(a) Income-tax---

----Recovery of tax---Firm=--Partner---Dissolution of registered firm---Notice of demand in the name of firm---Court holding that tax could not be recovered from partners---Subsequent notices of demand on partners---Recovery proceedings against partners valid.

The assessee, a registered firm, way dissolved and proceedings for recovery of tax were initiated against the partners. The High Court quashed the proceedings on the ground that more existence of liability on the firm to pay tax was not sufficient to allow recovery of the same from the partners and that recovery proceedings would be valid only if the partners were treated as assessees in default.

(b) Income-tax---

----Res judicata---Scope of doctrine---Recovery proceedings quashed because notices had not been issued to partners---Subsequent issue of notices to partners---Judgment of Court does not bar recovery proceedings.

Subsequently, notices were issued against the partners: On a writ petition to quash the recovery proceedings:

Held, dismissing the writ petition that after the judgment of the Court the defect pointed out by the Court had been rectified and notices had been issued against the partners under section 156 of the Income-tax Act, 1961. Hence, the judgment of the Court did not operate as res judicata nor did it preclude the income-tax authorities from recovering the tax from the petitioner.

Baladin Ram Kalwar. v. I.T.O. (1966) 62 ITR 392 (All.); Balchand (P.) v. TRO (1974) 95 ITR 321 (Mys.); Brij Ratan Lal Bhoop Kishore v.Additional CIT (1983) 139 ITR 906 (All.); Manohar Lai v. CIT (1988) 171 ITR 241 (All.) ref.

Ravi Kant for Petitioner.

JUDGMENT

B. P. JEEVAN REDDY, C J.--This writ petition is filed for the issuance of a writ, order or direction declaring the notices dated April 8, 1988, March 25, 1988, and February 3, 1988, issued by the Tax Recovery Officer, Meerut (second respondent), under rules 31, 73 and 2 of the Second Schedule of the Income Tax Act, 1961, respectively.

The firm Raghunandan Prasad Manohar Lal, consisting of four partners, was an assessee under the Act. For the assessment year 1981-82, a large amount of tax was determined to be payable by the firm. A notice under section 156 of the Act was issued to the firm on December 22, 1987, calling upon it to remit a sum of Rs. 6,64,988.

According to the petitioner, the firm was dissolved on January 28, 1981. Proceedings were initiated against the properties of the firm as well as of the partners of the dissolved firm for recovery of tax in arrears. Two writ petitions were filed by two partners of the firm in their individual capacity. Writ Petition No. 754 of 1986 was filed by the petitioner herein, Padam Prakash, and Writ Petition No. 830 of 1986 was filed by another partner Manohar Lal. These two writ petitions were heard and disposed of by a Division Bench of this Court comprising A. Banerji, Actg. C. J. (as he then was) and K. P. Singh, J. on August 25, 1987 (see 1988 171 ITR 241). In the judgment, the amount due from the firm is stated as Rs. 2,65,005. It is stated that the amount of tax was reduced in appeal. It is not really necessary for us to go into the question of the precise amount of tax due since that is not the issue in this writ petition. We may, however mention that on a further appeal by the department the Tribunal appears to have restored the demand raised by the Income-tax Officer. Be that as it may, we are not really concerned with the quantum of the tax due, but only with the liability of the partners of dissolved firm for the tax due from the firm). The Bench noticed the provisions contained in subsection (3) of section 189 and then held as follows:

(a) Mere existence of a liability of the firm to pay tax is not sufficient to recover tax from the partners of the firm under the provisions of the Act, as held by a learned Single Judge of the Mysore High Court in P. Balchand v. Tax Recovery Officer (1974) 95 ITR 321. Therefore, the tax liability of the firm cannot be realised from the petitioners (partners) unless they are held as "assessee-in-default" within the meaning of the Act.

(b) The position under the 1961 Act with respect to liability of the partners of the dissolved firm for the dues of the firm is different from the 1922 Act. In Brij Ratan Lal Bhoop Kishore v. Additional CIT (1983) 139 ITR 906, a Division Bench of this Court has held that "the Tax Recovery Officer has no power to recover tax from the partners by proceeding against their properties for the tax due from the firm. The said decision squarely applies here, hence unless the Tax Recovery Officer has assessed the partners of the firm in accordance with sections 182 and 183 of the Act and relevant notices had been served upon the partners, they cannot be termed as "assessees in default". Therefore, the partners' property in their individual capacities cannot be proceeded against in connection with the tax dues of the firm. Since in this case, the defaulter is shown to be the firm, the action of the Department against the petitioners individual properties is incompetent.

(c) The petitioners in the two writ petitions were partners in the defaulting firm as Kartas of their respective Hindu undivided families. On the reasoning contained in Baladin Ram Kalwar v. ITO (1966) 62 ITR 392 (All.), the notices issued under rule 73 of the Second Schedule to the Act against the petitioners are bad in law.

(d) It is true that the partners are jointly and severally liable for the tax due from the firm, as provided by section 189(3), but for realising the tax from the individual properties of the partners, "the Department should have taken action against the petitioners in the light of the provisions of sections 184 and 183 of the Act, 1961. In the absence of any proceedings under these sections, it is difficult to characterise the petitioners as assessees in default within the meaning of the provisions of the new Act of 1961."

Subsequent to the aforesaid judgment, the appeal filed by the Income- tax Department against the orders of the Appellate Assistant Commissioner reducing the tax liability of the firm was allowed and the order of the Income -tax Officer restored. Thereafter a fresh demand was raised by the Department against the partners. The petitioner says that when fresh recovery proceedings were initiated against him, he brought the aforesaid judgment of this Court dated August 25, 1987 (see (1988) 171 ITR 241), to the notice of the Tax Recovery Officer, but he persisted in proceeding with the recovery proceedings. It is in those circumstances that the petitioner has approached this Court again and also because proceedings under section 226(3) were taken to attach certain moneys due to the petitioner.

The contention of learned counsel for the petitioner is that, according to the judgment of this Court dated August 25, 1987 (see (1988) 171 ITR 241), which operates as res judicata between the parties, tax due from the firm cannot be recovered from its partners (after dissolution) unless an assessment is made upon the partners under sections 182 and 183 of the Act. Since no assessment has been made upon the partners under sections 182 and 183 of the Act subsequent to the said judgment, the factual position is the same as was obtaining at the time of the filing of the said writ petitions and, hence, no recovery proceedings can lie against the individual properties of the petitioner. On the other hand, it is submitted by learned standing counsel for the Revenue that subsequent to the judgment of the High Court, the Tribunal allowed the Department's appeal, and that the judgment of this Court, which pertains to a portion of the tax arrears, cannot hold good as to the larger amount of tax found due against the firm and its partners as a result of the decision of the Tribunal. It is also submitted that, subsequent to the said judgment, the partners have been held to be "assessees in default" within the meaning of section 189(3) and hence the arrears of tax due from the dissolved firm can be recovered from its partners as per section 189(3).

A perusal of the judgment of this Court in Writ Petitions Nos. 754 of 1986 and 830 of 1986, dated August 25, 1987(see Manohar Lai v. CIT (1988) 171 ITR 241), discloses that the Bench allowed the writ petitions mainly on two grounds. The first ground is that "mere existence of a liability on the firm to pay tax is not sufficient to recover the same from the partners of the dissolved firm, unless the partners are treated as assessees in default." This was so held following the decision of a learned Single Judge of the Mysore High Court in Balchand (P:) v. Tax Recovery Officer (1974) 95 ITR 321. The second ground is that unless the partners are assessed in accordance with the provisions of sections 182 and 183, the tax due from the dissolved firm cannot be recovered from its partners. This was so held following a decision of this Court in Brij Ratan Lal's case (1983) 139 ITR 906.

So far as the second ground is concerned, the submission of learned standing counsel for the Revenue is that the principle of the decision in Brij Ratan Lai's case (1983) 139 ITR 906 (All) is not applicable in this case. That was a case relating to an unregistered firm, whereas the firm concerned herein, is a registered firm. In the said decision, it was held that where the recovery certificate is only against an unregistered firm simpliciter without mentioning the names of the partners in the certificate, the Tax Recovery Officer has no jurisdiction to proceed to recover the arrears of tax from the partners of such unregistered firm personally. But this principle, says learned standing counsel, is not applicable in the case of a registered firm. He relies upon the provisions of section 189(3), which deals with liability of the partners for the tax due from the dissolved firm. Subsection (3) of section 189 reads thus:

"Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as maybe, shall apply to any such assessment or imposition of penalty or other sum.

Explanation.--The amount of tax referred to in this subsection shall also include that part of the share of each partner in the income of the firm before its discontinuance or dissolution which the firm could have retained under subsection (4) of section 182 but which has not been so retained:" However, it is not necessary for us to express any opinion on the said question. Suffice it to notice that section 189(3) clearly makes the partners of a dissolved firm liable for the arrears of tax due from the firm. This subsection creates a joint and several liability upon such partners. But the real question in this case is whether the judgment dated August 25, 1987 (see (1988) 171 ITR 241), bars the present proceedings. For this purpose, we have to ascertain what precisely was decided therein. We have set out hereinbefore the ratio of the said decision. We have also perused the earlier Bench decision of this Court in Brij Ratan Lai's case (1983) 139 ITR 906. All that was held therein was that where the firm is treated as a defaulter, the Department cannot proceed against the partners. It did not hold that in no circumstances can the partners' individual properties be proceeded against for recovering the tax arrears of a dissolved firm. Indeed, they could not have so held, since they expressly noticed the provisions of section 189(3). For proceeding against the individual properties of the partners, they said, you must first treat them as defaulters and then take further proceedings for recovery. In this case, we find that this has been done after the judgment dated August 25, 1987, Manohar Lal v. CIT (1988) 171 ITR 241 (All.).Notices have been issued in the names of the individual partners under section 156 first (see Annexures III and 1V). Annexure V is notice under rule 2 of the Second Schedule to the Act. It is issued in the name of the petitioners. Similarly, subsequent notices are also in the name of the petitioner as the partner of the aforementioned dissolved firm. Therefore, this is not a case where, in pursuance of a certificate issued against the firm, individual properties of the partners are sought to be proceeded against. After the judgment of this Court dated August 25, 1987 (see (1988) 171 ITR 241), the defect pointed out by the Division Bench has been rectified and notices have been issued under section 156 against the petitioner treating him as an assessee in default. Subsequent notices have all been issued in the name of and against the petitioner as the partner of the dissolved firm. We are, therefore, of the opinion that the judgment of this Court dated August 25, 1987 (see (1988) 171 ITR 241), does not operate as res judicata, nor does it preclude the respondents from seeking to recover the tax from the petitioner in pursuance of the impugned notices.

There is no ground to hold that the petitioner who was a partner of the dissolved firm, is not liable for the arrears of tax due from the said firm.

There are no grounds for interference in the matter. The writ petition fails and is accordingly dismissed. No costs.

M.BA./1551/T Petition dismissed.