes the Partnership Act itself recognises a firm as a distinct entity and it is this concept which has been carried over into the General Sales Tax Act. This has been explained by Subba Rao, J., in Public Prosecutor v. Jacob Nadav [1951] 2 S.T.C 53.. The headnote to that case runs as follows:—
“Under the Madras General Sales Tax Act, 1939, a firm is a person and for purpose of assessment it is treated as one entity. In default of payment pursuant to a notice under section 15(b), the firm is also liable to be prosecuted. Rule 19 of the Madras General Sales Tax Rules, 1939, does not override the provisions of the Act.”
(2) When a firm is dissolved—as the firm in the present case has been dissolved—it ceases to exist as a taxable entity. Even under the Indian Partnership Act a firm is recognised as an entity distinct from the persons constituting it. But that will be so only so long as the firm exists and continues to carry on business. If it ceases to exist as an entity no assessment can be made upon it, and, if no assessment can be made upon it, it follows a fortiori that no demand can be made upon it. By way of analogy reference was made to Ellis C. Reid v. Commissioner of Income-tax, Bombay 1931 5 I.T.C 100.. In that case a person was served with a notice under section 22(2) of the Income-tax Act. He failed to make a return and died after the expiration of the period specified in the notice. The court held that an assessment could not be made on him under section 23(4) of the Act after his death. On page 104 the learned Chief Justice observed:
“There appears to be nothing in that charging section to suggest that a man who has once become liable to tax can avoid payment by dying, and I must confess that I do not myself see any intelligible reason why when tax is once charged upon a subject in respect of a period during which he was alive and enjoying the benefits of the proceeds of taxation, he should escape liability by dying before the tax has been assessed or paid. But one has to look at the rest of the Act to see whether there are any appropriate provisions for collecting tax from the estate of a deceased person…………These are, I think, the only material provisions of the Act. It is to be noticed that there is throughout the Act no reference to the decease of a person on whom the tax has been originally charged, and it is very difficult to suppose the omission to have been unintentional. It must have been present to the mind of the Legislature that whatever privileges the payment of income-tax may confer, the privilege of immortality is not amongst them. Every person liable to pay tax must necessarily die and, in practically every case, before the last instalment has been collected, and the Legislature has not chosen to make any provisions expressly dealing with assessment of, or recovering payment from, the estate of a deceased person. In order that the Government may succeed and the assessment made in this case may be held legal, I think, one must do a certain amount of violence to the language of section 23(4); I think one must either do a certain amount of violence—I should say a considerable amount of violence—to the language of section 27, or else hold that the privilege conferred on a living person assessed under section 23(4) of getting the assessment set aside is not to be enjoyed by the estate of a deceased person—a distinction for which I can see no logical reason. One must also construe section 29 so as to give to the word ‘assessee’ one meaning in one place and another meaning in another place.
In my judgment, in construing a taxing Act the Court is not justified in straining the language in order to hold a subject liable to tax. If the Legislature intends to assess the estate of a deceased person to tax charged on the deceased in his life-time the Legislature must provide proper machinery and not leave it to the Court to endeavour to extract the appropriate machinery out of the very unsuitable language of the statute”.
And, adopting the language of the learned Chief Justice of the Bombay High Court, Mr. Balasubramanyam argued that there are no appropriate words in the General Sales Tax Act to enable the tax to be collected from the partners of a firm after the firm itself has been dissolved. He also referred to the decision in S.V. Veerappan Chettiar v. Commissioner Of Income-Tax, in which it was held that section 44 of the Income-tax Act does not authorise the Income-tax Officer to levy a penalty on a registered firm which has ceased to be in existence on the date the penalty is imposed, even if the notice relating to the penalty proceedings had been issued in the course of the assessment proceedings before the firm was dissolved.
(3) It is not open to the Department to call in aid the rule that even after the dissolution of a firm the members of the erstwhile firm continue to be liable for the debts of the firm, because the liability to pay tax in the present case had not become a debt at the time the firm was dissolved. It was held in Re Pratt, ex parte Inland Revenue Commissioners v. Phillips, that the principle “that where a tax has to be assessed, it does not become either due or payable till at least an assessment is made, is one of general application.” That principle was adopted in Recols (India) Ltd., In re, by a Bench of the Calcutta High Court. In the present case, therefore, there was no debt properly so called payable on account of general sales tax by the firm to the Government.
(4) The Income-tax Act contains clear and express provisions to meet contingencies of this kind. Vide section 44, which enacts that where any business 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 the firm shall be jointly and severally liable to assessment under Chapter IV.
(5) No such provision has been made in the General Sales Tax Act. A lacuna clearly exists, and, as explained in Ellis C. Reid v. Commissioner of Income-tax, Bombay, in construing a taxing Act the Court is not justified in straining the language in order to hold a subject liable to tax.
6. A Bench of the Allahabad High Court has ruled directly on this point. In Jagat Behari Tandon v. Sales Tax Officer, Etawah [1957] 8 S.T.C 459., it was held that an assessment cannot be made under the U.P Sales Tax Act, 1948, on a firm after it has been dissolved and has discontinued business on the ground that the firm as a unit of assessment has ceased to exist. It may be mentioned that the relevant provisions of the U.P Sales Tax Act are the same as those of the Madras General Sales Tax Act. The Court observed:
“It is no doubt true that under the Indian Partnership Act, 1932, a firm has no legal existence, but this Court has held in Shri Hiralal Barman v. The Sub-Divisional Officer, Hathras,4, that under the Sales Tax Act, as under the Income-tax Act, a firm is a separate unit of assessment and to this extent it is distinguishable from its partners. There appears to be no good reason why a firm which carried on business in the accounting year should escape payment of sales tax by dissolution before it has been assessed, and this aspect of the matter clearly influenced the learned Judge. The question is however whether the Act makes provision for the assessment and collection of tax in such circumstances. In our opinion it does not.”
7. On behalf of the Government it was explained that a firm is recognised as an entity only as a matter of convenience and for certain limited purposes. Such recognition does not affect to any extent, much less wipe out, the liability of the members of the firm under the Partnership Act. A firm is only a collective name for a group of individuals. To say that because the firm has been dissolved the entity which could have been taxed has ceased to exist and that therefore there is no entity which could be taxed is misleading, because it overlooks the fact that a firm as such has no juristic existence. Besides, even after the dissolution of a firm, the individuals who constituted the firm continue to be liable in respect of its obligations. The assessment in this case, though nominally in the name of the firm, was in substance on the persons composing it. By dissolving a firm the partners thereof cannot shed the obligations that attached to them before such dissolution. Section 47 of the Partnership Act expressly provides that even after the dissolution of a firm the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the firm. Now, ascertaining the liability of the firm and making arrangements to settle them is a necessary part of the various processes involved in winding up the firm. The liability to pay sales tax having already accrued, its quantification and payment can properly be regarded as part of the process of winding up of the firm. Kurshi-dulla Sahib who was a partner of the firm had the requisite authority to represent the petitioner for this purpose. The tax was therefore properly charged and the amount claimed by the Department is due.
8. In Deputy Commissioner of Commercial Taxes v. Bakthavatsalam Naidu, a Bench of the Andhra High Court ruled:
“Under the Madras General Sales Tax Act a firm is a ‘dealer’ and therefore in respect of a transaction done by a firm, which was in existence during the assessment year but was dissolved subsequently, it is the firm that is to be assessed to tax and not any of its partners in their individual capacity.”
9. Another decision that was cited before me is that reported as R.D Fernandes, In re. In that case it appears that a firm dealing in tiles was dissolved in October, 1951. Subsequent to that date the firm was assessed to sales tax and a notice was issued to it to pay the amount. The notice was served on both the partners of the dissolved firm. The tax, not having been paid, one of the partners was prosecuted. He was convicted by the Magistrate and he came up in revision to this Court. The conviction was confirmed and the revision petition dismissed. Ramaswami, J., who dealt with the matter observed,
“This State debt will be recoverable from and out of the partnership assets even after dissolution and in the hands of the partners or otherwise.”
10. In W.P No. 397 of 1954 Rajagopalan, J., went into the matter more fully. The relevant facts there were as follows: Manickam Chettiar and Lakshmayya Ammal were partners of a firm which traded under the name of Starch Manufacturing Co., Salem. The firm was dissolved on 4th August, 1949. Thereafter Manickam Chettiar continued the business. The firm was assessed to sales tax for the year 1948-49. It was assessed to sales tax for that portion of the year 1949-50 during which it was in existence. The amount of the assessment not having been paid, notices of demand were issued to Manickam Chettiar who was described as “Sri P. Manickam Chetty Starch Manufacturing Co., Shevapet, Salem”. The notices were served on him. As the amount was not paid the revenue authorities threatened to proceed against the petitioner under the Revenue Recovery Act. He therefore came to this Court and prayed for the issue of an appropriate writ to prohibit the concerned authorities from doing so. In dismissing the petition, Rajagopalan, J., observed:
“It is no doubt true that neither the Act nor the rules framed thereunder make any separate provision for assessing the turnover of the dissolved firm or for the recovery of the taxes due by a dissolved firm, which was a dealer as defined by section 2(b) of the Act up to the date of its dissolution. To that extent it differs from the Income-tax Act. That however, in my opinion, is not enough to” sustain the contention of the learned counsel for the petitioner, that the partners of the dissolved firm are not in any way liable for the sales tax due by the dissolved firm……………Though there is no specific provision in the Act or the rules thereunder for collection of arrears of tax due from a dissolved firm, the liability of the petitioner as a partner of the dissolved firm to pay whatever was lawfully due by the partnership of which he was a partner can be enforced, if it is established that there was default within the meaning of section 10. The arrears could be recovered from him independent of his possession of any, of the assets of the dissolved partnership, as if the arrears of tax constituted an arrear of land revenue.”
11. The appeal from this decision—W.A No. 132 of 1955—was dismissed in limine. Learned counsel for the petitioner tried to explain away this case. But, I think, it is clearly in point. I prefer to follow the views expressed in this Court, which means that this writ petition must fail. It is therefore dismissed with costs. Advocate's fee Rs. 150.
12. Petition dismissed.