1976 (2) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Liability of partners for tax assessed on the firm under the Income-tax Act, 1961.
2. Interpretation of Section 25 of the Indian Partnership Act in relation to the Income-tax Act.
3. Applicability of Supreme Court precedents on the liability of partners for firm's tax dues.
4. Enforcement of tax recovery from partners based on firm's tax liability.

Issue-wise Detailed Analysis:

1. Liability of partners for tax assessed on the firm under the Income-tax Act, 1961:
The primary issue was whether partners of a registered firm could be proceeded against for recovery of tax assessed on the firm under the Income-tax Act, 1961. The court examined exhibits P-1 and P-3, where the Tax Recovery Officer claimed that partners were jointly and severally liable for the firm's tax dues. However, the court found that the liability for tax assessed on the firm did not extend to the partners under the Income-tax Act, 1961.

2. Interpretation of Section 25 of the Indian Partnership Act in relation to the Income-tax Act:
The revenue argued that Section 25 of the Indian Partnership Act, which states that "every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner," should be read into the Income-tax Act. The court rejected this argument, stating that the liability of partners under the Partnership Act did not translate to a liability under the Income-tax Act. The court emphasized that the liability to pay income-tax is statutory and must be determined by the statute itself, not by importing provisions from other laws.

3. Applicability of Supreme Court precedents on the liability of partners for firm's tax dues:
The court referred to the Supreme Court decision in Sahu Rajeshwar Nath v. Income-tax Officer, which clarified that the liability of partners for tax assessed on the firm arises under the Partnership Act and not under the Income-tax Act. The court reiterated that the phrase "other person liable to pay" in Section 29 of the Indian Income-tax Act, 1922, and the corresponding Section 156 of the Income-tax Act, 1961, should be construed as "other person liable to pay under the Income-tax Act." Therefore, the liability cannot be extended to partners based on the Partnership Act.

4. Enforcement of tax recovery from partners based on firm's tax liability:
The court noted that under the Income-tax Act, assessments could be made either on the firm as such or on the partners individually. When only the firm is assessed, it is the firm that is considered the assessee and liable for the tax. The court disagreed with the view that a notice of demand issued in the name of the firm is a demand upon the partners. The court held that the partners would only become liable if there were separate assessments on them. The court also pointed out the absence of a provision in the Income-tax Act, 1961, similar to Rule 50 of Order XXI of the Civil Procedure Code, which was present in the Indian Income-tax Act, 1922, and allowed proceedings against partners for firm's tax dues.

Conclusion:
The court dismissed the appeal, holding that the partners of a registered firm could not be proceeded against for the recovery of tax assessed on the firm under the Income-tax Act, 1961. The court directed that the parties bear their own costs.