CHANDRA REDDY C.J. - The question to be answered by us in this reference under section 66(1) of the Indian Income-tax Act is framed in these terms :
'Whether an assessment could be made on a dissolved association of persons without service of notice on all the erstwhile members of the association ?'
This reference relates to the assessment year 1358 Fasli, i.e., from October 1, 1948, to September 30, 1949, the chargeable accounting period being the year ended 30th September, 1948. The assessee is an association of persons styled 'the Hyderabad Deccan Liquor Syndicate by member, D. D. Italia, Hyderabad', consisting of nine persons and carrying on business in liquor.
In the relevant assessment year, D. D. Italia, one of the members of the association, had included in his return a sum of Rs. 77,912 as his share of the profits from the said syndicate. Thereupon, the department initiated the present proceedings by letter dated April 2, 1951, indicating that D. D.Italia had admitted a profit ofRs. 77,912 as his share and that the total income of the syndicate appeared to be Rs. 2.07 lakhs. Two return forms were annexed to the preliminary letter and the association was required to fill them and send them back to the department.
On April 3, 1951, D. D. Italia, and another member, Sri. Madanlal, appeared before the concerned Income-tax Officer and stated that since the accounts of the said business were with one Sri Bansilal, an ex-abkari contractor, the latter might be addressed in regard to that matter. The attempts made by the department to serve a notice on the said Bansilal having proved abortive, a notice under section 46 of the Hyderabad Income-tax Act, corresponding to section 34 of the Indian Income-tax Act, issued in the name of 'The Hyderabad Deccan Liquor Shop Syndicate, c/o Mr. D. D. Italia' along with return forms, was directed to be served on D. D. Italia and it was actually received by one Manchusha, an employee of his.
Some time later, i.e., on July 27, 1951, a notice under section 30(4) was issued to D. D. Italia, as representing the association and the same again was served on Manchusha. This notice was returned by Italia, on August 1, 1951, with the endorsement that the Hyderabad Deccan Liquor Syndicate did not exist in 1357 Fasli. However, D. D. Italia appeared in the office and said that the books of account were with Bansilal Shivcharan. Thereupon, the concerned Income-tax Officer issued summons under section 49 of the Hyderabad Income-tax Act to him to appear on August 17, 1951. As this was not served on him, summons was re-issued on August 18, 1951, and it was served by affixture. On September 28, 1951, the Income-tax Officer issued another letter to Italia, stating that no return was filed by him in compliance with the notice served on him, previously. To this, Italia replied that the Hyderabad Deccan Liquor Syndicate was not assessable as a unit. On receipt of this, the Income-tax Officer again requested Italia to file a return and issued a notice under section 30(4) of the Hyderabad Income-tax Act for production of books. This was served on Manchusha on November 15, 1951. At the request of Italia, another attempt was made to serve a notice on Bansilal. This was returned with the endorsement that Bansilal refused to accept the said notice. Another notice was issued on May 24, 1952, under section 30(4) to Bansilal which again was refused.
Thereupon, the Income-tax officer made the assessment ex parte and to the best of his judgment after obtaining the approval of the Deputy Commissioner and sent the assessment form and demand notice on September 22, 1952, by registered post addressed to the Hyderabad Deccan Liquor Syndicate, Narayanguda, and sent the same to Bansilal Shivcharan for service. This was also returned by the postal authorities as refused. Subsequently, service was effected by affixture at the residential premises of Bansilal Shivcharan on October 8, 1952. At that stage, the assessee appeared before the concerned Income-tax Officer and raised the objection that the assessment was vitiated by non-service of notice on all the members. This objection did not prevail with the Income-tax Officer.
The Appellate Assistant Commissioner, on appeal by the aggrieved assessee, affirmed the assessment, holding that the association was correctly assessed as a unit in the status of an 'association of persons'.
The further appeal to the Income-tax Appellate Tribunal by the assessee succeeded. The contention that the assessment was bad in law as it was made on an association of persons admittedly defunct on the date of assessment without service of notice on all the members found favour with the Tribunal which set aside the assessment.
At the request of the Commissioner of Income-tax, the Tribunal made reference to this court under section 66(1) of the Indian Income-tax Act, corresponding to section 82 of the Hyderabad Income-tax Act.
When the matter came up for hearing before a Division Bench of this court, it was represented by the learned counsel on either side that as there was divergence of opinion on this point between two Division Benches of this court, namely, Haji Moosa Saya v. Commissioner of Income-tax and Rajareddy Mallaram v. Commissioner of Income-tax the first decision containing the rule that a member of a firm or association was jointly and severally liable to tax in respect of the income, profits and gains of such firm or association notwithstanding its dissolution and that any notice served on any member of the discontinued firm under sub-section (2) of section 30 would be a valid notice for the purpose of assessing the said firm or association, while the opposite opinion was expressed in the latter ruling. It is to resolve this apparent conflict that the matter was referred to a Full Bench. That is how the reference is before us.
The main question that falls for adjudication in this reference is whether assessment of pre-dissolution income of an association of persons could be validly made by service of notice on any one of the members after its discontinuance. The solution to this problem chiefly turns on the interpretation to be placed on sections 56 and 78 of the Hyderabad Income-tax Act.
Section 56 is in pari materia with section 44 of the Indian Income-tax Act as it stood prior to its amendment in 1958. Since this statutory provision plays a leading role in the context of this enquiry, we have to extract it here. That section is in these words :
'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 Chapter V, and for the amount of tax payable and all the provisions of Chapter V shall, so far as may be, apply to any such assessment.'
We will do well to quote section 44 of the Indian Income-tax Act as amended in 1958 as it is of some help in expounding that section as it stood before amendment. It runs as follows :
'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 Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.'
The object of the section is perfectly plain, namely, it enables the tax on the profits of a firm or association of persons, which has been dissolved or discontinued, to be got by the department and prevents avoidance of taxation by the discontinuance of the firm. It creates a fiction that for the purpose of collecting tax on the profits made before disruption of the business, the association is subsisting. This section provides that proceedings for a assessment would be continued against the dissolved firm or association disregarding its discontinuity. The expression 'so far as may be' indicates that the procedure applicable to firms and associations prior to their dissolution will govern even after their discontinuance. The concept embodied in the section as unamended is the same as in the amended one. As pointed out by a Division Bench of the Bombay High Court in Ramniwas Hanumanbux Somani v. Venkataraman, Income-tax Officer, what was implicit in section 44 prior to its amendment in 1958, has been made explicit by the amendment.
Section 44 of the Indian Income-tax Act, which, as we have already stated, corresponds to section 56 of the Hyderabad Income-tax Act, has received judicial attention at the hands of the highest court in the land.
In C. A. Abraham v. Income-tax Officer, the Supreme Court dealt with the question whether penalty could be levied on a defunct partnership under section 28 of the Indian Income-tax Act. Their Lordships answered it in the affirmative, notwithstanding the fact that notice was served on one of the partners. Dealing with the impact of section 44 on the problem to be solved by their Lordships, this is what they said :
'The use of expression so far as may be in the last clause of section 44 also does not restrict the application of the provisions of Chapter IV only to those which provide for computation of income. By the use of the expression so far as may be it is merely intended to enact that the provisions in Chapter IV which from their nature have no application to firms will not apply thereto by virtue of section 44. In effect, the legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms...'
The principle that emerges from this passage is that, the section enacts a fiction that for the purpose of assessment the firm or association of persons will be deemed to subsisting, though, in fact, it might have been dissolved.
In other words, the procedure that is applicable in regard to assessment of the firm or association of persons before its dissolution will apply to it even after its dissolution and the disruption of the business makes no difference in that regard.
That section creates a machinery for determining the tax liability of firms which have discontinued their business. In the words of their Lordships in C. A. Abraham v. Income-tax Officer, it provides for three consequences : (i) that on the discontinuance of the business of a firm, every person who was, at the time of its discontinuance, a partner, is liable in respect of income, profits and gains of the firm to be assessed jointly and severally, (ii) that each partner is liable to pay the amount of tax payable by the firm, and (iii) that the provisions of Chapter IV, so far as may be, apply to such assessment. This brings out succinctly, if we may say so with respect, the functions performed by the said section.
Although this decision was rendered under section 28 read with section 44 of the Income-tax Act, the principle applies with full vigour to this case, and as their Lordships proceeded on the assumption that penalty was comprehended in the assessment, we will presently show that the procedure under the Hyderabad Income-tax Act is similar to that envisaged under the Indian Income-tax Act.
Another ruling of the Supreme Court, which also interpreted section 44, is Muthappa Chettiar v. Income-tax Officer. It is true that it related to an assessment under the Excess Profits Tax Act. All the same, the principle governing the construction of section 44 is the same as that in Abrahams case. What was laid decided onwn here was that the procedure applicable to an undissolved firm was attracted to a dissolved firm and the partners continued to be liable jointly and severally even after dissolution as they were liable before dissolution. The observations of Chakravartti C.J. in Bose v. Manindra Lal Goswami extracted in Muthappa Chettiar v. Income-tax Officer called in aid by the learned Advocate-General may be extracted hereunder :
'It will thus be seen that in the case of excess profits tax, there is no difference in the method of assessment prescribed for the assessment of the profits of a running business and that prescribed for the assessment of the past profits of a business carried on by a firm, since dissolved. In the case of a running business too, the assessment is to be made on the persons, carrying on the business, jointly. In the case of the business of a firm which has been dissolved, it is to be made on the partners jointly and severally; and since section 44 of the Act is made applicable to the assessment of pre-dissolution profits of the business of a dissolved firm, such assessment can obviously be made in the partnership name. It was obviously in view of these provisions that the learned judge in the Madras case stated that even assuming that the firm had been dissolved by the date of the issue of the notice under section 13, still the machinery provided for by section 13 and 14 of the Act could be availed of and the partners would continue to be jointly and severally liable to assessment under section 14 of the Act and for the amount of tax payable after determination.'
We do not think that the approval of these remarks by the Supreme Court would amount to acceptance of the position argued for on behalf of the assessee. We are not convinced that this justifies the conclusion that the principle underlying section 44 is confined in its operation to an assessment under the Excess Profits Tax Act. Doubts, if any, arising out of this case are dispelled by the statement of law contained in Abrahams case which was re-affirmed by the Supreme Court in Commissioner of Income-tax v. Angidi Chettiar.
A Divisional Bench of the Bombay High Court in Ramniwas Hanumanbux Somani v. Venkataraman, Income-tax Officer negatived the submission that a notice could not be issued against the firm after its discontinuance in a case falling under section 44 of the Indian Income-tax Act but it could be issued only against persons who were partners at the relevant time.
The learned Advocate-General sought to persuade us to hold that a firm or an association of persons and the partners of the firm or the members of the association respectively being distinct entities where a partner of the firm or a member of the association is selected as a unit, it is only his share of the income that could form the subject-matter of assessment and, consequently, assessment of pre-dissolution income of the firm after notice only to one of the members would not bind the other members of the firm or association. To establish this position, he cited to us J. C. Thakkar v. Commissioner of Income-tax, Commissioner of Income-tax v. A. W. Figgies and Company and Narayana Chetty v. Income-tax Officer :
These cases have no analogy here and they do not in any way advance the case of the assessee. In the first of the above-cited cases, the point raised by a partner of an unregistered firm was that unless and until the income of the firm was assessed to tax, the assessment of income of each of the partners of the firm or members of the association was bad in law. The objection did not prevail with the Division Bench of the Bombay High Court. It is in the course of discussion of this topic that the learned judges observed that the assessable entity under the Income-tax Act was different from the legal entity, that there was no prohibition in any provision of the Income-tax Act prohibiting the assessment of a partner until the firm of which he was the partner was assessed and that the Income-tax Act gave option to the income-tax authorities either to assess the unregistered firm and then proceed to assess each individual partner of that firm or not to assess the unregistered firm at all but to assess each individual partner and his share of the profits in the firm. This decision does not throw any light on the question that poses itself before us.
The situation is the same in regard to Commissioner of Income-tax v. A. W. Figgies . What was stated there was that for the purpose of the income-tax the firm was to be regarded as having a separate juristic existence apart from the partners carrying on the business and that the firm could be carried on even if there was a change in its constitution.
Narayana Chetty v. Income-tax Officer, Nellore dealt with the effect of section 23(5) of the Indian Income-tax Act and it has no bearing on the present enquiry. The main controversy in that case was whether the assessee, who was entitled to notice under section 34(1)(a), was the firm or the individual partners of the firm. It was argued there that each individual partner should have been called upon to make a return of his total income assessable for the relevant year and inasmuch as notice was issued against the firm and not against the individual partners, the assessment was invalid. This contention was not acceptable to their Lordships of the Supreme Court. It was laid down in that case that the firm could be an assessee within the contemplation of the Act, that the notice issued against the firm and served on one of the partners was valid and that the Income-tax Officer was not bound to serve notice on each partner of the firm despite the firm having been dissolved at the relevant time. These cases, therefore, do not render any assistance to the assessee.
We shall now proceed to consider whether the difference between the language in section 63 of the Indian Income-tax Act, which deals with the procedure for service of notice, and in section 78 of the Hyderabad Income-tax Act, makes C. A. Abraham v. Income-tax Officer inapplicable to the present case. For a decision of this question, it is necessary to look at the terms of both the section. Section 63 is in these words :
'63. (1) A notice or requisition under this Act may be served on the person therein named either by post or, as if it were a summons issued by a court, under the Code of Civil Procedure, 1908 (V of 1908).
(2) Any such notice or requisition may, in the case of a firm or a Hindu undivided family, be addressed to any member of the firm or to the manager, or any adult male member of the family and, in the case of any other association of persons, be addressed to the principal officer thereof.
Section 78 of the Hyderabad Income-tax Act runs thus :
'78. All provisions of the Hyderabad Civil Procedure Code (III of 1323 F.) relating to the service of summons shall, as far as possible, be applicable in regard to the issue and service of notice or requisition to any person under this Act.'
It is seen that section 78 of the Hyderabad Income-tax Act by itself does not prescribe the procedure in that behalf. It only extends the provisions of the Hyderabad Civil Procedure Code (III of 1323 F.) relating to service of summons. It is section 449 of the Hyderabad Civil Procedure Code that governs service of summons. It is in the following words :
'When a suit is filed against more than one person as partners of a firm and in the name of their firm, the summons shall be served in accordance with the directions of the court as follows :
(a) on one or more of the partners;
(b) on any person who may be managing or be in charge of the partnership business at the head-office within the Hyderabad Dominion where the business of partnership is carried on.
Such service on the firm shall be deemed to be sufficient irrespective of the fact as to whether all the partners reside within or outside the Hyderabad Dominion :
Provided that in the case of a partnership firm which has been wound up, within the knowledge of the plaintiff before the filing of the suit, the summons shall be served on any partner who may be present in the Hyderabad State and whom it is intended to hold liable.'
This section is analogous to Order xxx, rule 3, of the Code of Civil Procedure, 1908.
It is manifest that there is no material difference between the second part of section 63 of the Indian Income-tax Act and the first part of section 449 of the Hyderabad Civil Procedure Code (III of 1323 F.). The only difference between them is that, while section 63(2) includes a joint family or an association of persons, section 449 relates only to firms. But that cannot drive us to the conclusion that this section is inapplicable to service on association of persons. In this behalf, it cannot be overlooked that the Hyderabad Income-tax Act does not contain any other provisions in regard to service of summons. We must, therefore, take it that the intention of the legislature was that this should apply equally to association of persons or joint families. So, we may proceed on the assumption that this section comes into operation even in regard to association of persons.
The next problem that poses itself is whether an association of persons, whose business is discontinued, comes within the proviso or within the main section itself. There can be only one answer to this, namely, that it falls within the ambit of the first part of the section and not within the proviso, having regard to the fiction enacted by section 44 that the firm is deemed to continue even after its discontinuance for purpose of assessment under Chapter IV. It is to be remembered that it is the combined operation of section 63 read with section 44 that brings about the result that service of notice on individual partners of the firm or members of an association is not necessary to validate an assessment of the pre-dissolution income of the firm or association of persons. It follows that the consequences that flow from the operation of section 56 and section 78 of the Hyderabad Income-tax Act read in conjunction with section 449 of the Hyderabad Civil Procedure Code are the same as those that flow from the relevant provisions of the Indian Income-tax Act. For these reasons, we hold that the rule stated in Abrahams case is applicable to the case on hand. It is thus seen that Haji Moosa Saya v. Commissioner of Income-tax is in consonance with the principle enunciated above and that the view expressed in Rajareddy Mallaram v. Commissioner of Income-tax is not in conformity with Abrahams case .Rajareddy Mallaram v. Commissioner of Income-tax is based upon the observations of Chakravartti C.J. in Bose v. Manindra Lal Goswami. The head-note to the decision is in these words :
'The assessment to income-tax of the pre-dissolution income of an association which has been dissolved before initiation of assessment proceedings can, under section 44 of the Income-tax Act, 1922 (before amendment in 1958) only be made on the persons who were members of the association at the time of dissolution as assessees, so that they may be jointly and severally liable. The assessment cannot be made on the firm as assessee. As assessment has to be made on the ex-members of the dissolved association as assessees, and assessment cannot be made on the association as a unit, notice to each member is necessary in order that there might be an assessment binding on him and valid against him.'
The learned judges in that case thought that the rule stated in A. G. Pandu Rao v. Collector of Madras, which dealt with an assessment under the Excess Profits Tax Act, was inapplicable to proceedings under the Indian Income-tax Act. We do not feel that there is anything in A. G. Pandu Rao v. Collector of Madras to suggest that this doctrine does not apply to proceedings started under the Indian Income-tax Act. It is only by extending section 44 with certain modifications and section 63 of the Indian Income-tax Act to the Excess Profits Tax Act that the procedure applicable to undissolved firms is attracted to dissolved firms and it is because of this it was held that, even if a firm had been dissolved by the date of issue of notice under section 13 of the Excess Profits Tax Act, the machinery provided by sections 13 and 14 could be availed of, and that even after dissolution the partners continued to be jointly and severally liable to assessment under section 14 and for the amount of tax payable after determination and that a notice under section 13 may be issued and served on any member of the firm. The principle is the same even in regard to proceedings initiated under the Indian Income-tax Act.
In Bose v. Manindralal Goswami, notice of demand was served only on two out of the three partners of an unregistered firm under section 34 of the Indian Income-tax Act, no notice having been served on the firm. In the notice served on each of the partners, he was described as a partner of the firm and the income, which had been discovered to have escaped assessment, was described as 'your income' and he was required to submit a return of 'your total income and total world income' assessable for the particular year. Notice of demand was served on another partner as representing the partnership which had been dissolved. It was under those circumstances that it was held that the notice issued to the two individual partners could not form the basis of a valid assessment of the firms income and the two individual partners could not be proceeded against for recovery of the tax due under that assessment. It is true that they observed that the decision in A. G. Pandu Rao v. Collector of Madras related to sections 13 and 14 of the Excess Profits Tax Act read with section 44 of the Indian Income-tax Act, as adapted by the Central Board of Revenue, that in that decision there was no comparison of the relevant provisions of the Indian Income-tax Act and the Excess Profits Tax Act, that if a comparison was made it would be found that the relevant provisions of the Indian Income-tax Act were noticeably different and that the decision could not be applied to a case under the Indian Income-tax Act. Those obiter dicta can no longer be regarded as embodying sound law, having regard to the principle enunciated in Abrahams case. However, it is unnecessary for us to pursue the subject any further having regard to the authoritative pronouncement of the Supreme Court in C. A. Abraham v. Income-tax Officer.
For the reasons indicated above, we must dissent from the view expressed in Raja Reddy Mallaram v. Commissioner of Income-tax as it cannot be reconciled with Abrahams cas and answer the reference in favour of the department and against the assessee.
The learned Advocate-General argued that this rule does not apply to recovery of tax payable by the firm and that a member of the association, who was not served with notice under section 34, could not be made liable for payment of tax due by the firm in excess of his share of the profits. In other words, the argument is that his liability should be co-extensive with the income received by him in the chargeable accounting year from the association. This argument is met by Sri Kondaiah, learned counsel for the department, by contending that section 56 of the Hyderabad Income-tax Act does not make a distinction between assessment and the amount of tax payable by a partner of the firm or a member of the association, as is apparent from the language of section 56, which specifically says, '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 Chapter V, and for the amount of tax payable all the provisions of Chapter V shall, so far as may be, apply to any such assessment.' The learned counsel says that the liability in regard to payment of tax also is inherent in the section. He further relies upon the dictum of the Supreme Court in C. A. Abraham v. Income-tax Officer contained in the following words :
'Section 44 sets up machinery for assessing the tax liability of firms which have discontinued their business and provides for three consequences, (i) that on the discontinuance of the business of a firm, every person who was at the time of the discontinuance a partner is liable in respect of the income, profits and gains of the firm, to be assessed jointly and severally, (ii) each partner is liable to pay the amount of tax payable by the firm, and (iii) that the provisions of Chapter V, so far as may be, apply to such assessment.'
However, we are not called upon to answer this question, as the objection related in this case only to assessment and the question referred to us does not include this.
The assessee will pay the costs of the department. Advocates fee Rs. 250 (two hundred and fifty).
Question answered in the affirmative.