(a) Income-tax---

---Recovery of tax---Firm---Tax due from partner---Liability of firm for such tax---Scope of section 182(4), Indian Income Tax Act, 1961---Conditions precedent for application of the section---Indian Income-tax Act, 1961, S.182(4).

Though ordinarily the tax due from a partner cannot be recovered from the firm and every partner has to discharge the liability to tax fastened on him by himself, section 182(4) of the Income-tax Act, 1961, enables the retention by the firm of the share of income of each partner not exceeding 30 per cent. until such time as the payment of the tax by the partner in respect of his share is made. This retention of share of income of the partner in the firm to the extent of 30 per cent. is intended to be held as a security for the due payment of tax by the partner in respect of the tax levied on him in respect of his share income. Only if the tax levied on the partner cannot be recovered from him, whether partially or in its entirety, the firm would be liable to pay the tax to the extent of the retained amount. Section 182(4) is in the nature of a salvage provision in order to realize the tax payable by the partner. Accordingly, before section 182(4) could be invoked, there should be (1) ir-recoverability of tax from the partner on whom it is assessed, and (2) the tax sought to be realised ought not to be in excess of 30 per cent of the defaulting partner's share in the profits of the firm. The circumstance that there are some difficulties or there is delay in the matter of recovery of the tax from the partner would not justify resort by the Income-tax Officer to section 182(4). Though section 182(4) does not contemplate the passing of any order as such by the Income-tax Officer to this effect, and though there is a statutory transformation of the liability to tax of the partner into that of the firm when the firm is sought to be made liable to pay the tax, it would be necessary for the Income-tax Officer to effectuate section 182(4) of the Act and this could be done by making a demand for tax against the firm. That would mean that the Income-tax Officer is required to state that the conditions for demanding the tax against the firm have been fulfilled rendering the firm liable to pay the tax and a demand is also made by the issue of a notice of demand under section 156.

(b) Income-tax---

----Appeal to A.A.C.---Firm---Competency of appeal---Scope of section 246(c), Indian Income Tax Act, 1961---Tax due by partner demanded from firm---Firm can appeal to AAC---Indian Income-tax Act, 1961, Ss.182(4), 246(c).

Under section 2(7), Indian Income. Tax Act, 1961 "assessee" means a person by whom any tax or any other sum of money is payable under the Act and when a notice of demand under section 156 is issued to a firm after the ITO is satisfied about the requirements of section 182(4), Indian Income Tax Act, 1961 being fulfilled, it would follow that the firm would be an assessee by whom tax is payable. Accordingly, when a notice of demand is issued to a firm for payment of a sum of money, the firm can file an appeal against the demand denying its liability to pay that amount. The words "denial of liability" in section 246(c) are comprehensive enough to take in not only total denial of liability, but also the liability to tax under particular circumstances.

(c) Income-tax---

----Reference---Powers of High Court---High Court-cannot consider question of fact---Tax whether recoverable from partner---Not agitated before AAC or Tribunal---Cannot be considered by High Court---Indian Income-tax Act, 1961, Ss.182(4), 256.

The question of recoverability or otherwise of tax from a partner was essentially a question of fact. This question was not agitated by the Revenue either before the Appellate Assistant Commissioner or the Tribunal, and therefore, the High Court could not consider such a question on a reference:

CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) ref.

N. V. Balasubramaniam for the Commissioner. R. Janakiraman for the Assessee.

JUDGMENT

RATNAM, J.---During the previous years relevant to the assessment years 1962-63 and 1963-64, one S. Rajannan was a partner in the assessee-firm, Messrs Sannanna Chetty and Sons, Elampillai. His share income for the assessment years 1962-63 and 1963-64 was Rs. 94,206 and Rs. 50,011, respectively. Since the tax payable by S. Rajannan for the aforesaid assessment years was outstanding, the income-tax Officer fell that the firm, Messrs Sannanna Chetty and Sons, should have retained 30% of the share income payable to the partner, S. Rajannan, as per section 182(4) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and issued a notice to the firm on June 30, 1975, to pay the amount that should have been retained under section 182(4) of the Act against the income-tax payable by the partner, S. Rajannan, for the assessment years 1962-63 and 1963-64. In response to, the notice so issued, the firm, Messrs Sannanna Chetty and Sons, took up the stand that it had not been established beyond doubt that the tax levied on the partner, S. Rajannan, could not be recovered from him and that there was also no machinery provision for enforcing section 182(4) of the Act. The Income ?tax Officer overruled the stand of the firm, Messrs Sannanna Chetty and Sons, holding that section 182(4) of the Act imposed an obligation on the firm to retain 30% of the share income until such time as the tax levied on the partner's share is paid by him, whether any recovery proceedings were initiated or not, and that as the firm had failed to retain 30% of the share income of the partner, S. Rajannan, the firm, Messrs Sannanna Chetty and Sons, was directed to pay a sum of Rs. 28,262 and Rs. 15,003, respectively, for the assessment years 1962-63 and 1963-64 and notices of demand under section 156 of the Act were also issued to the firm. On appeals preferred by the firm, Messrs Sannanna Chetty and Sons, an objection was raised by the Revenue to the maintainability of the appeals. The Appellate Assistant Commissioner took the view that the appeals were maintainable and considering the correctness of the orders passed by the Income-tax Officer, the Appellate Assistant Commissioner held that as it had not been found by the Income-tax Officer that the tax was not recoverable from the partner, S. Rajannan, one of the essential conditions for invoking section 182(4) of the Act had not been satisfied and, therefore, the orders passed by the Income-tax Officer under section 182(4) of the Act against the firm, Messrs. Sannanna Chetty and Sons, for the assessment years 1962-63 and 1963-64 were bad in law. Aggrieved by this, the Revenue preferred appeals before the Tribunal contending that the appeals preferred by the firm, Messrs Sannanna Chetty and Sons, before the Appellate Assistant Commissioner were not maintainable and that the provisions of section 182(4) of the Act had been properly applied. The Tribunal had no hesitation in rejecting the contentions of the Revenue and dismissing the appeals. It is, thereafter, at the instance of the Revenue under section 256(1) of the Act, that the following two questions of law, as refrained, have been referred to this Court for its opinion

"(1) Whether, on the facts and in the circumstances of the case, the appeal filed by the assessee before the Appellate Assistant Commissioner against the order passed by the Income-tax Officer under section 182(4) was competent ?

(2) Whether, on the facts and in the circumstances of the case, the order passed by the Income-tax Officer, under section 182(4), was not maintainable in law ?"

Learned counsel for the Revenue contended that the view taken by the Tribunal on the question of the maintainability of the appeals was erroneous, as section 246(c) of the Act, as it then stood, could not have been invoked by Messrs Sannanna Chetty and Sons, since the order passed under section 182(4) of the Act against that firm could not be regarded as an order against an assessee, where the assessee denied his liability to be assessed under the Act, falling under and appealable as well under section 246(c) of the Act, as it then stood. On the other hand, learned counsel for the assessee submitted, drawing attention to sections 2(7), 182(4) and 246(c) of the Act, that the firm, by the order passed by the Income-tax Officer under section 182(4) of the Act, had been made liable to pay the tax and a notice of demand under section 156 of the Act had also been served upon the firm demanding payment of the amount of tax payable by the partner, S. Rajannan, and the firm, Messrs Sannanna Chetty and Sons, should be regarded as an assessee, for purposes of the Act, denying its liability, squarely falling under section 246(c) of the Act and, therefore, the Tribunal was right in concluding that the appeals were maintainable.

Before proceeding to consider this contention, it would be appropriate to refer to section 182(4) of the Act. That section states that a registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or that could have been so retained. The purpose behind section 182(4) of the Act appears to be this. Ordinarily, the tax due from a partner cannot be recovered from the firm and every partner has to discharge the tax liability fastened on him by himself. Section 182(4) of the Act, however, enables the retention by the firm of the share of income of each partner in the firm not exceeding 30%, until such time as the payment of the tax by the partner in respect of that share. This retention of the share of income of the partner in the firm, not exceeding 30%, is intended to be held as security for the due payment of the tax by the partner of the firm, in respect of the tax levied on the partner in respect of his share income. The further provision in section 182(4) of the Act is to the effect that if the tax levied cannot be recovered from the partner, whether partially or in its entirety, then, the firm would be liable to pay the tax to the extent of the retained amount or the amount which could have been retained. In the Indian Income-tax Act, 1922, there was no provision corresponding to section 182(4) of the Act. The basic idea behind section 182(4) of the Act is that if default is committed by a partner in the payment of his tax, the firm of which he is a partner is liable to pay the tax to the extent of the amount retainable by the firm equal to 30% of the share of each partner in the income of the firm irrespective of whether there is any factual retention or not. We may also, in this connection, refer to Circular A No.260, dated July 31, 1979 ([1981] 131 ITR (St.) 117) to the effect that, under section 182(4) of the Act, the legal liability to retain the amount equal to 30% of the share of each partner in the income of the firm arises even before the tax is levied by the Income-tax Officer and is communicated to the partners and the amount has to be retained as a sort of security by the registered firm towards the payment of the tax liabilities of the partners and has to be released only after the said liability has been duly discharged by the partner or on his behalf. From the provision under section 182(4) of the Act and its avowed object as set out in the circular, it is obvious that it is intended as almost a salvage provision, as it were in that to realise the tax payable by the partner, when not paid or otherwise discharged, recourse could be had to 30% of the share income of the partner in the firm. However, before the firm could be made liable, two conditions must co-exist. The first is the irrecoverability of tax from the partner on whom it is assessed; and the second is, the tax sought to be realised ought not to be in excess of 30% of the defaulting partner's share in the profits of the firm. If the aforesaid conditions are fulfilled, then, under section 182(4) of the Act the liability of the partner of a firm to pay tax is transformed into a tax liability of the firm. It is true that section 182(4) of the Act does not contemplate the passing of any order as such by the Income-tax Officer to this effect, but even though there is statutory transformation of the liability to tax of the partner into that of the firm, when the firm is sought to be made liable to pay the tax, it would be necessary for the Income-tax Officer to effectuate section 182 (4) of the Act and this could be done by making a demand for tax against the firm. That would mean that the Income-tax Officer is required to state that the conditions for demanding the tax against the firm liable to pay the tax and a demand is also made by the issue of a notice of demand under section 156 of the Act. Under section 156 of the Act, the Income-tax Officer is enabled to serve upon the assessee a notice of demand when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act. Under section 2(7) of the Act, "assessee" means a person by whom any tax or any other sum of money is payable under the Act and when a notice of demand under section 156 of the Act is issued to the firm, after the Income-tax Officer is satisfied that the requirements of section 182 (4) of the Act are fulfilled, it would follow that the firm would be an assessee by whom tax is payable. When an assessee denies its liability to be assessed under section 182(4) of the Act, such a case would fall under section 246(c) of the Act enabling the firm as an aggrieved assessee denying its liability to be assessed and made liable for payment of tax under section 182(4) of the Act, to prefer an appeal against the order passed by the income-tax Officer. Incidentally, we may also refer to CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225(SC), where it has been pointed out by the Supreme Court that the words "denial of liability" are comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances. In this case, the attempt of the assessee by preferring the appeals was to establish that the liability of the firm to tax is not there because of the non-fulfillment of one of the essential ingredients for the application of section 182(4) of the Act and that in turn would lead to a total denial of liability on its part by the assessee. We have carefully considered the objection raised by learned counsel for the Revenue, but we arc not persuaded to accept the argument regarding the non-maintainability of the appeals at the instance of the firm. M/s. Sannanna Chetty and Sons. We agree with the Tribunal that the appeals preferred by the firm M/s. Sannanna Chetty and Sons, against the demand for payment of tax, pursuant to proceedings under section 182(4) of the Act, under section 246(c) of the Act before the Appellate Assistant Commissioner were maintainable. We, therefore, answer the first question in the affirmative and against the Revenue.

We now proceed to a consideration of the second question. We have earlier referred to the two conditions which should be fulfilled before recourse to section 182(4) of the Act can be had. One such condition to which we have already adverted is the irrecoverability of the tax from the partner on whom it had been assessed. In this case, on a careful perusal of the order passed by the Income-tax Officer, we find that it had nowhere been stated that the tax levied on the partner cannot be recovered. In the absence, therefore, of the fulfillment of this important ingredient, the Income-tax Officer could not have proceeded to hold the firm liable for the tax levied on the partner in respect of his share income. We may also point out that the circumstance that there are some difficulties or there is delay in the matter of recovery of the tax from the partner would not justify resort by the Income-tax Officer to section 182(4) of the Act. The retention up to a limit of 30% of the share of each partner in the income of the firm and the statutory imposition of the liability to tax on the firm to the extent of the amount retained, in the event of the irrecoverability of the tax levied on the partner, whether wholly or in part, clearly indicate that, in the absence of the fulfillment of the requirement regarding irrecoverability, the mere retention would be of no avail, as the statutory transformation of the liability takes place only in the event of the irrecoverability of the tax payable by the partner of the firm and not otherwise. We are, therefore of the view that on the facts of this case there was no justification whatever for the Income-tax officer to have invoked section 182(4) of the Act. Learned counsel for the Revenue strenuously contended that the tribunal should have directed the Income-tax Officer to go into the matter and find out whether the conditions contemplated under section 182(4) of the Act have been fulfilled or not. The question of recoverability or otherwise of the tax from the partner is essentially one of fact and should have been agitated by the Revenue at the appropriate stage. We find that, neither before the Appellate Assistant Commissioner nor even before the Tribunal, the Revenue had taken the stand that the factual question regarding the irrecoverability of the tax from the partner should have been further investigated by the Income-tax Officer. We do not, therefore, see any justification whatever for entertaining this belated attempt of the Revenue at this stage to settle a vital question of fact which had gone almost unnoticed by the Revenue at the appropriate earlier stages of the proceedings. We, therefore, answer the second question referred to us also in the affirmative and against the Revenue. The assessee will be entitled to the costs of this reference Counsel's fee Rs. 500. One set.

M.BA./1612/T???????????????????????????????????????????????????????????????????????????????????? Questions answered