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PETITIONER: INCOME-TAX OFFICER, AGRA

       Vs.

RESPONDENT: RADHA KRISHAN

DATE OF JUDGMENT: 27/04/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V.

CITATION:  1968 AIR   46            1967 SCR  (3) 821  CITATOR INFO :  R          1969 SC 285  (4)

ACT: Indian  Income-tax  Act,  1922, s.  23(5)(a),  26A  and  44- Registered firm-Partners taxed individually on their  shares -- One partner defaulting in payment of tax on his share-Tax so due whether can be recovered from other partners.

HEADNOTE: The respondent was one of the partners in a partnership firm registered under s. 26A of the Indian Income-tax Act,  1922. The   Incometax  Officer  in  making  assessments  for   the assessment  years 1944-45, 1945-46, and 1946-47 and  1947-48 determined the shares of each of the partners and taxed them according  to the provisions of s. 25 (3) (a) of the  Indian Income-tax Act,. 1922.  One of the partners defaulted in the payment of tax and the Income-tax Officer sought to  recover the  unpaid tax attributable to the share of the  defaulting partner  in the firm from the respondent.  The  respondent’s petition tinder Art. 226           challenging the attempted recover  was  allowed by the single Judge  whose  order  was confirmed by  the  Division Bench.  The Revenue  by  special came to this Court. It was urged on behalf of the Revenue that even though by s. 23  (5) (a) the total income of each member of a  registered firm  is  taxed it is the firm which is assessed to  tax  so that the tax attributable to the share of one partner can be recovered  from  another, the responsibility  of  all  being joint and several.  Reliance was also placed on s. 44 of the Act. HELD : (i) Undoubtedly contractual obligations of a firm are enforceable jointly and severally against the partners.  But the  liability to pay income-tax is statutory" it  does  not arise  out  of  any  contract, and  its  incidence  must  be determined by the statute.  If the statute which imposes the liability has not made it enforceable jointly and  severally against  the partners, no such implication can arise  merely because contractual liabilities    (if a firm     may     be jointly     and    severally    imposed     against      the partners.[825E-F] (ii) There is nothing in s. 44 of the Act which supports the

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contention  that  for  payment of  tax  assessed  against  a partner of a registered firm individually under s.  23(5)(a) of  the  Act,  another partner becomes  liable  jointly  and severally with the first partner to pay tax. [825C] The entire scheme of taxing the income of a registered  firm in the hands of the individual partner is inconsistent  with any  assumption that for payment of tax assessed  against  a partner,  other  partners  are  liable.   The  tax  assessed against  a partner of a registered firm is assessed  on  his total  income- inclusive of the share in the  firm’s  income and the rate applicable is determined by the quantum of  the total income of the partners[1825D-E] Commissioner of Income-tax, Madras v. S. V. Angidi Chettiar, 44  I.T.R.  739,  Commissioner  of  Income-tax,  Bomaby   v. Amritlal  Bhogilal  &  Company, 34 I.T.R.  130  and  Shivram Poddar v. lncometax Officer, Central Circle II, Calcutta, 51 I.T.R. 823, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1413 of 1966. 822 Appeal  by special leave from the judgment and  order  dated July 31, 1963, of the Allahabad High Court in Special Appeal No. 205 of 1963. B.   Sen, S. K. Aiyar and R. N. Sachthey, for the appellant. A.   K.  Sen,  J.  P.  Goyal  and  G.  C.  Sharma,  for  the respondent. The Judgment of the Court was delivered by Shah,  J.  A business of manufacture and sale of  tents  was commenced  in 1940 in the name and style of  Messrs  Jawahar Tent  Factory,  Agra,  in  partnership.   There  were   four partners in the firm-Jawahar Lai, Shiam Lal, Radha Raman and Radha Krishan.  Jawahar Lal represented his Hindu  undivided family  and his share in the profit & loss was -/8/-  (eight annas)  in a rupee.  The share of other partners was  -/12/8 (two annas eight pies) each.  The firm was registered  under s.  26A  of  the Indian Income-tax Act, 1922,  and  tax  was assessed on The income of the firm in accordance with s.  23 (5)  (a) of the Act.  The partnership was, according to  the Income-tax Officer, dissolved on October 23, 1946. This  appeal relates to the tax liability of Jawahar Lal  in respect of the income from the firm for the assessment years 1944-45, 1945-46, 1946-47 and 1947-48.  The tax attributable to  the share of Jawahar Lal, which it is claimed could  not be  recovered from him, is sought to be recovered  from  his erstwhile  partner Radha Krishan.  The following table  sets out  the  share of ’the income of Jawahar Lal  and  the  tax liability not satisfied by him in respect of the four  years of assessment : Year  of assessment Share of income of Jawahar Lal from  the firm Tax liability not satisfied      1944-45       47,717           8,623-56      1945-46       53,864           39,416-23      1946-47       35,167           16,92-59      1947-48       19,466           15,163-87                                     79,296-25 The manner in which the tax liability is determined requires some elucidation.  The Hindu undivided family of Jawahar Lal had  considerable  other  income.  In  accordance  with  the provisions of S. 25(3) (a) of the Indian Income-tax Act, the share of Jawahar Lal from the income of the partnership  was added to the other income of the family, and the family  was assessed  to  tax on the total income.  For the  purpose  of

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computing "the tax liability not satisfied" as shown in  the last  column  of the statement set  out  herein-before,  the Income-tax Officer determined the average rate of tax on the total income of the Hindu undivided family and then  applied that  rate  to the share of Jawahar Lal from th˜e  fir˜m  to determine the tax liability attributable to that share.  Tax collected  from Jawahar Lal was credited proportionately  to the 823 income  under  the two heads towards the  tax  liability  so determined,   and   the  tax  liability   of   Jawahar   Lal attributable to his share in the income was computed. The  Income-tax Officer served Radha Krishan  respondent  in this appeal--on October 3, 1962 with demand notices for  the tax   remaining  unpaid  by  Jawahar  Lal.   Radha   Krishan thereupon  moved the High Court of Judicature  at  Allahabad for a writ of certiorari quashing the notices of demand  and for  an order directing the Income-tax Officer  to  withdraw the  notices.  Manchanda, J., allowed the petition filed  by Radha  Krishan  and the order passed by Manchanda,  J.,  was confirmed  in appeal by a Division Bench of the High  Court. With  special  leave,  the  Income-tax  Officer,  Agra   has appealed to this Court. Section  23(5)  of the Income-tax Act, as it  stood  at  the material time, read as follows :               "(5)  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  sub-section  (1),  sub-               section  (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               Provided               Provided further               Provided also               (b)   in the case of an unregistered firm, the               Income-tax Officer may instead of  determining               the sum payable by the firm itself proceed  in               the manner laid down in clause (a)  applicable               to  a registered firm, if in his opinion,  the               aggregate  amount of the tax including  super-               tax,  if  any, payable by the  partners  under               such  procedure  would  be  greater  than  the               aggregate amount which would be payable by the               firm and the partners individually if the firm               were assessed as an unregistered firm. The machinery for assessment to tax the income of a firm  in the  relevant  years of assessment may be noticed.   A  firm under  the Income-tax Act is a unit of assessment;  and  the income  of  the  firm  is  computed  as  that  of  the  unit irrespective of whether the L9SUP.  Cl/67-9 8 24 firm is registered or unregistered, after the income of  the firm is computed if the firm is registered under S. 26A  the share  of  each  partner  in  the  income  of  the  firm  is determined  and is added to his other income and  the  total income  so  computed  is brought to tax.   If  the  firm  is unregistered,  the tax payable by the firm is,  except  when

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the Income-tax Officer otherwise directs in the interests of revenue, determined as in the case of any other entity,  and demand  for tax is made on the firm itself.  The  result  is that  if  the firm is registered tax is collected  from  the partners  individually and there is no levy of  tax  against the firm.  If the firm is unregistered, the tax may,  unless other wise directed, be levied against the firm.  In  either case, the machinery Set up by s. 23 (5) is for assessment of tax  payable on the income of the firm.  The income  of  the firm is computed, but tax is assessed on that income on  the partners  or the firm, according as the income is of a  firm registered  or  unregistered.  Counsel  for  the  Income-tax Officer  contended  that  even  though by  S.  23(5)  (a)  a provision was made for assessment to tax of the total income of  each  member  of  a registered firm  by  adding  to  his separate income the share of the profits of the firm, it  is the  firm  which  is  assessed  to  tax,  and  if  the   tax attributable  to  the share in the income of the firm  of  a partner  cannot be recovered from him, it may  be  recovered from his other partners. Counsel  for  the Income-tax Officer says that  this  is  so because  the liability of the partners of a firm in  respect of all its obligations including the liability to pay tax is joint and several.  Undoubtedly contractual obligations of a firm  are  enforceable  jointly and  severally  against  the partners.  But the liability to pay Incometax is  statutory: it  does  not arise out of any contract, and  its  incidence must  be  determined by the statute.  If the  statute  which imposes  liability has not made it enforceable  jointly  and severally  against  the partners, no  such  implication  can arise  merely because contractual liabilities of a firm  may be jointly and severally enforced against ’the partners. Counsel also relied upon S. 44 of the Income-tax Act, which, as it stood at the relevant time, read 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 the  provisions               of  Chapter IV shall, so far as may be,  apply               to any such assessment."               825 Section 44 is enacted with a view to prevent evasion of  tax by  discontinuance of the business of a firm or  dissolution of  an  association of persons.  On  discontinuance  of  the business  of  a firm or dissolution of  the  association  of persons,  it is declared that 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 and  for  the amount of tax payable. This  Court  has in Commissioner of Income-tax,  Madras  and Anr. v. S. V. Angidi Chettiar(1) held that the provisions of s.  44  of the Income-tax Act apply both to  registered  and unregistered  firms.  But there is nothing in s. 44  of  the Act  which supports the contention that for payment  of  tax assessed against a partner of a registered firm individually under  s.  23(5)  (a) of the Act,  another  partner  becomes

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liable jointly and severally with that first partner to  pay tax.  The entire scheme of taxing the income of a registered firm  in  the hands of individual partners  is  Inconsistent with any assumption that for payment of tax assessed against a  partner,  other partners are liable.   The  tax  assessed against  a partner of a registered firm is assessed  on  his total  income inclusive of the share in the firm income  and the  rate  applicable is determined by the  quantum  of  the total income of the partner.  Section 44 contemplates  cases of joint and several assessment of income of the business of a  firm which is discontinued.  When such an  assessment  is made,  each member of the firm may be liable to pay  jointly and  severally tax payable by the firm.  But when under  the scheme of the Act tax is assessed individually against  each partner,  and  no  tax  is made payable  by  the  firm,  the principle of joint and several liability under s. 44 has  no application. Counsel  for the Commissioner said that this Court  had,  if not expressly tacitly, accepted the view that the  liability of  the  partners of a firm to pay tax attributable  to  the share of each partner in the income of the firm is joint and several.   Counsel relied upon the clause  "determining  the tax   payable   by   registered   and   unregistered   firms respectively" in the judgment of this Court in  Commissioner of Income-tax., Bombay v. Amritlal Bhogilal & Company  2   ) at p. 136;               "It  is  true that the Income-tax  Officer  is               empowered to follow the two methods  specified               in  section 23(5) (a) and (b)  in  determining               the tax payable by registered and unregistered               firms  respectively and making the demand  for               the tax so found due; but this does not affect               the computation of taxable income",               (1) 44 I.T.R. 739.               (2) 34 1,T.R.               130.               8 2 6 and contended that the tax determined to be payable under s. 23 (5) is payable by the firm, and hence by all the partners jointly  and severally.  But in Amritlal Bhogilal’s  case(1) the   Court  was  called  upon  to  determine  whether   the Commissioner  of  Incometax in exercise  of  his  revisional power  may cancel registration of the firm granted under  s. 26A  and  direct  the  Income-tax  Officer  to  make   fresh assessment  of  the firm as an unregistered  firm,  when  an appeal is pending against the order of assessment before the Appellate  Assistant Commissioner.  In making  the  observa- tions relied upon, the Court broadly examined the scheme  of assessment  of  registered firms: it was not stated  by  the court  expressly,  nor  can  it be  implied,  that  for  tax attributable to the share of a partner in a registered firm, the  other  partners are  liable,  notwithstanding  separate assessment under s. 23(5) (a). Reliance  was  then placed upon the  following  observations made by this Court in S. V. Angidi Chettiar’s case(1) ;it p. 744               "Under section 23 (5) of the Indian Income-tax               Act,  before  it was amended in 1956,  in  the               case  of a registered firm the tax payable  by               the  firm  itself  was  not  required  to   be               determined  but  the  total  income  of   each               partner  of  the firm  including  therein  the               share of its income, profits and gains of  the               previous year was required to be assessed  and               the  sum payable by him on the basis  of  such               assessment was to be determined.  But this was

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             merely a method of collection of tax due  from               the firm." In  S.  V. Angidi Chettiar’s case (1) it was held  that  the Incometax  Officer  has power to make an order under  s.  28 imposing  penalty  on a firm even after dissolution  of  the firm.   There  is nothing in the  observations  relied  upon which indicates that under s. 23(5) (a) when the income of a registered  firm  is  computed, and  the  tax  liability  is imposed  by  the machinery provided thereunder, the  tax  is imposed  upon  the  firm  or  is  recoverable  jointly   and severally from the partners of the firm. A  recent case was also relied upon : Shivram Poddar v.  In- come-tax  Officer, Central Circle II, Calcutta and  Anr.(3). In   that   case  it  was  held  that  the  firm,   by   the discontinuance of its business, does not cease to be  liable to  pay tax on the income earned by it; nor can a  procedure different  from  the, one prescribed under Ch.   IV  of  the Income-tax  Act, 1922 apply for assessment of the income  of such  a  firm.   The firm, after  it  has  discontinued  its business,  whether it is dissolved or not, will be  assessed either  under  S. 25(1) in the year of account in  which  it discontinues its business, or in the year of assessment.  In both (1) 34 I.T.R. 130.                                 (2) 44 I.T.R. 739. (3)  51 I.T.R. 823. 827 cases the procedure for assessment is under s. 23(3) and (4) supplemented  by s. 23(5).  The principle of  that  judgment also  has no application to the present case.  Reliance  was placed upon the observation made at p. 828.               "On  the discontinuance of the business  of  a               firm.  however,  by  section 44  a  joint  and               several  liability of all partners  arises  to               pay tax due by the firm." But that obviously means that a joint and several  liability arises when the income of a firm which has discontinued  its business  is  assessed under s. 44.  It does not  mean  that where  the  assessment  is made under s. 23  (5)  (a)  of  a registered firm and the income of each individual partner is assessed,  the partners become jointly and severally  liable to  pay  the aggregate amount of tax attributable  to  their various shares, in their individual assessments. The cases relied upon by counsel for the Income Tax  Officer do not support the claim made by the Income-tax Officer. The appeal fails and is dismissed with costs. G.C.                                            Appeal dismissed. 828