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PETITIONER: THE III INCOME TAX OFFICER,CIRCLE-I, SALEM & ANOTHER,

       Vs.

RESPONDENT: ARUNAGIRI CHETTIAR

DATE OF JUDGMENT:       07/05/1996

BENCH: B.P. JEEVAN REDDY, SUHAS C. SEN

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T S.P.JEEVAN REDDY, J.      The question  in these appeals is: whether an erstwhile partner is  liable to  pay the  tax  arrears  due  from  the partnership  firm  pretaning  to  the  period  when  he  was partner. The  Madras High Court had held that he is not. The Revenue is disputing the correctness of that holding      The respondent-assessee  was a  partner  in  the  firm, Sannanna Chettiar  and Sons.  He retired  therefrom on April 19, 1963.  On his  retirement, the  firm  was  continued  by taking in  two new  partners. The sad firm too was dissolved with effect  from April  12, 1972.  The assessments  for the Assessment Years  1962-63 and 1963-64 were competed on March 25, 1967  and March  29, 1968. [For the two accounting years relevant to  the said  assessment years,  accounts were duly made up  by the partners and the share of profits due to the respondent paid  to him before him retirements.] On February 23, 1972, the Income Tax Officer sent a communication to the respondent that  in respect  of the  arrears of tax due from the firm  for the  aforesaid assessment  years,  he  too  is jointly and  severally liable  along with the other partners inasmuch as he was a partner of the firm during the relevant occurring years.  The respondent denied his liability on the ground that  he ceased  to be a partner long ago, that there was a  change in  the constitution  of the  firm  after  his retirement and that such re-constituted partnership alone is responsible for  paying the  said arrears.  The  Income  Tax Officer did  not agree  with  the  respondents  contentions. Recovery proceedings  were initiated  and  the  respondent’s properties attached, whereupon he approached the Madras High Court by  way of  two writ petitions. The High Court allowed the writ  petitions mainly  lying  upon  and  following  the decision of  a Full Bench of the Kerala High Court in Income Tax Officer,  Assessment-ii, Calicut  & Anr.  v.C.V.George & Ors.  [(1976)   105  I.T.R.144]  which  dissented  from  the decision of  the Allahabad High Court in Sahu Rajeshwar Nath v. Income  Tax Officer, Meerut & Anr. [(1964) 54 I.I.R.755]. The reasoning  of the High Court, in short, is this: Section 189(3) has  no application to the facts of the case inasmuch as the  respondent was not a partner of the firm at the time

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of its  dissolution; he ceased to be a partner long prior to the dissolution.  Further, because  the Income Tax Act, 1961 did not  contain a provision corresponding to the proviso to sub-section (2)  of Section 46 of the Indian Income Tax Act, 1992, the areas of tax due from the firm cannot be recovered from an erstwhile partner.      Sri  B.B.Ahuja,  learned  counsel  for  the  appellant- Revenue assailed  the  correctness  of  the  judgment  under appeal and  also that  of the  Full Bench  decision  of  the Kerala High  Court aforesaid.  Learned counsel  pointed  out that the  decision of  the  Allahabad  High  Court  in  Sahu Rajeshwar Nath  [(1964) 54  I.T.R.755[ (which  was dissented from by  the Full  Bench  of  the  Kerala  High  Court)  has actually been  affirmed by this Court in Sahu Rajeshwar Nath v. Income  Tax Officer,  C-Ward Meerut  &  Anr.  [(1969)  72 I.T.R.617] and  that  the  reasoning  and  approach  of  the Allahabad High  Court  and  of  this  Court  is  clearly  at variance with  the reasoning  of the  judgment under appeal. Since  the   respondent-assessee   was   unrepresented,   we requested Mrs.  Ramachandran to assist us in this matter, to which she  has agreed  graceful. We  are  grateful  for  her valuable assistance. Learned counsel supported the reasoning and conclusion of the Madras and Kerala High Courts. Learned counsel submitted  that the  decision of  this Court in Sahu Rajeshwar Nath does not in any manner affect the correctness of the reasoning contained in judgment under appeal.      Clause (23)  of Section  2 of  the Income Tax Act, 1961 [1961 Act]  says that  "’firm’, ’partner’  and ’partnership’ have the  meanings respectively  assigned  to  them  in  the Indian Partnership  Act, 1932;  but the expression ’partner’ shall also  include any  person who, being a minor, has been admitted to  the benefits  of partnership".  [Since  we  are concerned with the position obtaining prior to April 1, 1989 (i.e., prior  to the  introduction of  Section 188-A  by the Direct Tax Laws (Amendment) Act, 1989) We shall refer to the relevant provisions  as they  stood prior to April 1, 1989.] Chapter XVI contains special provisions applicable to firms. Section 182  provides for  assessment  of  registered  firms while Section  183 provides  for assessment  of unregistered firms. Section 184 provides for application for registration and Section  185 proscribes  the procedure to be followed on receipt  of   such  application.   Section  186  deals  with cancelation of  registration. Section  187 to  189 deal with changes in  the constitution  of the firm, succession of one firm by  another and  with  the  dissolution  of  the  firm. Subsection (1)  of Section  187 provides  that "where at the time of  making an  assessment under  section 143 or section 144,  it   is  found  that  a  change  has  occured  in  the constitution of  a firm, the assessment shall be made on the firm as  constituted at  the time  making  the  assessment". Subsection (2)  of Section  187   specifies  what  does  the expression "change  in the constitution of the firm" meaning in the said section.      Section 156 provides for issuance of a notice of demand upon the  assessee specifying the sum payable. If the tax is not paid  pursuant to  the notice  of demand,  it has  to be recovered in  accordance with  the Rules  contained  in  the second Schedule to the Act.      In the  Indian Income Tax Act, 1922 [1992 Act], Section 46  provided  that  the  arrears  of  income  tax  shall  he recovered as  arrears of  land revenue by the Collector. The proviso to  Subsection (2)  provided that "without prejudice to any  other powers  of the  Collector in  this behalf,  he shall, for  the purpose  of recovering the said amount, have the powers  which under the Code of Civil Procedure, 1908 [V

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of 1908],  a Civil court has for the purpose of the recovery of an  amount due  under a  decree......". Sub-Rules (1) and (2) of  Rule 50  of Order  21 of the Code of Civil Procedure prescribe the mode of execution of a decree obtained against a firm. Rule 50 reads:      "50. Execution  of  decree  against      firm.-- (1) Where a decree has been      passed against  a  firm,  execution      may be granted--      (a) against  any  property  of  the      partnership;      (b)  against  any  person  who  has      appeared in his own name under Rule      6 or Rule 7 or Order XXX or who has      admitted on  the pleadings  that he      is, or who has been adjudged to be,      a partner;      (c) against any person who has been      individually served  as  a  partner      with a  summons and  has failed  to      appear;      Provided that  nothing in this sub-      rule shall  be deemed  to limit  or      otherwise affect  the provisions of      Section   30    of    the    Indian      Partnership Act, 1932 (9 of 1932).      (2) Where  the decree-holder claims      to be  entitled to cause the decree      to be  executed against  any person      other than  such  a  person  as  is      referred  to   in   sub-rule   (1),      clauses (b)  and (c),  as  being  a      partner in  the firm,  he may apply      to  the   Court  which  passed  the      decree for  leave,  and  where  the      liability  is  not  disputed,  such      Court may  order that the liability      of  such   person  be   tried   and      determined in  any manner  in which      any issue  in a  suit may  be tried      and determined.      (3)  Where  the  liability  of  any      person   has    been   tried    and      determined under  sub-rule (2), the      order made  thereon shall  have the      same force  and be  subject to  the      same  condition  as  to  appeal  or      otherwise as if it were a decree.      (4) Save as against any property of      the partnership, a decree against a      firm  shall   not  release,  render      liable  or   otherwise  affect  any      partner therein  unless he has been      served with a summons to appear and      answer.      (5)  Nothing  in  this  rule  shall      apply to  a decree passed against a      Hindu undivided family by virtue of      the provisions  of Rule 10 of Order      XXX."      Sections 25  of  the  Partnership    Act  may  also  be referred to  in this  connection. "Every  partner is liable, jointly with  all the other partners and also severally, for all acts  of the  firm done while he is a partner". says the section.

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    The question  in this  case, to  repeat, is whether the respondent who  was a  partner of  the aforesaid firm during the accounting  years relevant  to Assessment  Years 1962-63 and 1963-64 is liable to pay the arrears of tax due from the said firm  notwithstanding his retirement from the said firm on and  with effect  from April  19, 1963.  Before we answer this question, we may well ask which is the provision in the Act which  says liable  to pay  the tax  due from  the  firm which is  continuing. Neither Sri Ahuja, learned counsel for the Revenue,  nor Mrs.  Ramchandran, learned counsel for the assesee, could  point out  any provision  stating  expressly that the  partners are  liable to  pay, whether  jointly  or severally, the  tax due  from the  firm. It is true that the tax due  from the  firm  will  be  recovered  in  the  first instance by  proceeding against  the assets  of the firm but it may  happen that  either the  firm has  no assets  or the assets of the firm are not sufficient to satisfy the demand. In such  a case, can the said demand be enforced against the partners, i.e., against persons who were partners during the period to which the demand relates and who are continuing as partners even  at the  time  of  the  demand  and  recovery. Because thereis  no express provision in the 1961 Act making the partners liable for the tax due from the firm, it is not suggested by  Mrs.Ramachandran -  nor can  it be suggested - that they  are not liable. But then the question immediately arises, under  which provision  are they  being made liable. The answer  obviously is  because of  the very   nature  and characteristics  of  a  partnership  firm  as  explained  in various decisions  of this  Court [See Addanki Narayanppa v. Bhaskara  Krishnappa   (1966  (3)   S.C.R.400)  and  Malabar Fisheries Company  v. Commissioner  of  Income  Tax,  Kerala [(1979) 120  I.T.R.49] and the provisions of the Partnership Act. In  Malabar Fisheries,  this Court discussed the nature and character  of the  Partisanship under the Indian Law and held that  "a  partnership firm under the Indian Partnership Act, 1932,  is not  a distinct  legal entity  apart from the partners constituting it and equally in law the firm as such has *** separate rights of its own in the partnership assets and when  one talks  of the firm’s property or firm’s assets all the is meant is property or assets in which all partners have a  joint or  common interest".  In the  particular, the court held  that Indian  law in  this  respect  is  akin  to English Law  - and  different from  the  Scottish  law  -and quoted several  passage from  Lindley on  Partnership  [12th Edn.] to indicate the relationship between  the firm and the partners. The  following passage from one of the extracts is relevant. It reads:       The  firm  is  not  recognised  by      English lawyers  as  distinct  from      the members composing it. IN taking      partnership   accounts    and    in      administering  partnership  assets,      courts have  to some extent adopted      the mercantile  view,  and  actions      may  now,  speaking  generally,  be      brought by  or against  partners in      the  name   of  their   firm;  but,      speaking  generally,  the  firm  as      such has  no legal recognition. The      law, ignoring  the firm,  looks  to      the  partners   composing  it;  any      change amongst  them  destroys  the      identity  of   the  firm;  what  is      called the  property of the firm is      their property, and what are called

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    the debts  and liabilities  of what      are   called    the    debts    and      liabilities of  the firm  are their      debts  and  their  liabilities.  In      point of law,  a partner may be the      debtor or  the creditor  of his co-      partners, by  the cannot  be either      debtor or  creditor o f the firm of      which he  is himself a members, nor      can be  employed by his firm, for a      man cannot be his own employer."      Sections 25  of the  Partnership Act  expressly  states that every  partner is  liable, jointly  with all  the other partners, and  also severally, for all acts of the firm done while he  is a partner. It is worthy of note that Section 25 does not make a distinction between a continuing partner and an erstwhile  partner. Its  principle is clear and specific, viz., that  every partner  is liable for all the acts of the firm done  while he  is a  partner jointly  along with other partners and  also severally.  If a  continuing  partner  is liable to  pay the  tax due  from the  firm relating  to the period when  he was a partner of the firm, we see no reason, in principle,  to hold that the said liability ceases merely because   partner has  ceased to  be a partner subsequent to the said  period. We  do not  think that  the absence  of  a provision corresponding  to the  proviso to Section 46(2) of the 1922  Act in the present Act [we many remind that we are dealing with  the provisions  obtaining prior  to  April  1, 1989, i.e.,  prior to  the introduction  of  Section  188-A] makes any difference to the position, since the liability of the partners  to pay  the dues of the firm does not arise by virtue of  Order XXI Rule 50 of the Code of Civil Procedure, which is  attracted by  virtue of  the said  proviso, but on account of  the basic  premise mentioned  hereinabove. Order XXI Rule  50 merely  reiterates the  said basic  premise; it does not create a new liability.      In this  connection, it  would be  relevant to refer to the reasoning  of the Allahabad Court in Sahu Rajeshwar Nath [(1964) 5  I.T.R.755].  R.S.Pathak,  J.,  speaking  for  the Bench, observed:      "It is  true that under the Income-      tax law  a firm  is treated  as  an      entity distinct  from its partners,      but  that   is  so   only  for  the      purposes   of    assessment.    The      procedure  relating  to  assessment      concludes when  an assessment order      has been made and the tax liability      consequent upon that assessment has      been determined.  When a  notice of      demand  is   issued  requiring  the      payment of  the tax  liability, the      stage of  assessment has  been left      behind, and with it the distinction      between   the    firm    and    its      partners.....The liability  of  the      partners of  the firm  is joint and      several,  and   it  is  open  to  a      creditor of  the firm to proceed to      recover a  debt the  firm from  any      one or  more of  the  partners.  In      Simon’s Income  Tax (2nd  edition),      volume I  page 337,  paragraph 510,      the law is thus stated:      The tax  assessed in  the firm name

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    is a partnership debt for which all      who were partners a t the time when      the debt was incurred, or have held      themselves out to the Revenue to be      such,  are   jointly  liable,  This      means that  any or all of the those      persons may  be used  for the whole      of   the    tax   due   (when   the      asssessment become  final)  without      reference     to  their  respective      shares   under    the   partnership      agreement’:  See  also  Stevens  v.      Britten [1954] 3 All. E.R.385]."      In our  considered  opinion,  the  aforesaid  statement represents the  correct understanding  of law. In the appeal preferred against  the said judgment (Sahu Rajeshwar Nath v. Income Tax  Officer), the  first  contention  urged  by  the appellant-assessee before  this  Court  was  that  unless  a separate notice  of attachment  is issued in the name of the partner of  the firm,  the  tax  arrears  due  from  an  un- registered firm  cannot be  recoverd from  the partner. This contention was  rejected by  this Court. We are, however not concerned with  this aspect  in this case and, therefore, we need  not   go  into  the  question  whether  there  is  any distinction in  this behalf  between the  1922 Act  and  the present Act.  No contention  was raised in this case that no demand notice  was  served  upon  the  respondent.  We  must presume that  such a  notice was served before attaching his properties. The  second contention  urged on  behalf of  the assessee in the said appeal we that since the certificate or recovery mentions only the arrears of tax due from the firm, they cannot be recovered from the partner. This argument was rejected with  reference to  the proviso to Section 46(2) of the Act  which conferred  upon the Collector the powers of a civil court  in the  matter of  recovery of  the amount  due under a  decree. The court also referred to Rule 50 of Order XXI in  this behalf. And the observed: "In the present case, we see  no reason  why the  Collector should not execute the certificate for  demand of  income-tax against the appellant who admits  that he  was a partners of the unregistered firm for the relevant accounting year.....It is manifest that the provisions of  Order XXI,  Rule 50(2)  apply to  the present case mutatis  mutandis  and  sine  the  appellant  does  not dispute that  he was  a partner of the unregistered firm for the relevant  accounting year,  the Collector could lawfully proceed to  execute the  certificate under  section 46(2) of the Act  against the  appellant and  recover the  income-tax arrears from  him". The above observations cannot be read as holding that  but for  the proviso  to  Section  46(2),  the arrears of  tax due from the partnership cannot be recovered from the partner, for the reasons set out by us in extension hereinabove. The  liability of  a partner to pay the dues of the partnership does not arise from Order XXI Rule 50 C.P.C. but from  the very  nature and  character of  a  partnership firm.      We are  also of  the opinion that the discussion in the judgment of  this Court  in Sahu  Rajeshwar Nath in the para [beginning on  620 and  ending  on  621]  dealing  with  the contention based  upon Section  29 of the 1922 Act cannot be read as  disapproving the  reasoning of  the Allahabad  High Court, quoted  by us  supra. It  is, therefore, not possible for us  to agree with the reasoning of the Full Bench of the Kerala High  Court -  which has been adopted in the judgment under appeal  -   that where  an assessment  is made  on the firm, the  firm alone is the assesee and that any default in

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paying the  tax assessed  in that  of the  firm alone. It is also not  possible for  us to  agree that  merely because  a separate assessment  is made  on the  partner the  liability imposed on  the firm  cannot be  treated as the liability of the individual  partners by importing the general principles of Partnership  Act. In  our opinion, this would be making a distinction between  the firm  and its partners, which is at variance with the accepted notion and, at any rate, does not follow from  the decision  of this  Court in  Sahu Rajeshwar Nath. Similarly,  the reliance  by the  Full Bench  upon the decision of  this Court  in  Income  Tax  Officer  v.  Radha Krishan [66  I.T.R. 590]  is  equally  of  not  avail.  That decisions says  that tax  due from  one partner on his share income cannot  be  recovered  from  the  other  partner.  To repeat, the  firm is  treated as  an entity only for certain purposes. It is not a separate juristic entity distinct from its partners. A firm cannot be equated to a corporate body.      In this  view of the matter, it makes little difference that Section  189(3) is  not attracted  in the  facts of the case to make the respondent liable.      We may  mention  that  by  virtue  of  introduction  of Section  188-a   with  effect   from  April   1,  1989,  the controversy of  the present nature would not arise where the proceedings for  recovery are initiated on or after April 1, 1989. Section 188-A reads:      "Joint  and  several  liability  of      partners for tax payable by firm.      188A. Every  person who was, during      the previous  year, a  partner of a      firm, and  the legal representative      of any such person who is deceased,      shall  be   jointly  and  severally      liable along  with the firm for the      amount of tax, penalty or other sum      payable  by   the  firm   for   the      assessment  year   to  which   such      previous ear  is relevant  and  all      the provisions  of this Act, so far      as  may  be,  shall  apply  to  the      assessment   of    such   tax    or      imposition or  levy of such penalty      or other sum."      This section  explicitly  provides  what  was  implicit hitherto.      For the  above reasons,  these appeal  are allowed, The judgment of  the High Court is set aside. The writ petitions filed by  the respondent  in  the  High  Court  shall  stand dismissed. No order as to costs.