1985 PLP 521 (PTD)

D. C. Chaturvedi for Petitioner. M. Katju for Respondent. V. K. MEHROTRA, J.‑By this petition under Article~226 of the Cons titution, Messrs Hira Lal and Sons, a firm registered under the Income tax Act, 1961, has assailed an order dated 20th March, 1979 (Annexure '1' to the writ petition) in so far as it relates to an adjustment of Rs. 2,02,931 towards the alleged tax liability of one Hira Lal Mithal (in his individual capacity) who was, at one time, a partner of the petitioner from the amount due to the petitioner as refund. It is not in dispute that Hira Lal Mithal was a partner of Messrs Hira Lal and Sons until his retirement therefrom with effect from 5th July, 1977. It is also not in dispute that the deed of partnership dated 1st April, 1962, under which Hira Lal Mithal was also a partner of firm Messrs Hiralal and, Sons, was substituted by a fresh deed by which anew partnership firm came into existence with effect from 9th July, 1977. The case of the petitioner is that no adjustment of any tax liability of Bira Lal Mithal could be made by the Income‑tax Department from any amount which was due to the partnership firm of which he ceased to be a partner. The case also is that, in fact, some amount due to Hira Lal Mitbal had earlier been adjusted by the Dep'itment from out of the funds of the partnership.

3. The stand of the respondents is that the refund was in respect of assessment for the years during which Hira Lal Mithal was admittedly partner and that it was open to the department, therefore, to adjust part of the amount of refund against the income‑tax liabilities of Hira Lal Mithal. It has been suggested that the petitioner firm could be required to pay to the Income‑tax Department dues of Hira Lal Mithal by recourse to the provisions contained in sections 182 (4) and. 226 (3) of the Income‑tax Act in particular. It has further been said that a notice under section 226 (3) of the Act was actually served upon the firm in the year 1976 and the order impugned to the present writ petition could validly have followed such a notice.

4. It is not necessary for us, in the view that we are taking, to notice the rival contentions or the facts, brought by the petitioner and the respondents on the record of the writ petition in the form of affidavits, in detail. Suffice it to mention that the notice under section 226 (3) of the. Act, of which a copy has been appended as Annexure to the supplementary counter‑affidavit, was served upon the firm in the year 1976 while the amount, which has now been adjusted through the impugned order, became clue for refund by virtue of an order passed by the Income‑tax Tribunal in the year 1978. In a supplementary rejoinder affidavit filed on behalf of the petitioner detailed explanation has been offered in regard to the claim of the petitioner that the demand made through the notice issued to the petitioner firm in the year 1976 under section 226 (3) of the Act has been fully adjusted. It has also been mentioned that at the time when the adjustment from the amount of the refund allowed to the petitioner by the Tribunal was made, the petitioner firm did not owe anything to Hira Lal Mithal so that no amount could have been adjusted out of the amount of refund towards the tax liabilities of Hira Lal Mithal even on the assumption that the firm could be asked to discharge the liabilities of Hira Lal Mithal on the presumption that the amount of refund related to a period when Hira Lal Mithal was a partner of the firm.

5. Proceedings for adjusting an amount towards .tax liability under the Act, out of any sum due to an assessee by way of refund, are quasi‑judicial in nature. Without anything more, therefore, the assessee entitled, on principles of natural justice, to a reasonable notice to place his version before the authority before an order of adjustment is finally passed. From the facts noticed earlier and those asserted in the affidavits, exchanged between the parties, it is amply borne out the before the impugned order of adjustment was passed no opportunity was afforded, to the petitioner firm to have its say in the matter. It is obvious that the petitioner can legitimately urge that prejudice has been caused to it and that in case an opportunity was afforded to it, it would have succeeded in satisfying the respondents that no amount, from out of the amount which became due for refund to it in pursuance of the order of the Tribunal, could be adjusted towards any tax liability of Hira Lal Mithal. ' The petitioner's grievance in this respect is well founded. It is, therefore, necessary to quash that part of the impugned order which contains an adjustment of a sum of Rs. 2,02,931, from out of the sum of Rs. 4,44,600‑97 refundable to the petitioner; towards the tax liabilities of Hira Lal Mithal in his capacity as an individual assessee. The matter deserves to be left to be re‑determined, if the, respondents so desire, after notice to the petitioner‑firm.

6. In conclusion, the petition succeeds and is allowed. The order of the Income‑tax Offcer, Circle I (2), Meerut, dated 20th March, 1979 (Annexure I to the petition), in so far as it relates to the adjustment of the aforesaid sum of Rs. 2,02,931 towards the tax liabilities of Hira Lal Mithal, is quashed The petitioner shall be entitled to its costs. M. B. A. Petition allowed