1979 (12) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice issued u/s 226(3) of the I.T. Act, 1961.
2. Liability of the petitioner to pay income-tax dues.
3. Effect of protective assessments when the income is included in another firm's assessment.
4. Recovery of tax from partners of an unregistered firm.
5. Issuance of tax recovery certificate u/s 222 of the Act.

Summary of Judgment:

1. Validity of the Notice Issued u/s 226(3) of the I.T. Act, 1961:
The petitioner challenged the validity of the notice issued u/s 226(3) of the I.T. Act, 1961, directing respondent No. 3 firm to pay any amount due to the petitioner towards his alleged tax liability. The notice was upheld in revision by the Commissioner.

2. Liability of the Petitioner to Pay Income-Tax Dues:
The petitioner contended that he was not liable to pay the income-tax dues as claimed by the Department. He argued that the assessment of respondent No. 5, which included the income of respondent No. 4 (a benamidar), had become final, nullifying the protective assessments against respondent No. 4. The petitioner also claimed to have given notice u/s 30(5) of the Partnership Act, 1932, electing not to become a partner in the firm upon attaining majority.

3. Effect of Protective Assessments:
The court examined the effect of protective assessments, particularly when the income covered by those assessments was included in the assessment of respondent No. 5. The court noted that the protective assessments would cease to be operative if the income was included in another firm's assessment. The court cited the Supreme Court case of Lalji Haridas v. ITO [1961] 43 ITR 387, which allowed protective assessments to avoid income going untaxed due to pending enquiries. However, the court concluded that since the income of respondent No. 4 was included in respondent No. 5's assessment, the protective assessments against respondent No. 4 were nullified.

4. Recovery of Tax from Partners of an Unregistered Firm:
The petitioner argued that even if the protective assessments were enforceable, they were against an unregistered firm, and tax could not be recovered from the partners. The Department contended that tax could be recovered from the partners under s. 289(d) of the Act. The court did not find it necessary to address this issue in detail, given its conclusion on the protective assessments.

5. Issuance of Tax Recovery Certificate u/s 222 of the Act:
The petitioner alleged that the recovery proceedings were bad as no tax recovery certificate was issued u/s 222 of the Act. This contention was not pressed during arguments as the Department confirmed that tax recovery certificates had been issued against respondent No. 4 firm.

Conclusion:
The court held that the petitioner was not liable to pay any tax based on the protective assessments against respondent No. 4, as these assessments had become nullities. The impugned notice dated March 25, 1977, and the revisional order dated May 27, 1977, were quashed. No recovery of tax on the basis of these documents should be effected. The petition was allowed, and the rule was made absolute with no order as to costs.