Judgment Case ID: 2211

Judgment:
Appeal No. 1413 of 1966. 822 Appeal by special leave from the judgment and order dated July 31	 1963	 of the Allahabad High Court in Special Appeal No. 205 of 1963. B. Sen	 section K. Aiyar and R. N. Sachthey	 for the appellant. A. K. Sen	 J. P. Goyal and G. C. Sharma	 for the respondent. The Judgment of the Court was delivered by Shah	 J. A business of manufacture and sale of tents was commenced in 1940 in the name and style of Messrs Jawahar Tent Factory	 Agra	 in partnership. There were four partners in the firm Jawahar Lai	 Shiam Lal	 Radha Raman and Radha Krishan. Jawahar Lal represented his Hindu undivided family and his share in the profit & loss was /8/ (eight annas) in a rupee. The share of other partners was /12/8 (two annas eight pies) each. The firm was registered under section 26A of the Indian Income tax Act	 1922	 and tax was assessed on The income of the firm in accordance with section 23 (5) (a) of the Act. The partnership was	 according to the Income tax Officer	 dissolved on October 23	 1946. This appeal relates to the tax liability of Jawahar Lal in respect of the income from the firm for the assessment years 1944 45	 1945 46	 1946 47 and 1947 48. The tax attributable to the share of Jawahar Lal	 which it is claimed could not be recovered from him	 is sought to be recovered from his erstwhile partner Radha Krishan. The following table sets out the share of 'the income of Jawahar Lal and the tax liability not satisfied by him in respect of the four years of assessment : Year of assessment Share of income of Jawahar Lal from the firm Tax liability not satisfied 1944 45 47	717 8	623 56 1945 46 53	864 39	416 23 1946 47 35	167 16	92 59 1947 48 19	466 15	163 87 79	296 25 The manner in which the tax liability is determined requires some elucidation. The Hindu undivided family of Jawahar Lal had considerable other income. In accordance with the provisions of section 25(3) (a) of the Indian Income tax Act	 the share of Jawahar Lal from the income of the partnership was added to the other income of the family	 and the family was assessed to tax on the total income. For the purpose of computing "the tax liability not satisfied" as shown in the last column of the statement set out herein before	 the Income tax Officer determined the average rate of tax on the total income of the Hindu undivided family and then applied that rate to the share of Jawahar Lal from th~e fir~m to determine the tax liability attributable to that share. Tax collected from Jawahar Lal was credited proportionately to the 823 income under the two heads towards the tax liability so determined	 and the tax liability of Jawahar Lal attributable to his share in the income was computed. The Income tax Officer served Radha Krishan respondent in this appeal on October 3	 1962 with demand notices for the tax remaining unpaid by Jawahar Lal. Radha Krishan thereupon moved the High Court of Judicature at Allahabad for a writ of certiorari quashing the notices of demand and for an order directing the Income tax Officer to withdraw the notices. Manchanda	 J.	 allowed the petition filed by Radha Krishan and the order passed by Manchanda	 J.	 was confirmed in appeal by a Division Bench of the High Court. With special leave	 the Income tax Officer	 Agra has appealed to this Court. Section 23(5) of the Income tax Act	 as it stood at the material time	 read as follows : "(5) Notwithstanding anything contained in the foregoing sub sections	 when the assessee is a firm and the total income of the firm has been assessed under sub section (1)	 sub section (3)	 or sub section (4) as the case may be. (a) in the case of a registered firm	 the sum payable by the firm itself shall not be determined but the total income of each partner of the firm	 including therein his share of its income	 profits and gains of the previous year	 shall be assessed and the sum payable by him on the basis of such assessment shall be determined Provided Provided further Provided also (b) in the case of an unregistered firm	 the Income tax Officer may instead of determining the sum payable by the firm itself proceed in the manner laid down in clause (a) applicable to a registered firm	 if in his opinion	 the aggregate amount of the tax including super tax	 if any	 payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm. The machinery for assessment to tax the income of a firm in the relevant years of assessment may be noticed. A firm under the Income tax Act is a unit of assessment; and the income of the firm is computed as that of the unit irrespective of whether the L9SUP. Cl/67 9 8 24 firm is registered or unregistered	 after the income of the firm is computed if the firm is registered under section 26A the share of each partner in the income of the firm is determined and is added to his other income and the total income so computed is brought to tax. If the firm is unregistered	 the tax payable by the firm is	 except when the Income tax Officer otherwise directs in the interests of revenue	 determined as in the case of any other entity	 and demand for tax is made on the firm itself. The result is that if the firm is registered tax is collected from the partners individually and there is no levy of tax against the firm. If the firm is unregistered	 the tax may	 unless other wise directed	 be levied against the firm. In either case	 the machinery Set up by section 23 (5) is for assessment of tax payable on the income of the firm. The income of the firm is computed	 but tax is assessed on that income on the partners or the firm	 according as the income is of a firm registered or unregistered. Counsel for the Income tax Officer contended that even though by section 23(5) (a) a provision was made for assessment to tax of the total income of each member of a registered firm by adding to his separate income the share of the profits of the firm	 it is the firm which is assessed to tax	 and if the tax attributable to the share in the income of the firm of a partner cannot be recovered from him	 it may be recovered from his other partners. Counsel for the Income tax Officer says that this is so because the liability of the partners of a firm in respect of all its obligations including the liability to pay tax is joint and several. Undoubtedly contractual obligations of a firm are enforceable jointly and severally against the partners. But the liability to pay Incometax 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 'the partners. Counsel also relied upon section 44 of the Income tax Act	 which	 as it stood at the relevant time	 read as follows "Where any business	 profession or vocation carried on by a firm or association of persons has been discontinued	 or where an association of persons is dissolved	 every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall	 in respect of the income profits and gains of the firm or association	 be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall	 so far as may be	 apply to any such assessment. " 825 Section 44 is enacted with a view to prevent evasion of tax by discontinuance of the business of a firm or dissolution of an association of persons. On discontinuance of the business of a firm or dissolution of the association of persons	 it is declared that every person who was	 at the time of such discontinuance or dissolution	 a partner of such firm or a member of such association shall	 in respect of the income	 profits and gains of the firm or association be jointly and severally liable to assessment and for the amount of tax payable. This Court has in Commissioner of Income tax	 Madras and Anr. vs section V. Angidi Chettiar(1) held that the provisions of section 44 of the Income tax Act apply both to registered and unregistered firms. But there is nothing in section 44 of the Act which supports the contention that for payment of tax 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 firm 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	 the principle of joint and several liability under section 44 has no application. 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 vs Amritlal Bhogilal & Company 2 ) at p. 136; "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"	 (1) (2) 34 1	T.R. 130. 8 2 6 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 Bhogilal 's case(1) 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 Appellate Assistant Commissioner. In making the observa tions 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). Reliance was then placed upon the following observations made by this Court in section V. Angidi Chettiar 's case(1) ;it p. 744 "Under section 23 (5) of the Indian Income tax Act	 before it was amended in 1956	 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 section V. Angidi Chettiar 's case (1) it was held that the Incometax 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. A recent case was also relied upon : Shivram Poddar vs In come tax Officer	 Central Circle II	 Calcutta and Anr.(3). 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 section 25(1) in the year of account in which it discontinues its business	 or in the year of assessment. In both (1) (2) (3) 827 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. "On the discontinuance of the business of a firm. however	 by section 44 a joint and several liability of all partners arises to pay tax due by the firm. " But that obviously means that a 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 become jointly and severally liable to pay the aggregate amount of tax attributable to their various shares	 in their individual assessments. The cases relied upon by counsel for the Income Tax Officer do not support the claim made by the Income tax Officer. The appeal fails and is dismissed with costs. G.C. Appeal dismissed.

Summary:
The respondent was one of the partners in a partnership firm registered under section 26A of the Indian Income tax Act	 1922. The Incometax Officer in making assessments for the assessment years 1944 45	 1945 46	 and 1946 47 and 1947 48 determined the shares of each of the partners and taxed them according to the provisions of section 25 (3) (a) of the Indian Income tax Act	. One of the partners defaulted in the payment of tax and the Income tax Officer sought to recover the unpaid tax attributable to the share of the defaulting partner in the firm from the respondent. The respondent 's petition tinder article 226 challenging the attempted recover was allowed by the single Judge whose order was confirmed by the Division Bench. The Revenue by special came to this Court. It was urged on behalf of the Revenue that even though by section 23 (5) (a) the total income of each member of a registered firm is taxed it is the firm which is assessed to tax so that the tax attributable to the share of one partner can be recovered from another	 the responsibility of all being joint and several. Reliance was also placed on section 44 of the Act. HELD : (i) 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 the liability has not made it enforceable jointly and severally against the partners	 no such implication can arise merely because contractual liabilities (if a firm may be jointly and severally imposed against the partners.[825E F] (ii) There is nothing in section 44 of the Act which supports the contention that for payment of tax 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 the first partner to pay tax. [825C] The entire scheme of taxing the income of a registered firm in the hands of the individual partner 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 firm 's income and the rate applicable is determined by the quantum of the total income of the partners[1825D E] Commissioner of Income tax	 Madras vs section V. Angidi Chettiar	 	 Commissioner of Income tax	 Bomaby vs Amritlal Bhogilal & Company	 and Shivram Poddar vs lncometax Officer	 Central Circle II	 Calcutta	 	 distinguished.