http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: C. A. ABRAHAM, UPPOOTTIL, KOTTAYAM

       Vs.

RESPONDENT: THE INCOME-TAX OFFICER, KOTTAYAM AND ANOTHER

DATE OF JUDGMENT: 29/11/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR  609            1961 SCR  (2) 765  CITATOR INFO :  R          1961 SC1265  (8)  RF         1962 SC 970  (3,4)  R          1964 SC 825  (3,4)  R          1964 SC1095  (4,11)  D          1966 SC1295  (15)  E          1968 SC 162  (10,11)  F          1968 SC 816  (3)  E          1969 SC 835  (5)  R          1969 SC1352  (7)  R          1970 SC1173  (26)  E          1970 SC1782  (3)  D          1975 SC1549  (21,23,54)  F          1977 SC 459  (3)

ACT: Income-tax--Suppression  of  income  of  Partnership  firm-- Penalty,   if   can   be  imposed   after   dissolution   of Partnership--Income-tax   Act,  1922  (11  of   1922),   SS. 28(I)(c), 44.

HEADNOTE: The appellant who was carrying on business in food grains in partnership with another person submitted the returns of the income  of the firm for the accounting years even after  his partner’s  death.  It was found that certain income  of  the firm  was  concealed  and the Income-tax  Officer  not  only assessed the firm to tax for the suppressed income but  also imposed  penalties for concealing the said income.   Appeals to  the  higher  income  tax  authorities  failed  and   the appellant  then  applied  to the High Court for  a  writ  of certiorari quashing the orders of assessment and  imposition of  penalty  on  the ground inter alia  that  the  firm  was dissolved  by  his partner’s death and no penalty  could  be imposed  after  dissolution  of the  firm,  The  High  Court rejected  the petition.  On appeal with the  certificate  of the High Court, Held,  that by virtue of s. 44 and other provisions  of  the Income Tax Act a partner of a dissolved partnership firm may not only be made liable to assessment for income tax for the accounting years but despite dissolution of the firm he  may be  made liable to pay penalty for concealing the income  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

the  firm  under  s. 28(1)(c) of the Act.   The  analogy  of dissolution  of  a  Hindu joint Family  does  not  apply  to dissolution of a partnership. Mareddi Krishna Reddy v. Income-tax Officer, Tenali,  [1957] 31 I.T.R. 678, approved. Commissioner of Income-tax v. Ravalaseema Oil Mills,  [1959] 37  I.T.R. 208 and S. V. Veerappan Chettiar v.  Commissioner of Income-tax, Madras, [1957] 32 I.T.R. 411, disapproved. Mahankali Subbarao v. Commissioner of Income-tax, [1957]  31 I.T.R. 867, distinguished. The  Legislature intended that the provisions of Ch.  IV  of the  Act shall apply to a firm even after discontinuance  of its  business.  In interpreting a fiscal statute  the  Court cannot  proceed to make good deficiencies if there  be  any. In  case of doubt it should be interpreted in favour of  the tax payer. The  expression "assessment" has different  connotations  an has been used in its widest connotation in Ch.  IV and S. 44 97 766 he Act.  It is not restricted only to computation of tax but includes  imposition of penalty on tax payers found  in  the process of assessment guilty of concealing income. Commissioner  of Income-tax, Bombay Presidency and  Aden  v. Khemchand Ramdas, [1938] 6 I.T.R. 414, referred to. The  Income-tax  Act  provided  a  complete  machinery   for obtaining  relief  against  improper orders  passed  by  the Income-tax  Authorities  and  the  appellant  could  not  be permitted   to  abandon  that  machinery,  and  invoke   the jurisdiction  of  the  High  Court under  Art.  226  of  the Constitution against the orders of the taxing authorities.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 517 of 1958. Appeal  from the judgment and order dated October 31,  1957, of the Kerala High Court in O. P. No. 215 of 1957. G. B. Pai and Sardar Bahadur, for the appellant. Hardyal Hardy and D. Gupta, for the respondents. 1960.  November 29.  The Judgment of the Court was delivered by SHAH,  J.-C.  A.  Abraham hereinafter  referred  to  as  the appellant  and one M. P. Thomas carried on business in  food grains in partnership in the name and style of M. P.  Thomas &  Company  at Kottayam.  M. P. Thomas died on  October  11, 1949.   For  the  account years 1123,  1124  and  1125  M.E. corresponding  to  August 1947-July 1948,  August  1948-July 1949 and August 1949-July 1950, the appellant submitted as a partner returns of the income of the firm as an unregistered firm.   In the course of the assessment proceedings, it  was discovered  that  the firm had carried  on  transactions  in different commodities in fictitious names and had failed  to disclose substantial income earned therein.  By order  dated November  29,  1954,  the Income Tax  Officer  assessed  the suppressed  income of the firm in respect of the  assessment year  1124 M.E. under the Travancore Income Tax Act  and  in respect  of assessment years 1949-50 and 1950-51  under  the Indian  Income Tax Act and on the same day   issued  notices under  s. 28 of the Indian Income Tax Act in respect of  the years 1949-50 and 1950-51 and 767 under  s. 41 of the Travancore Income Tax Act for  the  year 1124  M.E.,  requiring the firm to show  cause  why  penalty should  not be imposed.  These notices were served upon  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

appellant. The Income Tax Officer after considering the explanation  of the appellant imposed penalty upon the firm, of Rs. 5,000 in respect of the year 1124 M.-E., Rs. 2,O00 in respect of  the year 1950-51 and Rs. 22,000 in respect of the year  1951-52. Appeals against the orders passed by the Income Tax  Officer were dismissed by the Appellate Assistant Commissioner.  The appellant  then applied to the High Court of  Judicature  of Kerala praying for a writ of certiorari quashing the  orders of assessment and imposition of penalty.  It was claimed  by the  appellant inter alia that after the dissolution of  the firm by the death of M. P. Thomas in October, 1949, no order imposing  a penalty could be passed against the  firm.   The High  Court rejected the application following the  judgment of the Andhra Pradesh High Court in Mareddi Krishna Reddy v. Income   Tax  Officer,  Tenali  (1).   Against   the   order dismissing  the  petition,  this appeal  is  preferred  with certificate of the High Court. In  our view the petition filed by the appellant should  not have  been  entertained.   The Income  Tax  Act  provides  a complete  machinery for assessment of tax and imposition  of penalty and for obtaining relief in respect of any  improper orders  passed  ’by  the Income  Tax  authorities,  and  the appellant  could not be permitted to abandon resort to  that machinery  and to invoke the jurisdiction of the High  Court under  Art.  226 of the Constitution when  he  had  adequate remedy  open to him by an appeal to the Tribunal.   But  the High  Court did entertain the petition and has also  granted leave  to  the  appellant  to appeal  to  this  court.   The petition  having  been  entertained and  leave  having  been granted,  we do not think that we will be justified at  this stage  in dismissing the appeal in limine.  On  the  merits, the  appellant  is not entitled to relief.  The  Income  Tax Officer  found that the appellant had, with a view to  evade payment of tax, (1) (1957) 31 I.T.R. 678. 768 deliberately  concealed material particulars of his  income. Even  though the firm was carrying on transactions  in  food grains  in  diverse names, no entries in  respect  of  those transactions  in the books of account were posted and  false credit  entries of loans alleged to have been borrowed  from several persons were made.  The conditions prescribed by  s. 28(1)(c) for imposing penalty were therefore fulfilled.  But says the appellant, the assessee firm had ceased to exist on the death of M. P. Thomas, and in the absence of a provision in  the  Indian  Income Tax Act  whereby  liability  to  pay penalty  may be imposed after dissolution against  the  firm under  s.  28(1)(c)  of  the Act,  the  order  was  illegal. Section 44 of the Act at the material time stood as follows: "Where  any business,...carried on by a firm...... has  been discontinued  ... every person who was at the time  of  such discontinuance  ...  a  partner of such  firm,...  shall  in respect  of  the  income, profits and gain of  the  firm  be jointly and severally liable to assessment under Chapter  IV for  the  amount of tax payable and all  the  provisions  of Chapter  IV  shall,  so far as may be,  apply  to  any  such assessment." That  the business of the firm was discontinued  because  of the  dissolution of the partnership is not disputed.  It  is urged  however that a proceeding for imposition  of  penalty and  a proceeding for assessment of income-tax  are  matters distinct, and s. 44 may be resorted to for assessing tax due and   payable   by  a  firm  business   whereof   has   been discontinued,  but an order imposing penalty under s. 28  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

the  Act  cannot by virtue of s. 44 be passed.   Section  44 sets  up machinery for assessing the tax liability of  firms which  have  discontinued their business  and  provides  for three  consequences, (1) that on the discontinuance  of  the business of a firm, every person who was at the time of  its discontinuance  a  partner is liable in respect  of  income, profits  and  gains of the firm to be assessed  jointly  and severally,  (2) each partner is liable to pay the amount  of tax  payable  by the firm, and (3) that  the  provisions  of Chapter,  so far as may be, apply to such  assessment.   The liability declared by s. 44 is 769 undoubtedly   to  assessment  under  Chapter  IV,  but   the expression  "assessment" used therein does not  merely  mean computation  of income.  The expression "assessment" as  has often been said is used in the Income Tax Act with different connotations.    In  Commissioner  of  Income  Tax,   Bombay Presidency  &  Aden v. Khemchand Ramdas  (1),  the  Judicial Committee of the Privy Council observed: "One  of the peculiarities of most Income-tax Acts  is  that the  word  "assessment"  is used as  meaning  sometimes  the computation  of income, sometimes the determination  of  the amount of tax payable and sometimes the whole procedure laid down  in the Act for imposing liability upon the  tax-payer. The   Indian  Income-tax  Act  is  no  exception   in   this respect............". A  review  of  the  provisions of  Chapter  IV  of  the  Act sufficiently  discloses that the word "assessment" has  been used  in its widest connotation in that chapter.  The  title of the chapter is "Deductions and Assessment".  The  section which deals with assessment merely as computation of  income is s. 23; but several sections deal not with computation  of income,  but  determination  of  liability,  machinery   for imposing  liability  and  the  procedure  in  that   behalf. Section 18A deals with advance payment of tax and imposition of penalties for failure to carry out the provisions  there- in.  Section  23A  deals with  power  to  assess  individual members  of certain companies on the income deemed  to  have been  distributed as dividend, s. 23B deals with  assessment in case of departure from taxable territories, s. 24B  deals with  collection  of  tax  out of  the  estate  of  deceased persons; s. 25 deals with assessment in case of discontinued business,  s. 25A with assessment after partition  of  Hindu Undivided  families and ss. 29, 31, 33 and 35 deal with  the issue  of demand notices and the filing of appeals  and  for reviewing  assessment  and s. 34 deals  with  assessment  of incomes  which  have  escaped  assessment.   The  expression "assessment"  used in these sections is not used  merely  in the  sense  of  computation of income and there  is  in  our judgment no ground for holding (1) [1938] 6 I.T.R. 414. 770 that  when  by s. 44, it is declared that  the  partners  or members  of the association shall be jointly  and  severally liable  to  assessment, it is only intended to  declare  the liability  to computation of income under s. 23 and  not  to the  application  of  the  procedure  for  declaration   and imposition   of   tax  liability  and  the   machinery   for enforcement  thereof.   Nor  has the  expression,  "all  the provisions  of  Chapter IV shall so far as may be  apply  to such assessment" a restricted content: in terms it says that all  the provisions of Chapter IV shall apply so far as  may be  to  assessment of firms which  have  discontinued  their business.   By  s. 28, the liability to pay  additional  tax which  is  designated  penalty is imposed  in  view  of  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

dishonest contumacious conduct of the assessee.  It is  true that this liability arises only if the Income-tax Officer is satisfied  about the existence of the conditions which  give him  jurisdiction and the quantum thereof depends  upon  the circumstances  of the case.  The penalty is not uniform  and its  imposition depends upon the exercise of  discretion  by the  Taxing authorities; but it is imposed as a part of  the machinery  for assessment of tax liability.  The use of  the expression  "so far as may be" in the last clause of  s.  44 also does not restrict the application of the provisions  of Chapter  IV only to those which provide for  computation  of income.  By the use of the expression "so far as may be"  it is  merely intended to enact that the provisions in Ch.   IV which  from their nature have no application to  firms  will not  apply  thereto  by virtue of s.  44.   In  effect,  the Legislature  has  enacted  by  s.  44  that  the  assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has  not taken place.  It is enacted manifestly with a view to ensure continuity in the application of the machinery provided  for assessment  and imposition of tax liability  notwithstanding discontinuance of the business of firms.  By a fiction,  the firm  is  deemed to continue after  discontinuance  for  the purpose of assesment under Chapter IV. The Legislature has expressly enacted that the provisions of Chapter IV shall apply to the assessment of 771 a business carried on by a firm even after discontinuance of its  business,  and if the process  of  assessment  includes taking  steps  for  imposing penalties, the  plea  that  the Legislature  has  inadvertently  left a lacuna  in  the  Act stands  refuted.   It is implicit in the contention  of  the appellant  that it is open to the partners of a firm  guilty of  conduct  exposing them to penalty under s. 28  to  evade penalty  by the simple expedient of discontinuing the  firm. This plea may be accepted only if the court is compelled, in view  of  unambiguous language, to hold that  such  was  the intention  of the Legislature.  Here the language used  does not even tend to such an interpretation.  In interpreting  a fiscal  statute,  the  court cannot  proceed  to  make  good deficiencies  if there be any: the court must interpret  the statute  as  it  stands and in case of  doubt  in  a  manner favourable  to the tax-payer.  But where as in  the  present case,  by the use of words capable of comprehensive  import, provision  is made for imposing liability for  penalty  upon tax-payers guilty of fraud, gross negligence or contumacious conduct,  an  assumption  that  the words  were  used  in  a restricted  sense so as to defeat the avowed object  of  the Legislature qua a certain class will not be lightly made. Counsel for the appellant relying upon Mahankali Subbarao v. Commissioner of Income Tax (1), in which it was held that an order  imposing  penalty  under s. 28(1)(c)  of  the  Indian Income  Tax  Act  upon a Hindu Joint  Family  after  it  had disrupted,  and the disruption was accepted under s.  25A(1) is invalid, because there is a lacuna in the Act,  submitted that  a  similar  lacuna exists in the Act  in  relation  to dissolved firms.  But whether on the dissolution of a  Hindu Joint Family the liability for penalty under s. 28 which may be  incurred during the subsistence of the family cannot  be imposed  does not fall for decision in this case: it may  be sufficient  to observe that the provisions of s. 25A and  s. 44  are  not in pari materia.  In the absence  of  any  such phraseology  in s. 25A as is used in s. 44, no real  analogy between  the  content  of  that section and  s.  44  may  be assumed.  Undoubtedly,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

(1) [1957] 31 I.T.R. 867. 772 by s. 44, the joint and several liability which is  declared is liability to assessment in respect of income, profits  or gains of a firm which has discontinued its business, but  if in  the process of assessment of income, profits  or  gains, any other liability such as payment of penalty or  liability to pay penal interest as is provided under s. 25, sub-s. (2) or  under  s.  18A sub-ss. (4), (6), (7),  (8)  and  (9)  is incurred,  it  may also be imposed, discontinuation  of  the business notwithstanding. In our view, Chief Justice Subba Rao has correctly stated in Mareddi Krishna Reddy’s case (supra) that: "Section  28  is  one of the sections  in  Chapter  IV.   It imposes  a  penalty  for the concealment of  income  or  the improper  distribution  of profits.  The  defaults  made  in furnishing a return of the total income, in complying with a notice under sub-s. (4) of s. 22 or sub-s. (2) of s. 23  and in  concealing  the particulars of  income  or  deliberately furnishing   inadequate  particulars  of  such  income   are penalised  under  that  section.   The  defaults  enumerated therein  relate to the process of assessment.   Section  28, therefore,  is  a  provision enacted  for  facilitating  the proper assessment of taxable income and can properly be said to apply to an assessment made under Chapter IV.  We  cannot say that there is a lacuna in s. 44 such as that found in s. 25A of the Act. We are unable to agree with the view expressed by the Andhra Pradesh  High  Court  in the later Full  Bench  decision  in Commissioner  of  Income Tax v. Rayalaseema Oil  Mills  (1), which purported to overrule the judgment in Mareddi  Krishna Reddy’s case (supra).  We are also unable to agree with  the view  expressed by the Madras High Court in S. V.  Veerappan Chettiar v. Commissioner of Income Tax, Madras (2). In  the view taken by us, the appeal fails and is  dismissed with costs. (1) [1959] 37 I.T.R. 208.                                     Appeal dismissed. (2) [1957] 32 I.T.R. 411. 773