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Writ Petition No. 235 of 1959, decided on 13th November 1968.

Ss. 18‑A & 26‑A‑Advance tax -Partnership firm assessed to Income‑tax in previous year‑Held, governed, for payment of advance tax, by provisions of sub section (I) and not subsection (3) of S. 18‑A‑Notice fn writing not sent to firm for payment of advance tax‑Demand for penal interest under S. 18‑A(8), held, without lawful authority and of no legal effect.

Commissioner of Income‑tax, Bombay Presidency & Aden v. Khemchand Ramdas 1938 I T R 414 ; Seth Bidridas Daga and another v. Commissioner of Income‑tax, Central and United Provinces 1949 I T R 209 ; Commissioner of Income‑tax, West Bengal v. A. W. Figgies & Company and others 1953 I T R 405 and Law of Income‑tax in India by V. S. Sundram, 1954 Ed., p. 161 ref.

Javaid Hashmi for Petitioners.

Sh. Abdul Haq for Respondent.

‑The petitioner firm, carrying on business under the name and style of Messrs Muhammad Ibrahim‑Nasiruddin of Gole Bazar, Lyallpur, was constituted as a partnership of eight persons by three deeds dated the 19th of April 1952, and was assessed to income‑tax as a registered firm for the assessment year 1953‑54, the assessment having been completed on the 29th of September 1953. The original partnership was up to the 31st of March 1953 and under clause 14 of the partnership deed it automatically stood dissolved on that date. However, a new partnership deed was drawn up on the 2nd of April 1953 with the same eight persons as partners and for the purpose of carrying on the same business, namely, the sale agency of the Lyallpur Cotton Mills Ltd., Lyallpur. The Income‑tax Officer refused registration of the firm for the assessment year 1954‑55 and carried out the new assessment on the 26th of February 1957. He also created a demand in the sum of Rs. 1,60,245 as penal interest under section 18‑A of the Income‑tax Act, 1922 (hereinafter referred to as the Act) on the ground that the petitioner had not complied with the provisions of subsection (3) of the same section in the matter of the advance payment of tax. It is stated that the amount of the penal interest has been reduced to Rs. 93,244 by the Income‑tax Appellate Tribunal. The petitioner then requested the Income‑tax Officer under section 35 of the Act to rectify his mistake in imposing the penal interest, but the said officer declined to do so by his letter dated the 26th of January 1959.

2. By means of the present petition, which was instituted under article 2(4) of the Laws (Continuance in Force) Order, 1958 the legality of the imposition of the penal interest has been challenged by the petitioner mainly on the ground that it being an existing assessee a notice in writing was necessary as required by subsection (1) of section 18‑A and that the case did not fall under subsection (3) thereof. It is conceded by Sh. Abdul Haque, the learned counsel appearing for the Income‑tax Department, that no notice in writing was issued to the firm as such under subsection (1) just mentioned and instead notices were issued to the partners as individual assessees. The contention on behalf of the Department is that the original partnership which came into existence on the 19th of April 1952 automatically stood dissolved on the 31st of March 1953 and thereafter a new firm was formed under a new partnership deed, and as that firm was refused registration it was, not the same assessee as in the previous year ; that in fact for the year in dispute the petitioner was assessed as an association of persons and, therefore, had to be treated as a new assessee falling within the ambit of subsection (3) of section 18‑A.

3. The term "firm" is not defined in the Income‑tax Act itself and, according to clause (6‑B) of section 2 of the Act, the terms "firm", "partner" and "partnership" have to be assigned the same meanings respectively as in the Partnership Act, 1932 provided that the expression "partner" includes any person who being a minor has been admitted to the benefits of partnership. According to section 4 of the Partnership Act, 1932, "partnership" is relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all" ; and "persons who have entered into partnership with one another are called individually "partners" and collectively a firm', and the name under which their business is carried on is called the "firm name." Under section 11 of the Partnership Act "the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be express or may be implied by a course of dealing", and "such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing". Clause (b) of section 17 of the same Act further provides that "subject to contract between the partners, where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will."

4. Reading these provisions of the Partnership Act together, it will be seen that even though the original period of partnership as created by the partnership deeds of the 19th of April 1952 came to an end on the 31st of March 1953, it was open to the partners to carry on the business after the expiry of that term, subject to contract between them ; and this is precisely what they did by entering into a fresh partnership deed on the 2nd of April 1953 for carrying on the same business: namely, the sale agency of the Lyallpur Cotton Mills. It is clear, therefore, that as far as the implications of the partnership under the Partnership Act of 1932 were concerned, the petitioner continued to be the same firm although the original period had expired. It has already been stated that the same eight partners constituted the fresh partnership under the deed of the 2nd of April 1953. Now the question is whether the mere fact that the Income‑tax Officer refused registration for the assessment year 1954‑55 would have the effect of making the petitioner firm a person "who has not hitherto been assessed" within the meaning of subsection (3) of section 18‑A of the Act.

5. The procedure for the registration of firms for the purposes of the Act is outlined in section 26‑A and according to subsection (3) thereof, the Income tax Officer may register a firm if he is satisfied that the application is complete and that there is, or was, as the case may be, a genuine firm in existence constituted as shown in the instrument or instruments, of partnership executed in writing and in force in the relevant previous year ; and where the firm has already been registered for the immediately preceding year, he may renew the registration. According to section 3 of the Act, income‑tax is to be charged in respect of the total income of the previous year of "every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually". It would thus appear that under the charging section a firm is recognised as a possible "assessee". This latter term is defined in clause (2) of section 2 of the Act, and at the relevant tinge the definition meant a person by whom income‑tax or any other sum of money was payable under the Act and included every person in respect of whom any proceedings under the Act had been taken for the assessment of his income etc. The words "and every person who is required to file a return of income under section 22" were added later. The assessment is carried out under section 23 and subsections (1) to (4) thereof prescribe the procedure which is to be observed by the Income‑tax Officer in completing the assessment. Subsection (5) then proceeds to outline the method by which the income‑tax payable by a firm has to be assessed or computed depending on the fact whether it is a registered firm under section 26‑A of the Act or it is unregistered. Although the term "assessment" has been used in different senses in the Act, as observed by the Privy Council in Commissioner of Income‑tax, Bombay Presidency & Aden v. Khemchand Ramdas (1938 I T R 414) and Seth Badridas Daga and another v. Commissioner of Income‑tax, Central and United Provinces (1949 I T R 209) "but the context in section 23 makes it clear that down at least to the middle of subsection (5)(a) assess' and assessment' refer primarily to the computation of the amount of income and assessee' means primarily a person the amount of whose income is being computed. The section requires the Income‑tax Officer to do two things first to compute or assess' a person's total income, and then to determine the sum payable as tax. Subsections (1) to (4) set out alternative methods of computation or assessment'. In the normal case the person whose income is being computed is the person who pays the tax and for that case these sub sections also provide for the Income‑tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by subsection (5). This subsection only comes into operation after the total income of the firm has been computed or assesses' under one of the earlier subsections. It draws a distinction between registered and unregistered firms. In the case of a registered firm the firm does not itself pay income‑tax and, therefore, the subsection directs that the sum payable by the firm shall not be determined, but that each partner's share of the firm's income shall be included in the assessment or computation of the total income of that partner. Thereupon the sum payable by that partner as tax is to be determined on the basis of that assessment which includes his share of the firm's income".

6. From these observations of their Lordships of the Judicial Committee it is clear that in either case, i.e., whether the firm is registered or unregistered, it is the firm's income which is first assessed or computed and, therefore, the assessee in the primary sense is the firm, although the mode of computing the tax payable differs according as the firm is registered or unregistered. The same position was reiterated by the Supreme Court of India in Commissioner of Income‑tax, West Bengal v. A. W. Figgies & Company and others (1953 I T R 405). In that case the question was whether a partnership firm was entitled to relief under section 25(4) of the Act on its being converted into a limited company in 1947. As originally constituted, the firm had consisted of three partners, but there were several changes in the constitution of the firm since then resulting in a change in the shares of the partners. The Income‑tax Officer disallowed the claim to relief under section 25(4) on the ground that the partners of the firm in 1939 being different from the partners of the firm in 1947, no relief could be given to the assessee. The Appellate Tribunal and the High Court, however, allowed the assessee's claim on the ground that in spite of the changes in the constitution of the firm, the business of the firm as originally constituted continued right from its inception till the time it was succeeded by the limited company and that it was the same unit all through, carrying on the same business at the same place and there was no cessation of that business or any change in the unit. This view was upheld by the Indian Supreme Court observing, with reference to section 3 of the Act, that a firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually. Support for this view was also sought from the provisions appearing in sections 26, 48 and 55 of the Act and it was added that the true question to decide was one of identity of the unit assessed under the Income‑tax Act. Finally, the learned Judges approved of the view taken by the Income‑tax Appellate Tribunal that under the Partnership Act a firm could be carried on even if there was a change in its constitution. Sh. Abdul Haque referred to certain observations appearing on page 161 of the Law of Income‑tax in India by V. S. Sundaram, 1954 Edition, to bring out the difference in the mode of assessment obtaining in the case of a registered firm as against that of an unregistered firm, but these observations only serve to emphasise the fact that the primary assessee in either case is the firm.

7. It seems to us, therefore, that when a firm, which term merely denotes a relationship between partners who have agreed to carry on a business, continues functioning under the provisions of the Partnership Act, for carrying on the same business, in spite of a change in its constitution, or the expiry of the original period of partnership, then it remains the same assessee unit for the purpose of the Income‑tax Act, irrespective of the fact whether the Income‑tax Officer is pleased to register the same or not under the provisions off section 26‑A of the Act for any particular assessment year. On this view of the matter, the petitioner firm having been assessed to income‑tax for the assessment year 1953‑54 was not "any person who has not hitherto been assessed for the year 1954‑55 and, therefore, in the matter of the payment of advance tax it was governed by the provisions contained in subsection (1) of section 18‑A and not subsection (3) of the same section. Penal interest could not, therefore, be imposed unless a notice in writing had been sent to the firm for the payment of the advance tax as required by subsection (1), but this was not done. As a result, we must hold that the demand for penal interest under subsection (8) of section 18‑A of the Act is without lawful authority and of no legal effect. The petition is, therefore, accepted with costs.

S. Q.

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