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Ito Calicut And Another V. C. v. George And Others
Summary of the Opinion
Factual and Procedural Background
The core dispute concerned whether partners of a registered firm can be proceeded against for recovery of tax assessed on the firm pursuant to a certificate issued to the Tax Recovery Officer under S.222 of the Income-tax Act, 1961 (the Act). The Tax Recovery Officer addressed Ext. P-1 to the partners stating 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 protested by Ext. P-2, contending that arrears due from the firm could not be recovered from the partners. The Tax Recovery Officer replied (Ext. P-3) invoking general partnership liability under the Partnership Act. The learned judge before whom the question arose answered the principal question in the negative, allowed the writ application and directed that Exts. P-1 and P-3 not be enforced. The Revenue appealed; by the terms of the judgment under review the appeal was dismissed and the parties were directed to bear their own costs.
Legal Issues Presented
- Whether 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 under S.222 of the Act.
- Whether provisions of the Indian Partnership Act (in particular S.25) can be imported into the Income-tax Act so as to treat partners as assessees or to render them personally liable under the Act for tax assessed on the firm.
- Whether a certificate issued for collection of tax from the firm can be utilised for taking coercive steps against the partners of the firm.
Arguments of the Parties
Appellant (Revenue)
- Relied on Ext. P-3 and argued that, by virtue of S.2(23) of the Income-tax Act incorporating meanings of 'partnership', 'firm' and 'partner' from S.4 of the Indian Partnership Act, S.25 of the Partnership Act (which provides that "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") must be treated as part of the Income-tax Act for purposes of enforcement.
- Submitted that an assessment order on the firm under S.182(1) (historical provision cited for assessment procedure) when read with S.25 of the Partnership Act imposes liability on the partners, thereby justifying proceedings against partners for recovery of the firm's tax arrears.
Respondents (Partners)
- Protested by Ext. P-2 that the arrears of income-tax due from the firm, M/s. Mutual Benefit Corporation, cannot be recovered from the partners.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sahu Rajeshwar Nath v. Income-tax Officer, C-Ward, Meerut and Another (1969) 72 I.T.R. 617 | Held that where partners' liability arose under S.25 of the Partnership Act, such liability was not a liability which arose under the Income-tax Act by virtue of the assessment order; the phrase "other person liable to pay" in the income-tax provision should be construed as meaning "liable to pay under the Income-tax Act". | The court relied on this decision to conclude that liability of partners arising under the Partnership Act cannot be construed as a liability under the Income-tax Act merely because an assessment has been made on the firm; hence partners are not assessees for the firm's assessment unless the Act itself imposes liability on them. |
| Sahu Rajeshwar Nath v. Income-tax Officer (1964) 54 I.T.R. 755 | Contained a passage (quoted in the present opinion) suggesting that when a notice of demand is issued in the name of the firm it is a demand upon the partners of the firm who are liable to meet it like any other firm liability (this passage was based on partnership law and on an English case). | The court expressly disagreed with the view taken in this earlier decision to the extent that it treats a firm's tax demand as a demand upon partners under the Income-tax Act; the present court held the scheme of the Act makes the firm the assessee where the firm alone has been assessed and the partners are not to be treated as assessees without separate statutory assessment. |
| Income-tax Officer, Agra v. Radha Krishnan (1967) 66 I.T.R. 590 | Considered whether tax imposed on a partner could be recovered from another partner; the decision held that statutory liability to pay income-tax must be determined by the taxing statute and cannot be treated as jointly and severally enforceable against partners unless the tax statute makes it so; noted also that the 1922 Act incorporated R.50 of Order XXI Civil Procedure Code which affected enforcement against partners. | The court relied on the reasoning in this case to conclude that, in the absence of a provision in the 1961 Act analogous to the specific rule incorporated in the 1922 Act, the proceedings taken against partners for collection of tax imposed on the firm cannot be upheld. |
| Stevens v. Britten (1954) 3 All E.R. 385 | English authority applied in context of partnership liabilities under general law (example used in relation to a deed of dissolution providing indemnities between partners and retired partners); held that tax assessed in the name of the firm could be a partnership debt enforceable under contractual or partnership arrangements between partners. | The court noted Stevens v. Britten to show that English partnership law may make a firm's tax a partnership liability between partners under private law (e.g., a deed of dissolution), but held that this does not authorize enforcement against partners under the Income-tax Act when the Act itself does not impose the liability on partners. |
Court's Reasoning and Analysis
The court proceeded by analysing the statutory definitions and scheme of the Income-tax Act. It emphasized that the definition of "assessee" in the Act is a person "by whom any tax or any other sum of money is payable under this Act" and that only a person who is liable under the Act can be an assessee. The court therefore distinguished between (a) liability arising under the Income-tax Act and (b) liability arising under general partnership law (notably S.25 of the Partnership Act).
The court rejected the Revenue's submission that S.25 of the Partnership Act could be imported into the Income-tax Act (by reference to S.2(23) and the Partnership Act definitions) to make partners liable under the Income-tax Act for tax assessed on the firm. It held that S.25 creates liability under the Partnership Act or general law, but that such liability does not automatically become a liability under the Income-tax Act merely because the firm was assessed under the Income-tax Act.
The court relied on prior authorities (including Sahu Rajeshwar Nath and Income-tax Officer, Agra v. Radha Krishnan) which held that the incidence of tax must be determined by the taxing statute itself and cannot be supplemented by general partnership law unless the tax statute provides for it or there is a necessary implication to that effect. The court observed that the earlier 1922 Act expressly incorporated R.50 of Order XXI CPC, a provision which had bearing on proceedings against partners; the present 1961 Act lacks such a specific provision and that absence is material.
Concluding the analysis, the court determined that where there has been assessment on the firm as such the firm alone is the assessee for the purpose of the Act; partners do not become assessees merely because of S.25 of the Partnership Act. Therefore, proceedings under S.222 (collection/recovery) and a certificate issued to the Tax Recovery Officer in respect of the firm's assessment cannot be used to take coercive steps against the individual partners unless the Act itself imposes liability on them by separate assessment or statutory provision.
Holding and Implications
Holding: The court dismissed the appeal. It directed the parties to bear their own costs. The court upheld the decision below which had answered the principal question in the negative and had issued directions preventing enforcement of Exts. P-1 and P-3 against the partners.
Implications:
- Direct effect: Partners of the firm cannot be proceeded against under the Income-tax Act for tax assessed on the firm as such by using a certificate issued to the Tax Recovery Officer under S.222, because the firm alone is the assessee where only the firm has been assessed.
- The court reaffirmed that liability to pay income-tax is statutory and its incidence must be determined by the Income-tax Act; general partnership liabilities under the Partnership Act (for example S.25) do not, by themselves, convert partners into assessees or create enforceable tax liability against them under the Income-tax Act unless the tax statute so provides or there is a necessary implication.
- The opinion noted that the 1922 Act had a specific incorporation (R.50, Order XXI CPC) which influenced enforcement against partners; the absence of an analogous provision in the 1961 Act means enforcement against partners for firm-assessed tax is not permissible on that basis.
- No novel tax principle was announced; the court applied and reaffirmed existing authority distinguishing statutory tax liability from partnership law obligations and required a statutory basis for treating partners as assessees.
1. 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 S.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 Exts. P-1 and P-3 communications sent by the Tax Recovery Officer.
2. In Ext. 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 Ext. 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 Ext. P-2 is in Ext. 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 Ext. P-3. Counsel contended that S.2 (23) of the Act incorporated the meanings attributable to the expressions 'partnership', 'firm' and 'partner' stated in S.4 of the Indian Partnership Act for the purpose of the Act. So it was submitted that S.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 S.182 (1) of the Act, when that order is read with S.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.
5. 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 S.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, and Another (1969) 72 I. T. R.617.
"But the argument was stressed that the appellant was "other person liable to pay such tax" within the meaning of the language of S.29 of the Act. In our opinion, there is no warrant or justification for this argument. The phrase "other person liable to pay" in S.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."
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6. S.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."
7. The corresponding provision in the Act is S.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."
We must also refer to the definitions 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; "2. In this Act, unless there is anything repugnant in the subject or context,
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(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,
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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;
8. 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.
9. The question whether the tax imposed on a partner of a firm under S.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. Agro v. Radha Krishnan (1967) 66 ITR. 590). S.23(5) of the Indian Incometax Act, 1922 which was considered in the case as it stood at the relevant time ran thus:
"(3) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the has been assessed under sub-section (1), subsection (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) 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".
10. The firm consisted of four partners, A, B, C and D. The firm had been registered under S.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 S.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 Art.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".
The provisions of S.25 of the Partnership Act cannot be imported into the Income-tax Act, 1961, unless there is any provision to that effect in the Incometax Act or atleast there was such a necessary implication arising from the provisions thereof. We are unable to discern any such provision in the Incometax Act.
11. The reasoning in the judgment of the Supreme Court must apply in 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 S.25 of the Indian Partnership Act.
12. 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 S.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 S.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 S.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.
13. With respect we are unable to agree with the view taken by the Allahabad High Court in Sahu Rajeshwar Nath v. Income-tax Officer (1964) 54 ITR. 755) that
"when a notice of demand is issued by the Incometax 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 these proceedings ended with the issue of notice under S.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.
14. The passage quoted from Simon's Income Tax Law in the judgment in Sahu Rajeshwar Nath v. Income-tax Officer (1964) 54 ITR. 755 is based on the decision in Stevens v. Britten (1954) 3 All. E.R. 385. 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 win 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 debts and liabilities..." 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 Mar. 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.
15. A certificate issued for collection of tax from the firm cannot be utilised for the purpose of taking coercive steps against the partners of the firm
16. The Indian Income-tax Act, 1922 contained a provision specially incorporating R.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 (1967) 66 I. T. R 590) 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.
17. We dismiss this appeal but direct the parties to bear their costs. Dismissed.
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