1978 (1) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Liability of a retired partner for tax arrears of the firm.
2. Validity of recovery proceedings under the Income Tax Act, 1961.
3. Applicability of Section 25 of the Partnership Act to tax liabilities.

Issue-wise Detailed Analysis:

1. Liability of a Retired Partner for Tax Arrears of the Firm:
The petitioner retired from the firm of M/s. S. S. Sannanna Chettiar & Sons on April 19, 1963. The business continued under a new partnership arrangement. The assessments for the years 1962-63 and 1963-64 were completed after the petitioner's retirement, and the profits were allocated among the partners who constituted the firm before the retirement. The first respondent claimed that the petitioner was jointly and severally liable for the arrears due by the firm for these assessment years. The petitioner contended that he ceased to be a partner and, therefore, was not liable for the arrears at the time of the firm's dissolution on April 12, 1972.

2. Validity of Recovery Proceedings under the Income Tax Act, 1961:
The court examined Sections 185, 187, and 189 of the Income Tax Act, 1961. Section 189(3) specifies that every person who was a partner at the time of such discontinuance or dissolution shall be jointly and severally liable for the amount of tax. The court concluded that the petitioner could not be considered a "defaulter" within the meaning of the Act, as he was not a partner at the time of the firm's dissolution. The assessments were made on the firm, not on individual partners, thus the firm alone was the assessee.

3. Applicability of Section 25 of the Partnership Act to Tax Liabilities:
The court referred to several precedents, including ITO v. C. V. George and P. Balchand v. TRO, which held that recovery proceedings under the Income Tax Act could not be taken against individual partners for the firm's tax liabilities. The court noted that while the petitioner's liability under the Income Tax Act could not be enforced, Section 25 of the Partnership Act, which creates joint and several liability, could still be invoked by the revenue. The court clarified that the right available to the revenue under Section 25 of the Partnership Act against a partner of the firm is preserved.

Conclusion:
The court allowed the writ petition, prohibiting the respondents from taking recovery proceedings against the petitioner under the Income Tax Act, 1961. However, it made it clear that the revenue could proceed against the petitioner for recovery of arrears by invoking Section 25 of the Partnership Act. The court did not award costs due to the peculiar circumstances of the case.