1987 (8) TMI 54 - HC - Income Tax

Summary

Issues Involved:

1. Realization of tax liability from individual properties of partners.
2. Status of petitioners as "assessees in default."
3. Legality and jurisdiction of the Department's actions.
4. Application of Section 52 of the Transfer of Property Act.
5. Requirement of fresh notice of demand after reduction in tax assessment.

Detailed Analysis:

1. Realization of Tax Liability from Individual Properties of Partners:

The petitioners argued that the tax liability of the dissolved firm, M/s. Raghunandan Prasad Manoharlal, should not be realized from their individual properties. They contended that the Department should sell the firm's property, specifically shop No. 116 at Sarafa Market, Meerut, to recover the tax dues. The Department countered that the petitioners, as partners, are liable to pay the tax standing against the firm and justified their actions based on the provisions of section 189(3) of the Income-tax Act, 1961, which establishes joint and several liability for partners of a dissolved firm. However, the court found that the tax liability of the firm cannot be realized from the petitioners' individual properties unless they are held as "assessees in default."

2. Status of Petitioners as "Assessees in Default":

The petitioners claimed they were not "assessees in default" and thus, their individual properties could not be attached or sold, nor could they be arrested for the firm's tax liability. The court agreed, referencing the Mysore High Court ruling in P. Balchand v. TRO [1974] 95 ITR 321, which stated that tax recovery from partners is only permissible if they are explicitly mentioned as defaulters in the recovery certificate. The court also cited a Division Bench of the Allahabad High Court in Brij Ratan Lal Bhoop Kishore v. Addl. CIT [1983] 139 ITR 906, which held that the Tax Recovery Officer cannot proceed against partners' personal properties unless they are assessed as "assessees in default."

3. Legality and Jurisdiction of the Department's Actions:

The petitioners argued that the Department's actions were arbitrary, unreasonable, and contradictory, thus mala fide. The Department maintained that their actions were lawful and within jurisdiction. The court, however, concluded that the Department's actions were not in accordance with the law because the petitioners were not assessed as "assessees in default" under sections 182 and 183 of the Income-tax Act, 1961. Therefore, the notices under rule 73 of the Second Schedule and the order under rule 32 of the Second Schedule were beyond the Tax Recovery Officer's powers.

4. Application of Section 52 of the Transfer of Property Act:

The Department cited Section 52 of the Transfer of Property Act, arguing that the property in question could not be sold due to pending litigation. The court noted that the plaintiffs in the suit claimed only a half share in the property, and thus, the doctrine of lis pendens did not apply to the other half. The court held that the Department should proceed against the firm's property for tax recovery.

5. Requirement of Fresh Notice of Demand after Reduction in Tax Assessment:

The petitioners contended that no fresh notice of demand was served after the tax assessment was reduced on appeal. The court dismissed this argument, referencing the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, and Supreme Court rulings which clarified that no fresh notice is required after a reduction or enhancement of tax in appeal.

Conclusion:

The court concluded that the petitioners were not "assessees in default" and thus their individual properties should not be proceeded against. The Department's actions were beyond their jurisdiction. The writ petitions were allowed, and the petitioners were granted reliefs (i) to (iv) as claimed, including quashing the notices and orders under rule 73 and rule 32 of the Second Schedule to the Income-tax Act, 1961. The court also awarded costs to the petitioners.