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TMI Blog1974 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... m. The petitioners allege that soon after its constitution, the firm took several contracts with the railway department for construction of buildings. When the firm was reconstituted in September, 1970, the work under these contracts was going on. The reconstituted firm took over the assets and liabilities of the previous firm, including the existing contracts. For the assessment year 1971-72 (accounting period ending on January 31, 1971) the firm filed a return on February 22, 1972, showing a total income of Rs. 78,648. The firm was assessed for this year on an income of Rs. 1,09,602 on March 22, 1972. It was also granted registration by a separate order of the same date. The assessment order shows that petitioners Nos. 1 and 2 were recognised as the partners of the firm, while petitioners Nos. 3 and 4 were recognised as having been admitted to its benefits. The petitioners' case is that in April, 1971, differences arose amongst the partners. The four petitioners formed one group, while the remaining partners, headed by Sri L. K. Ahuja, formed another group. The partnership firm is alleged to have been dissolved on April 30, 1971. Sri L. K. Ahuja formed a fresh firm with effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------- 1970-71 1971-72 Adv. Tax Adv. Tax ---------------------------------------------------------------------------------------------- 1. M/s. L.K. Ahuja & Co. (Firm) 12,551 7,500 ..... 2. Shri L.K Ahuja (Lal Chand) 17% 521 4,317 42,757 20% 3,297 3. Shri S.K. Ahuja (Shreechand) 6% 693 1,329 40,000 5% 768 4. Shri Kanhaiya Lal (Ex-partner) 10% 426 ... ... ... ... 5. Shri Dhruva Kumar 10% 250 1,302 20,000 5% 768 6.Shri S.K. Ahuja & Co. ... 3,639 ... ... ... 7. Shri Chandra Kumar 10% 50 1,204 15,000 5% 768 8. Shri Ashok Kumar 8% ... 433 10,000 10% 1,536 9. Miss Ashu Kumari (Ex-partner) 8% ... 433 ... ... ... 10. Miss. Shashikala 8% ... 433 10,000 8% 1,237 11. Shri Shankar Lal (Ex-partner) 8% ... 433 ... ... ... 12. Shri Hola Ram (Ex-partner) ... 187 845 ... ... ... 13. Shri Ambrat Lal (Ex-partner) ... 1,469 ... ... ... 14. Shrimati Sundaribai ... ... ... 10% 1,536 15. Shri Behari Lal ... ... ... 10% 1,536 16. Shri Mewal Das ... ... ... 10% 1,536 17. Master Ravi Kumar ... ... ... 6% 920 18. Master Inder Kumar ... ... ... 6% 920 19. Miss Reshma ... ... ... 5% 768 ----- ------- -------- ------ 2,127 28,388 1,45,257 15,590 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners requested the ITO not to make any refunds, but he was reluctant to accede to this prayer. The petitioners state that the sum attached and recovered by the ITO belonged to the firm as it stood till April 30, 1971, when the four petitioners were its partners, and the same could not, in the circumstances, be validly attached and recovered at the instance of one group of partners. The petitioners have challenged the validity of the notice issued under s. 226(3) of the I.T. Act for recovery of the amount due from the railway department on the following grounds: (i) No demand of tax or of advance tax, either against the firm or any of its partners being in arrear on April 22, 1972, and no recovery certificate having been issued till then, the ITO had no jurisdiction to issue the notice under section 226(3). (ii) Moneys belonging to the firm could not, in law, be utilised for adjusting the demand, if any, due from the partners. The material provisions of section 226 of the Income-tax Act, 1961, are: " (1) Notwithstanding the issue of a certificate to the Tax Recovery Officer under section 222, the Income-tax Officer may recover the tax by any one or more of the mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same would be true with respect to the tax demand for the assessment year 1971-72, payable by the partners of this firm. Neither the firm nor the partners were, therefore, in arrears in respect of the tax demand due for the assessment year 1971-72. There is no averment that any tax demand due from the firm or from its partners for any prior period was in " arrears ". The ITO has, in his counter-affidavit, stated that the assessment of the firm and its partners for subsequent years is still pending. It could not hence be said that the firm or the partners were in arrears in respect of any tax demand. In view of ss. 208 and 209 of the I.T. Act, 1961, an individual is not liable to pay advance tax if his total income of the latest previous year in respect of which he has been assessed by way of regular assessment does not exceed Rs. 30,000. In the latest assessment order, which was for the year 1971-72, the income of the firm, namely, Rs. 1,09,602, was allocated to the various partners of this firm as follows : -------------------------------------------------------------------------------- | 1st Period 2nd Period | (1-2-70 to 31-8-70) (1-9-70 to 31-1-71) Names of partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalty/interest/fine. Even the notice did not mention that any sum is due from the firm or its partners towards advance tax. From the adjustments made by the ITO, as mentioned by him in para. 32 of the counter-affidavit, it appears that sum of Rs. 1,45,257 was adjusted towards advance tax for the year 1971-72, and a sum of Rs. 15,590 was adjusted by him as advance tax payable for the financial year 1972-73. He was not competent to issue the notice nor to make these recoveries by adjustments. In the next place, it was argued on behalf of the petitioners that moneys belonging to a partnership firm could not, in law, be utilised for paying personal tax liabilities of the partner. From the adjustments effected by the ITO it is evident that a sum of Rs. 12,551 was adjusted towards the tax liability of the firm, while Rs. 7,500 were adjusted towards advance tax due from the firm. Apart from this, a sum of about Rs. 20,000, which had been adjusted in relation to the dues of the firm, the balance out of Rs. 1,91,362 was adjusted against the tax or advance tax payable personally by the individual partners. In Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, the Supreme Court, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be recovered from the assets of the firm, but the jurisdiction to so " recover " accrues only when the tax demand cannot be recovered from a partner. Section 226 provides a mode of recovery by adopting the coercive method mentioned in it. This mode can be resorted to only when it is found that the tax assessed upon a partner cannot be recovered from him. In the present case, the time for payment of the tax demand had not even expired. It is no one's case that the ITO was, when he issued the notice under s. 226, satisfied that the tax assessed upon the partners cannot be recovered from them. So even if we proceed on the assumption that there was change in the constitution of the firm, the action of applying s. 226 was invalid. Section 189 of the I.T. Act provides for dissolution of a firm. Subsection (3) thereof provides that every person who was at the time of its dissolution a partner of the firm shall be jointly and severally liable for the amount of tax payable by the firm, but there is no provision like the second proviso to s. 187(1) that the tax liability of individual partners can, in the case of a dissolved firm, be recovered from the assets of the firm. Our attention w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tachment of this money from the railway authorities, he did not require them to satisfy him that the amount sought to be attached belonged to the existing firm and that the erstwhile partners had no interest in them. He does not appear to have even applied his mind to this problem. This is evident from the counter-affidavit in which the ITO refused to admit the assertion made by the petitioners that this amount was the income of the firm as it existed till April 30,1971, but did not say that he was satisfied that this amount belonged to the firm as it existed on or after May 1, 1971. This coupled with the fact that the adjustments made by him were mostly of imaginary and unascertained future liabilities, shows that the man was not acting as an ITO, but as a banker carrying out the instructions of a depositor. Having failed in their attempt to get the small demands adjusted, the petitioners have come to this court with the prayer that the action under s. 226(3) itself being incompetent and void, the notice be quashed and direction for the refund of the entire amount be issued. In view of the legal position, the respondents have no escape from these prayers. The petitioners in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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