1. Liability of an erstwhile partner for tax arrears of a partnership firm pertaining to the period of their partnership under the Income Tax Act. (Para 1 , 2 )
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1996 Supreme(SC) 930
1996(5) Supreme 202
SUPREME COURT OF INDIA
B.P. Jeevan Reddy and Suhas C. Sen, JJ.
III Income Tax Officer, Circle -I, Salem & Anr. -Appellants
versus
Arunagiri Chettiar -Respondent
Civil Appeal Nos. 1615-16 of 1979
Decided on 7-5-1996
Counsel for the Parties :
For the Appellant : B.B. Ahuja
For the Respondent : Ms. Janki Ramachandran
Important Points
IMPORTANT POINT
An erstwhile partner is liable to pay the income tax arrears due from the partnership firm pertaining to the period when he was a partner.
An erstwhile partner is liable to pay the income tax arrears due from the partnership firm pertaining to the period when he was a partner.
Subject
Taxation Law - Liability of Partners for Firm's Tax Arrears
Act Referred
Headnote
Income Tax Act, 1961--Section 188-A-Assessment years 1962-63 and 1963-64-Arrears of tax due from partnership firm-Liability of partners-Whether an erstwhile partner is liable to pay tax arrears due from partnership firm pertaining to period when he was a partner?-(Yes)-Provisions obtaining prior to April 1, 1989, i.e., prior to introduction of Section 188-A.
Held : It is true that the tax due from the firm will be recovered in the first instance by proceeding against the assets of the firm but it may happen that either the firm has no assets or the assets of the firm are not sufficient to satisfy the demand. In such a case, can the said demand be enforced against the partners, i.e.,against persons who were partners during the period to which the demand relates and who are continuing as partners event at the time of the demand and recovery. Because there is no express provision in the 1961 Act making the partners liable for the tax due from the firm, it is not suggested by Mrs. Ramachandran -nor can it be suggested- that they are not liable. But then the question immediately arises, under which provision are they being made liable. The answer obviously is because of the very nature and characteristics of a partnership firm. (Para 6)
Further held : Section 25 of the Partnership Act expressly states that every partner is liable, jointly with all the other partners, and also severally, for all acts of the firm done while he is a partner. It is worthy of note that Section 25 does not make a distinction between a continuing partner and an erstwhile partner. Its principle is clear and specific, viz., that every partner is liable for all the acts of the firm done while he is a partner jointly along with other partners and also severally. If a continuing partner is liable to pay the tax due from the firm relating to the period when he was a partner of the firm, we see no reason, in principle, to hold that the said liability ceases merely because a partner has ceased to be a partner subsequent to the said period. We do not think that the absence of a provision corresponding to the proviso to Section 46(2) of the 1922 Act in the present Act [we may remind that we are dealing with the provisions obtaining prior to April 1, 1989, i.e., prior to the introduction of Section 188-A] makes any difference to the position, since the liability of the partners to pay the dues of the firm does not arise by virtue of Order XXI Rule 50 of the Code of Civil Procedure, which is attracted by virtue of the said proviso, but on account of the basic premise mentioned hereinabove. Order XXI Rule 50 merely reiterates the said basic premise; it does not create a new liability. (Para 7)
Consequently held : That by virtue of introduction of Section 188-A with effect from April 1, 1989, the controversy of the present nature would not arise where the proceedings for recovery are initiated on or after April 1, 1989, (Para 12)
Legal Category Hierarchy
Table of Contents
2. Revenue asserts joint and several liability of partners for firm debts; respondent contends retirement and change in firm constitution extinguish such liability. (Para 2 , 3 )
3. A partnership firm is not a distinct legal entity; partners are jointly and severally liable for firm acts performed during their tenure. (Para 6 , 7 , 8 , 9 , 10 )
4. Partners are jointly and severally liable for tax debts incurred by the firm during their partnership, regardless of subsequent retirement or firm dissolution. (Para 7 , 8 , 9 )
5. Appeals allowed, High Court judgment set aside, and writ petitions dismissed. (Para 13 )
6. Is an erstwhile partner liable for tax arrears of a partnership firm for the period they were a partner?
Yes. Under Section 25 of the Partnership Act, every partner is jointly and severally liable for all acts of the firm done while they were a partner, regardless of whether they are continuing or erstwhile partners. (Para 7 , 8 , 9 )
7. Does the absence of a specific provision in the Income Tax Act, 1961, exempt partners from the firm's tax liability?
No. Liability arises from the basic nature and characteristics of a partnership firm, which is not a distinct legal entity apart from its partners. (Para 6 , 7 , 9 , 10 )
8. Does the liability of a partner for firm tax debts depend on the application of Order XXI Rule 50 of the Code of Civil Procedure?
No. Order XXI Rule 50 merely reiterates the basic premise of partnership liability; it does not create the liability, which stems from the nature of the partnership itself. (Para 7 , 9 )
9. How does the legal status of a partnership firm differ from a corporate body regarding tax liability?
A partnership firm is not a separate juristic entity distinct from its partners, unlike a corporate body, meaning the debts of the firm are the debts of the partners. (Para 6 , 10 )
JUDGMENT
B.P. Jeevan Reddy, J.-The question in these appeals is : whether an erstwhile partner is liable to pay the tax arrears due from the partnership firm pertaining to the period when he was a partner. The Madras High Court has held that he is not. The Revenue is disputing the correctness of that holding.
2. The respondent-assessee was a partner in the firm, Sannanna Chettiar and Sons. He retired therefrom on April 19, 1963. On his retirement, the firm was continued by taking in two new partners. The said firm too was dissolved with effect from April 12, 1972. The assessments for the Assessment Years 1962-63 and 1963-64 were completed on March 25, 1967 and March 29, 1968. (For the two accounting years relevant to the said assessment years, accounts were duly made up by the partners and the share of profits due to the respondent paid to him before his retirement.) On February 23, 1972, the Income Tax Officer sent a communication to the respondent that in respect of the arrears of tax due from the firm for the aforesaid assessment years, he too is jointly and severally liable along with the other partners inasmuch as he was a partner of the firm during the relevant accounting years. The respondent denied his liability on the ground that he ceased to be a partner long ago, that there was a change in the constitution of the firm after his retirement and that such re-constituted partnership alone is responsible for paying the said arrears. The Income Tax Officer did not agree with the respondent s contentions. Recovery proceedings were initiated and the respondent s properties attached, whereupon he approached the Madras High Court by way of two writ petitions. The High Court allowed the writ petitions mainly relying upon and following the decision of a Full Bench of the Kerala High Court in Income Tax Officer, Assessment-II, Calicut & Anr. v. C.V. George & Ors.1, which dissented from the decision of the Allahabad High Court in Sahu Rajeshwar Nath v. Income Tax Officer, Meerut & Anr.2. The reasoning of the High Court, in short, is this: Section 189(3) has no application to the facts of the case inasmuch as the respondent was not a partner or the firm at the time of its dissolution ; he ceased to be a partner long prior to the dissolution. Further, because the Income Tax Act, 1961 did not contain a provision corresponding to the proviso to sub-section (2) of Section 46 of the Indian Income Tax Act, 1922, the arrears of tax due from the firm cannot be recovered from an erstwhile partner.
3. Sri. B.B. Ahuja, learned counsel for the appellant-Revenue, assailed the correctness of the judgment under appeal and also that of the Full Bench decision of the Kerala High Court aforesaid. Learned counsel pointed out that the decision of the Allahabad High Court in Sahu Rajeshwar Nath, (supra) (which was dissented from by the Full Bench of the Kerala High Court) has actually been affirmed by this Court in Sahu Rajeshwar Nath v. Income Tax Officer, C-Ward, Meerut & Anr.3, and that the reasoning and approach of the Allahabad High Court and of this Court is clearly at variance with the reasoning of the judgment under appeal. Since the respondent-assessee was unrepresented, we requested Mrs. Ramachandran to assist us in this matter, to which she has agreed gracefully. We are grateful for her valuable assistance. Learned counsel supported the reasoning and conclusion of the Madras and Kerala High Courts. Learned counsel submitted that the decision of this Court in Sahu Rajeshwar Nath does not in any manner affect the correctness of the reasoning contained in judgment under appeal.
4. Clause (23) of Section 2 of the Income Tax Act, 1961 (1961 Act) says that "`firm , `partner and `partnership have the meanings respectively assigned to them in the Indian Partnership Act, 1932; but the expression partner shall also include any person who, being a minor, has been admitted to the benefits of partnership". (Since we are concerned with the position obtainin
