THE III INCOME TAX OFFICER, CIRCLE - I, SALEM AND ANR. vs. ARUNAGIRI CHETTIAR

CIVIL APPEAL No. 1615/1979Supreme Court1996 INSC 63607 May 1996Bench: 2 JudgesAuthor: B.P. JEEVAN REDDY, S.C. SEN III11 pages
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What were the facts?

The respondent-assessee was a partner in a firm, Sannanna Chettiar and Sons, and retired on April 19, 1963. The firm was reconstituted with new partners and later dissolved. Assessments for the accounting years relevant to Assessment Years 1962-63 and 1963-64 were completed. The Income Tax Officer informed the respondent that he was jointly and severally liable for the firm's tax arrears for these years, as he was a partner during that period. The respondent denied liability, arguing he had retired and the reconstituted firm was responsible. Recovery proceedings were initiated, leading the respondent to file writ petitions in the High Court. The High Court allowed the petitions, holding that the Income Tax Act, 1961, lacked a provision similar to Section 46(2) of the 1922 Act, thus preventing recovery from an erstwhile partner. The Revenue appealed this decision.

What did the Supreme Court hold?

The Supreme Court allowed the appeal, setting aside the High Court's judgment. The Court held that an erstwhile partner remains liable for tax arrears due from the firm for the period he was a partner. Section 25 of the Partnership Act, 1932, establishes joint and several liability for all acts of the firm done while a partner was associated with it. The Court reasoned that this liability does not cease upon retirement. The absence of a provision in the Income Tax Act, 1961, similar to the proviso to Section 46(2) of the 1922 Act, does not alter this position, as the liability arises from the fundamental nature of partnership, not solely from procedural provisions like Order XXI Rule 50 of the CPC. The Court overruled the decision in Income Tax Officer, Assessment - II, Calicut & Anr. v. C. V. George & Ors. and approved the reasoning in Sahu Rajeshwar Nath v. Income Tax Officer. The introduction of Section 188-A in the Income Tax Act, 1961, effective from April 1, 1989, was noted as explicitly providing for this joint and several liability, clarifying what was previously implicit. The Court found no reason to distinguish between the 1922 Act and the 1961 Act regarding this fundamental liability.

What were the issues?

1. Whether an erstwhile partner is liable to pay tax arrears due from a partnership firm pertaining to the period during which he was a partner, despite retiring before the assessment or recovery proceedings, under the Income Tax Act, 1961? (Question of law) 2. Does the absence of a provision in the Income Tax Act, 1961, similar to the proviso to Section 46(2) of the Indian Income Tax Act, 1922, preclude the recovery of tax arrears from an erstwhile partner? Assessee's Contentions (as understood from the High Court's reasoning and the respondent's denial): The respondent denied liability on the grounds that he ceased to be a partner long before the recovery proceedings, that the firm's constitution changed after his retirement, and that the reconstituted partnership alone was responsible for the arrears. The High Court relied on the absence of a provision corresponding to the proviso to Section 46(2) of the 1922 Act in the 1961 Act. Revenue's Contentions: The Revenue assailed the High Court's judgment, arguing that the liability of an erstwhile partner for tax arrears accrued during his partnership subsists. They relied on the principle that a partner is liable for firm's acts during his tenure and cited the Supreme Court's affirmation of the Allahabad High Court's decision in Sahu Rajeshwar Nath v. Income Tax Officer.

Which sections of the Income-tax Act were involved?

Section 2(43),Section 156,Section 182,Section 183,Section 184,Section 185,Section 188,Section 188A,Section 189

AI-generated summary — verify with the full judgment below

- THE III INCOME TAX OFFICER, CIRCLE - I, SALEM AND ANR. A v. ARUNAGIRI CHETTIAR MAY 7, 1996 [B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.] B Income Tax Act, 1961 : Sections 2(43), 156 and 182 to 189. Assessment years 1962-63 and 1963-64-Partnership fimr'-Assessee erstwhile partner thereof-Firm reconstituted and subsequently dis- C solved-Liability of assessee to pay t~eld: Eve11 though assessee retired from partnership fim1 he was still liable to pay tax arrears due from partner- ship jinn pertaini11g to the period duri11g which he was ti partner-Abse11ce in the 1961 Act of provision similar to S.46(2) of 1922 Act made no dif- ference-S.188-A explicitly provided what was implicit hitherto--Part11ership'

Act, 1932, S.25-lncome Tax Act, 1922, S.46(2}-Code of Civil Procedure, · D 1908, Or. 21 R 50. The respondent-assessee was a partner in a firm from which he retired. On bis retirement, the firm was continued by taking in two new. partners. The said firm was subsequently dissolved. The assessments for E the accounting years relevant to the Assessnient years 1962-63 and 1963-64 were completed. The Income Tax Officer sent a communication to the respondent•assessee that in

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