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Income-Tax Officer, Assessment Ii, Calicut, And Another v. C.V George And Others.
Factual and Procedural Background
The issue arose from communications (exhibits P-1 and P-3) sent by the Tax Recovery Officer stating that Rs. 70,763 was outstanding as arrears towards income-tax, penalty and interest from the firm M/s. Mutual Benefit Corporation, Calicut, and addressed to the firm's partners. The three partners (respondents) objected (exhibit P-2), contending that arrears due from the firm could not be recovered from them personally. The learned judge below accepted their contention, allowed the writ petition and directed that exhibits P-1 and P-3 should not be enforced. The revenue appealed this decision. The central procedural context is an appeal against an order restraining enforcement of recovery communications directed at partners for tax assessed on the firm.
Legal Issues Presented
- Whether the partners of a registered firm are liable to be proceeded against for recovery of tax assessed on the firm as such under the Income-tax Act, 1961, pursuant to a certificate issued to the Tax Recovery Officer as envisaged by section 222 of the Act.
- Whether section 25 of the Indian Partnership Act (the general rule of joint and several liability of partners) can be imported into, or read as part of, the Income-tax Act so as to make partners liable under the Income-tax Act for tax assessed on the firm.
Arguments of the Parties
Respondents' (Partners') Arguments
- They protested (exhibit P-2) that the arrears of income-tax due from the firm (M/s. Mutual Benefit Corporation) could not be recovered from the partners individually.
Appellant (Revenue)'s Arguments
- The revenue maintained (as reflected in exhibit P-3 and submissions) that, under the Partnership Act, partners are jointly and severally liable for the firm's obligations, and that this legal position is not affected by the Income-tax Act.
- Counsel for the revenue argued that section 2(23) of the Income-tax Act incorporates the Partnership Act meanings of “partnership”, “firm” and “partner,” and therefore section 25 of the Partnership Act (which makes each partner jointly and severally liable for acts of the firm) must be treated as part of the Income-tax Act for the purpose of recovery.
- It was submitted that an assessment on the firm (under section 182(1) as invoked) read with section 25 of the Partnership Act imposes a liability on the partners that could be enforced under the Income-tax Act.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sahu Rajeshwar Nath v. Income-tax Officer, C‑Ward, Meerut [1969] 72 ITR 617, 620 SC | The phrase “other person liable to pay” in the earlier section (section 29 of the 1922 Act) must be construed as referring to persons liable to pay under the Income‑tax Act itself; liability cannot be created by reference to the Partnership Act or other statutes. | The court relied on this principle to support the view that liability to pay tax for purposes of the Income‑tax Act must arise under the Income‑tax Act itself and cannot be imported merely from the Partnership Act. |
| Income Tax Officer, Agra v. Radha Krishan | Statutory liability to pay income‑tax is distinct from contractual obligations; if the statute does not make tax payable jointly and severally, no such implication arises from partnership law. | The court applied this principle to hold that liabilities imposed by assessment on one partner cannot be recovered from another partner unless the Income‑tax Act itself makes such recovery permissible; partnership law cannot be used to create statutory liability under the Income‑tax Act. |
| Stevens v. Britten [1954] 3 All ER 385 CA | Under general partnership law and contractual arrangements (e.g., deed of dissolution providing indemnity), a tax assessed in the name of the firm may be a partnership debt enforceable between partners under their agreement. | The court distinguished this decision: while it shows that, between partners (or a retired partner and continuing partner) contractual or partnership law may make a partner liable to another partner for tax paid, it is not authority for treating a tax assessed on the firm as creating a statutory liability on partners enforceable under the Income‑tax Act. |
Court's Reasoning and Analysis
The court began by identifying the central statutory provisions and definitions. It extracted and compared the notice-of-demand provisions in the earlier 1922 Act (section 29) and the corresponding provision in the 1961 Act (section 156). It also examined the statutory definition of “assessee” in the Income‑tax Act (1961) and, for context, the earlier definition in the 1922 Act.
The court reasoned that the term “assessee” in the Income‑tax Act denotes a person by whom any tax or other sum is payable under that Act — that is, liability must arise under the Income‑tax Act to make someone an assessee for purposes of proceedings under the Act. An assessment made on a firm, where the firm is treated as a distinct assessee for purposes of the Act, does not itself impose a statutory liability on the individual partners under the Income‑tax Act.
The court analysed the revenue's reliance on section 25 of the Partnership Act (partners jointly and severally liable for acts of the firm) and rejected the contention that this provision could be imported into the Income‑tax Act unless the Income‑tax Act itself either expressly provides for that or such an implication necessarily arises from its provisions. The court stated that it could not discern any provision in the Income‑tax Act that would incorporate or make section 25 operative as a statutory basis for proceeding against partners for tax assessed on the firm.
The court applied the principles from the cited authorities: it accepted the Supreme Court's view that liability for tax must be traced to the Income‑tax Act itself (citing Sahu Rajeshwar Nath) and relied on the reasoning in Income Tax Officer v. Radha Krishan that statutory incidence cannot be equated with contractual or partnership liabilities unless the statute so provides. It distinguished Stevens v. Britten on the ground that that case dealt with contractual arrangements and consequences between partners (and a retired partner) and does not support creating a statutory liability on partners under the Income‑tax Act for tax assessed on the firm.
The court also noted that the earlier 1922 Act contained a provision incorporating rule 50 of Order XXI of the Civil Procedure Code, which had played a role in some decisions allowing proceedings against partners; such a provision is absent in the 1961 Act, and this absence made a material difference in the present statutory scheme.
On these bases the court concluded that when only the firm has been assessed, the firm alone is the assessee for purposes of notice under section 156 and, if in default, for proceedings under section 222. Partners of the firm cannot be treated as assessees (or assessees in default) simply because the firm has been assessed; the partners become liable under the Income‑tax Act only if separate assessments have been made against them under the Act.
Holding and Implications
APPEAL DISMISSED.
Direct effect on the parties:
- The court upheld the view that the Tax Recovery Officer's communications addressed to the partners in respect of tax assessed on the firm could not be enforced to proceed against the partners under the Income‑tax Act where only the firm had been assessed.
- The partners cannot be proceeded against under the Income‑tax Act for tax assessed on the firm as such unless the Income‑tax Act itself imposes liability on them by separate assessment or contains a provision making them liable for collection procedures.
- The parties were directed to bear their own costs (the court directed the parties to bear their costs).
Wider precedent or rule-setting: The opinion rests on interpretation of the Income‑tax Act and on application/distinction of prior case law; it does not purport to import section 25 of the Partnership Act into the Income‑tax Act and does not state that it sets a new broad precedent beyond the statutory interpretation and distinctions discussed.
Govindan Nair, C.J:— The question is whether the partners of a registered firm are liable to be proceeded against for recovery of tax assessed on the firm as such under the Income-tax Act, 1961 (for short “the Act”), pursuant to a certificate issued to the Tax Recovery Officer as envisaged by section 222 of the Act. The learned judge before whom this question arose answered it in the negative, allowed the writ application and issued a direction not to enforce exhibits P-1 and P-3 communications sent by the Tax Recovery Officer.
2. In exhibit P-1 addressed to the partners it was stated that “a sum of Rs. 70,763 is outstanding as arrears towards income-tax, penalty, interest, etc., from the firm, M/s. Mutual Benefit Corporation, Calicut, of which you are a partner……” The three partners who are respondents in this writ appeal protested by exhibit P-2 and contended that the arrears of income-tax due from the firm, M/s. Mutual Benefit Corporation, cannot be recovered from the partners. The reply to exhibit P-2 is in exhibit P-3 and it was stated therein:
“As per the provisions of the Partnership Act, the partners are jointly and severally liable to the dues of the firm. This position in law is not in any way affected by the Income-tax Act, 1961, and, therefore, your contention that the arrears on account of income-tax dues of the firm can only be recovered from the firm is not acceptable……”
3. The argument before us on behalf of the revenue also proceeded on the basis of the proposition stated in exhibit P-3. Counsel contended that section 2(23) of the Act incorporated the meanings attributable to the expressions “partnership”, “firm” and “partner” stated in section 4 of the Indian Partnership Act for the purpose of the Act. So it was submitted that section 25 of the Partnership Act which we shall extract immediately must be taken to be a part of the Act.
“25. Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.”
4. Counsel contended that the assessment order on the firm passed in accordance with the provisions of section 182(1) of the Act, when that order is read with section 25 of the Indian Partnership Act, imposed a liability on the partners of the firm. If this submission can be accepted, this appeal has to be allowed. But we find it difficult to accept this submission. The question arose before the Supreme Court whether the partners of a firm, which has been as such assessed to income-tax under the Act, can also be said to be liable under the Act for the tax assessed on the firm. The answer to the question was that the liability of the partners arose under section 25 of the Indian Partnership Act and such liability was not a liability which arose under the Act by virtue of the assessment order. We shall extract the relevant passage in the decision in Sahu Rajeshwar Nath v. Income-tax Officer, C-Ward, Meerut [1969] 72 ITR 617, 620 SC.:
“But the argument was stressed that the appellant was ‘other person liable to pay such tax’ within the meaning of the language of section 29 of the Act. In our opinion, there is no warrant or justification for this argument. The phrase ‘other person liable to pay’ in section 29 should be construed as ‘other person liable to pay under the Income-tax Act’ and the liability cannot, therefore, be construed with reference to the Partnership Act or any other statute.”
5. section 29 of the Indian Income-tax Act, 1922, which has been referred to in the passage, was in these terms:
“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. The corresponding provision in the Act is section 156 which also we shall extract:
“156. Notice of demand.— When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Income-tax Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable.”
7. We must also refer to the definition of the term “assessee” under the Act as well as the Indian Income-tax Act, 1922.
“2. Definitions.— In this Act, unless the context otherwise requires,
(7) ‘assessee’ means a person by whom any tax or any other sum of money is payable under this Act, and includes—
(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act.”
8. Under the Indian Income-tax Act, 1922, section 2 read as follows:
“2. In this Act, unless there is anything repugnant in the subject or context:—
(2) ‘assessee’ means a person by whom income-tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or of the amount of refund due to him.”
9. It is clear from the definitions that only a person who is liable under the Act is an assessee as defined in the Act. An order of assessment on the firm as such, which is considered a separate entity for the purpose of the Act, does not by itself impose any liability on the partners of the firm. This has been ruled by the Supreme Court in the decision referred to.
10. The question whether the tax imposed on a partner of a firm under section 23(5)(a) of the Indian Income-tax Act, 1922, could be recovered from another partner of the firm arose for consideration in the decision in Income Tax Officer, Agra v. Radha Krishan. Section 23(5) of the Indian Income-tax Act, 1922, which was considered in the case as it stood at the relevant time ran thus:
“(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be,—
(a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined:……
(b) in the case of an unregistered firm, the Income-tax Officer may instead of determining the sum payable by the firm itself, proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of the tax including super-tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm.”
11. 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 is apposite:
“Undoubtedly, contractual obligations of a firm are enforceable jointly and severally against the partners. But 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.”
12. 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.
13. The reasoning in the judgment of the Supreme Court must apply on all fours to the case before us; the liability of the partner to pay the tax imposed on the firm is sought to be made out by counsel on behalf of the revenue on the basis of the provision in section 25 of the Indian Partnership Act.
14. Under the provisions of the Act there can be assessments made either on a firm as such or on the partners of the firm in given circumstances. When there has been only an assessment on the firm as in the case before us the firm alone is considered as an assessee for the purpose of the Act and it is to that firm that notice has to be issued under section 156 of the Act and if the notice has not been complied with, it is that firm that can be treated as a defaulting assessee which can be proceeded against as envisaged by section 222 of the Act. This section commences by stating “when an assessee is in default……” The question is whether the partners of a firm can be said to be assessees when the firm as such alone has been assessed. Counsel for the revenue contended that by virtue of section 25 of the Indian Partnership Act the partners of a firm assessed as such must also be treated as assessees. We do not think that it is possible to accept the contention in the light of the provisions of the Act, which envisage separate assessments being made on the firm as such and on the partners separately.
15. With respect we are unable to agree with the view taken by the Allahabad High Court in Sahu Rajeshwar Nath v. Income-tax Officer that “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”. Nor are we with respect able to agree that a firm is treated as an entity distinct from its partners only for the purpose of assessment and that those proceedings ended with the issue of notice under section 29 of the Indian Income-tax Act, 1922, and thereafter the liability of the firm as such can be treated as the liability of the partners by applying the general principles of law. The assessee in the case of a partnership which has been assessed as such is the firm. When tax is demanded from that firm and if it is not paid the assessee in default is the firm and not its individual partners according to the scheme of the Act. The partners will become liable under the Act only if there are separate assessments on the partners. 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 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. This is the view that has been taken by the Supreme Court in the decisions that we have already referred to.
16. The passage quoted from Simon's Income Tax Law in the judgment in Sahu Rajeshwar Nath v. Income-tax Officer is based on the decision in Stevens v. Britten [1954] 3 All ER 385 CA.. The facts of the case were the following: The plaintiff and the defendant in the suit were formerly partners carrying on a business in the name of a firm. By a deed of dissolution dated 26th February, 1951, the partnership was dissolved with effect from December 10, 1950, and the plaintiff, who retired from the partnership, assigned his interest in the business to the defendant. It was provided by clause 4 of the deed of dissolution that:
“The continuing partner (the defendant) hereby covenants with the retiring partner (the plaintiff) that he will duly pay and satisfy all debts and liabilities of the said partnership and will at all times hereafter keep the retiring partner indemnified against the said debts and liabilities…”
17. An assessment of Schedule D tax for the year 1950–51 was made in the name of the firm and the plaintiff was required to pay £ 37 9s. 6d., i.e, half of the assessment. On March 13, 1954, the plaintiff paid this sum to the collector of taxes and obtained a receipt for the payment. It was thereafter that the plaintiff sued to recover the sum from the defendant under clause 4(a) of the deed. The defendant denied liability. The court held that the tax assessed in the name of the firm was a partnership debt or liability within the meaning of clause 4(a) of the deed of dissolution, and the plaintiff was entitled to recover the amount claimed from the defendant. It has to be noted that the liability that was sought to be enforced by the retired partner against the other stemmed mainly from the terms of the deed of dissolution; that the question arose between a retired partner and his erstwhile partner, and that the question was whether under the general law of partnership the tax assessed on the firm is a debt or liability of the firm and further whether one partner who had discharged that liability could recover from the other partner in terms of the agreement of dissolution. The liability of a firm under the general law and its application as we have seen cannot be applied for the purpose of the Income-tax Act to enable the partners being proceeded against under the Income-tax Act for the liability imposed on the firm as such. The decision is no authority for the proposition that the liability imposed on a firm under the Income-tax Act by an assessment order against the firm also imposed a liability under the same Act on the partners. Only if a liability has been imposed under the provisions of the Income-tax Act on the partners can the partners be proceeded against under the provisions of the Act. A certificate issued for collection of tax from the firm cannot be utilised for the purpose of taking coercive steps against the partner of the firm.
18. 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, Agra v. Radha Krishan, 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.
19. We dismiss this appeal but direct the parties to bear their costs.
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