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Judgment
Ramaprasada Rao, J.—""Messrs Ammonia Supply Corporation"" is a partnership firm. It had five partners originally consisting of the father,
wife, son, daughter-in-law and a third party. This was dissolved on 11th October, 1967. The dissolution was duly intimated to the taxing
authorities and the registration certificate issued to the firm was surrendered. After such dissolution, a new firm, consisting of different partners, but
drawn from the same family, was constituted on 13th October, 1967. The newly constituted partnership firm consists of the sons, mother and
daughter-in law and a third party. It is not in dispute that this new firm got itself registered as a dealer, after its constitution on 15th October, 1967,
and obtained new and separate registration certificates both under the Madras General Sales Tax Act and under the Central Sales Tax Act.
For the year 1966-67, the old firm of the Ammonia Supply Corporation was assessed to sales tax both under the Madras General Sales Tax
Act and under the Central Sales Tax Act. The assessing authority considered the objections of the assessee and passed the impugned order dated
9th January, 1968. In the very same order, notice in form 3 was issued to the assessee so that the tax could be recovered as per the order of
assessment. This notice of demand of recovery was served on the new firm. It may at once be stated that notwithstanding the constitution of the
new firm, the partners were trading under the same old style of ""Ammonia Supply Corporation"". When the notice of demand was served on the
new firm, the petitioner has come up to this court for the issue of a writ of prohibition restraining the respondent from processing through the notice
of demand by collecting the arrears of tax, as indicated in the order of assessment, from the petitioner, which is a separate legal entity in the eye of
law.
Learned counsel for the revenue, however, would state that as the partners of both the old and the new firms were drawn from the same family,
and as the trading style and the place of business are the same, the fair presumption is that there is identity both in law and in fact of both the old
and the new firms ; and, in this view, the latter firm (or the petitioner) should be deemed to be a ""transferee"" of the quondam dissolved partnership
firm. Reliance was placed upon Section 27 of the Madras General Sales Tax Act and it was urged that in view of this ""deemed transfer"" of the
assets of the quondam firm, there is no snapping of the responsibility of the new firm to pay the taxes payable by the quondam firm; and in that
view of the matter, no prohibition should issue.
I am unable to agree with Mr. Venkataswami, learned counsel for the revenue. Section 27 of the Act has no application whatsoever. Section 27
provides a safeguard for the recovery of taxes where the business of a dealer is transferred. In order to circumvent motivated and designed
transfers for the purpose of avoiding tax, the Legislature has provided that notwithstanding such a transfer, whether real or benami, the transferee
would also be liable along with the transferor for all such taxes which remained unpaid at the time of the transfer. In fact, Section 27 provides that
any tax or other amount due up to the date of transfer, though unassessed, may also be recovered from the transferee without prejudice to the right
of the revenue to take such appropriate action for its recovery from the transferor. The essential ingredient of this section is therefore the element of
transfer. A partnership is generally formed by consensus between partners and normally is the product of a contract. Such contract can be put an
end to once again by mutual consent, and this is done under what is legally termed as ""dissolution"". If, therefore, a partnership firm is dissolved by
consent, then there is a civil death of that firm and it no longer exists for any purpose excepting for certain purposes very well known in the eye of
law, such as recovery of taxes from the quondam partners or from the property of the erstwhile partnership firm. Once there is a dissolution, and a
reconstitution-if that expression can loosely be adopted of another firm-but with the same trading style, and by members drawn from the family to
which the quondam partners belonged, it cannot'' be said that the business of the first partnership was ""transferred"" within the meaning of Section
27 of the Act. The birth of the new partnership is a circumstance which is relatable to a fresh consensus between the new partners of the second
firm and it cannot be traced to any agreement in the nature of a ""transfer"" of business of the old firm to the new partnership firm. In this view,
Section 27 of the Act is inapplicable.
On the merits, the contention is raised that there is sufficient identity between the first and second firms, since the partners are relations, the
business place is the same, the trading style is not disturbed and the business also is within the same compass. But these factual details by
themselves cannot dislodge the legal status which the new partnership secures in the eye of law by a voluntary constitution of such a firm by
agreement between the new partners. By such an agreement, the consensus between the newly constituted members of the petitioner, therefore,
brings a firm which has no nexus legally with the old firm. The fact that the trading style is the same and some of the members of the new
partnership were members of the old partnership, or all the members of the new and the old partnerships are related, and belong to one family, are
all extraneous material for consideration, which cannot weigh while deciding whether the newly constituted firm on 13th October, 1967, is a
reflection of the old firm, or is identifiably the same in the eye of law. As I am of the view that the new firm, as constituted on 13th October, 1967,
which is the petitioner before me, is a separate entity in the eye of law, and has to be understood as such, I am unable to agree that on the merits
there is identity between the two firms which would enable the revenue to process through their notice of demand by recovering the arrears of sales
tax, admittedly payable by the old firm, from and out of the assets of the new firm.
There is abundant authority for the proposition that under the tax law, a partnership firm is a legal entity by itself which functions separately,
operates separately, and is approachable also separately. In this view of the matter, the second firm cannot be proceeded against for the arrears of
tax due by the first firm. In Mohamed Sulaiman & Go. v. State of Madras [1965] 16 S.T.C. 571 Ramamurti, J., in a similar situation, observed,
after reviewing the authorities on the point:
Where a person happens to be a common partner in two firms, the State, while realising the arrears of sales tax due from one of the firms or from
him as a partner thereof, is not entitled to seize the movable properties of the other firm, of which also he is a partner, which firm, however, is not
liable for the sales tax in question.
It cannot be disputed in the instant case that the arrears of tax demanded are not payable by the petitioner, as such. It is only a demand for
payment of tax concerning the quondam firm. Therefore, it follows that, that part of the order of the assessing authority that a notice of demand
shall issue to the petitioner-firm for recovery of the tax due by the quondam firm, is erroneous and, therefore, the rule nisi is made absolute, and the
writ petition is allowed. There will be no order as to costs.
The revenue is at liberty to proceed and recover the arrears of tax payable by the quondam firm by proceeding against the assets of the
erstwhile firm or against its partners individually, in accordance with the prescribed procedure under the Madras General Sales Tax Act and under
the common law.