Mamchand and others vs Income Tax Officer ''B'' Ward and another

Jaganmohan Reddy, J.—This petition for the issue of a writ certiorari is directed against the order of the income tax Officer, Hyderabad City Circle (B Ward) and the Collector Hyderabad District demanding a sum of I. G. Rs. 1,67,186-0-0 as income tax and threatening to recover the amount as Government dues. The '' petitioner alleged that he obtained in auction from the Excise Department the right to sell liquor in Sultan Bazar Shop on a monthly premium of Rs. 7726 for the year 1357 Fasli corresponding to the period from 1-10-1947 to 30-9-1948. Eight other persons viz., Bansilal Sivacharan, Ashrafilal, Bikkamlal, Jagdishpershad, Ibrahim Ali Akber, Rameshwar Reddy, Balapershad, D. D. Italia, also obtained similar shops and in order to avoid unhealthy competition they formed a pool under the name and style of "Hyderabad Deccan Liquor Syndicate, Narayanguda" to sell liquor in the respective areas authorised to them.

This Syndicate was supervised by the first named gentleman Bansilal Sivacharan whose function, according to the affidavit of the petitioner was to supervise the sales on agreed prices and to distribute the profits according to the total sales in proportion to the premium amounts paid by the respective contractors. It is therefore contended that the said syndicate was neither a partnership nor an association of persons. Inasmuch as the licence to sell liquor granted to the petitioner and the other eight contractors, was valid only for the year 1357 Fasli, the pool arrangement came to an end at the end of Aban 1357 Fasli corresponding to 30-9-1948 and Bansilal Sivacharan ceased to function as a supervisor.

It may be stated that the petitioner, it is alleged, included in his return of total income made to the income tax Officer, the income received by him from the pool arrangement with respect to the Sultan Bazar Shop and since there was loss in another business the income tax Officer by his order of 30-4-1952 did not levy income tax and even allowed a loss of Rs. 6,583 to be carried forward to the succeeding year.

In or about August, 1951, the income tax Officer purporting to act on information issued a notice to Bansilal Sivacharan under S. 46, Hyd. income tax Act, which was not served on the said Sivacharan, but was affixed to his residence on 21-8-1951, made an order assessing the Syndicate at I. G. Rs. 1,67,186 and asked the Collector, Hyderabad District to collect this amount as Government debt. The Collector thereupon sent a notice to the petitioner on 28-12-1951 calling upon him to pay the tax amount. According to the petitioner this notice reached him on 18-2-1954 and it was then for the first time that he learnt about the assessment. Prior to this notice he avers that he had no knowledge of the proceedings initiated by respondent 1, nor about the ex parte assessment.

In these circumstances on the receipt of the notice, the petitioner, immediately presented a revision petition before the Commissioner on 4-3-1954 for the cancellation of the assessment order under S. 53-B corresponding to S. 45(1) , Hyderabad income tax Act and in the alternative to order the income tax Officer to withdraw the order directing the Collector to recover the tax. It appears that two further petitions were presented by the applicant before the income tax Officer, B Ward on 16-3-54 and on 22-4-1954 asking for the previous orders to be set aside and a proper demand notice issued to him.

The Commissioner rejected these petitions on 27-4-1954 on the ground (that S. 33B, Indian income tax Act was not applicable) of their being barred by limitation under S. 45(1) , Hyderabad income tax Act because the order complained of was passed beyond one year from the date of the application for revision. The provisions of S. 33B, Indian income tax Act which empowered the Commissioner to call for the records and revise the orders within two years from the date of the passing of the order were held inapplicable to the facts of the petitioner''s case.

The petitioner contends that inasmuch as the Syndicate was formed for the year 1357 F. and it was dissolved on 30-9-1948, it ceased thereafter to excise as an association of persons and if the income tax Officer wished to re-open the assessment on the basis of escaped income he should have served notices individually on all persons who formed the association. He further claims that before a debt can be recovered from the petitioner under the Hyderabad Recovery of Debts Act, there must be a debt due to the Government and as in the absence of a proper notice of demand issued to him under S. 41, Hyderabad income tax Act which inter alia provides that:

When any tax or penalty is due in consequence of any order or in pursuance of this Act, the income tax Officer shall serve upon the assessee or other person liable to pay tax or penalty notice of demand in the prescribed form specifying the sum so payable.

the entire assessment is ultra vires. It was also pointed out that one of the members of the alleged association Shri D. D. Italia was already taxed to the extent of Rs. 49,367 for the accounting year 1357 F. in respect of the profits alleged to be accrued to the said association and Shri Rameshwar Reddy was also similarly assessed at Rs. 1,02,693 in respect of the profits received from the same association for the same period. It is urged that in these circumstances, the demand on the petitioner is opposed to law and would amount to double taxation.

The respondent in his counter did not deny the salient facts. It was, inter alia contended that the Hyderabad Deccan Liquor Syndicate was an assessee on the files of, the income tax Officer, B Ward and that notice under S. 30(2) , Hyderabad income tax Act was served on Bansilal Sivacharan calling upon him to file a return on behalf of the Hyderabad Deccan Liquor Syndicate. It is further alleged that as no return was filed in spite of a notice being served on the manager, Bansilal Sivacharan, the Syndicate was eventually assessed on 16-2-1952 under S. 31(4), Hyderabad income tax Act on the basis of the best judgment on a total income of Rs. 4,43,296-0-0 treating the status of the assessee as an association of persons.

The respondents maintain that as the Syndicate failed to pay the tax, a notice under S. 46(2) , Indian income tax Act was issued to the Collector, respondent 2, directing him to collect the tax from the individual members of the association under the provisions of S. 58, Hyderabad income tax Act. The absence of petitioner''s knowledge of the proceedings is denied and it is alleged that during the course of the said proceedings the petitioner appeared as a witness and gave his statement which was recorded by the income tax Officer B Ward City Circle.

In the counter filed on behalf of respondent 1 it is contended that the assessment on the discontinued syndicate could be made under S. 35(4) , Hyderabad income tax Act and that under S. 78 of the Act, it is sufficient to serve the notice on the principal Officer of the Syndicate. At any rate the provisions of S. 63(2), Indian income tax Act which govern procedural matter, would apply and the notice of service on Bansilal Sivacharan was sufficient. It was further contended that under S. 56, Hyderabad income tax Act, every person who was a member of the dissolved association of persons at the time of discontinuance or dissolution is jointly and severally responsible for the profits thereon and the amount of tax payable and that all provisions, of Chap. V, Hyderabad income tax Act will, as far may be, apply to such assessment.

With respect to the third contention of the petitioner the respondent admits that tax has been charged twice representing the share of each member, but he contends that such inclusion in the assessment of Messrs. D. D. Italia and Rameshwer Reddy is mandatory in calculating the total assessment and tax on the share income is by way of abundant caution.

According to the respondent''s learned counsel the intention of the Department is to free the share income included in the assessment of each of the members thereof from tax liability except in so far as such share income is considered for rate purposes as soon as the entire tax liability which has been levied on the association, has been realised through the recovery proceedings now in progress before respondent 2.

In order to determine whether this petition for a writ certiorari is tenable, the question for determination appears to us to be whether the petitioner has no other remedy open to him under the provisions of Hyderabad income tax Act and if not is the order of 16-9-1952 without jurisdiction and invalid? When an ex parte assessment order of the nature complained of is passed and a notice of demand is made under S. 41, Hyderabad income tax Act the assessee has three courses open to him under Ss. 39, 42 and 45.

Under S. 39 the assessee can, within 30 days from the service of a notice of demand satisfy the income tax Officer that he was prevented by sufficient cause from making a return required by S. 30 or that he did not receive the notice issued under sub-s. (4) of S. 30 or sub-s. (2) of S. 31 or that he has no reasonable opportunity to comply or was prevented by sufficient cause from complying with the last mentioned notice. If the income tax Officer is satisfied he is empowered to cancel the assessment and proceed to make a fresh assessment in accordance with the provisions of S. 31. Under S. 42 the assessee has also a right of appeal, but if an application is pending under S. 39 no appeal will lie under S. 42 in respect of the assessment made under S. 31(4) until after the application of S. 39 is finally disposed of by the income tax Officer. Apart from these two remedies the assessee has also been provided with the right of moving the Commissioner in revision under S. 45 (1) .

In this case it is clear that no notice of demand was made upon the petitioner and he could not therefore file the application within 30 clays from the service of notice of demand as specified in S. 39 nor could he present an appeal or a revision within the time specified in Ss. 42 and 45. The petitioner, however, filed a petition under S. 39 before the income tax Officer and under S. 45 before the Commissioner. The income tax Officer, it appears, did not agree to reopen the assessment in spite of reminders by the petitioner. The Commissioner on the other hand rejected the petition on the ground that it was barred by limitation. In these circumstances the objection of the learned advocate for the department that the applicant could have pursued other remedies under the Act has no validity.

Now coming to the question on merits the learned advocate for the petitioner submits that since the Syndicate was dissolved by the end of 1357 F. Bansilal Sivacharan is no longer a principal Officer of the Syndicate and even if he is deemed to be one, there is no provision in Hyderabad income tax Act, analogous to sub-s. (2) of S. 63, Indian income tax Act which authorises the service of notice on the principal Officer of a firm or an association of persons. In view of this defect, he contends that the assessment on the Syndicate is bad. The learned advocate for the department, on the other hand, contends that sub-s. (4) of S. 35 read with S. 56 authorises the income tax Officer to assess and levy income tax on a discontinued firm or dissolved association of persons as if the firm or association of persons was in existence.

He further submits that since the provisions of S. 63(2), Indian income tax Act are procedural, they alone govern the case from the date when the Indian income tax Act was made applicable to Hyderabad State. It appears to us that the contention of the learned advocate for the department, in so far as the argument based on S. 63(2) is concerned, is not tenable, inasmuch as S. 13, Finance Act, 1950 saves the Hyderabad income tax Act. for the purposes of levy and assessment and collection of income tax and Super-tax with respect to the period to which the Hyderabad income tax Act applied and therefore the provisions of that Act alone are applicable.

The question whether the notice served upon Bansilal Sivacharan, is valid for the purpose of assessing the dissolved Syndicate as an association of persons and whether the assessment on the association as such is legal, need not be considered as it appears to us that the non-service of a demand notice on the petitioner is fatal to respondent 1''s right to recover the tax from him. Section 56, Hyderabad income tax Act provides:

Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association, shall in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chap. V and for the amount of tax payable and all the provisions of Chap. V shall, so far as may be, apply to any such assessment.

Section 41 relating to the issue of demand notice forms part of Chap. V. It is therefore clear that where a member of a discontinued association of persons is sought to be made liable to payment of tax due from the association of persons on the joint and several liability arising under S. 56, Hyderabad income tax Act, a notice of demand will have to be served under S. 41. The section clearly makes it mandatory for the income tax Officer to serve upon the assessee or ''other person liable to pay tax'' in consequence of any order passed a notice of demand in the prescribed form specifying the sum so payable.

The underlined words (here in '' '') clearly contemplate persons liable to pay tax other than the assessee. In other words, where the assessee is a dissolved association of persons, assuming that it is liable to be assessed, if the income tax Officer seeks to recover the tax due from any or all its members, he must serve a notice of demand in accordance with S. 41, Hyderabad income tax Act. In this case it is admitted that no such notice has been served on the petitioner and without doing so, the income tax Officer has directed the Collector to collect the debt as it is a debt due to the Government under S. 118, Land Revenue Act.

The Collector in compliance with this direction has issued the requisite notice under the said provision of the Land Revenue Act and is seeking to collect the tax from the petitioner. In our view unless a demand notice is served on the petitioner there is no debt due from him to the State. The omission to serve such a notice is fatal to respondent l''s right to demand and respondent 2''s right to recover or collect the amount of the tax. Their Lordships of the Privy Council, have in the case of - AIR 1945 62 (Privy Council) observed at p. 64 that:

In their Lordships'' opinion, although income tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference to the income of the assessee for a given year, but it is duo when demand is made under S. 29 and S. 45. It then becomes a debt due to the Crown, but not for any particular period.

In view of these observations and having regard to the provisions of S. 41 and S. 56, Hyderabad income tax Act, the action taken by the income tax Officer as well as by the Collector in trying to recover the amount of Rs. 1,67,186 from the applicant is, in the absence of a demand notice under S. 41, income tax Act, wholly without jurisdiction and void in law.

We allow the application with costs which we assess at Rs. 150 and direct that a writ certiorari shall issue to respondents 1 and 2 quashing the proceedings for assessment against the petitioner and for the recovery of the amount from the petitioner.