1996 (5) TMI 1 - SC - Income Tax

Retirement of Partner - liability to Tax - held that assessee is liable to pay tax of firm for periods when he was partner

Issues Involved:

1. Liability of an erstwhile partner for tax arrears of a partnership firm.
2. Applicability of Section 189(3) of the Income-tax Act, 1961.
3. Interpretation of Section 25 of the Indian Partnership Act, 1932.
4. Relevance of the absence of a provision similar to the proviso to Section 46(2) of the Indian Income-tax Act, 1922, in the 1961 Act.
5. Joint and several liability of partners under the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Liability of an Erstwhile Partner for Tax Arrears of a Partnership Firm:

The Supreme Court examined whether an erstwhile partner is liable for tax arrears accrued during the period he was a partner. The respondent-assessee retired from the firm on April 19, 1965, and the firm continued with new partners until its dissolution on April 12, 1972. The Income-tax Officer asserted that the respondent was jointly and severally liable for tax arrears for the assessment years 1962-63 and 1963-64. The Madras High Court had ruled that the respondent was not liable, but the Supreme Court overturned this decision, emphasizing that the liability of partners for the firm's acts during their partnership tenure persists even after their retirement.

2. Applicability of Section 189(3) of the Income-tax Act, 1961:

The Madras High Court had held that Section 189(3) was inapplicable since the respondent was not a partner at the time of the firm's dissolution. The Supreme Court, however, clarified that the absence of a provision similar to Section 189(3) does not absolve the erstwhile partner of liability for tax arrears. The Court noted that the liability of partners arises from the nature and characteristics of a partnership firm and the provisions of the Partnership Act, rather than specific sections of the Income-tax Act.

3. Interpretation of Section 25 of the Indian Partnership Act, 1932:

Section 25 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." The Supreme Court emphasized that this section does not distinguish between continuing and erstwhile partners. Thus, a partner's liability for the firm's acts during his tenure continues even after his retirement. The Court rejected the notion that the liability ceases upon retirement, affirming that the fundamental principles of partnership law impose enduring liability on partners for acts done while they were partners.

4. Relevance of the Absence of a Provision Similar to the Proviso to Section 46(2) of the Indian Income-tax Act, 1922, in the 1961 Act:

The Madras High Court had relied on the absence of a provision similar to the proviso to Section 46(2) of the 1922 Act in the 1961 Act to rule that tax arrears could not be recovered from an erstwhile partner. The Supreme Court disagreed, stating that the liability of partners does not stem from procedural rules like Order XXI, Rule 50 of the Civil Procedure Code, but from the inherent nature of partnerships. The Court concluded that the absence of such a provision in the 1961 Act does not affect the liability of partners for tax arrears.

5. Joint and Several Liability of Partners under the Income-tax Act, 1961:

The Supreme Court reaffirmed the joint and several liability of partners for the firm's tax dues, as articulated in various judicial precedents and the Partnership Act. The Court cited the Allahabad High Court's decision in Sahu Rajeshwar Nath v. ITO, which held that partners are jointly liable for the firm's tax debts. The Supreme Court endorsed this view, emphasizing that the firm's tax liability is inherently the liability of its partners. The Court also noted that Section 188A, introduced in 1989, explicitly codifies this principle, but it was implicit in the law even before its introduction.

Conclusion:

The Supreme Court allowed the appeals, setting aside the Madras High Court's judgment and dismissing the writ petitions filed by the respondent. The Court held that an erstwhile partner remains liable for tax arrears of the firm for the period during which he was a partner, based on the fundamental principles of partnership law and the inherent nature of a partnership firm. The decision underscores the enduring joint and several liability of partners for the firm's obligations, irrespective of their subsequent retirement.

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