Case: Income-Tax Officer, Agra Vs. Radha Krishan

assessed against a partner of a registered firm individually under Section 23 (5) (a) of the Act, another partner becomes liable jointly and severally with that first partner to pay tax.The entire scheme of taxing the income of a registered firm in the hands of individual partners is inconsistent with any assumption that for payment of tax assessed against a partner, other partners are liable. The tax assessed against a partner of a registered firm is assessed on his total income inclusive of the share in the firms income, and the rate applicable is determined by the quantum of the total income of the partner. Section 44 contemplates cases of joint and several assessment of income of the business of a firm which is discontinued. When such an assessment is made, each member of the firm may be liable to pay jointly and severally tax payable by the firm. But when under the scheme of the Act tax is assessed individually against each partner, and no tax is made payable by the firm, principle of joint and several liability under Section 44 has no application.8. Counsel for the Commissioner said that this Court had, if not expressly tacitly, accepted the view that the liability of the partners of a firm to pay tax attributable to the share of each partner in the income of the firm is joint and several. Counsel relied upon the clause "determining the tax payable by registered and unregistered firms respectively" in the judgment of this Court in Commissioner of Income-tax, Bombay v. Amritlal Bhogilal and Co., 1958-34 ITR. 130 (at p. 136) = (AIR 1958 SC 868 at p. 872);"It is true that the Income-tax Officer is empowered to follow the two methods specified in Section 23 (5) (a) and (b) in determining the tax payable by registered and unregistered firms respectively and making the demand for the tax so found due, but this does not affect the computation of taxable income,"and contended that the tax determined to be payable under Section 23 (5) is payable by the firm, and hence by all the partners jointly and severally. But in Amritlal Bhogilals case, 1958-34 ITR 130 = (AIR 1958 SC 868 ) the Court was called upon to determine whether the Commissioner of Incometax in exercise of his revisional power may cancel registration of the firm granted under Section 26A and direct the Income-tax Officer to make fresh assessment of the firm as an unregistered firm, when an appeal is pending against the order of assessment before the Appellant Assistant Commissioner. In making the observations relied upon, the Court broadly examined the scheme of assessment of registered firms; it was not stated by the court expressly, nor can it be implied, that for tax attributable to the share of a partner in a registered firm the other partners are liable, notwithstanding separate assessment under Section 23 (5) (a).9. Reliance was then placed upon the following observations made by this Court in S. V. Angidi Chettiars Case, 1962-44 ITR 739 (at p. 744) = (AIR 1962 SC 970 at p. 974)."Under Section 23 (5) of the Indian Income-tax Act, before it was amended in l956 in the case of a registered firm the tax payable by the firm itself was not required to be determined but the total income of each partner of the firm including therein the share of its income, profits and gains of the previous year was required to be assessed and the sum payable by him on the basis of such assessment was to be determined. But this was merely a method of collection of tax due from the firm."In S. V. Angidi Chettiars case, 1962-44 ITR 739 = (AIR 1962 SC 970 ) it was held that the Income-tax Officer has power to make an order under Section 28 imposing penalty on a firm even after dissolution of the firm. There is nothing in the observations relied upon which indicates that under Section 23 (5) (a) when the income of a registered firm is computed and the tax liability is imposed by the machinery provided thereunder the tax is imposed upon the firm or is recoverable jointly and severally from the partners of the firm.10. A recent case was also relied upon Shivram Podar v. Income-tax Officer, Central Circle II, Calcutta, 1964-51 ITR 823 = (AIR 1964 SC 1095 ). In that case it was held that the firm, by the discontinuance of its business, does not cease to be liable to pay tax on the income earned by it; nor can a procedure different from the one prescribed under Ch. IV of the Income-tax Act 1922, apply for assessment of the income of such a firm. The firm after it has discontinued its business, whether it is dissolved or not, will be assessed either under S. 25 (1) in the year of account in which it discontinues its business, or in the year of assessment. In both cases the procedure for assessment is under Section 23 (3) and (4) supplemented by Section 23 (5). The principle of that judgment also has no application to the present case. Reliance was placed upon the observation made at p. 828 (of ITR) = (at p. 1098 of AIR)."On the discontinuance of the business of a firm, however, by Section 44 a joint and several liability of all partners rises to pay tax due by the firm."But that obviously means that joint and several liability arises when the income of a firm which has discontinued its business is assessed under Section 44. It does not mean that where the assessment is made under Section 23 (5) (a) of a registered firm and the income of each individual partner is assessed, the partners becomes jointly and severally liable to pay the aggregate amount of tax attributable to their various shares, in their individual assessments.(11) The cases relied upon by counsel for the Income Tax Officer do not support the claim made by the Income-tax Officer.(12)

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 0

Reasoning from the judgment:
0[ds]Undoubtedly, contractual obligations of a firm are enforceable jointly and severally against the partners.But the liability to pay income-tax is statutory; it does not arise out of any contract, and its incidence must be determined by the statute. If the statute which imposes liability has not made it enforceable jointly and severally against the partners, no such implication can arise merely because contractual liabilities of a firm may be jointly and severally enforced against theentire scheme of taxing the income of a registered firm in the hands of individual partners is inconsistent with any assumption that for payment of tax assessed against a partner, other partners are liable. The tax assessed against a partner of a registered firm is assessed on his total income inclusive of the share in the firms income, and the rate applicable is determined by the quantum of the total income of the partner. Section 44 contemplates cases of joint and several assessment of income of the business of a firm which is discontinued. When such an assessment is made, each member of the firm may be liable to pay jointly and severally tax payable by the firm. But when under the scheme of the Act tax is assessed individually against each partner, and no tax is made payable by the firm, principle of joint and several liability under Section 44 has nois nothing in the observations relied upon which indicates that under Section 23 (5) (a) when the income of a registered firm is computed and the tax liability is imposed by the machinery provided thereunder the tax is imposed upon the firm or is recoverable jointly and severally from the partners of theboth cases the procedure for assessment is under Section 23 (3) and (4) supplemented by Section 23 (5). The principle of that judgment also has no application to the presentthat obviously means that joint and several liability arises when the income of a firm which has discontinued its business is assessed under Section 44. It does not mean that where the assessment is made under Section 23 (5) (a) of a registered firm and the income of each individual partner is assessed, the partners becomes jointly and severally liable to pay the aggregate amount of tax attributable to their various shares, in their individualThe cases relied upon by counsel for the Income Tax Officer do not support the claim made by the Income-tax Officer.