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O. J. C. No. 441 of 1956, decided on 21st April 1958.
Ss. 44 &c 46(2)-Partnership -Discontinuance of business‑Assessment and demand on firm- Failure to pay tax‑Certificate of arrears forwarded to Collector‑ Recovery proceedings‑Substitution of partner‑‑Validity‑‑(Bihar and Orissa Public Demands Recovery Act (IV of 114), .S.s. 7 &11.)
A partnership carried on business during September, 1946, to March, 1949, and discontinued its business. As the assessment of the partnership for the assessment year 1947‑48 had escaped assessment, the Income‑tax Officer issued a notice under section 34 of the Income‑tax Act, 1922 and completed the assessment on March 3, 1952, in the name of the partnership in the status of an unregistered firm. No tax was paid in response to the notice of demand under section 29 issued in the name of the unregistered firm. The Income‑tax Officer, therefore, issued a certificate under section 46(2) to the Certificate Officer for realisa tion of the tax. Notice under section 7 of the Bihar and Orissa Public Demands Recovery Act, 1914, issued against the firm, pursuant to the certificate, could not be served. At the instance of the Income‑tax Officer the Certificate Officer substituted the names of the petitioners as partners of that firm and again issued the notice under section 7. The petitioners appeared before the Revenue Authorities and raised their objections but the objec tions were dismissed throughout. The petitioners thereupon filed a petition in the High Court for a writ of mandamus prohibiting the Certificate Officer from proceeding with the case;
Held, (i) that as in this case the quantum and the legality of the assessment on the partnership was‑ not challenged, the Income-tax Officer had jurisdiction to proceed to realise the arrears under section 46(2) read ‑with section 44 of the Income‑tax Act ;
(ii) that the Certificate Officer had jurisdiction to substitute the partners of the unregistered firm under section 11 of the Bihar and Orissa Public Demands Recovery Act, 1914, and to proceed against them, since the partners were jointly and severally liable for the income‑tax dues under section 44 of the Income‑tax Act.
Manindra Lal Goswami v. Income‑tax Officer (1956) 30I T R 550 and R. N. Bose v. Manindra Lal Goswami (1958) 33 I T R 435 distinguished.
Chengalvaroya Chettiar v. Commissioner of Income‑tax (1937) 5 I T R 70 applied.
C. K. Ghose and B. N. Mohanty for petitioners.
H. Mahapatra and Advocate‑General for Opposite Parties.
.‑This is an application under Articles 226 and 227 of the Constitution for issuance of a writ of mandamus to the Certificate Officer, Cuttack, prohibiting him from proceeding with the certificate case against the petitioners. It was further prayed that the opposite party No. 1, the Income‑tax Officer, Cuttack, be prohibited from collecting the arrears of tax in question by the aforesaid certificate proceedings from the petitioners. The facts leading up to this application are these: One Natabarlal along under name and si; ie of Messrs Natabarlai Jayashankar, agent to Orient Dyeing and Printing Works, Cuttack. The sole purpose of the partnership, it is stated, was to work as commission agent of the Orient Dyeing and Printing Works, It is an admitted fact that tire partnership worked for three years, that is from September, 1946, to March, 1949. The assessment to income‑tax for the year 1948‑49 was completed on November 19, 1949; and the assessment for the subsequent year 1949‑50 was similarly completed on De cember 23, 1949. The assessment for the assessment year 1947‑48, however, escaped assessment and a notice under section 34 of the Indian Income‑tax Act was issued. The assessment for the said year was eventually completed on March 19, 1952. A previous application under section 26A of the Indian Income‑tax Act for the registration of the firm having been rejected, assessment was made on the former firm of Natabarlal Jayashankar in the status of an unregistered firm.
Though a demand notice under section 29 was issued in the name of the said unregistered firm, no tax, however, was paid. Accordingly, the Income‑tax Officer filed a certificate case being Case No. 235 of 1953‑54 in the Court of the Certificate Officer, Cuttack, against the unregistered firm. The notice under section 7 of the Bihar and Orissa Public Demand Recovery Act (IV of 1914) was only issued against the firm. But since the firm discon tinued business from March, 1949, the notices could not be served. The Certificate Officer at the instance of the Income‑tax Officer under section 11 of Act IV of 1914 substituted the names of the petitioners as partners of the aforesaid firm and again issued notice under section 7 to them. The partners of the firm appeared before the Certificate Officer and registered their objections amongst others on the following grounds;
"(1) That the petitioners are not the assessees in default and hence the Income‑tax Officer, Cuttack, had no cause of action against the petitioners.
(2) That there is no demand against the petitioners and hence it could not be enforced against them.
(3) That Article 258(1) of the Constitution of India read with section 46(6) of the Income‑tax Act, 1922, was a bar against the realisation of the income‑tax dues by the Certificate Officer, Cuttack.
(4) That petitioner No. 2, being a minor, he should not be proceeded against.
The Certificate Officer after hearing the parties disallowed these objections and proceeded to realise the tax from the present petitioners leaving out one partner Natabarlal Ilyas. Against this order of the Certificate Officer the present petitioners preferred an appeal before the Collector which was dismissed in due course by the Additional District Collector, Cuttack. Against this order, the petitioners filed a revision petition before the Member, Board of Revenue (Revision Case No. 158 of 1955‑56) which also was dismissed. It is against this order of the Member, Board of Re venue, that tile present petition is directed.
The sole contention of the petitioners was that the requisi tioning Officer (the Income‑tax Officer, Cuttack) had no jurisdiction to assess the petitioners in 1952, the unregistered firm having been discontinued in March, 1949, and accordingly the Certificate Officer had no jurisdiction whatsoever to realise the same from the petitioners.
Before the Member, Board of Revenue, two contentions were raised;
(1) Article 258(1) of the Constitution read with section 46(6) of the Income‑tax Act is a complete bar against the realisation of the income‑tax due by the Certificate Officer.
(2) The assessment being on a firm, the partners have no liability for it and they are not the persons to be called upon to pay the arrears of tax. The Member, Board of Revenue, nega tived both the contentions.
Under Article 258(1) of the Constitution of India the President may, notwithstanding anything contained in the Constitution, with the consent of the Government of a State, entrust either condition ally or unconditionally to that Government or to its officers functions in relation to any matter to which the executive power of the Union extends. Thus, the provision under Article 258(1) contemplates entirely different circumstances in relation to a matter to which the executive power of the Union applies. Here in this case, no executive function of the Union Government has been conferred on the State Government. The income‑tax is levied under the Indian Income‑tax Act by authorities mentioned therein who are doubtless officers of the Union Government.
The legality of the‑tax has not been challenged by the peti tioners although the present petitioners carried an appeal against the order dismissing the petition under section 26A of he Income-tax Act. All that is sought to be challenged is that the Income‑tax Officer has no jurisdiction under section 46(6) of the Income‑tax Act. This contention cannot be accepted for a movement, for as I have stated earlier, Article 258(1) contemplates different circumstances and hence section 46(6) has no application whatsoever; and much less a bar against any recovery. The only section thus applicable is section 46(2).
Accordingly, the whole argument of the learned counsel on behalf of the petitioners is based upon a loose expression used by the Member, Board of Revenue, that the "unregistered firm stood dissolved in March, 1949". He has also used the expression "discontinuance" at places. Hence the sole contention on behalf of the petitioners depends upon the fact whether the firm was dissolved or discontinued its business. The petitioners' case throughout had been that the unregistered firm discontinued its business in about March, 1949. No case of dissolution was set up at any time. Taking advantage of the use of the expression "dissolution" in the judgment of the Member, Board of Revenue, the learned counsel for the petitioners urged that section 44 of the Income‑tax Act would have no application after the dissolution of the firm whether it was a registered firm or an unregistered one.
Thus, he contended that an assessment to income‑tax of its income before the dissolution can only be made on the persons who were partners of the firm at the time of the dissolution jointly or severally and cannot be made on the firm. Section 44 of the Income‑tax Act runs as follows;
"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 provisions of Chapter IV shall, so far as may be, apply to any such assessment".
Thus, section 44 refers to liability in case of discontinuance of a firm or an association of persons. Therefore, when any business, profession or vocation is carried on by a firm or an association of persons and is discontinued, every person who was at the time of such discontinuance a partner of such a firm, shall, in respect of the income, profits, or gains of the firm be jointly and severally liable to, assessment under Chapter IV and for the amount of tax payable. Hence, the unregistered firm, having, according to the contention of the petitioners, discon tinued business, the petitioners are jointly and severally liable for the assessment which is payable by them. Thus, the provisions of section 44 are clearly attracted.
Section 2 (6‑B) of the Income‑tax Act lays down that "firm", "partner" and "partnership" have the same meanings 'respectively as in the Indian Partnership Act, 1932 (Act IX of 1932), provided that the expression "partner" includes any person who being a minor has been admitted to the benefits of partnership under the Indian Partnership Act. "Partnership" has been defined in section 4. According to that section "partnership" is the relation between the persons who have agreed to share the profits of business carried on by all or any of them acting for all. 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 this 'Act the liability of a partner for the acts of the firm has been laid down in section 25, in accordance with which every partner is liable, jointly with all the other partners and also severally for all the ‑acts of the firm done, while he is a partner. Thus one has to look to section 25 for the liability of an individual partner for acts of the firm.
Mr. B. N. Mohanty, learned counsel for the petitioners, strongly relied upon a recent decision of the Calcutta High Court reported in R. N. Bose v.' Manindra Lal Goswami ((1958) 33 I T R 435). That was a decision against the judgment of a single Judge (Sinha, J.) in Manindra Lal Goswami v. Income‑tax Officer ((1956) 30 I T R 550). The facts of that case were that the respondent Manindra, Lal Goswami was one of the three partners of an unregistered firm carrying on business under the name and style of Dyes and Chemical Agency.
The firm did business only from April 1, 1940, up to March 31, 1944. A notice of its dissolution was given to the Income‑tax Department on or about January 14, 1947. The Department did not admit or deny receipt of the notice, but since it was seeking to justify the assessment as an assessment on a dissolved firm, the question whether notice of dissolution was or was not given was not material. It did not appear whether the firm had previously been assessed to income‑tax but towards the end of 1944, the Income‑tax Officer came to be of opinion that the firm's income for the assessment year 1943‑44 had escaped assessment, and in that view issued a notice under section 34 of the Income7tax Act on November 25, 1944, to the respondent describing, him in the notice as "M. L. Goswami, Esqr., Partner of Messrs Dyes and Chemical Agency" and the income which had been discovered to have escaped assessment was described as "your income". The notice ended by requiring the respondent to deliver to the Income-tax Officer by a certain date a return of "your total income and total world income assessable for the said year ending March 31, 1944". A similar notice was also addressed to another partner of the firm named B. R. Dasgupta, in almost similar terms, but no notice, however, was issued to the third partner, P. C. Mukherji. Notices were received by the respondent on November 30, 1944, but he paid no heed to them. B. R. Dasgupta on the other hand, complied with the notice served on him and filed a return of the firm's income for the year concerned showing a loss of Rs. 1,189.
The Income‑tax Officer did not believe that the firm had suffered loss and he determined the total income at Rs. 45,101. 'The assessment thus made was ultimately an assessment on the firm, Dyes and Chemical Agency. A demand notice was directed to be issued to the firm which was duly served. Since no payment was made, the Income‑tax. Officer forwarded a certificate under section 46 (2) of the‑ Income‑tax Act and a certificate case was registered against the firm. Notice under, section 7 of the Bengal Public Demands Recovery Act was next issued, but it came back unserved with the report that the certificate debtor, viz. the firm was not traceable. The Income‑tax Officer thought that since the firm was an unregistered firm, the partners were liable for the firm's dues and hence no separate demand notice was required to be served on them. Accordingly, he supplied the names of the three partners to the Certificate Officer who in his turn directed notice under section 7 to the partners. On receipt of the notice under section 7, several objections were registered by the partners including P. C. Mukberji on whom no notice was served. The objections, however, were rejected by the Certificate officer under section 9. An appeal was carried against this decision to the Commissioner of the Presidency Division. During the pendency of that appeal an application under Article 226 of the 'Constitution was moved in the Calcutta High Court, and a rule was issued on the appellant and the Union of India directing them to show cause why an order in the nature of certiorari should not be made for the production of the records relating to the assessment proceedings, and why an order in the nature of mandamus should not be made commanding the respon dents to refrain from taking any further steps in connection with the certificate proceedings. Before the rules came up for hearing the respondent's appeal to the Commissioner, Presidency Division, was heard and allowed. The Commissioner held that no notice of dissolution under section 25 (2) of the Income‑tax Act having been given to the income‑tax authorities, section 44 of the Act was not applicable, and, consequently, the assessment could not be sustained as an assessment of a dissolved first. He further held that a certificate against a firm could not be executed against its partners. In that view, he set aside the proceedings under the Public Demands Recovery Act.
Thus, at the date of the final hearing of the rule, the respondent was no longer required to be relieved of any certificate proceedings pending against him or to be protected against any such proceeding that might be launched in future. The assessment order, however, was subsisting and, therefore, although the Income‑tax Department might not proceed against the respondent any longer under section 46 (2) it may try to recover the tax from him in other ways. Accordingly Sinha, J., proceeded to consider whether on the assessment as made, the respondent could be proceeded against for the recovery of the tax due under it at all and whether after the dissolution of a firm any assessment of the firm as a firm for income earned by it before the date of the' dissolution was possible in law. The learned Judge answered both the questions in the negative.
On appeal from the judgment of Sinha, J., Chakravarti, C. J. and Dasgupta, J., held that the notice under section 34 as issued on two persons could not form the basis of a valid assessment of the firm or the firm's income and the said two persons could not be proceeded against for the recovery of the tax due under that assess ment. The learned Chief Justice also held that whether a firm be a registered firm or an unregistered firm, when the firm is subsist ing the Income‑tax Officer cannot in any circumstances proceed against the partners individually at the beginning. In both cases the proceedings, when commenced are proceedings as against the firm. In the case of a registered firm, after the amount of the assessable income has been determined is the income so determined distributed among the several partners in accordance with their shares and the share allotted to each is transferred to his‑ own income‑tax account, to be assessed there along with his other income. In the case of an unregistered firm, the proceedings may remain proceedings against the firm up to the last and the assessment of the tax also can be made in the firm's hands. Assuming that section 44 of the Income-tax Act applies, after the dissolution of a firm, whether it be a registered firm or an unregistered firm, an assessment to Income-tax of its pre‑dissolution income can only be made on the persons who were the partners of the firm at the time of the dissolution jointly and severally and cannot be made on the firm. I have given a narration of the facts of this case in detail in order to show how widely the facts of that case were different from the facts of the present case. What the learned Judges of the Calcutta High Court were considering was a case of dissolution of a partnership and notices were issued to two of the partners leaving out the third when the partnership was in subsistence.
In the instant case, the notice was issued on the unregistered firm and the assessment was completed on the firm. A demand notice was subsequently issued under section 29 on the unregistered firm. A significant fact to be remembered in this case is that the quantum and the legality of the assessment is not under challenge. Once the quantum and the legality of the assessment is not chal lenged the Income‑tax Officer is quite within his jurisdiction to proceed to realise the arrears of tax under section 46 (2) read with section 44 of the Income‑tax Act.
The Certificate Officer substituted the present petitioner under section 11 of the Bihar and Orissa Public Demands Recovery Act (Act IV of 1914). Section 11 empowers the Certificate Officer to amend the certificate by addition, omission or substitution of parties. Hence the Certificate Officer was well within his jurisdic tion to substitute the partners of the unregistered firm and to proceed against them, since the partners are jointly and severally liable for the income‑tax dues under section 44 of the Income‑tax Act.
Thus, the decision in R. N. Bose v. Manindra Lal Goswami is clearly distinguishable and does not appear to have any applica tion to the facts of the present case, this being a case of discontinu ance and not a case of dissolution of the partnership. In this connection, I would refer to a decision of the Madras High Court reported in Chengalvaroya Chettiar v. Commissioner of Income tax ((1937) 5 I T R 70). A Special Bench of the Madras High Court in that case held that;
"The object of section 44 is perfectly clear. It is to enable the tax on the profits of a firm which has been discontinued to be got by the income‑tax authorities and to prevent the avoid ance of taxation by the discontinuance of the firm. The words tax payable' in the section mean tax that is due to be paid', tax which the firm of partnership would be liable to pay, if it had got been discontinued' or tax either found to be due already or that will be found to be due in the future'. Therefore the partners of the discontinued firm are jointly and severally liable to be assessed in respect of the profits earned by the firm before it was discontinued".
This decision seems to apply in all fours to the present case.
Accordingly, the sole contention of Mr. Mohanty having failed, the rule is discharged and the petition is dismissed with costs. Hearing fee is assessed at Rs. 100.
I agree.
Petition dismissed.
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