1966 (1) TMI 2 - HC - Income Tax

Firm - order determining and quantifying liability of the firm u/s. 187 - held thattax assessed on a partner can not be recovered from the firm without an order determining and quantifying the liability of the firm

Issues Involved:
1. Applicability of proviso (ii) to section 187(1) of the Income-tax Act, 1961.
2. Inclusion of tax payable in respect of the share income of Hariprasad.
3. Rate of tax applicable to the share income of Bajranglal.
4. Requirement of an order determining the liability of the firm before issuing demand notices under section 156 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of proviso (ii) to section 187(1) of the Income-tax Act, 1961:
The petitioner contended that proviso (ii) to section 187(1) was not applicable to the assessment year 1956-57 as there was no reconstitution of the firm at the time of the assessment for that year. The assessment for 1956-57 was made on 13th January 1960, and at that time, the firm had not been reconstituted. The court noted that the petitioner conceded during arguments that the firm had been reconstituted at the time the assessment order for 1956-57 was made. Therefore, this issue was resolved in favor of the revenue, confirming that the firm was reconstituted at the relevant time, making proviso (ii) to section 187(1) applicable.

2. Inclusion of tax payable in respect of the share income of Hariprasad:
The petitioner argued that the tax demanded included the tax payable in respect of the share income of Hariprasad, which had been included in the total income of his father, Bajranglal, without any averment that the tax could not be recovered from Hariprasad. The court recognized this as a disputed question of fact that required further inquiry. The department's contention was that Hariprasad was a benamidar for Bajranglal, and thus, the income earned by Hariprasad was actually the income of Bajranglal. This matter was not conclusively resolved and was left for further determination by the Income-tax Officer.

3. Rate of tax applicable to the share income of Bajranglal:
The petitioner contended that the proportionate tax claimed from the firm was based on the rate applicable to Bajranglal's total income, which included income from other sources, resulting in a higher tax rate. The court held that the tax assessed on a partner, when it cannot be recovered from the partner, is recoverable from the firm as per the language of the second proviso to section 187(1). The court rejected the petitioner's argument, stating that the revenue is entitled to recover the proportionate tax in respect of the share income from the firm, irrespective of the rate at which the share income alone would have been taxed.

4. Requirement of an order determining the liability of the firm before issuing demand notices under section 156 of the Income-tax Act, 1961:
The petitioner argued that no order had been made determining the firm's liability for the tax payable by Bajranglal, and thus, the Income-tax Officer was not competent to issue demand notices under section 156. The court agreed, stating that an order must be made after hearing the firm, deciding the contentions raised by the firm, and quantifying the amount to be recovered from the firm. The court emphasized that the requirements of section 156 were not fulfilled, and a further order determining the firm's liability under section 187 was necessary before issuing demand notices. The court quashed the demand notices and remanded the matter back to the Income-tax Officer for further proceedings in accordance with the law.

Conclusion:
The court allowed the petition, quashing the five demand notices issued under section 156 of the Income-tax Act, 1961, and remanded the matter back to the Income-tax Officer for further proceedings, ensuring compliance with the principles of natural justice and proper determination of the firm's liability.

← Previous Next →