M. Vedachala Mudaliar (died) and Others vs S. Rangaraju Naidu

Subrahmanyam, J.—The plaintiff appeals from the judgment and decree dated 30th November, 1955, on the file of the Subordinate Judge

of Pudukottai, in Original Suit No. 7 of 1954 on his file.

The plaintiff and the defendant''s father, Srinivasalu Naidu, were doing business as partners until Srinivasalu Naidu''s death, on 19th September,

1942. After his death, the defendant was admitted to the partnership in his father''s stead. The main business of the firm consisted in the sale of

petrol and allied products as agents of Messrs. Burmah Shell Company. The firm had its headquarters at Pudukottai and branch at Karaikudi and

other places. Though, on Srinivasalu Naidu''s death, that partnership was, in law, dissolved, accounts were not settled and the assets and liabilities

were taken over by the new firm of which the plaintiff and defendant were the partners. This partnership was registered under the Indian

Partnership Act. It continued to do business until it was dissolved by agreement of parties on 17th January, 1945. At the time of the dissolution,

proceedings for assessment of the profits of the firm to tax were pending. The assessment proceedings for the years 1943-44 and 1944-45 were

concluded after the dissolution. The profits, found by the Income Tax authorities to have been earned by the firm, were carried into the separate

accounts of each of the partners, one-half to the assessable income of the plaintiff and the other half to the assessable income of the defendant.

In assessing the profits of the firm of Vedachala Mudaliar and Rangaraju Naidu, the Income Tax authorities did not accept as correct the

accounts submitted by the firm. The authorities held that, in addition to the sum disclosed in the accounts, the firm had received moneys by sale of

diesel oil at prices in excess of the authorised price. During the accounting years 1942-43, 1943-44, control orders were in force relating to the

sale of petrol and diesel oil, and sale of diesel oil at prices in excess of the prices fixed by the control orders was an offence under the law. The

Income Tax authorities held, after enquiry, that there had been such sales on the part of this firm and although the amount determined by the

Income Tax officer as realised by the firm by such sales was reduced in appeal, the finding of the Income Tax officer that there had been such sales

was maintained and profits were determined accordingly.

After the proceedings relating to assessment of the partners to tax were completed, the Income Tax officer proceeded to take action u/s 28 of

the Act. Under that section, if the Income Tax officer is satisfied that any person has concealed the particulars of his income or deliberately

furnished inaccurate particulars of such incomer the officer may direct that such person shall pay, by way of penalty, such sum, in addition to any

tax payable by him, as the Income Tax officer may decide to levy. Acting under that section, the Income Tax officer passed orders in 1951

directing the firm to pay a penalty of Rs. 19,000 in respect of the year 1943-44 and Rs. 13,000 in respect of the year 1944-45. The proceedings

u/s 28 were commenced after the firm had been dissolved by agreement of parties. The Income Tax officer was aware of the fact of the

dissolution. In relation to the proceedings taken u/s 28 of the Act, notice was served only on the plaintiff as partner of the firm to show cause why

such penalty should not be levied. He appeared on behalf of the firm and showed cause. After the orders levying the penalty were passed, the

plaintiff was called upon to pay the entire amount and, on threat of coercive steps, he paid Rs. 16,000. The Income Tax officer sent the notice,

Exhibit B-2 on 3rd July, 1951 to the defendant informing him that the firm had been ordered to pay Rs. 32,000 as penalty u/s 28(1)(c) of the

Income Tax Act and that the plaintiff had paid his half share namely Rs. 16,000 and called on the defendant to pay the balance of Rs. 16,000. The

defendant did not pay. He took no notice of that demand. The plaintiff purporting to act on behalf of the firm appealed to the Appellate Assistant

Commissioner who reduced the penalty for both years together to Rs. 9,800. That sum was withheld out of the sum of Rs. 16,000 which had been

paid by the plaintiff and the balance was refunded to him.

The plaintiff called upon the defendant to pay the plaintiff a half of the sum of Rs. 9,800 which he had paid to the Income Tax authorities as

penalty levied u/s 28(1)(c) of the Act, and pay the plaintiff, further, a half of the expenses which he had incurred in conducting the proceedings

before the Income Tax officer and the Appellate Assistant Commissioner. The defendant repudiated liability. Consequently, the plaintiff instituted

the suit which has given rise to this appeal for recovery of a sum of Rs. 7,080-12-2.

The plaintiff stated in paragraph 7 of the plaint that the defendant had had the benefit of the entire profits realised by the firm during the

accounting years 1942-43, 1943-44 and that, since he had his share of the profits, he was bound to pay a half share of the liability. The plaintiff

pleaded further that the ascertainment of the profits and the payment to the defendant of his half share at the time of the dissolution of the

partnership in January, 1945 were subject to the defendant bearing a half share of the liabilities of the firm and that, even independently of that

contract, the defendant was bound under law to pay a half of the penalty which the plaintiff had paid and a half of the expenses which the plaintiff

had icnurred.

The defendant in his written statement pleaded that, during the period of his partnership with the plaintiff, the affairs of the firm had been

managed solely by the plaintiff, and that the defendant was a sleeping partner. The defendant denied that he had received or had been paid any

part of the profits said to have been illegally earned. The defendant pleaded that, since the plaintiff appeared to have had the exclusive benefit of

the illegal profits, he was bound solely to bear the burden of the penalty. The defendant alleged that at the time of the dissolution of the partnership,

accounts were settled in full between him and the plaintiff and there was no reservation of any contingent liability. Under the terms of the

dissolution, according to the defendant, the plaintiff alone was bound to bear the penalty. The defendant denied that any expenses had been

incurred as alleged in the plaint or that he was liable to bear a half of the expenses. The defendant contended that, the transaction in respect of

which the expenses were incurred being illegal, the defendant could not, in law, be called upon to pay the plaintiff any part of the expenses.

The learned Subordinate Judge held that the levy of the penalty was illegal; and that the Income Tax Officer did not have jurisdiction, after the

dissolution of the firm, to take action against the firm u/s 28 of the Act. It was conceded before him that, if the levy of the penalty was illegal and

without jurisdiction, the plaintiff could not claim contribution from the defendant. That was the main ground on which the learned Subordinate Judge

dismissed the plaintiff''s suit. The learned Subordinate Judge held further, that, even assuming that the Income Tax officer had jurisdiction u/s 28(1)

of the Act, after the dissolution of the partnership, to levy a penalty on the firm, the proceedings which ended in the order levying the penalty could

not bind the defendant, because no notice had been taken out to him calling on him to show cause why penalty should not be levied. There was a

subsidiary point mentioned by the learned Subordinate Judge in his judgment relating to the time when this alleged illegal transaction took place.

The defendant''s father died in September, 1942. The learned Subordinate Judge said that, during the accounting year 1942-43 the illegal

transactions had taken place during the father''s period of partnership and that, therefore, the defendant could not be made liable for the penalty

levied as for that year. The Subordinate Judge found also that, under the terms of the dissolution of the partnership in 1945, there was no

reservation of liability under which the defendant could be called upon to share with the plaintiff the liability to pay the penalty. On the question

whether the defendant was only a sleeping partner, the Subordinate Judge held that he was not. On the question whether both the partners would

be liable to pay the penalty if the levy of the penalty was justified, the Subordinate Judge held that both the partners would be liable.

The first question for decision in this appeal is whether the Income Tax officer acted without jurisdiction in taking action u/s 28(1) of the Income

Tax Act after the date of the dissolution of the firm. On that point, the appellant''s learned Counsel states that there is no plea in the written

statement that levy of penalty on the firm was illegal on the ground of want of jurisdiction. It is true that no such express plea appears in the

defendants'' written statement. But the plea raises a pure question of law on the facts admitted in the plaint. The plea was taken during the trial of

the suit and the learned Subordinate Judge has considered the plea and given a finding thereon. The question has therefore to be considered and

decided in the appeal. On that question, the learned Subordinate Judge held that the Income Tax officer did not have jurisdiction to take action u/s

28(1), after the date of dissolution of the firm. His view on that point is fully endorsed by the decision of this Court in S.V. Veerappan Chettiar

(died) and Another Vs. Commissioner of Income Tax and Another, . On facts not distinguishable from the facts of this case, it was held in S.V.

Veerappan Chettiar (died) and Another Vs. Commissioner of Income Tax and Another, that the basic principle underlying Section 28(1) is that a

penalty could be levied under the section only on a person in existence on the date the penalty is imposed by the competent authority and that the

Act could not authorise the Income Tax Officer to levy a penalty u/s 28(1) on the assessee which had ceased to be in existence on the relevant

date. The Subordinate Judge''s view that the order passed by the Income Tax Officer, confirmed in appeal by the Appellate Assistant

Commissioner, and the Income Tax Appellate Tribunal is an order which is legally not sustainable is correct. That finding, however, would not

conclude the case against the plaintiff. It appears to have been conceded in the lower Court by the learned advocate who appeared for the plaintiff

that, if the penalty levied by the Income Tax officer was without jurisdiction, the plaintiff could not claim contribution from the defendant. That was

an erroneous concession on a point of law. The order levying penalty might be an order passed without jurisdiction. But so long as the order

remained in force, it would be lawful for the Income Tax authorities to call upon the revenue authorities concerned to enforce the order and collect

the penalty. The collection of the penalty would not be unlawful though the order had been passed without jurisdiction. The only consequence of

the order being an order passed without jurisdiction is that, if appropriate steps were taken in the appropriate forum, the order may be set aside.

That is what happened in S.V. Veerappan Chettiar (died) and Another Vs. Commissioner of Income Tax and Another, . On the basis of the order,

the authorities sought to collect the tax. The assessee filed a petition for the issue of a writ of certiorari for quashing the order and that petition was

allowed. If the assessee had not filed that writ petition and obtained an order quashing the order of the Income Tax Officer, the assessee would not

have been permitted to resist enforcement of the order levying the penalty. In this case, the plaintiff appealed to the Appellate Assistant

Commissioner and the Income Tax Appellate Tribunal. The penalty was reduced by the Appellate Commissioner. No further relief was obtained

from the Tribunal. The plaintiff did not take any further steps to have the order quashed. The defendant received the communication Exhibit B-2

from the Income Tax Officer personally informing him that the order levying the penalty had been passed and that he was liable to pay the amount

which remained unpaid. He did not take any action to have the order set aside. Therefore, the order could have been enforced either against him

or against the plaintiff. The liability of the firm was the joint and several liability of the partners. I find that the fact that the order levying the penalty

had been passed by the Income Tax authorities without jurisdiction does not by itself disentitle the plaintiff to the relief of contribution.

The next contention urged on behalf of the defendant, which the learned Subordinate Judge accepted, was that the order was, in any event, not

binding on the defendant. The reason urged in support of the contention was that notice of the proceedings u/s 28 had not been given to the

defendant until after the order had been passed by the Income Tax Officer. But in a case where action is taken u/s 28(1) against a firm, notice

required u/s 28(3) may be served on a partner of the firm. Section 63(2) of the Act is to the same effect. Since notice of the proceedings u/s 28(1)

was served on the plaintiff, the defendant cannot plead that he had not been personally served with notice before the Income Tax Officer passed

the order levying the penalty.

I find that neither the fact that the order of penalty might have been set aside if appropriate steps had been taken in the High Court nor the fact

that the order was made without giving personal notice to the defendant disentitles the plaintiff to these relief of contribution.

The next question is whether, notwithstanding that the order levying the penalty might have been enforced either against the plaintiff or against

the defendant, the plaintiff is not entitled to the relief of contribution, by reason (1) either of the contract between the parties at the time of the

dissolution or (2) under the rule of law relating to contribution as between wrong-doers.

On the question whether, under the contract between the parties at the time of the dissolution of the partnership in 1945, the defendant was

bound to contribute towards the penalty paid by the plaintiff, the learned Subordinate Judge finds that there was no agreement between the parties

at the time of the dissolution whereby the defendant undertook to share any such liability. There is the evidence of the plaintiff who says:

After the defendant ceased to be a partner that is after 16th January, 1945, I associated Manager Govindarajulu Naidu as a partner.... The new

partnership took over the assets and liabilities of the old partnership and continued as before.

The defendant stated:

On 16th January, 1945 there was a dissolution of partnership between us, and I was paid half a share of the profits accrued and the whole of the

capital contributed by me. The plaintiff took the entire stock in trade of the business....

At the time of the the dissolution it was agreed that I should not be held liable for any tax that might be levied on the suit partnership. The plaintiff

must have spent the moneys in his, own interest.

In the order of the Income Tax officer, dated 16th March, 1950 relating to the year of assessment 1945-46, the Income Tax Officer states in

relation to the firm of Vedachala Mudaliar and Rangaraju Naidu:

The assessee firm was dissolved on 16th January, 1945, the assets and liabilities of the firm having been taken over by Mr. M. Vedachala

Mudaliar. The other partner Mr. S. Rangaraju Naidu has retired from the business.

It would of course not be correct to describe the transaction as a transaction of retirement of the defendant from the partnership. The expression

retirement"" would be appropriate if there were more than two partners at that time and the partners other than the retiring partner continued the

business as a firm. In this case, the plaintiff and the defendant were the only partners and the appropriate terms in relation to the severance of the

defendant from the business is dissolution and not retirement. There was no firm in existence immediately after the defendant severed his

connection with the business. It was being continued by Vedachala Mudaliar as the sole proprietor. A few weeks thereafter he entered into a

partnership with Govindarajulu Naidu in relation to the same business and the business which was the exclusive concern of Vedachala Mudaliar

became the business of the partnership after the formation of the firm of which Vedachala Mudaliar and Govindarajulu Naidu were partners.

In support of the proposition that the defendant was bound to pay a half share of the penalty, the appellant''s learned Counsel relied on the

decision in Haveli Shah v. Charan Das AIR 1929 P.C. 184. In that case after the dissolution of the partnership, two items which represented

properties of the partnership were received by the principal partner who was continuing the business. The junior partners who had ceased to be

partners by reason of the dissolution claimed their share of the assets. It was held by the Courts in India that the junior partners were entitled to a

share. The Judicial Committee confirmed that decision. It was found that those two items which were subsequently received, were destined for the

assets of the firm and were not included in the accounts which were settled at the time of the dissolution. After the dissolution, the principal partner

had given receipts for the moneys due to the junior partners. The question whether the junior partners were entitled to a share of the assets

received after the dissolution turned on the construction of those receipts. If, as a matter of construction of the receipts, it could be said that the

accounts were finally settled and that the junior partners would not be entitled to any share in the assets received subsequent to the dissolution,

notwithstanding that such assets were not included in the accounts, the suit would fail. If, on the other hand, on a construction of the receipts, it was

found that the intention of the parties was that the accounts should be settled in relation only to the matters stated in the accounts and that, as

regards subsequent receipts, the parties would be entitled to shares in the same way as they would have been entitled before the settlement of

accounts, the junior partners would be entitled to succeed. On the terms of the receipts and looking at the context in which the receipts were

passed, the Courts held that the settlement at the time of the dissolution did not extend to the assets received subsequent to the dissolution; and

that, therefore, in the items subsequently received the junior partners were entitled to a share, in the same way as they would have been if the

assets had been received before the dissolution. That decision, therefore, does not lay down a rule of law applicable to every case of an asset

falling in, or a liability arising, after the dissolution of a partnership. With reference to the terms of the dissolution of the partnership between the

plaintiff and the defendant, we would have to determine whether, in regard to any liability which accrued thereafter as a liability of the partnership,

the defendant would have to share the burden with the plaintiff. The plaintiff''s own evidence makes it clear that, after the date of the dissolution, the

defendant had nothing to do either with the assets or the liabilities of the partnership. If any item of asset were discovered subsequent to the

settlement of accounts, as an asset of the partnership, the defendant would not be entitled to claim a share in such asset. He handed over the

business to the plaintiff as his exclusive concern and received profits as ascertained from the accounts and the capital contributed by him and

ceased his connection with the business. The inference to be drawn from the evidence is that the business inclusive of the assets and liabilities as

they stood on the date of the dissolution and of assets and liabilities which might be discovered or might accrue after the date of dissolution became

the exclusive concern of the plaintiff, and that the defendant would not be entitled to any asset which might be discovered subsequent to the

dissolution and would not be liable to share any burden which might accrue subsequent to that date. I find on this point that, under the agreement

between the parties at the time of the dissolution, the plaintiff was bound himself to bear the penalty that was levied. The next question, is whether

assuming that there was no agreement between the parties, either express or implied, relating to the penalty, the plaintiff would, in law, be entitled

to claim contribution. Discussion of that question often takes the form of a discussion of the applicability in India of the rule stated in Merryweather

v. Nixan (1799) S.T.R. 186. It is unnecessary to consider the facts of that particular case, or the precise form of the rule laid down therein. An

exhaustive discussion of the subject is found in Yegnarayana v. Yagannadha Rao (1931) 34 L.W. 618. The rule in the form in which it should be

applied in our country is thus stated by Madhavan Nair, J., in that case:

If an act is unlawful, or the doer of it knows it to be unlawful as constituting either a civil wrong or a criminal offence, he cannot maintain an action

for contribution or for indemnity against the liability which results to him therefrom.

If two persons deliberately commit an offence and derive profits therefrom and the commission of the offence involves them in a penalty for which

they are jointly and severally liable, one person from whom the penalty is wholly realised cannot maintain an action for contribution against the

other. That decision is in full accord with the earlier Bench decision of this Court in Manja v. Kadugochen ILR 9 Mad. 89. That decision itself

followed the Bench decision in Suput Singh v. Imrit Tewari ILR (1880) Cal. 720. It is true that the rule, as stated by Madhavan Nair, J., in

Yegnarayana v. Yagannadha Rao (1931) 34 L.W. 618, was not fully endorsed by King, J., in Edara Venkata Rao Vs. Edara Venkayya, . The

view of King, J., was adopted in Dharna Dhar v. Chandra Shekhar ILR (1952) 1 All. 759. In England, the rule as to joint tort-feasors not being

entitled to contribution has been abrogated by the Law Reform (Married Women and Tort-feasors) Act, 1935. Section 6 of the Act states that

where damage is suffered by any person as a result of a tort (whether a crime or not) judgment recovered against any tort-feasor liable in respect

of that damage shall not be a bar to an action against the other tort-feasor and every tort-feasor liable in respect of that damage may recover

contribution from any other tort-feasor. There is, however, no right of contribution from any person who is entitled to be indemnified by the person

seeking contribution. The English Act would not, in terms, apply to a case like the present where the liability was not founded on a tort but arose

out of acts for which the State levied a penalty. But, irrespective of whether the English Act would be applicable to the facts before us, I am bound

to follow the rule laid down in Manja v. Kadugochen ILR 9 Mad. 89 and Yegnarayana v. Yagannadha Rao (1931) 34 L.W. 618. The rule of law

to be applied to this case may be thus stated : Where as a result of wilful wrong-doing on the part of two persons, they became jointly and

severally liable to pay a penalty to the State, and such penalty is recovered wholly from one person, he cannot maintain a suit against the other for

contribution.

That leads us to the question of fact whether there was wilful wrong-doing on the part both of the plaintiff and the defendant. If the sales of

diesel oil at prices in excess of the price prescribed by law had been made by the employees of the firm without the knowledge of the partners, the

firm could not justly have been made liable to pay a penalty. It is true that, in this case, there is no evidence that either partner directed the sale of

diesel oil at prices in excess of the legally permissible price or appropriated profits accruing therefrom. But we cannot obviously have evidence of

that kind in this suit, because the persons examined are the plaintiff and the defendant and the employees of the firm. On that point, we have only

the statements found in the orders of the Income Tax Authorities, when they declined to accept as correct the accounts submitted by the firm for

the assessment years 1943-44 and 1944-45. The question for decision is whether the statements made in the orders for assessment form legally

admissible evidence. That question, I answer in the affirmative on the basis of the decision in Koppanna Chelamiah v. Suryanarayana Jagapathi

(1920) 37 M.L.J. 346 : 10 L.W. 261. I adopt, with respect, the statement of the law made in that case that the judgment in a suit which is the

basis of a suit for contribution is admissible in evidence in the suit for contribution. In that case, the Subordinate Judge based his decision on the

finding in the previous judgment which showed that the plaintiff was a joint tort-feasor. This Court held that the Subordinate Judge was right. In this

case, the Officer, who passed orders of assessment in relation to the assessment years 1943-44 and 1944-45, and in relation to the levy of

penalty, held that the firm was itself a party to the illegal sales. The Income Tax Officer stated in his order, dated 28th February, 1951 that the

assessee had concealed his income and furnished inaccurate particulars of it. The Appellate Assistant Commissioner stated in his order, dated 15th

October, 1952 that the transactions in the black market and income therefrom were concealed by the appellant and so the penalties were rightly

levied. The Income Tax Appellate Tribunal, dealt more specifically with the question whether the sales had been made without the knowledge of

the partners. The Tribunal stated:

It is idle for the assessee to attempt to make a scape-goat of its employees at Karaikudi.

The probability is that the employees would not sell in black market without the approval of the partners. The finding recorded by the Income Tax

Authorities that the assessee, namely, the partners, authorised the illegal sales is correct, and I accept it. There is evidence that both partners were

in management of the affairs of the firm. The learned Subordinate Judge has accepted that evidence. I see no reason to differ from him. I find that

the penalty was the result of deliberate wrong-doing on the part of both the partners. That being so, I find that the rule of law enunciated in

Yegnarayana v. Yagannadha Rao (1931) 34 L.W. 618, becomes directly applicable, and one partner cannot sue the other for contribution.

The learned Counsel for the appellant relied on Section 69 of the Indian Contract Act, for relief. Section 69 enacts:

A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed

by the other.

I do not think that that section can be invoked in a case where contribution is claimed. It is only where one person pays, because he is interested in

such payment, what another person is alone liable to pay, that the section can be invoked. I find that the appellant is not entitled to relief u/s 69 of

the Contract Act.

Under the agreement between the parties at the time of the dissolution, the liability to pay the penalty was solely that of the plaintiff. Hence even

if the rule of law applicable be the rule enacted in Law Reforms (Married Women and Joint Tort-feasors) Act, 1935, the plaintiff would not be

entitled to contribution from the defendant. The rule as to contribution is cancelled by the right of indemnity arising on the agreement.

The decree of the Subordinate Judge is correct, though not for the reasons given in his judgment. The appeal is dismissed with costs.