1960 PLP 1011 (PTD)

SUBRAHMANYAM, J.‑The plaintiff appeals from the judgment and decree dated 30th November, 1955, on the file of the Subordinate Judge of Pudukottai, in O. S. No. 7 of 1954, on his file. The plaintiff and the defendant's father Srinivasalu Naidu were doing business as partners until Srinivasalu Naidu's death, on 19th September, 1942. After his death, the defendant was admitted to the partnership in his father's stead. The main business of the firm consisted in the sale of petrol and allied products as agents of Messrs Burmah Shell Co. The firm had its headquarters at Pudukottai and branches at Karaikudi and other places. Though, on Srinivaslu Naidu's death, that partnership was, in law, dissolved, accounts were not settled and the assets and liabilities were taken over by the new firm of which the plaintiff and the defendant were the partners. This partnership was registered under the Indian Partnership Act. It continued to do business until it was dissolved by agreement of the parties on 17th January, 1945. At the time of the dissolution, proceedings for assessment of the profits of the firm to tax were pending. The assessment proceedings for the years 1943‑44 and 1944‑45 were concluded after the dissolution. The profits, found by the Income‑tax authorities to have been earned by the firm, were carried into the sepa rate accounts of each of the partners, one half to the assessable income of the plaintiff and the other half to the assess able income of the defendant. In assessing the profits of the firm of Vedachala Muda liar and Rangaraja Naidu, the Income‑tax authorities did not accept as correct the accounts submitted by the firm. The authorities held that, in addition to the sum disclosed in the accounts, the firm had received moneys by sale of diesel oil at prices in excess of the authorised price. During the account ing years 1942‑43 and 1943‑44, control orders were in force relating to the sale of petrol and diesel oil, and sale of diesel oil at prices in excess of the prices fixed by the control orders was an offence under the law. The income‑tax autho rities held, after enquiry, that there had been such sales on the part of this firm and although the amount determined by the Income‑tax Officer as realised by the firm by such sales was reduced in appeal, the finding of the Income‑tax Officer that there had been such sales was maintained and profits were determined accordingly. After the proceedings relating to the assessment of the partners to tax were completed, the Income‑tax Officer pro ceeded to take action under section 28 of the Act. Under that section, if the Income‑tax Officer is satisfied that any person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, the officer may direct that such person shall pay, by way of penalty, such sum, in addition to any tax payable by him, as the Income‑tax Officer may decide to levy. Acting under that section, the Income‑tax Officer passed orders in 1951, directing the firm to pay a penalty of Rs. 19,000 in respect of the year 1943‑44, and Rs. 13,000 in respect of the year 1944‑

45. The proceedings under section 28 were commenced after the firm had been dissolved by agreement of parties. The Income‑tax Officer was aware of the fact of the dissolution. In relation to the proceedings taken under section 28 of the Act, notice was served only on the plaintiff as partner of the firm to show cause why such penalty should not be levied. He appeared on behalf of the firm and showed cause. After the orders levying the penalty were passed, the plaintiff was called upon to pay the entire amount and, on threat of coer cive steps, he paid Rs. 16,

000. The Income‑tax Officer sent the notice, exhibit B.2, on 3rd July, 1951, to the defendant informing him that the firm had been ordered to pay Rs. 32,000 as penalty under section 28 (1) (c) of the Income‑tax Act and that the plaintiff had paid his half share namely Rs. 16,000 and called on the defendant to pay the balance of Rs. 16,

000. The defendant did not pay. He took no notice of that demand. The plaintiff purporting to act on behalf of the firm appealed to the Appellate Assistant Commissioner who reduced the penalty for both years together to Rs. 9,

800. That sum was withheld out of the sum of Rs. 16,000 which had been paid by the plaintiff and the balance was refunded to him. The plaintiff called upon the defendant to pay the plaintiff a half of the sum of Rs. 9,800 which he had paid to the Income‑tax Authorities as penalty levied under section 28 (1) (c) of the Act, and pay the plaintiff, further, a half of the expenses which he had incurred in conducting the proceedings before the Income‑tax Officer and the Appellate Assistant Commissioner. The defendant repudiated liability. Consequ ently, the plaintiff instituted the suit which has given rise to this appeal for recovery of a sum of Rs. 7,080‑12‑

2. The plaintiff stated in paragraph 7 of the plaint that the defendant had had the benefit of the entire profits realised by the firm during the accounting years 1942‑43 and 1943‑44, and that, since he had his share of the profits, he was bound to pay a half share of the liability. The plaintiff pleaded further that the ascertainment of the profits and the payment to the defendant of his half share at the time of the dissolution of the partnership in January 1945, were subject to the defendant bearing a half share of the liabilities of the firm and that, even independently of that contract, the defendant was bound under law to pay a half of the penalty which the plaintiff had paid and a half of the expenses which the plaintiff had incurred. The defendant in his written statement pleaded that, during the period of his partnership with the plaintiff, the affairs of the firm had been managed solely by the plaintiff, and that the defendant was a sleeping partner. The defendant denied that he bad received or had been paid any part of the profits said to have been illegally earned. The defendant pleaded that, since the plaintiff appeared to have had the exclusive benefit of the illegal profits, lie was bound solely to bear the burden of the penalty. The defendant alleged that at the time of the dissolution of the partnership, accounts were settled in full between him and the plaintiff and there was no reservation of any contingent liability. Under the terms of the dissolution, according to the defendant, the plaintiff alone was bound to bear the penalty. The defendant denied that any expenses had been incurred as alleged in the plaint or that he was liable to bear a half of the expenses. The defendant contended that, the transaction in respect of which the expenses were incurred being illegal, the defendant could not, in law, be called upon to pay the plaintiff any part of the expenses. The learned Subordinate Judge held that the levy of the penalty was illegal ; and that the Income‑tax Officer did not have jurisdiction, after the dissolution of the firm, to take action against the firm under section 28 of the Act. It was conceded before him that, if the levy of the penalty was illegal and without jurisdiction, the plaintiff could not claim contri bution from the defendant. That was the main ground on which the learned Subordinate Judge dismissed the plaintiff's suit. The learned Subordinate Judge held further, that even assuming that the Income‑tax Officer had jurisdiction under section 28 (1) of the Act, after the dissolution of the partner ship, to levy a penalty on the firm, the proceedings which ended in the order levying the penalty could not bind the defendant because no notice has been taken out to him cal ling on him to show cause why penalty should not be levied. There was a subsidiary point mentioned by the learned Subor dinate Judge in his Judgment relating to the time when this alleged illegal transaction took place. The defendant's father died in September 1942. The learned Subordinate Judge said that, during the accounting year 1942‑43, the illegal transactions had taken place during the father's period of partnership and that, therefore, the defendant could not be made liable for the penalty levied as for that year. The Subordinate Judge found also that, under the terms of the dissolution of the partnership in 1945, there was no reservation of liability under which the defendant could be called upon to share with the plaintiff the liability to pay the penalty. On the question whether the defendant was only a sleeping partner, the Subordinate Judge held that he was not. On the question whether both the partners would be liable to pay the penalty if the levy of the penalty was justified, the Subordinate Judge held that both the partners would be liable. The first question for decision in this appeal is whether the Income‑tax Officer acted without jurisdiction in taking action under section 28 (1) of the Income‑tax Act, after the date of the dissolution of the firm. On that point, the appellant's learned counsel states that there is no plea in the written statement that levy of penalty on the firm was illegal on the ground of want of jurisdiction. It is true that no such express plea appears in the defendant's written statement. But the plea raises a pure question of law on the facts admitted in the plaint. The plea was taken during the trial of the suit and the learned Subordinate Judge has considered the plea and given a finding thereon. The question has therefore to be considered and decided in the appeal. On that question, the learned Subordinate Judge held that the Income‑tax Officer did not have jurisdiction to take action under section 28 (1), after the date of dissolution of the firm. His view on that point is fully endorsed by the decision of this Court in Veerappan Chettiar v. Commissioner of Income‑tax ((1957) 32 I T R 411). On facts not dis tinguishable from the facts of this case, it was held in Veerappan Chettiar v. Commissioner of Income‑tax, that the basic principle underlying section 28 (1) is that a penalty could be levied under the section only on a person in existence on the date the penalty is imposed by the competent authority and that the Act could not authorise the Income‑tax Officer to levy a penalty under section 28 (1) on the assessee which had ceased to be in existence on the relevant date. The Sub ordinate Judge's view that the order passed by the Income‑tax Officer, confirmed in appeal by the Appellate Assistant Com missioner, and the Income‑tax Appellate Tribunal, is an order which is legally not sustainable is correct. That finding, however, would not conclude the case against the plaintiff. It appears to have been conceded in the lower Court by the learned advocate who appeared for the plaintiff that, if the penalty levied by the Income‑tax Officer was without jurisdiction, the plaintiff could not claim contribution from the defendant. That was an erroneous concession on a point of law. The order levying penalty might be an order passed without juris diction. But so long as the order remained in force, it would be lawful for the Income‑tax authorities to call upon the revenue authorities concerned to enforce the order and collect the penalty. The collection of the penalty would not be unlawful though the order had been passed without Juris diction. The only consequence of the order being an order passed without jurisdiction is that, if appropriate steps were taken in the appropriate form, the order may be set aside. That is what happened in Veerappan Chettiar's case. On the basis of the order, the authorities sought to collect the tax. The assessee filed a petition for the issue of a writ of certiorari for quashing the order and that petition was allowed. If the assessee had not filed that writ petition and obtained an order quashing the order of the Income‑tax Officer, the assessee would not have been permitted to resist enforcement of the order levying the penalty. In this case, the plaintiff appealed to the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal. The penalty was reduced by the Appellate Commissioner. No further relief was obtained from the Tribunal. The plaintiff did not taken any further steps to have the order quashed. The defendant received the communication Exhibit B. 2 from the Income‑tax Officer per sonally informing him that the order levying the penalty had been passed and that he was liable to pay the amount which remained unpaid. He did not take any action to have the order set aside Therefore, the order could have been enforced either against him or against the plaintiff. The liability of the firm was the joint and several liability of the partners. I find that the fact that the order levying the penalty had been passed by the Income‑tax authorities without jurisdiction does not by itself disentitle the plaintiff to the relief of contri bution. The next contention urged on behalf of the plaintiff, which the learned Subordinate Judge accepted, was that the order was, in any event, not binding on the defendant. The reason urged in support of the contention was that notice of the proceedings under section 28 had not been given to the defendant until after the order had been passed by the Income tax Officer. But in a case where action is taken under section 28 (1) against a firm, notice required under section 28 (3) may be served on a partner of the firm. Section 53 (2) of the Act is to the same effect. Since notice of the proceedings under section 28 (1) was served on the plaintiff, the defendant can not plead that he had not been personally served with notice before the Income‑tax Officer passed the order levying the penalty. I find that neither the fact that the order of penalty might have been set aside if appropriate steps had been taken in the High Court or that the order was made without giving personal notice to the defendant disentitles the plaintiff to the relief of contribution. The next question is whether, notwithstanding that the order levying the penalty might have been enforced either against the plaintiff or against the defendant, the plaintiff is not entitled to the relief of contribution, by reason (1) either of the contract between the parties at the time of the dissolution, or (2) under the rule of law relating to contribution as bet ween wrong‑doers. On the question whether, under the contract between the parties at the time of the dissolution of the partnership in 1945, the defendant was bound to contribute towards the penalty paid by the plaintiff, the learned Subordinate Judge finds that there was no agreement between the parties at the time of the dissolution whereby the defendant undertook to share any such liability. There is the evidence of the plaintiff who says: "After the defendant ceased to be a partner that is after January 16, 1945, I associated manager Govindarajulu Naidu as a partner . . . . The new partnership took over the assets and liabilities of the old partnership and continued as before." The defendant stated: "On January 16, 1945, there was a dissolution of partner ship between us, and I was paid half a share of the profits accrued and the whole of the capital contributed by me. The plaintiff took the entire stock in trade of the business . . . . At the time of the dissolution it was agreed that I should not be held liable for any tax that might be levied on the suit partnership. The plaintiff must have‑ spent the moneys in his own interest." In the order of the Income‑tax Officer, dated 16th March, 1950, relating to the year of assessment 1945‑46, the Income tax Officer states in relation to the firm of Vedachala Mudliar and Rangaraju Naidu: "The assessee firm was dissolved on January 16, 1945, the assets and liabilities of the firm having been taken over by Mr. M. Vedachala Mudliar. The other partner Mr. S. Rangaraju Naidu has retired from the business." It would of course not be correct to describe the trans action as a partnership transaction of retirement of the defendant from the partnership. The expression "retirement" would be appropriate if there were more than two partners at that time and the partners other than the retiring partner continued the business as a firm. In this case, the plaintiff and the defen dant were the only partners and the appropriate terms in relation to the severance of the defendant from the business is dissolution and not retirement. There was no firm in exis tence immediately after the defendant severed his connection with the business. It was being continued by Vedachala Mud liar as the sole proprietor. A few weeks thereafter he entered into a partnership with Govindarajulu Naidu in relation to the same business and the business which was the exclusive concern of Vedachala Mudliar became the business of the partnership after the formation of the firm of Vedachala Mudliar and Govindarajulu Naidu as partners. In support of the proposition that the defendant was bound to pay a half share of the penalty, the appellant's learned counsel relied on the decision in Haveli Shah v. Charan Das, (A I R 1929 PC184). In that case after the dissolution of the partnership, two items which represented properties of the partnership were received by the principal partner who was continuing the business. The junior partners who had ceased to be partners by reason of the dissolution claimed their share of the assets. It was held by the Courts in India that the junior partners were entitled to a share. The Judicial Committee confirmed that decision. It was found that these two items, which were subse quently received, were destined for the assets of the firm and were not included in the accounts which were settled at the time of the dissolution. After the dissolution, the principal partner had given receipts for the moneys due to the junior partners. The question whether the junior partners were entitled to a share of the assets received after the dissolution turned on the construc tion of those receipts. If, as a matter of construction of the receipts, it could be said that the accounts were finally settled and that the junior partners would not be entitled to any share in the assets received subsequent to the dissolution, notwithstanding that such assets were not included in the accounts, the suit would fail. If, on the other hand, on a construction of the receipts, it was found that the intention of the parties was that the accounts should be settled in relation only to the matters stated in the accounts and that, as regards subsequent receipts, the parties would be entitled to shares in the same way as they would have been entitled before the settlement of accounts, the junior partners would be entitled to succeed. On the terms of the receipts and looking at the context in which the receipts were passed, the Courts held that the settlement at the time of the dissolution did not relate to the assets received subsequent to the disso lution ; and that, therefore, in the items subsequently received the junior partners were entitled to a share, in the same way as they would have been if the assets had been received before the dissolution. That decision, therefore, does not lay down a rule of law applicable to every case of an asset falling in or a liability arising after the dissolution of partner ship. With reference to the terms of the dissolution of the part nership between the plaintiff and the defendant, we would have to determine whether, in regard to any liability which accrued thereafter as a liability of the partnership, the defendant would have to share the burden with the plaintiff. The plaintiff's own evidence makes it clear that, after the date of the dissolution, the defendant had nothing to do either with the assets or the liabilities of the partnership. If any item of asset were dis covered subsequent to the settlement of accounts, as an asset of the partnership, the defendant would not be entitled to claim a share in such asset. He handed over the business to the plaintiff as his exclusive concern and received profits as ascertained from the accounts and the capital contributed by him and ceased his connection with the business. The inference to be drawn from the evidence is that the business inclusive of the assets and liabilities as they stood on the date of the dissolution and of the assets and liabilities which might be discovered or might accrue after the date of dissolution became the exclusive concern of the plaintiff, and that the defendant would not be entitled to any asset which might be discovered subsequent to the dissolution and would not be liable to share any burden which might accrue subsequent to that date. I find on this point that, under the agreement between the parties at the time of the dissolution, the plaintiff was bound himself to bear the penalty that was levied. The next ques tion is, whether, assuming that there was no agreement bet ween the parties, either express or implied, relating to the penalty, the plaintiff would, in law, be entitled to claim contribution. Discussion of that question often takes the form of a discussion of the applicability in India of the rule stated in Merryweather v. Nixan ((1799) S T R 186). It is unnecessary to consider the facts of that particular case, or the precise form of the rule Laid down therein. An exhaustive discus3ion of the subject is found in Yegnanarayana v. Yegannadha Rao ((1931) 34 L W 618). The rule in the form in which it should be applied in our country is thus stated by Madhvan Nair, J., in that case: "If an act is unlawful, or the doer of it knows it to be unlawfull as constituting either a civil wrong or a criminal offence, he cannot maintain an action for contribution or for indemnity against the liability which results to him therefrom." If two persons deliberately commit an offence and derive profits therefrom and the commission of the offence involves them in a penalty for which they are jointly and severally liable, one person from whom the penalty is wholly realised cannot maintain an action for contribution against the other. That decision is in full accord with the earlier Bench decision of this Court in Manja v. Kadugochen ((1883) I L R 7 Mad. 89). That decision itself followed the Bench decision in Suput Singh v. Imrit Tiwari ((1880) I L R 5 Cal. 720). It is true that the rule, as stated by Madhvan Nair, J., in Yegnanarayana v. Yegannadha Rao was not fully endorsed by King, J., in Venkatarao v. Venkayya (A I R 1943 Mad. 38). The view of King, J., was adopted in Dharni Dhar v. Chandra Shekhar (I L R (1952) All. 759). In England, the rule as to joint tortfeasors not being entitled to contribution has been abrogated by the Law Reform (Married Women and Tortfeasors) Act, 1935. Section 6 of the Act states that where damage is suffered by any person as a result of a tort (whether a crime or not) judgment recovered against any tortfeasor liable in respect of that damage shall not be a bar to an action against the other tortfeasor and every tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor. There is, however, no right of contribution from any person who is entitled to be indemnified by the person seeking contribution. The English Act would not, in terms, apply to a case like the pre sent, where the liability was not founded on a tort but arose out of acts for which the State levied a penalty. But, irrespective of whether the English Act would be applicable to the facts before us, I am bound to follow the rule Laid down in Manja v. Kadugochen and Yegnanarayana v. Yegna nadha Rao. The rule of law to be applied to this case may be thus stated: Where as a result of wilful wrong doing on the part of two persons, they became jointly and severally liable to pay a penalty to the State, and such penalty is recovered wholly from one person, he cannot main tain a suit against the other for contribution. That leads us to the question of fact whether there was wilful wrong‑doing on the part both of plaintiff and the defendant. If the sales of diesel oil at prices in excess of the price prescribed by law had been made by the employees of the firm without the knowledge of the partners, the firm could not justly have been made liable to pay a penalty. It is true that, in this case, there is no evidence that either partner directed the sale of diesel oil at prices in excess of the legally permissible price or appropriated profits accruing therefrom. But we cannot obviously have evidence of that kind in this suit, because the persons examined are the plaintiff and the defendant and the employees of the firm. On that point, we have only the statements found in the orders of the Income‑tax authorities, when they declined to accept as correct the accounts submitted by the firm for the assessment years 1943- 44 and 1944-45. The question for decision is whether the statements made in the orders of assessment form legally admissible evidence. That question, I answer in the affirmative on the basis of the decision in Koppanna Chelamiah v. Suryanarayana Jagapathy ((1919) 10 L W 261.). I adopt, with respect, the statement of the law made in that case that the judgment in a suit which is the basis of a suit for contribution is admissible in evidence in the suit for contribution. In that case, the Subordinate Judge based his decision on the finding of the previous judgment which showed that the plaintiff was a joint tortfeasor. This Court held that the Subordinate Judge was right. In this case, the officer, who passed orders of assessment in relation to the assessment years 1943‑44 and 1944‑45, and in relation to the levy of penalty, held that the firm was itself a party to the illegal sales. The Income‑tax Officer stated in his order dated February, 28, 1951, that the assessee had concealed his income and furnished inaccurate particulars of it. The appel late Assistant Commissioner stated in his order, dated October 15, 1952, that the transactions in the black market and in come therefrom were concealed by the appellant and so the penalties were rightly levied. The Income‑tax Appellate Tribu nal dealt more specifically with the question whether the sales had been made without the knowledge of the partners. The Tribunal stated. "It is idle for the assessee to attempt to make a scape‑goat of its employees at Karaikudi." The probability is that the employees would not sell in black market without the approval of the partners. The find ing recorded by the income‑tax authorities that the assessee, namely, the partners, authorised the illegal sales is correct, and I accept it. There is evidence that both partners were in management of the affairs of the firm. The learned Subordinate Judge has accepted that evidence. I see no reason to differ from him. I find that the penalty was the result of deliberate wrong doing on the part of both the partners. That being so, I find that the rule of law enunciated in Yegnanarayana v. Yegan nadha Rao, becomes directly applicable, and one partner cannot sue the other for contribution. The learned counsel for the appellant relied on section 69 of the Indian Contract Act, for relief. Section 69 enacts: "A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other." I do not think that that section can be invoked in a case where contribution is claimed. It is only where one person pays, because he is interested in such payment, what another person is alone liable to pay, that the section can be invoked. I find that the appellant is not entitled to relief under section 69 of the Contract Act. On the agreement between the parties at the time of the dissolution, the liability to pay the penalty was solely that of the plaintiff: Hence even if the rule of law applicable be the rule enacted in Law Reforms (Married Women and Joint Tort feasors) Act, 1935, the plaintiff would not be entitled to contribution from the defendant. The rule as to contribution is cancelled by the right of indemnity arising on the agreement. The decree of Subordinate Judge is correct, though not for the reasons given in his judgment. The appeal is dismissed with costs. Appeal dismissed.