1959 (2) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 44 of the Income-tax Act.
2. Validity of the assessment order passed after the dissolution of the firm.
3. Competence of the Income-tax Officer to recover tax from the petitioners.
4. Requirement of notice under Section 29 of the Income-tax Act for recovery proceedings.

Detailed Analysis:

1. Applicability of Section 44 of the Income-tax Act:
The petitioners challenged the notice on the ground that Section 44 of the Income-tax Act was inapplicable as the business of the assessee firm had not been discontinued but had been succeeded by one of the partners. The court noted that the Income-tax Department contended that there had been discontinuity of the business, thus justifying the application of Section 44. However, the court did not find it necessary to decide on the applicability of Section 44, focusing instead on the validity of the notice and subsequent proceedings.

2. Validity of the Assessment Order Passed After the Dissolution of the Firm:
The petitioners argued that the assessment order was illegal and without jurisdiction as it was passed after the firm's dissolution. The court acknowledged that the assessment order dated 22nd February 1949, was passed when the firm had already been dissolved on 7th February 1948. However, the court upheld the preliminary objection that it could not question the validity of the order under Article 226 of the Constitution since the order was passed before the Constitution came into force and had attained finality. The court cited the Supreme Court's principle that judicial orders passed before the Constitution's enactment could not be challenged retrospectively.

3. Competence of the Income-tax Officer to Recover Tax from the Petitioners:
The petitioners contended that the Income-tax Officer had agreed to realize the tax from the partners in proportion to their shares and was not competent to recover the entire amount from them. The court noted that the assessment was made on the firm as an entity, not on the partners individually. Consequently, the ordinary procedure would have been to issue a notice under Section 29 to the firm, which was not possible post-dissolution. The court did not pronounce on whether Section 44 or the Partnership Act provisions could be applied to hold the partners liable, focusing instead on the procedural validity of the recovery notice.

4. Requirement of Notice Under Section 29 of the Income-tax Act for Recovery Proceedings:
The court emphasized that before taking any recovery proceedings, a notice under Section 29 should have been served on the petitioners. Such a notice was necessary to treat the petitioners as "other persons liable to pay tax" and to initiate proceedings under Sections 45 and 46 of the Income-tax Act. The court found that no such notice was served, rendering the recovery proceedings invalid. The court restrained further action under the notice dated 4th November 1955, on this ground, without deciding the other legal questions raised by the petitioners.

Conclusion:
The court allowed the petition to the extent that a writ of mandamus was issued, restraining the Income-tax Officer from taking any recovery proceedings under the notice dated 4th November 1955. The court clarified that this order would not prevent the Income-tax Officer from taking other lawful proceedings for tax recovery. Each party was directed to bear its own costs, and the fee for counsel on each side was fixed at Rs. 500.