The judgment of the court was delivered by
B. 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 pertaining to the period when he was a partner. The Madras High
Court has 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, 1965. On his
retirement, the firm was continued by taking in two new partners. The said firm
too was dissolved with effect from April 12, 1972. The assessments for the
assessment years 1962-63 and 1963-64 were completed 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 his retirement.] 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 accounting 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
reconstituted partnership alone is responsible for paying the said arrears. The
Income-tax Officer did not agree with the respondent's 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 relying upon and following the decision of a
Full Bench of the Kerala High Court in ITO v. C. V. George [1976] 105 ITR 144
which dissented from the decision of the Allahabad High Court in Sahu Rajeshwar
Nath v. ITO [1964] 54 ITR 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 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, 1922, the arrears
of tax due from the firm cannot be recovered from an erstwhile partner.
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's case [1964] 54
ITR 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. ITO [1969] 72
ITR 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 gracefully. 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's case [1969]
72 ITR 617 does not in any manner affect the correctness of the reasoning
contained in the judgment under appeal.
Clause (23) of section 2 of the Income-tax Act, 1961, 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
188A 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
prescribes the procedure to be followed on receipt of such application. Section
186 deals with cancellation of registration. Sections 187 to 189 deal with
changes in the constitution of the firm, succession of one firm by another and
with dissolution of the firm. Sub-section (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 occurred in the constitution of a firm, the
assessment shall be made on the firm as constituted at the time making the
assessment". Sub-section (2) of section 187 specifies what the expression
"change in the constitution of the firm" means 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, section 46 provided
that the arrears of income-tax shall be recovered as arrears of land revenue by
the Collector. The proviso to sub-section (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 [5 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 of 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 grant such leave, or, where such
liability is disputed, 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 an
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 conditions 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."
Section 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.
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 the 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 that the
partners [i.e., continuing partners] are liable to pay the tax due from the firm
which is continuing. Neither learned counsel for the Revenue, nor Mrs.
Ramachandran, learned counsel for the assessee, 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 there is no express
provisions 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 Narayanappa v. Bhashara Krishnappa [1966]
AIR 1966 SC 1300 ; [1966] 3 SCR 400 and Malabar Fisheries Co, v. CIT [1979] 120
ITR 49) and the provisions of the Partnership Act. In Malabar Fisheries' case,
this, court discussed the nature and character of the partnership 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 no separate rights of its own in the
partnership assets and when one talks of the firm's property or firm's assets
all that is meant is property or assets in which all partners have a joint or
common interest". In particular, the court held that Indian law in this
respect is akin to English Law---and different from the Scottish law---and
quoted several passages 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 the debts and liabilities of the firm are their debts and their
liabilities. In point of law, a partner may be the debtor of the creditor of his
co-partners, but he cannot be either debtor or creditor of the firm of which he
is himself a member, nor can he be employed by his firm, for a man cannot be his
own employer."
Section 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 a partner has cease 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 may remind ourselves that we are dealing with the provisions obtaining prior
to April 1, 1989, i.e., prior to the introduction of section 188A) 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 High Court in Sahu Rajeshwar Nath v. ITO [1964] 54
ITR 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 of 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 is a partnership
debt for which all who were partners at the time when the debt was incurred, or
who have held themselves out to the Revenue to be such, are jointly liable. This
means that any or all of those persons may be sued for the whole of the tax due
(when the assessment becomes final), without reference to their respective
shares under the partnership agreement' : See also Stevens v. Britten [1954] 3
All ER 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. ITO), 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 unregistered firm cannot be recovered 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 was that since the certificate of 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 then observed (page 622 of 72 ITR) : " 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 partner 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 since 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 extenso hereinabove. The liability of
a partner to pay the dues of the partnership does not arise from Order XXI, rule
50 of the Civil Procedure Code, 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's case [1969] 72 ITR 617 in the
paragraph (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. 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 assessee and that any default in paying the tax
assessed is 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 the Partnership Act. In our
opinion, this would be making a distinction between the firm and its partners,
which is at variance with the accepted notions and, at any rate, does not follow
from the decision of this court in Sahu Rajeshwar Nath's case [1969] 72 ITR 617.
Similarly, the reliance by the Full Bench upon the decision of this court in ITO
v. Radha Krishan [1967] 66 ITR 590 is equally of no avail. That decision only
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 the introduction, of section
188A with effect from April 1, 1989, a controversy of the present nature would
not arise where the proceedings for recovery are initiated on or after April 1,
1989. Section 188A reads :
" 188A. joint and several liability of partners for
tax payable by firm.---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 year 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 appeals 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
