The core legal questions considered by the Tribunal in these appeals revolve around the validity of issuance and service of statutory notices under section 148 of the Income Tax Act, 1961, to a dissolved partnership firm; the consequent jurisdiction of the Assessing Officer (AO) to proceed with reassessment under section 147; and the proper procedure for assessing tax liability in the context of a dissolved firm under the provisions of the Indian Partnership Act, 1932 and section 189 of the Income Tax Act. Specifically, the issues include:
1. Whether the notice under section 148 issued to the partnership firm was valid and properly served, given that all partners had expired prior to issuance of the notice, effectively dissolving the firm by operation of law.
2. Whether the AO had jurisdiction to proceed with reassessment proceedings against a non-existent entity and whether the assessment order passed on the legal heir of only one partner without impleading all legal heirs of deceased partners was valid.
3. Whether the CIT (Appeals) erred in confirming the reassessment and rejecting the rectification application under section 154, despite the alleged procedural and jurisdictional defects.
4. The applicability and interpretation of section 189(3) of the Income Tax Act regarding joint and several liability of legal representatives of deceased partners and the requirement of impleading all such legal representatives in the reassessment proceedings.
5. The validity of imposing interest under sections 234A and 234C on the appellant in the context of the disputed assessment.
Issue-wise Detailed Analysis:
Issue 1: Validity of Notice under Section 148 and Service Thereof on a Dissolved Partnership Firm
Legal Framework and Precedents: Section 148 mandates that a valid notice must be served on the assessee before reassessment proceedings under section 147 can be initiated. The Supreme Court has held that service of notice is a condition precedent to valid reassessment (Y. Narayana Chetty v. ITO; CIT v. Thayaballi Mulla Jeevaji Kapasi; CIT v. Kurban Hussain Ibrahimji Mithiborwala). Notices issued to a non-existent entity are without jurisdiction (CIT v. Spice Infotainment Ltd.; PCIT v. Maruti Suzuki India Ltd.). Section 189(3) of the Income Tax Act imposes joint and several liability on legal representatives of deceased partners but requires their impleadment in proceedings.
Court's Interpretation and Reasoning: The Tribunal noted that at the time of issuance of the notice under section 148 (dated 08.03.2018), all partners of the firm had expired, resulting in the dissolution of the partnership by operation of law under section 42-C of the Indian Partnership Act, 1932. The firm had last filed returns for AY 2010-11, and no returns were filed thereafter. The AO issued the notice to the firm without impleading the legal heirs of all deceased partners, relying only on the participation of one legal heir during survey proceedings.
The Tribunal emphasized that the existence of the firm as a legal entity ceased on the death of all partners and that the AO failed to verify this fact before issuing the notice. The notice was thus issued to a non-existent entity, which is not permissible under law. The AO also failed to serve notice on all legal representatives as mandated by section 189(3), violating the statutory procedure and principles of natural justice.
Key Evidence and Findings: The survey proceedings and impounding order were in the name of the firm, but notices under section 131 were issued only to one legal heir. The last surviving partner died on 02.10.2017, before the notice under section 148 was issued. Objections were raised by legal heirs against service of notice on a non-existent entity, which were ignored by the AO without passing a speaking order.
Application of Law to Facts: The Tribunal applied the principle that reassessment cannot proceed without valid service of notice on the proper person. Since the firm was dissolved, the AO was required to serve notice on all legal heirs of deceased partners jointly and severally liable under section 189(3). Failure to do so rendered the notice invalid and the reassessment proceedings void.
Treatment of Competing Arguments: The Revenue argued that participation of one legal heir in survey proceedings validated the notice and reassessment. The Tribunal rejected this, holding that participation does not amount to valid service or representation of the dissolved firm, especially when other legal heirs were neither impleaded nor served.
Conclusion: The notice under section 148 was invalid as it was issued to a non-existent entity and not properly served on all legal heirs. The reassessment proceedings initiated thereon were without jurisdiction.
Issue 2: Jurisdiction of AO to Proceed with Reassessment and Validity of Assessment Order Passed on One Legal Heir
Legal Framework and Precedents: Section 189(3) mandates joint and several liability of all legal representatives of deceased partners. The AO must implead all such representatives and provide opportunity of hearing. The Supreme Court and various High Courts have held that assessment proceedings against a dissolved firm must be conducted against all legal heirs collectively.
Court's Interpretation and Reasoning: The Tribunal found that the AO failed to implead all legal heirs and passed the assessment order solely against the legal heir of one partner. This was contrary to the mandatory statutory requirement. The CIT (Appeals) upheld the AO's order without appreciating this fundamental legal principle.
Key Evidence and Findings: Objections were filed by multiple legal heirs, but only one was made party to the proceedings. No notices were issued to other legal heirs. The AO did not pass any speaking order on objections raised.
Application of Law to Facts: The Tribunal held that the AO lacked jurisdiction to pass an assessment order against a single legal heir without impleading others. The assessment order was thus invalid and liable to be quashed.
Treatment of Competing Arguments: The Revenue contended that the legal heir who participated was sufficient to represent the firm. The Tribunal rejected this, emphasizing the mandatory nature of joint and several liability and the necessity to implead all legal heirs.
Conclusion: The assessment order passed on the legal heir of only one partner without impleading others was invalid and without jurisdiction.
Issue 3: Rejection of Rectification Application under Section 154
Legal Framework and Precedents: Rectification under section 154 is meant to correct apparent mistakes or errors in orders. Courts have held that where there is a jurisdictional defect or fundamental illegality, rectification is warranted.
Court's Interpretation and Reasoning: The Tribunal observed that the CIT (Appeals) rejected the rectification application without proper consideration of the submissions regarding invalid notice and jurisdictional defects. Given the fundamental errors in the reassessment proceedings, the Tribunal found the rejection improper.
Key Evidence and Findings: The rectification application raised issues of invalid notice, non-service, and non-impleadment of legal heirs, all of which were ignored by the CIT (Appeals).
Application of Law to Facts: The Tribunal held that the rectification application deserved to be allowed in view of the jurisdictional defects and invalidity of the reassessment proceedings.
Treatment of Competing Arguments: The Revenue defended the rejection, but the Tribunal found the defense untenable in light of settled law.
Conclusion: The rejection of the rectification application was erroneous and set aside.
Issue 4: Interpretation and Application of Section 189(3) of the Income Tax Act
Legal Framework and Precedents: Section 189(3) provides that all persons who were partners at the time of dissolution and their legal representatives shall be jointly and severally liable for tax, penalty, or other sums payable. This imposes a mandatory requirement to involve all such persons in assessment proceedings.
Court's Interpretation and Reasoning: The Tribunal underscored the mandatory nature of the provision, stating that "shall be" denotes a compulsory obligation, and "jointly and severally liable" necessitates impleading all legal heirs. The AO's failure to do so violated the statutory mandate and principles of natural justice.
Key Evidence and Findings: The AO did not issue notices to all legal heirs nor provide them opportunity to be heard.
Application of Law to Facts: The Tribunal held that the AO's proceedings were void for non-compliance with section 189(3).
Treatment of Competing Arguments: The Revenue's approach was found inconsistent with the statutory scheme and judicial precedents.
Conclusion: The assessment proceedings without impleading all legal heirs were invalid under section 189(3).
Issue 5: Validity of Interest Imposed Under Sections 234A and 234C
Legal Framework and Precedents: Interest under sections 234A and 234C is contingent on valid assessment and tax liability.
Court's Interpretation and Reasoning: Since the reassessment order was quashed for lack of jurisdiction and invalid notice, consequential interest imposed under these sections could not be sustained.
Key Evidence and Findings: Interest was imposed based on the invalid assessment order.
Application of Law to Facts: The Tribunal held that interest could not be sustained as the foundational assessment order was void.
Treatment of Competing Arguments: The Revenue's contention to uphold interest was rejected.
Conclusion: Interest under sections 234A and 234C was not justified.
Significant Holdings:
"The provisions of section 148 of the Income tax Act, 1961 prescribe the service of a valid notice under section 148 on the assessee before making the assessment, reassessment or re-computation under section 147 of the Act, a valid service of a valid notice under section 148 of the Act, is not a mere procedural requirement, but is a condition precedent to the validity of any assessment, reassessment or re-computation to be made under section 147 of the Act and it is so because of the use of words 'shall serve on the assessee' and also the requirement to the effect 'before making the assessment, reassessment or re-computation under section 147' in the section itself, meaning thereby that if no notice under section 148 is issued or if the notice so issued is shown to be invalid, or the service of notice so issued, is shown to be invalid, the learned Assessing officer cannot proceed with the subsequent proceedings for making assessment, reassessment or re-computation under section 147 of the Act. In other words, if the learned Assessing officer, in such circumstances, proceeds with the subsequent proceedings, the same will be illegal and void."
"Section 189(3) of the Income Tax Act, 1961 provides that every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable... The word used here 'shall be' connotes mandatory nature and 'jointly and severally' connotes necessity to bring on record all legal representatives for the assessment etc."
"Issuance of notice to a company which is ceased to exist would be without jurisdiction."
"The AO failed to prove with any evidence that statutory notice u/s 148 was served upon the assessee or its authorized agent... The assessment order passed on the legal heir of only one partner without impleading others was invalid and without jurisdiction."
"Objections raised by the assessee against issuance of notice u/s 148 have to be dealt with by AO through speaking order which has not been done in this case."
The Tribunal set aside the orders of the CIT (Appeals), quashed the notice under section 148 and all subsequent proceedings, and allowed the appeals of the assessee on the grounds of invalid notice, lack of jurisdiction, and non-compliance with statutory provisions relating to dissolved partnership firms and their legal heirs.