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O. P. No. 536 of 1958, decided on 23rd March, 1959.
Ss. 26A, 44, 46‑(before amendment in 1958)‑Registered firm‑Assessment of partners‑Failure of one partner to pay tax‑Recovery of arrears from another partner‑ Whether permissible.
The petitioner and one K were the partners of a firm. For the assessment year 1951‑52 the Income‑tax Officer passed an order that as the firm was registered no tax was payable by it and that the share income of each partner would be considered in his individual assessment. The firm was dissolved and its business discontinued on June 21, 1952. The petitioner paid the tax due from him but a sum of Rs. 2,439 was due from K. On November 23, 1957, the Income‑tax Officer made a demand for that amount on the petitioner:
Held (i) that section 44 of the Income‑tax Act (before amendment in 1958) did not apply since there was no assessment after the discontinuance of the firm ;
(ii) that in the absence of an assessment of the firm either prior or subsequent to the discontinuance of the firm, there was no tax payable by the firm and the petitioner was not liable to pay the amount due from K ;
(iii) that, therefore, the demand made on the petitioner to pay the amount due from K was liable to be quashed.
Chengalvaroya Chettiar v. Commissioner of Income‑tax (1937) 5 I T R 70 ref.
T. L. Viswanatha Iyer for Petitioner.
G. Rama Iyer for Respondent.
.‑The petitioner and one Krishnan entered into a partnership on the 15th April, 1949. The firm was registered under section 26A of the Indian Income‑tax Act, 1922.
Exhibit P 3 dated June 5, 1952, is the assessment order in respect of the assessment year 195f‑52. In that order the Income- tax Officer stated as follows;
"As the firm is registered there is no tax payable by it. The share income of each partner will be considered in his individual assessment. No demand for 1951‑52."
The statement conformed to section 23(5)(a) of the Indian Income‑tax Act, 1922, which on the material date‑omitting the provisos thereto‑was in the following terms;
"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 subsection (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."
Exhibit P3 assessed the petitioner's taxable income from the firm at Rs. 18,790 and that of Krishnan at Rs 19,316. Individual assessments followed and the petitioner paid the tax due from him. Krishnan, however, did not do so and on November 23, 1957, the Income‑tax Officer wrote to the petitioner as follows;
"A sum of Rs. 2,439‑5‑0 is still in arrears in respect of the above assessee against the tax demand for the assessment years 1951‑52. In spite of the best efforts of the Department the tax arrears could not be collected from the assessee.
Since the tax payable by the firm is the tax due from each of the partners on the share income, the arrears due from the partner is part of the tax due from the firm and since the two partners are jointly and severally responsible for the amount of tax determined on the income of the firm you are also res ponsible for the tax arrears in the case of the other partner.
As the other partner Shri Krishnan has failed to pay the tax I would request you to pay the tax arrears immediately. Demand notice and chalan are enclosed."
The petitioner appealed to the Appellate Assistant Com missioner of Income‑tax, Kozhikode but without success. According to the petitioner he, is not liable to pay the amount and his prayer is that exhibit P2 and exhibit P1, the notice of demand mentioned in exhibit P2, should be quashed by an appropriate writ or direction from this Court.
It is common ground that the partnership was dissolved on June 21, 1952, and that its business was discontinued as from that date. The contention of the Department is that this fact will sustain the demand made on the petitioner in view of the pro visions of section 44 of the Indian Income‑tax Act, 1922. That section, at the material time, was in the following terms;
"Where any business, profession or vocation 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 such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment."
This provision apparently postulates an assessment after the discontinuance or dissolution and a liability for the amount of tax found due on such an assessment. There has been no assessment subsequent to the discontinuance of the business and if this interpretation is correct exhibits P1 and P2 are unsustainable and cannot be supported.
Section 44 as extracted above was the result of a substitution effected by the Indian Income‑tax (Amendment) Act, 1939. The original section as embodied in the Indian Income‑tax Act, 1922, read as follows;
"Where any business, profession or vocation carried on by a firm has been discontinued, every person who was at the time of such discontinuance a member of such firm shall be jointly and severally liable for the amount of the tax payable in respect of the income, profits and gains of the firm."
The expression "tax payable" occurring in the above provision came up for consideration in Chengalvaroya Chettiar v. Com missioner of Income‑tax ((1937) 5 I T R 70). The Special Bench said;
"It seems to us that tax payable' means tax that is due to be paid', duty which the firm or partnership would be liable to pay if it had not been discontinued; tax either found to be due already or that will be found to be due in the future'."
Even on the assumption that the words "tax payable" occurr ing in the provision with which we are concerned comprehends also a tax determined to be due prior to the discontinuance of the business, the Department cannot succeed as there was as a matter of fact no such determination in the case before us. As already pointed out the Income‑tax Officer has specifically stated in exhibit P3 that there was no tax payable by the firm.
In the absence of an assessment of the firm prior to the dicon tinuance of its business or of the partners subsequent to the discon tinuance, the liability of Krishnan cannot possibly be saddled on the petitioner. It follows that the petition has to be allowed and we do so with costs, advocate's fee Rs. 100.
An entirely new section with three subsections have been sub stituted for section 44 by the Finance Act of 1958 with effect from 1st April, 1958. We are not concerned with that provision in this case and is hence not discussed in this judgment.
Petition allowed.
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