1994 (3) TMI 89 - HC - Income Tax

Summary

Issues Involved:
1. Adjustment of refund due to the firm against the dues of a retired partner.
2. Authority of the assessing officer to adjust the refund under section 182(4) of the Income-tax Act.
3. Validity of the interest demand under section 220(2) of the Income-tax Act.
4. Legality of the garnishee order issued under section 226(3) of the Income-tax Act.

Detailed Analysis:

1. Adjustment of Refund Due to the Firm Against the Dues of a Retired Partner:
The petitioner, a registered partnership firm, contested the adjustment of Rs. 58,663, which was due as a refund to the firm for the assessment year 1988-89, against the individual tax liability of a retired partner, Kanagasabai, for the assessment year 1989-90. The firm argued that this amount should have been adjusted towards its own tax liability for the assessment year 1985-86, thereby nullifying any arrears and preventing the imposition of interest under section 220(2) of the Income-tax Act.

2. Authority of the Assessing Officer to Adjust the Refund under Section 182(4) of the Income-tax Act:
The assessing officer justified the adjustment by claiming that Kanagasabai had a 50% interest in the firm during the relevant assessment years and thus, 50% of the refund amount belonged to him. However, the court ruled that the liability of a partner is distinct from that of the firm, and section 182(4) of the Income-tax Act only allows the firm to retain up to 30% of a partner's share income to cover tax liabilities. The court stated that without invoking section 182(4) and attempting to recover the tax directly from Kanagasabai first, the adjustment was unauthorized.

3. Validity of the Interest Demand under Section 220(2) of the Income-tax Act:
The court found that if the unauthorized adjustment of Rs. 58,663 was reversed and credited towards the firm's tax liability for the assessment year 1985-86, the interest demand under section 220(2) would need to be recomputed. Consequently, the order demanding interest (exhibit P-7) was quashed.

4. Legality of the Garnishee Order Issued under Section 226(3) of the Income-tax Act:
The garnishee order (exhibit P-1) issued to Tamilnadu Mercantile Bank, requiring payment to the first respondent, was also deemed unsustainable as it was based on the unauthorized adjustment. The court thus set aside this notice as well.

Conclusion:
The court quashed the orders (exhibits P-1 and P-7) and the adjustment of Rs. 58,663 due as refund to the petitioner firm against the amounts due from Kanagasabai for the assessment year 1989-90. It directed the recomputation of interest under section 220(2) of the Act after adjusting the amount of Rs. 58,663 as requested by the petitioner. The court also clarified that the first respondent could invoke the provisions of section 182(4) or section 187(1) of the Act after fulfilling the conditions set out by these provisions. No order as to costs was made.