1958 (12) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Liability of a partner for income-tax assessed on an unregistered firm.
2. Applicability of Section 44 of the Indian Income-tax Act.
3. Validity of recovery proceedings initiated without a notice of demand under Section 29.
4. Jurisdiction to initiate recovery proceedings under Section 46(2).

Detailed Analysis:

1. Liability of a Partner for Income-Tax Assessed on an Unregistered Firm:
The petitioner, a partner in the firm "Unni & Co.", contested the recovery of income-tax due from the firm. The firm was assessed as an unregistered entity for the assessment year 1953-54, with a tax liability of Rs. 70,206-10-0. The petitioner argued that the firm, being an unregistered entity, was assessed separately from its partners, and hence, he could not be held liable for the firm's tax dues. The court noted that under the Income-tax Act, an unregistered firm is treated as a separate unit for taxation purposes, distinct from its partners. This principle was supported by the Supreme Court's ruling in Ravulu Subba Rao v. Commissioner of Income-tax, which stated that an unregistered firm is assessed as a unit, and the partners are not directly liable for the firm's tax.

2. Applicability of Section 44 of the Indian Income-tax Act:
The Department contended that Section 44 of the Act, which deals with the discontinuance of a business by a firm, applied to the case. According to Section 44, upon discontinuance, every person who was a partner at the time becomes jointly and severally liable for the firm's tax. The court examined a letter from the firm's auditor indicating that the firm had ceased business and was contemplating dissolution, thereby attracting Section 44. The court held that the petitioner, being a partner at the time of discontinuance, was liable under Section 44 to pay the tax assessed on the firm before its discontinuance.

3. Validity of Recovery Proceedings Initiated Without a Notice of Demand Under Section 29:
The petitioner argued that no notice of demand under Section 29 was served on him, which is a prerequisite for initiating recovery proceedings under Section 46(2). The court agreed, noting that Section 29 requires the Income-tax Officer to serve a notice of demand on the person liable to pay the tax. The petitioner, although liable under Section 44, had not been served with such a notice, and thus, could not be deemed an assessee in default under Section 45. Consequently, the recovery proceedings initiated against him were deemed invalid.

4. Jurisdiction to Initiate Recovery Proceedings Under Section 46(2):
The court examined whether the Collector could initiate recovery proceedings under Section 46(2) without the petitioner being an assessee in default. The Government Pleader argued that the notice served on the firm was sufficient for all partners and likened the situation to executing a decree against a firm under the Code of Civil Procedure. The court rejected this argument, emphasizing that an unregistered firm under the Income-tax Act is a separate entity from its partners, unlike a firm under the Code of Civil Procedure. The court concluded that without a notice of demand served on the petitioner, the proceedings under Section 46(2) lacked jurisdiction.

Conclusion:
The writ petition was allowed, and a writ of mandamus was issued, directing the respondents to refrain from recovering the tax from the petitioner based on the certificate issued against the firm. The court clarified that this order did not exonerate the petitioner from his liability to pay the tax but prevented recovery under the current proceedings. The respondents were free to take other lawful steps for tax recovery. No order as to costs was made.