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The Income- Tax Act, 1995
Section 182 in The Income- Tax Act, 1995
Section 52 in The Income- Tax Act, 1995
Union Of India vs Jardine Henderson And Ors. (And ... on 16 March, 1979
The Transfer Of Property Act, 1882

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Allahabad High Court
Manohar Lal And Padam Prakash vs Commissioner Of Income-Tax And ... on 25 August, 1987
Equivalent citations: (1988) 67 CTR All 55, 1988 171 ITR 241 All
Author: K Singh
Bench: A Banerji, K Singh

JUDGMENT

K.P. Singh, J.

1. These two writ petitions raise similar questions of law and fact for consideration and hence they are being disposed of by a common judgment.

2. The petitioners in the above two writ petitions along with Rajendra Kumar and Rakesh Prakash Agarwal were partners of a firm known as M/s. Raghunandan Prasad Manoharlal. The aforesaid firm was dealing in gold and silver ornaments and bullion. The petitioners in the two writ petitions were partners of the firm in their capacity as karta of their respective Hindu undivided families. The assessment year under consideration is 1981-82. The firm was dissolved on January 28, 1981. The firm was assessed to an income of Rs. 8,48,063, in the beginning as an unregistered firm but, on appeal, the amount was reduced to Rs. 2,65,005 as is evident from annexure II attached to the writ petitions. It appears that through annexure III attached to the writ petitions, the petitioners have indicated that the firm owns property, a three-storeyed building, shop No. 496 (old) and new number 116 situate at Sarafa Market, Meerut City, and, therefore, the tax liability should be realised from the aforesaid property of the firm. Notices of demand under rule 2 of the Second Schedule to the Income-tax Act, 1961, have been served upon the petitioners as is evident from annexure IV in Writ Petition No. 754 of 1986 as well as annexure VII in Writ Petition No. 830 of 1986. The notices of demand were in the name of the firm through the petitioners. In Writ Petition No. 754 of 1986, the petitioners' status has been described as" Hindu undivided family", Again, through annexure V in the writ petition of Manohar Lal and annexure VIII in the writ petition of Padam Prakash, the petitioners have requested that the demand may be recovered by attachment and sale of shop No. 116 owned by the firm. The Tax Recovery Officer through annexure VII of the first writ petition and annexure IX of the second writ petition has asked the petitioners to show cause why the tax amount along with interest may not be realised from the petitioners and the date fixed in the notice was March 20, 1986. The petitioners have taken the stand that the tax liability of the firm should be realised from the property of the firm and not from the petitioners in their individual capacities. It appears that under rule 73 of the Second Schedule to the Income-tax Act, 1961, the petitioners have been served with a notice to show cause why they should not be arrested as they have failed to pay the tax demanded of the firm. In the aforesaftd circumstances, the petitioners in the two writ petitions have prayed for quashing the notices issued by the Income-tax Officer mentioned in relief (I); secondly, they have prayed for restraining the respondents from arresting the petitioners in pursuance of the recovery proceedings ; thirdly, they have prayed for declaring the notices under rule 73 of the Act as void ; fourthly, they have prayed for declaring the order of the Tax Recovery Officer under rule 32 of the Second Schedule to the Act as illegal; fifthly, they have prayed for general relief; and sixthly, they have prayed for the costs of the writ petitions.

3. Learned counsel for the petitioners has contended before us that the tax liability of the firm, Raghunandan Prasad Manoharlal, Sarafa Market, Meerut, should not be realised from the petitioners from their individual property. The Department should realise the amount due from the firm by selling the property in the shape of shop No. 116 situate in Sarafa Market, Meerut, owned by the firm.

4. The second contention raised on behalf of the petitioners is that the petitioners are not "assessees in default" and, therefore, their properties in individual capacities cannot be touched by the Department in connection with the tax liability of the firm, M/s Raghunandan Prasad Manoharlal.

5. The third contention raised on behalf of the petitioners is that the Department is proceeding against the petitioners in an arbitrary and unreasonable manner and they have taken contradictory stands regarding the property of the firm suggested by the petitioners. Therefore, their action against the petitioners is mala fide and the petitioners are entitled to the reliefs claimed in the writ petitions.

6. Counsel for the Department has submitted in reply that in law the petitioners are liable to pay the tax standing against the firm and despite valid notice to them, they have failed to pay the dues standing against the firm and, therefore, the Department is within its jurisdiction to proceed against the petitioners and the grievances of the petitioners are wholly wrong and unjustified and that they deserve no relief in the writ petitions.

7. The second submission made by counsel for the Department is to the effect that regarding the property of the firm known as shop No. 116 situate at Sarafa Market, Meerut, a suit by Satya Prakash Agarwal, Devi Prasad Agarwal and Smt. Padmavati is pending in the Court of the Civil Judge, Meerut, as is evident from annexure I to the counter-affidavit. Therefore, the Department could not in law sell that property and realise the tax dues standing against the firm, M/s Raghunandan Prasad Manoharlal, from that property. In this connection, learned counsel for the Department has placed reliance upon the provisions of Section 52 of the Transfer of Property Act and has emphasised that the allegations of the petitioners that the Department is proceeding against them in a contradictory as well as arbitrary manner are wholly wrong and unjustified on the facts and circumstances of the present case. Learned counsel for the Department has submitted that relevant notices have been served upon the petitioners who have failed to pay the tax dues. Hence, they are liable to be proceeded against under rule 73 of the Second Schedule to the Income-tax Act, 1961. In short, learned counsel for the Department has justified the action of the Department in proceeding against the petitioners and characterised the proceedings as strictly in accordance with law.

8. In rejoinder, learned counsel for the petitioners has submitted that the provisions of Section 52 of the Transfer of Property Act could not at all be attracted to the facts of the present case as the petitioners were not a party to the plaint attached to the counter-affidavit and marked as C.A.I. Moreover, he has emphasised that only half of the property of the firm known as shop No. 116 situate at Sarafa Market, Meerut, had been claimed by the plaintiffs in the suit and, therefore, the other half of the property of the firm could easily be sold and the tax liability of the firm would stand wiped off and still enough amount will remain to the credit of the firm.

9. We have considered the contentions raised on behalf of the parties. We have weighed the oral submissions made by learned counsel for the parties and also we have examined the authorities cited at the bar. In our opinion, the contentions raised on behalf of the petitioners have force.

10. In the present case, learned counsel for the petitioners has contended before us that the petitioners are not" assessees in default" within the meaning of the provisions of the Income-tax Act, 1961. Therefore, the petitioners' properties in their individual capacity cannot be attached and sold nor can the petitioners be arrested for the tax liability standing against the firm known as M/s. Raghunandan Prasad Manoharlal.

11. Learned counsel for the Department has invited our attention to the provisions of Section 189(3) of the Act and has emphasised that the petitioners, being partners of the firm, M/s. Raghunandan Prasad Manoharlal, are liable to pay tax payable by the firm. The aforesaid section reads as below:

"Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum.

Explanation.--The amount of tax referred to in this sub-section shall also include that part of the share of each partner in the income of the firm before its discontinuance or dissolution which the firm could have retained under Sub-section (4) of Section 182, but which has not been so retained."

12. To our mind, the aforesaid section only indicates joint and several liability of the partners of a dissolved firm to pay the tax levied against the firm.

13. A similar question, as is involved in the present case, arose before the Mysore High Court which has been answered by a learned single judge of that court in P. Balchand v. TRO [1974] 95 ITR 321. The learned single judge has indicated that the mere existence of a liability to pay tax is not sufficient to recover the tax from the partners of the firm under the provisions of the Act of 1961. According to him, it is only from the defaulter shown in the certificate that the Tax Recovery Officer can recover the tax. A bare reading of annexures 2, 4, 7 and 13 attached to the writ petition numbered as 754 of 1986, Sri Manohar Lal v. CIT, would indicate that the aforesaid papers were in the name of the dissolved firm. Therefore, on the reasoning contained in the ruling referred to above, we think that the tax liability of the firm cannot be realised from the petitioners unless they are held as "assessees in default" within the meaning of the provisions of the Act of 1961.

14. It is noteworthy that a partner of a dissolved firm has been held responsible for paying the tax dues standing against the dissolved firm due to the provisions of Section 46(2) of the 1922 Act, but, according to the provisions of the 1961 Act, the same position does not continue because similar provisions have not been enacted under the new Act of 1961.

15. A Division Bench of this court in Brij Ratan Lal Bhoop Kishore v. Addl. CIT [1983] 139 ITR 906 has indicated that the Tax Recovery Officer has no power to recover tax from the partners and cannot attach or sell the personal properties of the partners. We have gone through the aforesaid ruling and we are in full agreement with the reasoning given therein. We are of the opinion that the aforesaid ruling fully supports the contentions raised on behalf of the petitioners and is a complete answer to the oral submissions made on behalf of the Department before us. We think that unless the Income-tax Officer had assessed the partners of the firm in accordance with the provisions of sections 182 and 183 of the Act of 1961 and relevant notices had been served upon the partners, they cannot be termed as "assessees in default". Therefore, the partners' property in their individual capacities cannot be proceeded with in con nection with the tax dues of the firm. The aforesaid Division Bench of this court at page 910 has made the following observations :

"So, if the assessee in default, mentioned in the recovery certificate, is the unregistered firm simpliciter (and the partners are not mentioned in the certificate), then, in such a case, the Tax Recovery Officer has no jurisdiction to proceed to recover the arrears of tax from the partners of such unregistered firm personally. He cannot attach or sell their personal property and he cannot attempt realisation by arrest or detention of their person.

Section 2(7) of the Act defines the word 'assessee' to include every person who is deemed to be an assessee under any provisions of this Act as well as every person who is deemed, to be an assessee in default under any provisions of this Act, but we have not been able to find any such provisions and learned counsel for the Revenue was unable to indicate any provision which deems a partner of an unregistered firm to be an assessee though the unregistered firm may itself have been assessed ; or which deems a partner of an unregistered firm to be an assessee in default where the unregistered firm admittedly is the assessee in default."

16. In the present case, the documents attached to the writ petition as well as the counter-affidavit indicate that the firm known as M/s. Raghunandan Prasad Manoharlal is the assessee and in the facts and circumstances of the present case, only the firm would be an assessee in default. Therefore, the action of the Department against the petitioners regarding their property in individual capacity and the notices under rule 73 of the Second Schedule to the 1961 Act are beyond the powers of the Tax Recovery Officer and the petitioners are entitled to the reliefs claimed in the writ petition with regard to the notices under rule 73 of the Second Schedule as well as the order issued regarding their properties under rule 32 of the Second Schedule.

17. It is noteworthy that the petitioners were partners of the firm known as M/s. Raghunandan Prasad Manoharlal as karta of their Hindu undivided family. Various notices issued by the Department also indicate their status as Hindu undivided family. Therefore, on the reasoning contained in the ruling in Baladin Ram Kalwar v. ITO [1966] 62 ITR 392 (All), we think that the notices under rule 73 of the Second Schedule to the 1961 Act against the petitioners are bad in law and without jurisdiction and on this score also the petitioners are entitled to the reliefs claimed by them with regard to the notices under rule 73 of the Second Schedule issued by the Tax Recovery Officer.

18. Our above discussion disposes of the first two contentions raised on behalf of the petitioners.

19. As regards the third contention, a suggestion has been made Oyn-behalf of the petitioners that in the suit filed by Satya Prakash Agarwal in the Court of the First Civil Judge, Meerut, it has been asserted on behalf of the defendants that the subject-matter of the suit belonged to the firm, but while realising the tax of the firm from the petitioners, a stand has been taken by the Department that a suit is pending ; therefore, the property of the firm could not be sold. No doubt some inconsistent pleas have been raised on behalf of the Department but that will not lead to the inference that the action of the Department is mala fide against the petitioners. At the most it can be said that the action of the Department may not be legal according to the provisions of the new Act of 1961, but an inference of mala fides cannot be made in the facts and circumstances of the present case against the Department.

20. After hearing learned counsel for the Department, we think that the petitioners are jointly and severally liable for the tax dues standing against the firm in view of the provisions of Section 189(3) of the new Act of 1961, but for realising the tax dues against the firm, the Department should have taken action against the petitioners in the light of the provisions of Sections 182 and 183 of the Act of 1961. In the absence of any proceedings under those sections against the petitioners, it is difficult to characterise the petitioners as assessees in default within the meaning of the provisions of the new Act of 1961. Therefore, we are not impressed with the submission of learned counsel for the Department that the proceedings against the petitioners are strictly in accordance with law.

21. It would not be out of place to mention here that learned counsel for the petitioners had half-heartedly contended that the recovery proceedings in the facts and circumstances of the present case stood vitiated in law as no fresh demand notice had been served upon .the assessees in pursuance of the order passed by the Appellate Assistant Commissioner whereby the amount of tax was substantially reduced. Learned counsel for the Revenue met this argument by inviting our attention to the ruling in ITO v. Seghu Buchiah Setty [1964J 52 ITR 538 (SC) and the ruling in Gopi Chand v. Union of India [1976] 102 ITR 707 (P & H) as well as the ruling in Union of India v. Jardine Henderson Ltd. [1979] 118 ITR 112 (SC). Our attention was also invited to the provisions of sections 3 and 5 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. A perusal of the ruling and the provisions of the Validation Act leads to an inference that no fresh notice of demand need be served upon the assessee in pursuance of reduction or enhancement of the tax in appeal. In the ruling in Union of India v. Jardine Henderson Ltd. [1979] 118 ITR 112, their Lordships of the Supreme Court have indicated as below (at page 121):

"Clause (c) of Section 3(1) of the Validation Act is also important and it clearly and expressly provides that no proceedings in relation to the Government dues shall be invalid merely because no fresh notice of demand was served upon the assessee after the dues were enhanced or reduced in any appeal or proceeding."

22. In Gopi Chand v. Union of India [1976] 102 ITR 707, a learned single judge of the Punjab and Haryana High Court, after quoting the provisions of Sections 3 and 5 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, has observed as below (at page 711):

"It is apparent that the Validating Act was enacted to counter the effect of the Supreme Court judgment referred to above and all recovery proceedings taken before its enactment were validated."

23. In the present case, it appears to us that learned counsel for the petitioners had advanced the argument regarding fresh notice of demand in pursuance of the order of the Appellate Assistant Commissioner whereby the tax dues were reduced from Rs. 8 lakhs odd to Rs. 2 lakhs odd on the basis of the observations made in ITO v. Seghu Buchiah Setty [1964] 52 ITR 538 (SC). The aforesaid ruling had considered the provisions of the Indian Income-tax Act, 1922, whereas the proceedings giving rise to the present writ petitions are under the provisions of the new Act of 1961 and the proceedings were'initiated much after the enforcement of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. Therefore, we do not find any merit in the contentions raised on behalf of the petitioners and we agree with the submissions of learned counsel for the Department who has rightly placed reliance upon the ruling in Union of India v. Jardine Henderson Ltd. [1979] 118 ITR 112 (SC) and the provisions of the Validation Act, 1964.

24. As regards the submission of learned counsel for the Department that the provisions of Section 52 of the Transfer of Property Act are attracted regarding the property of the firm described as shop No. 496 (old) and No. 116 (new) situate at Sarafa Market, Meerut City, we think that the plaintiffs of the suit had claimed only a half share in that property and, therefore, the doctrine of lis pendens would not apply regarding the half share of the property of the firm. According to the petitioners, the sale of half the property of the firm would fetch much more money than the tax dues standing against the firm. Therefore, we do not think that the objection of the Department regarding not auctioning the half share of the property is quite correct. Ordinarily, the Department should proceed against the property of the firm regarding tax dues against it.

25. From the foregoing discussion, we are of the opinion that both the writ petitions should succeed and the petitioners are entitled to the reliefs claimed at items Nos. (i) to (iv) contained in the prayer in both the writ petitions. We order accordingly. The petitioners' properties in their individual capacities need not be proceeded with. Both the writ petitions are hereby allowed with costs.