2006 (5) TMI 463 - HC - VAT and Sales Tax

Summary

Issues:
1. Liability of partners for tax assessment
2. Validity of ex parte assessment order

Analysis:

Liability of partners for tax assessment:
The petitioners challenged the assessment order on the grounds that the second petitioner should only be liable for 1/4th of the tax assessed, while the three pro forma-respondents should share the remaining liability. The pro forma-respondents contended that they had retired from the partnership firm in 1988, making the second petitioner the sole proprietor. The court examined the deed of retirement and the letter from the second petitioner to the tax authorities, concluding that the pro forma-respondents had no tax liability from 1988-89 onwards. The court held that the second petitioner, having claimed to be the sole proprietor after the retirement of the other partners, was estopped from disputing their non-liability.

Validity of ex parte assessment order:
The petitioners also challenged the ex parte assessment order, alleging that they were not given a reasonable opportunity to respond. The court found several flaws in the assessment process, including the haste with which the order was passed, lack of supply of relevant documents, and arbitrary increase in turnover assessment without basis. It was argued that the assessment for seven years, even after the firm had closed, was unjustified. The court noted that the order was made without disposing of the petition for cancellation under section 10 of the Act, infringing principles of natural justice. Consequently, the court quashed the assessment order, allowing the State to conduct a fresh assessment within six months, providing the petitioners with a reasonable opportunity to present relevant documents.

In conclusion, the court ruled that the pro forma-respondents had no tax liability from 1988-89 onwards, holding the second petitioner solely responsible for the tax liability until the closure of the firm. The court invalidated the ex parte assessment order due to procedural irregularities and lack of a fair opportunity for the petitioners to respond. The State was permitted to conduct a fresh assessment within six months, ensuring a just and transparent process.