1971 PLP 875 (PTD)

Under the scheme of the Income‑tax Act, in the case of a registered firm, tax is assessed individually against each partner and no tax is made payable by the partnership and, therefore, the principle of joint and several liability has no application. That in the case where a partnership is assessed after dissolution, section 44 of the Income‑tax Act is directly applicable, makes no difference to the application of the principle laid down in Income‑tax Officer, Agra v. Radha Krishan. The entire scheme of taxing the income of a registered firm in the hands of individual partners is inconsistent with any arguments that for payment of tax assessed against a partner, other partners are liable. Section 44 contemplates cases of joint and several assessment of the income of the business of a partnership which is dis continued. P. Rain Reddy, Senior Advocate (R. Thiagarajan, Advocate with him) for Appellant. C. K. Daphtary, Attorney‑General for India (T. A. Rama chandram, R. N. Sachthey and B. D. Sharma, Advocates with him) for Respondent. RAMASWAMI, J.‑This appeal is brought, by special leave, from the judgment of the High Court of Andhra Pradesh dated December 21, 1964, in Writ Petition No. 1294 of 1961. The appellant had entered into a partnership with three others named D. Sayappa, H. Siddappa and M. Veeraiah to carry out a "Gulmoha" contract for the year 1949‑

50. The firm was known as Messrs halve Suryanarayana. After completion of the contract the partnership came to an end. For the assessment year 1951‑52, the partners of the dissolved firm made an application for registration of the partnership to the respondent who granted the registration on February 28, 1953, and on that basis proceeded to assess the total income of the partnership which he determined as Rs. 1,64,546 (O.S.), and the total income was apportioned among the four partners in proportion of their respective shares. Subsequently, the Commissioner of Income tax, in exercise of his revisional power under section 33‑B of the Income‑tax Act, passed an order on February 26, 1955, holding that the partnership had suppressed income to the extent of its. 1,72,149 (I. G.) by inflating the expenses under railway freight and by not accounting for the sale of old gunnies. The Commissioner of Income‑tax accordingly directed that the assessment already made should be enhanced by a sum of Rs. 1,72,

149. In pursuance of this order the respondent revised the assessment on March 11, 1955, and determined the total income of the partnership at Rs. 3,13,189 (I. G.) and apportioned it among the several partners in proportion to their shares and demand notices were issued accordingly against individual partners of the dissolved firm. It appears that the appellant and D. Sayappa paid their shares of the tax, but M. Veeraiah and H. Siddappa failed to pay their shares which were R.s. 10,654'62 and Rs, 5,640'62 respectively, After about six years the respondent issued a notice to the appellant under section 45 of the Income‑tax Act, 1922., hereinafter called "the Act", calling upon him to pay up tie arrears on the footing that under the provisions of section 44 of the Act there was joint and several liability of each and every partner of the dissolved firm in respect of the arrears of tax. The appellant thereafter moved the High Court for grant of a writ to quash the notice. The writ petition was dismissed by the High Court by its judgment dated December 21, 1964. The provisions of section 23(5) and section 44 of the Act as they stood at the material time are reproduced below: "23. (5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under subsection (1), subsection (3) or subsection (4), as the case may be,‑- (a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm. including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. . .

44. Liability in case of a discontinued fir n or association. Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall. in respect of the income, profits and gains of the firm or association, 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 assess ment." In support of this appeal, the argument was addressed that the appellant who was an individual assessee under section 23(5) could not be held liable for payment of tax flue from the ex partners of the partnership and there was no joint and several liability imposed under the provisions of tie Act in such a case. In our opinion, the argument put forward on behalf of the appellant is well‑founded and must be accepted as correct. Under the scheme of the Act a partnership is a unit of assessment and the income of the partnership is computed as that of the unit irrespective of whether the partnership is registered or unregistered. After the income of the partnership is computed in a case where the partnership is registered under section 26‑A the share of each partner in the income of the partnership is determined and is added to his other income and the total income so computed is brought to tax. If the partnership is unregistered, the tax payable by the partnership is, except when the income‑tax Officer otherwise directs in the interests of revenue, determined as in the case of any other entity, and the demand for tax is made on the partnership itself. The result is that, if the partnership is registered, tax is collected from the partners individually and there is no levy of tax against the partnership. If the partnership is unregistered, the tax may, unless otherwise directed, be levied against the partnership. In either case, the machinery set up by section 23(5) is for assess ment of tax payable on the income of the partnership. The income of the partnership is computed, but tax is assessed on that income on the partners or the partnership, according as the income is of a partnership, registered or unregistered. In Income‑tax Officer, Agra v. Radha Krishan ((1967) 66 I T R 590 (S C)) it was argued that in the case of assessment made under section 23(5)(a) of the Act the tax liability was joint and several and the Income‑tax Officer could recover from other partners the share of the tax attributable to one partner which cannot be recovered from him. The argument was rejected by this Court and it was pointed out that under the scheme of the Act tax is assessed individually against each partner and no tax is made payable by the partnership and, therefore, the principle of joint and several liability has no application. It was also held in that case that there is nothing in section 44 of the Act which supports the contention that for payment of tax assessed against a partner of a registered partner ship under section 23(5)(a) another partner becomes liable jointly and severally with the first partner to pay tax. In our opinion, the principle of this decision governs the present case also. It is true that in the present case we are dealing with the assessment of a partnership after its dissolution and section 44 of the Act is directly applicable but this circumstance makes no difference to the application of the principle laid down in Income‑tax Officer, Agra v. Radha Krishan. The object of enacting section 44 is to prevent evasion of tax by discontinuance of the business of a firm or dissolution of an association of persons. On discontinu ance of the business of a firm or dissolution of the association of persons, it is declared that every person who was, at the time of such discontinuance or dissolution, a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the partnership or association, be jointly and severally liable to assessment and for the amount of tax payable. There is, however, nothing in the section which supports the argument of the respondent that for the payment of tax assessed against the partners of a registered partnership individually under section 23(5)(a) of the Act, another partner becomes liable jointly and severally with that first partner to pay tax. The entire scheme of taxing the income of a registered partnership in the hands of individual partners is inconsistent with any argument that for payment of tax assessed against a partner, other partners are liable. It should be noticed that the tax assessed against a partner of a registered partnership is assessed on his total income inclusive of the share in the income of the partnership and the rate applicable is determined by the quantum of the total income of the partner. Section 44 on the contrary contemplates cases of joint and several assessment of income of the business of a partnership which is discontinued. When such assessment is made, each member of the partnership may be liable to pay jointly and severally tax payable by the partnership. But when under the scheme of the Act tax is assessed individually against each partner, and no tax is made payable by the partnership, the principle of joint and several liability under section 44 cannot be invoked. It is true that under the partnership law the contractual obligations of a partnership are enforceable jointly and severally against the partners. But the liability to pay income‑tax statutory and does not ;.rise out of any contract and its incidence will be determined by the provisions of the statute. If the statute which imposes liability has not made it enforceable jointly and severally against the partners, no such implication can be drawn merely because the contractual liabilities of a partnership may be jointly and severally enforced against the partners. For these reasons we hold that the respondent had no jurisdiction to issue the impugned notice dated June 22, 1961, under section 45 of the Act and the proceedings taken against the appellant in pursuance of that notice should be quashed by grant of a. writ in the nature of certiorari under Article 226 of the Constitution. We accordingly set aside the judgment of the High Court of Andhra Pradesh dated December 21, 1964, and allow this appeal with costs here and in the High Court. Appeal allowed.