Cherian v. Income Tax Officer, Ernakulam And Another

Joseph, J.:— This is a petition under Article 226 of the Constitution for quashing certain orders passed in Income-tax proceedings against an unregistered Firm of which the partners were the petitioner and one P.J George. They were conducting distillery business in the year 1124, the petitioner having a four annas share in the business. The 1st Respondent is the Income-tax Officer, Ernakulam and the 2nd Respondent, the Commissioner of Income-tax, Kerala and Coimbatore. The petitioner was served with a letter Ext. P. 1, dated 27-10-1955 by the 1st respondent together with a notice of demand to remit a sum of Rs. 9,851-11-0 alleged to be the tax due pursuant to an assessment in the name of P.J George for the year 1950–1951. On receipt of Ext. P. 1 the petitioner filed an appeal before the Appellate Assistant Commissioner, Ernakulam. He also applied to the Inspecting Assistant Commissioner of Income-tax, Ernakulam to stay the collection of the tax covered by the demand till the disposal of the appeal and the latter directed the petitioner to remit the sum of Rs. 2,463 pending final disposal of the petition. The petitioner complied with this direction. P.J George had also filed an appeal from the order of assessment and the two appeals were heard and disposed of together, setting aside the assessment and directing re-assessment after proper enquiry. Ext. P. 2, is copy of the order passed in appeal. As the order of assessment was set aside in appeal, the petitioner applied for refund of the sum of Rs. 2,463 paid by him pursunt to order of the Inspecting Assistant Commissioner of Income-tax. The 1st respondent passed an order Ext. P. 3, dated 4-9-1957 stating that a sum of Rs. 1,000/- out of the amount remitted by the petitioner was adjusted towards penalty levied by him for non-payment of the tax in time and that the balance would be refunded. A refund order for Rs. 1,463 was sent to the petitioner along with a covering letter Ext. P. 4. The petitioner was unaware that penalty had been imposed and on his requisition, a copy of the order levying penalty was supplied to him. Ext. P. 5 is the said copy. On 16-9-1957 the petitioner filed a revision petition before the 2nd respondent who dismissed the same by order Ext. P. 6, dated 20-12-1957. The orders Ext. P. 3, P. 5 and P. 6 are sought to be quashed. The grounds relied on by the petitioner are that the order imposing the penalty was not validly passed, that the same could not stand as the order of assessment was set aside, that the 1st respondent had no jurisdiction to pass the order Ext. P. 3, that the petitioner was not a defaulter as contemplated by section 46(1) of the Income-tax Act, that no notice had been served on him for payment of the tax before imposing penalty, that no notice of the order imposing penalty was given to him, that in view of the appellate decision setting aside the order of assessment, the amount remitted by him as a condition for stay of proceedings could not be adjusted against the penalty and that the amount remitted by him was not towards tax due from the partnership but in his individual capacity. On these grounds the petitioner seeks for quashing the orders imposing the penalty and appropriating the sum of Rs. 1,000/- towards the same. The 1st Respondent has filed a counter affidavit stating that the notice of demand was served on P.J George who was the managing partner of the Firm, that such service was binding on the petitioner and that the penalty was imposed on account of the default of the Firm. It is also contended that the sum of Rs. 2,463 was paid by the petitioner on behalf of the firm, that the imposition of penalty was proper and that he was competent to adjust the sum of Rs. 1,000 towards penalty. The other contentions are that the order of the Appellate Assistant Commissioner does not ipso facto amount to cancellation of the order imposing penalty and that there is no lack of jurisdiction or error apparent on the face of the record justifying cancellation of the impugned orders. The petitioner filed an affidavit in reply stating that the Firm had become dissolved at the time of the assessment and that the assessment and penalty could be made only in the name of the individuals and not the Firm.

2. The point for decision is whether the petitioner is entitled to refund of the whole sum paid by him and whether the Income-tax Officer was justified in adjusting Rs. 1,000/- against the penalty levied by him. This depends on the question whether the levy of the penalty in the circumstances is proper.

3. It is urged on behalf of the petitioner that there was no demand on him to pay tax and that he cannot therefore deemed to be in default. Section 46 of the Income-tax Act provides that when an assessee is in default in making a payment of Income-tax the Income-tax Officer may in his discretion direct that in addition to the amount of the arrears a sum not exceeding that amount shall be recovered from the assessee by way of penalty. The argument advanced is that the petitioner could not be treated as a defaulter so long as notice of demand of tax or penalty was not served on him and that there was no valid order levying penalty.

4. It is necessary to state a few facts for the decision of this question. The assessee in this case was an unregistered Firm and the name of the assessee is described in the order of assessment as “Messrs P.J George and T.J Cheriyan.” The first notice of demand was sent on 30-3-’55 to “P.J George for P.J George and T.J Cheriyan”. There was no response and on 3-10-1955 the order Ext. P. 5 levying a sum of Rs. 1,000/- as penalty was passed by the 1st Respondent. It appears from Ext. P. 5 that the penalty was imposed on the Firm. The first notice of demand to the petitioner is Ext. P. 1 which was issued on 27-10-1955 i.e, 24 days after the order levying penalty was passed. Even though penalty had been levied before that date, Ext. P. 1 does not contain any reference to the same and it is a demand for payment of tax only. In fact no demand for payment of penalty has ever been made on the petitioner.

5. The assessee being an unregistered Firm it was open for the 1st respondent to assess either the Firm or the partners under section 23(5)(b) of the Income-tax Act. He chose to adopt the former course. The next stage is that of issuing notice of demand under section 29 which provides as follows:

“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”.

6. In the case of an unregistered Firm, the partners would come within the expression “other persons liable to pay”. This is the view taken by a Division Bench of the Bombay High Court in Gokuldas v. Kikabhai Abdulali (33 I.T.R 98 at 101). It was open for the 1st respondent to issue a notice of demand to the petitioner for payment of the tax assessed on the Firm but he did not choose to do so till a later stage of the proceedings for recovery of tax when penalty had already been imposed. I do not see how the petitioner can be deemed to be “in default” so long as notice of demand for payment of tax has not been served on him. Shri Rama Iyer learned counsel for the respondent contends that notice of demand was served on the Firm and as such it was open for the 1st respondent to levy penalty on the Firm and recover the same from the partners. Assuming for the sake of argument that the levy of penalty on the Firm is sufficient to enable the department to recover the same from the partners, the question arises whether there was a proper demand on the firm. The notice of demand issued under section 29 is not addressed to the Firm as such but to P.J George for “P.J George and T.J Cherian”. This in my opinion is not a proper demand on the Firm. No doubt under section 53, service of notice in the case of a Firm may be made on any partner but the essential thing is that there should be a notice to the Firm. The notice of demand issued to P.J George cannot be deemed to be a notice to the Firm. This argument of the respondent cannot therefore be accepted.

7. Another point raised by Shri Rama Iyer was that the payment made by the petitioner was towards the liability of the Firm and that as the order levying penalty is not open to objection so far as the Firm is concerned, it was competent for the 1st respondent to adjust the sum of Rs. 1,000/- against the penalty. This argument pre-supposes that the levy of penalty so far as the Firm is concerned is valid. I have already pointed out that there was no proper demand on the Firm to pay the tax and in the absence of such a demand, the levy of penalty cannot be deemed proper even in respect of the Firm. Again the payment by the petitioner was not on behalf of the Firm. It appears from the records produced by the 1st respondent at the hearing that after the said sum was paid by the petitioner, the 1st respondent sent a communication to the other partner P.J George stating that T.J Cherian had paid Rs. 2,463 being his share of the tax in the Firm and that P.J George was liable to remit his share viz., 75 per cent before 15-12-1955. It is therefore clear that the Income-tax authorities did not treat the payment made by the petitioner as one on behalf of the Firm. It may also be pointed out that a notice of demand was not served on the petitioner to pay the penalty before he paid the sum of Rs. 2,463/- pursuant to the order passed by the Inspecting Assistant Commissioner of Income-tax as a condition for obtaining an order staying proceedings for recovery of tax pending disposal of the appeal.

8. Section 49E enables the Income-tax authorities to set off any amount found refundable to a person against the tax, interest or penalty, if any, remaining payable by the person to whom the refund is due. Even if the order levying penalty was proper it cannot be held that the petitioner was liable to pay the same before notice of demand was served on him. In view of the conclusions reached above, the set-off of Rs. 1,000/- against the penalty is improper and the orders Exts. P. 3, P. 5 and P. 6 have to be quashed.

9. The petitioner had a case that the Firm had become dissolved even before the commencement of the assessment proceedings. This is a question of fact which has to be raised before the Income-tax Officer. Now that the order of assessment has been set aside in appeal and the petitioner gets an opportunity to contest the assessment proceedings, it is open for him to raise the same before the Income-tax Officer.

10. In the result the orders Exts. P. 3, P. 5 and P. 6 are quashed. A writ in the nature of mandamus will issue directing the 2nd respondent to refund the sum of Rs. 1,000/- to the petitioner. The original petition is thus allowed. In the circumstances I make no order as to costs.