1960 PLP 526 (PTD)

The petitioner contends that the assessee in the case was the unregistered firm of Unni & Co., which was assessed as a separate entity distinct from its partners, that, therefore, he, one of the partners, could not be said to be either an assessee or a person liable to pay the tax assessed on the firm, and that even on the assumption that he could be said to be either an assessee or a person liable to pay the tax, no notice of demand under section 29 having been served upon him, proceedings for recovery of the tax could not have been validly initiated against him and further, that the collector acting under the certificate issued under section 46(2) could proceed to recover the tax only from the assessee named in the certificate and from no other. In the counter affidavit filed on behalf of the first respondent the allegations of fact made by the petitioner in his affidavit were accepted as substantially correct and true, but his legal conten tions were described as untenable. A supplemental affidavit was subsequently filed on behalf of the first respondent in which it is stated that by virtue of a letter received by the Department on January 9, 1956, from the auditor of the firm, the provisions of section 44 of the Act were attracted to the circumstances of the case and that, therefore, it was open to the authorities to proceed against individual partners of the erstwhile firm to recover the tax levied on the firm. Neither the letter nor the accuracy of its contents are denied on behalf of the petitioner, but it is argued that it does not have the legal effect contended for by the Department. It will be convenient first to decide what exactly is the legal effect of the letter mentioned above. In the said letter it is clearly stated " the firm has not done any business for the assessment year under review (1955‑56) and the firm is not also having any idea of carrying on the business any further and that the same is going to be dissolved shortly". It is clear, therefore, that it was not a mere suspension of business. The firm had no idea of continuing the business at all. In fact it was contemplating dissolution. There is no suggestion that the business is going to be taken over by some other person or firm. It was not, therefore, a case of succession to the business of the firm either. The conclusion is inevitable that the situation was one of total cessation or stoppage of business. It would, therefore, be discontinuance within meaning of section

44. Taking up now the first contention of the petitioner, viz., that the assessee was the firm and not he or any of its partners, there can be no doubt that the common law idea that a firm is not a juristic person and that the term " firm " is merely a compendious expression to designate collectively the partners constituting it, does not apply in all its force to an assessment under the Income‑tax Act. That Act treats the firm as a unit for the purpose of taxation. This has been the consistent view taken in regard to assessment of firms under the Income‑tax Act. Their Lordships of the Supreme Court in Ravulu Subba Rao v. Commissioner of Income‑tax ((1956) 30 I T R 163, 171) clearly state as follows: "Thus under section 3 of the Act the charge is imposed on the total income of a firm, the partners as such being out of the picture, and accordingly under section 23 of the Act, the assessment will be on the firm on its total profits. Section 23(5) enacts an exception to this in the case of firms registered, under the Act . . . . If a firm is registered, it ceases to be a unit for purposes of taxation and the profits earned by it are taken, in accordance with the general law of partnership, to have been earned by the individual partners according to their shares, and they are taxed on their individual income including their shares of profits . . . . Thus, registration confers on the partners a benefit to which they would not have been entitled but for section 26‑A." It is clear, therefore, that an unregistered firm is a unit for assessment under the Income‑tax Act having a separate status and existence distinct and different from its partners. The assessment is imposed on the firm itself and not on the partners. To obviate the difficulty likely to arise on account of the disappearance of the assessee firm itself before the time comes for assessment or for collection of tax, the Legislature has enacted section

44. That section, so far as is material reads as follows: "Where any business, profession or vocation carried on by a firm . . . has been discontinued . . . every person who was at the time of such discontinuance . . . a partner of such firm . . . shall, in respect of the income, profits and gains of the firm . . . 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." The learned counsel on behalf of the petitioner contends that the section imposes on the partners only a single liability to assessment and that the liability for payment of tax is solely a liability which follows upon such assessment. In other words, his interpretation of the section is that a partner of a firm, which has discontinued business, will be liable to pay only if the assessment is also made on him, but that if the assessment had been made on the firm itself before the discontinuance, he is not liable to pay the tax assessed on the firm. The learned Government Pleader has relied upon a decision of the Madras High Court in Chengalvaroya Chettiar v. Commissioner of Income‑tax ((1937) 5 I T R 70) in which their Lordships of the Madras High Court say that the term " tax payable " under the section means tax which the firm or partner ship would be liable to pay if it had not been discontinued,‑tax either found to be due already or that will be found to be due in future. The learned counsel for the petitioner, however, states that the Madras case was decided before the amendment in 1939 when section 44 was differently worded. That wording was as follows: "Where any business, profession or vocation carried on by a firm has been discontinued, every person who was at the time of such discontinuance a member of such firm shall be jointly and severally liable for the amount of the tax payable in respect of income, profits and gains of the firm." The argument before the Madras High Court in that case was that the term "tax payable" meant "payable as a result of an assessment already made upon the firm" and that after disconti nuance an assessment cannot for the first time be made on the partners. Subsequently, section 44 was amended so as to state expressly the liability of the partners to assessment after discon tinuance. In our opinion the clear intention behind the amend ment was to give effect to the opinion expressed by the Full Bench of the Madras High Court by clarifying the wording of the section and it is too much to expect, as the learned counsel for the petitioner wants us to do, that the Legislature intended to take away from the Department a privilege which according to the ruling of the Madras High Court it undoubtedly had under the un-amended section. We, therefore, hold that by virtue of section 44 the petitioner, who was undoubtedly a partner of Unni & Co. at the time of the discontinuance of its business, is liable under section 44 to pay the tax assessed on the firm before discontinuance. This conclusion, however, is not sufficient to conclude the case in favour of the Department. It is clear from sections 45 and 46 of the Act dealing with recovery of tax that proceedings under section 46 (2) could be initiated only against an assessee in default. Section 45 states when an assessee is to be treated as an assessee in default. According to that section, any amount specified as payable in a notice of demand under section 29 should be paid within the time mentioned therein and that any assessee failing to pay shall be deemed to be in default. Section 29 reads as follows: "When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable." Section 2 (2) defines an assessee in the following terms "`Assessee' means a person by whom income‑tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustain ed by him or of the amount of refund due to him." It is not contended that any proceedings of the nature describ ed in the said definition have been taken in respect of the petitioner He would be an assessee only as a person by whom the tax is payable under section 44 of the Act. The highest that can be said, therefore, of the petitioner is that he must be taken to be an assessee by virtue of his liability to pay tax under section

44. No notice under section 29 having been admittedly issued to him, he cannot be said to have failed to pay the amount demanded in the notice and cannot, therefore, be described as an assessee in default. Hence prima facie there was no jurisdiction to initiate recovery proceedings against him under section

46. The learned Government Pleader, however, tries to meet this argument in two ways. Firstly, he states the notice of demand under section 29 admittedly served on the firm is sufficient notice to all the partners. He relies upon a judgment of the Madras High Court in Kumaraswami Chettiar v. Additional Income‑tax Officer, I Circle, Madurai ((1957) 31 I T R 457). The ruling does not in our opinion help him. In that case notice under section 34 of the Act was served long after the dissolution of the association. That notice was served on the petitioner himself in that case, who returned it stating that it should be served on another person who was manag ing the business as the principal officer of the association. After the assessment, a notice of demand was served on the petitioner himself and the only argument was that it was not a valid notice because it was not accompanied by the assessment form. Their Lordships distinguished the judgment of the Calcutta High Court in Manindra Lal Goswami v. Income‑tax Officer ((1956) 30 I T R 550), on the ground that in the Calcutta case no notice of demand had been served on any party and that in the absence of any such demand, proceed ings for recovery of the tax froth individual partners individually was not valid. The alternative argument of the learned Govern ment Pleader is that under section 46 (2) the Collector has all the powers which under the Code of Civil Procedure a Civil Court has for the purpose of recovery of an amount due under a decree. He, therefore, contends that just as an executing Court can under rule 50 of Order XXI of the Code of Civil Procedure; execute a decree passed against a firm even against a partner individually, so also the Collector under section 46 (2) of the Income‑tax Act acting under a certificate for recovery of tax due from a firm can recover the tax from the partners individually. This argument, however, is not available because under Order XXX of the Code of Civil Procedure partners of a firm may sue or be sued in the name of their firm and, therefore, the firm name is merely a des cription, the actual parties being the partners themselves. A decree against a firm, therefore, is really a decree against all the partners individually. Such a situation, however, is not available under the Income‑tax Act under which an unregistered firm is assessed as a separate entity distinct from its partners. The learned Government Pleader also pressed upon us the rule of construction that although charging provisions of a taxing statute should receive strict interpretation, provisions which really deal with the machinery for assessment or collection of tax should receive a construction which makes the machinery workable. There can be no quarrel with this rule of construction but when a statute provides a machinery for collection of tax, if the authorities or officers charged with working that machinery do not take the necessary steps which put the machinery in motion, Courts cannot be asked to say in the name of liberal construction that the machinery is nevertheless put in motion any more than it can be said that a car is in motion if the driver presses the accelerator with out switching on the engine. The essential pre‑requisite of initiating proceedings for recovery, viz., the issue of a notice of demand under section 29, not having been complied with, it is impossible to hold that the Income‑tax Officer has set in motion the machinery for collection. In the result this writ petition is allowed and a writ of manda mus will issue directing the respondents to forbear from proceeding to recover from the petitioner any portion of the tax due under the assessment order dated March 15, 1954, made on the firm of Unni & Company, on the strength of the certificate against the said firm issued by the first respondent to the second respondent. This order will not, however, exonerate the petitioner from his liability to pay the tax or prevent the first respondent from taking such other steps as may be permissible under the law for the recovery of the said tax from the petitioner. We make no order as to costs. Petition allowed.