Commissioner of Income Tax vs Sannanna Chetty and Sons

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, Elempillai. 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

felt 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 u/s 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 u/s 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 involving section 182(4) of the Act had not been satisfied and,

therefore, the orderspassed by the Income Tax Officer u/s 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 Commissioners 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 u/s 256(1) of the Act, that the following two questions of law,

as reframed, 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 u/s 182(4) was competent ?

(2) Whether, on the facts and in the circumstances of the case, the order passed by the Income Tax Officer, u/s 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 u/s 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 u/s 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

u/s 182(4) of the Act, had been made liable to pay the tax and a notice of demand u/s 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 u/s 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 partners,

whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or the 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 basis 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 No. 260, dated July 31, 1979 (1981) 131 ITR . 117 to the effect that, u/s 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 u/s 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, u/s 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 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 decided onne 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 u/s 156

of the Act. u/s 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. u/s 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 u/s 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 u/s 182(4) of the Act, such a case would fall u/s 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 u/s 182(4) of the Act, to prefer an appeal against the

order passed by the Income Tax Officer. Incidentally, we may also refer to Commissioner of Income Tax, U.P.,Lucknow Vs. Kanpur Coal

Syndicate, , 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-fulfilment 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 are 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 u/s 182(4) of the Act, u/s 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 fulfilment 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 812(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 fuilfilment 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 a 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 u/s 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.