1978 (10) TMI 38 - SC - VAT and Sales Tax

Whether the three partners can be held liable for the tax assessed against the firm ? Whether the sanction given by the Commissioner for prosecution under section 46(1)(c) is sustainable in law? Held that - Non-payment of tax against a firm cannot be visited on individual partners of the firm. It was only the firm that was assessed for liability for tax for all the three periods. In spite of repeated notices the firm did not pay the assessment or the penalty that was imposed. In the absence of a specific provision as found in s. 18 of the Bombay Act the partners of the firm cannot be held liable for the tax assessed on the firm. On this point, we agree with the High Court that the partners cannot be made liable for the tax assessed on the firm. In the present case, it is seen, under s. 46 before a prosecution can be launched, it is necessary that the assessee should have failed to pay the tax due within the time allowed without reasonable cause. The duty of the Commissioner is, therefore, to be satisfied that the assessee has failed without reasonable cause and without recourse to prosecution under s. 46(1)(c) the tax due cannot be collected. The provisions of s. 22(4A) can be read as being applicable to cases in which the stringent step of prosecution is considered not necessary. The option is with the Commissioner and if he thinks levy of penalty would achieve the purpose of collection of the tax he can have recourse to the provisions of s. 22(4A). Before levying a penalty under s. 22(4-A), the Commissioner shall give reasonable opportunity of being heard as to why the penalty should not be levied. Reading the two provisions harmoniously, we are of the view that the discretion is given to the Commissioner to resort to one of the two remedies as the facts of the case may require. In graver cases, he will be justified in taking the drastic remedy and resorting to prosecution in the criminal court if he is satisfied that such a course is necessary for the collection of the tax expeditiously. On a consideration of the decisions on the point we are satisfied that there is nothing illegal in conferring different procedures on the authorities. Thus the provisions of the Act conferring different procedures for collection of tax cannot be held to be invalid.

Issues Involved:
1. Liability of partners for tax assessed against the firm.
2. Validity of the sanction given by the Commissioner for prosecution under section 46(1)(c) of the Madhya Pradesh General Sales Tax Act, 1958.

Detailed Analysis:

Issue 1: Liability of partners for tax assessed against the firm

The High Court held that the result of non-payment of tax against a firm cannot be visited on individual partners of the firm. The firm was assessed for liability for tax for all three periods, and despite repeated notices, the firm did not pay the assessment or the penalty imposed. The notices of demand were issued in the name of the firm, and the firm failed to deposit the sum as directed. The inspector of sales tax concluded that the dealer had committed an offense under section 46(1)(c) of the Act and sanctioned the prosecution of the three surviving partners of the firm.

The definition of "dealer" under section 2(d) of the Act includes a firm, making it clear that the firm is a separate entity and is a dealer for the purposes of the Act. The firm was deemed to be a registered dealer under section 7(2) of the Act, and the tax due from a registered dealer is assessed separately for each year under section 18. Accordingly, the firm was assessed, and notice was given to the firm.

The Supreme Court in *State of Punjab v. Jullundur Vegetables Syndicate* and *Kapurchand Shrimal v. TRO* established that a firm in a partnership and a Hindu Undivided Family (HUF) are recognized as legal entities, and proceedings can only be taken against the firm or HUF, not against individual partners or members. The absence of a specific provision in the Madhya Pradesh General Sales Tax Act, 1958, similar to section 18 of the Bombay Sales Tax Act, 1959, which makes partners jointly and severally liable, means that partners cannot be held liable for the tax assessed on the firm.

Issue 2: Validity of the sanction given by the Commissioner for prosecution under section 46(1)(c)

The validity of the sanction was questioned on the grounds that the Commissioner has two different procedures for enforcing and realizing the assessment: under sections 22(4-A) and 46(1)(c) of the Act. Section 22(4-A) allows the Commissioner to levy a penalty after giving the dealer a reasonable opportunity of being heard. Section 46(1)(c) provides for punishment with simple imprisonment or fine for failure to pay the tax due within the time allowed, without reasonable cause.

The challenge was that the procedures under section 46 are harsher and more severe than those under section 22(4-A), and there is no guidance provided to the Commissioner as to which procedure to adopt. The Supreme Court in *Maganlal Chhaganlal (P.) Ltd. v. Municipal Corporation of Greater Bombay* and *State of Kerala v. C.M. Francis & Co.* held that when two remedies are available, both can be resorted to at the option of the authorities, unless the statute expressly states otherwise.

The Supreme Court also referred to *Shanti Prasad Jain v. Director of Enforcement* and *Rayala Corporation (P.) Ltd. v. Director of Enforcement, Delhi*, which established that necessary guidance for choosing between procedures can be inferred from the statute's provisions and surrounding circumstances. The court emphasized that the discretion given to high and responsible officers is expected to be exercised fairly and with a sense of responsibility.

The court concluded that the provisions of the Act conferring different procedures for collection of tax cannot be held to be invalid. The Commissioner has the discretion to choose the appropriate remedy based on the facts of the case. In graver cases, the Commissioner is justified in taking the drastic remedy of prosecution if it is necessary for the collection of the tax expeditiously. However, the partners cannot be proceeded with for the collection of arrears of the firm.

Conclusion:
The appeal was dismissed, upholding the High Court's decision that the partners cannot be held liable for the tax assessed on the firm and that the sanction for prosecution given by the Commissioner was valid under the law.

← Previous Next →