1976 (9) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of Union of India to relief under section 189(3) of the Income-tax Act, read with sections 226(4) and 2(7).
2. Liability of partners for dues of the firm under general partnership law.
3. Priority of government claims over other creditors.
4. Jurisdiction of the court to order payment to the government from sale proceeds held by the Sheriff.

Issue-wise Detailed Analysis:

1. Entitlement of Union of India to Relief under Section 189(3) of the Income-tax Act:
The Union of India argued that the ex-partners of the dissolved firm were liable for the firm's tax dues under section 189(3) of the Income-tax Act, which states that upon dissolution, the partners are jointly and severally liable for the firm's tax dues. The court examined whether the firm had indeed dissolved or discontinued and whether the ex-partners were liable as "assessees" under section 2(7) of the Act. The court noted that the firm had been assessed for various tax years and penalties were imposed, with notices of demand served. The court found sufficient material to conclude that the firm had dissolved and the ex-partners were liable under section 189(3).

2. Liability of Partners for Dues of the Firm under General Partnership Law:
The court considered the general law of partnership, which holds that partners are jointly and severally liable for the firm's debts, including tax liabilities. The court noted that under the general law, the individual partners could be proceeded against for the firm's tax dues without the need for separate notices of demand on each partner. This liability exists independently of the Income-tax Act provisions, reinforcing the partners' responsibility for the firm's tax dues.

3. Priority of Government Claims over Other Creditors:
The Union of India contended that its claim for tax dues should take priority over other creditors, including decree-holders. The court referred to the principle that government claims for taxes have priority over unsecured creditors. This principle was upheld in previous cases such as Manickam Chettiar v. Income-tax Officer and Raja Jagadish Pratap Sahi v. State of U.P., where it was established that the government could claim priority for tax dues from funds held by the court. The court affirmed that the government's claim was paramount and should be satisfied first from the sale proceeds held by the Sheriff.

4. Jurisdiction of the Court to Order Payment to the Government from Sale Proceeds:
The court examined whether it had the jurisdiction to direct the Sheriff to pay the government's claim from the sale proceeds. It referred to section 226(4) of the Income-tax Act, which allows the Income-tax Officer to apply to the court for payment of money belonging to the assessee. The court also considered section 232 of the Act, which clarifies that the modes of recovery specified in the Act do not affect other laws or the government's right to institute a suit for recovery. The court concluded that it had the jurisdiction to order the payment of the government's claim from the sale proceeds, as this was a preferential claim.

Conclusion:
The appeal by the Union of India was allowed, and the application for payment from the sale proceeds was granted. The court directed the Sheriff of Calcutta to pay the Union of India's claim of Rs. 7,49,062.42 from the sale proceeds of the premises. The judgment of the trial judge was set aside, and no order as to costs was made, with the costs of the decree-holder to be added to his claim.