P.K. Balasubramanyan, J.
1. The petitioner is a registered partnership firm. It had three partners during the assessment year in dispute. The three partners were one Kanagasabai who had 50 per cent. interest, one Muthiyah Rajasabai who had 30 per cent. interest and one Nagalingam Selvakumar who had 20 per cent. interest. Kanagasabai retired from the firm on September 30, 1991. The firm was reconstituted.
2. For the assessment year 1985-86, the first respondent passed an order of assessment on March 17, 1988. The first respondent disallowed certain claims made by the assessee, the petitioner firm. The petitioner firm filed an appeal against the said order of assessment before the Commissioner of Income-tax (Appeals) who by order dated August 29, 1989, deleted one of the additions made by the assessing authority and remitted the proceeding to the assessing authority for reconsideration of the point relating to disallowance of interest on certain amounts. Thereafter, by order dated March 31, 1992, the first respondent completed the assessment by upholding only a part of the claim made by the assessee on that score. Against the said order passed by the first respondent the assessee has filed an appeal on April 28, 1992, and the same is pending before the Commissioner of Income-tax (Appeals).
3. For the assessment year 1988-89, the petitioner firm was assessed and it was determined that the firm was entitled to a refund of Rs. 1,21,733. Exhibit P-2 is the copy of the order in that behalf produced by the petitioner. The said order indicates that the refund due of Rs. 1,21,733 is adjusted against the demand due from the petitioner for the assessment year 1990-91 to the tune of Rs. 63,070 and the further sum of Rs. 58,663 towards the dues of Kanagasabai, the retired partner, towards his individual liability for the assessment year 1989-90. Thereafter the first respondent issued the order, exhibit P-3, to the petitioner revising the assessment for the year 1985-86 and holding that a balance tax of Rs. 1,03,270 is due from the firm. On receipt of these orders, exhibits P-2 and P-3, the firm made a representation before the first respondent protesting against the adjustment of the sum of Rs. 58,663 which was due towards refund to the firm against the dues of Kanagasabai, the retired partner. A clarification was sought as to the provision under which the same was being effected. Regarding the final assessment for the year 1985-86, the petitioner remitted a sum of Rs. 45,000 on July 13, 1993. A representation was made by the petitioner to adjust the refund due to the firm of Rs. 58,663 in respect of the assessment year 1988-89. It could be seen that what the first respondent had done was to adjust a sum of Rs. 63,070 out of the refund of Rs. 1,21,733 towards tax due from the firm for the assessment year 1990-91 and the balance sum of Rs. 58,663 towards the amount due from the retired partner, Kanagasabai, for the assessment year 1989-90. Obviously, the petitioner firm did not accept the latter adjustment and requested that the sum of Rs. 58,663 due by way of refund to the firm be given credit towards the tax due for the assessment year 1985-86 and pointing out that in that view the entire demand for that year would stand satisfied. The first respondent ignored this request of the assessee and the protest of the assessee that the sum of Rs. 58,663 is not liable to be adjusted against the demand in respect of Kanagasabai. The first respondent purported to issue exhibit P-7 calling upon the petitioner assessee to pay interest under Section 220(2) of the Income-tax Act from March 30, 1988, to August 10, 1993, as due on the sum of Rs. 58,270, the balance demand due from the petitioner for the assessment year 1985-86. The petitioner has produced a copy of the said order as exhibit P-7. Not content with this the first respondent also issued a garnishee order, exhibit P-1, to the Tamil-nadu Mercantile Bank, Quilon, requiring the bank under Section 226(3) of the Income-tax Act to pay to the first respondent a sum of Rs. 1,60,976. It is at this stage that the petitioner firm approached this court praying for the issue of a writ of certiorari to quash the order, exhibit P-7, dated August 10, 1993, and the notice, exhibit P-1, dated August 24, 1993, contending that both are illegal, unauthorised and improper.
4. The petitioner has essentially contended that the assessing authority was not entitled to adjust the amount of Rs. 58,663 due to the firm by way of refund against the alleged dues of the retired partner, Kanagasabai, in respect of the assessment year 1989-90. The petitioner has therefore contended that the said Rs. 58,663 was available for being adjusted towards the tax due from it for the assessment year 1985-86 and if the said amount is adjusted and the payment of Rs. 45,000 on July 13, 1993, is reckoned, there will be no arrears of tax for the assessment year 1985-86 and no interest can run as demanded under exhibit P-7 against the assessee subsequent to July 13, 1993. Thus the petitioner in effect has questioned the authority of the first respondent to adjust the sum of Rs. 58,663 due to the firm as refund against the alleged dues from the retired partner, Kanagasabai, relating to the assessment year 1989-90.
5. The stand adopted in the statement and the additional statement filed on behalf of the first respondent is that since Kanagasabai was a partner in the assessee-firm during the relevant assessment year 1985-86 as also during the assessment year 1988-89, 50 per cent. of the refund amount due to the firm as indicated in exhibit P-2 must be reckoned as belonging to Kanagasabai and if so reckoned the said amount can be adjusted towards the tax individually due from Kanagasabai for the assessment year 1989-90. In short what is contended is that the first respondent is not bound to proceed only under Section 182(4) of the Income-tax Act and had in fact not proceeded under that provision and that once the adjustment is treated as being validly made the interest claimed under exhibit P-7 is correct. It is also submitted that even if there is any mistake in the calculation of interest the same could be got rectified by the assessee by approaching the first respondent himself. It is, therefore, contended that there is no merit in this original petition.
6. The salient facts are not in dispute. Kanagasabai, one of the partners of the firm, who had 50 per cent. interest in the firm retired from the partnership on September 30, 1991. He was a partner during the assessment year 1985-86 as also during the assessment year 1988-89. The refund was due to the firm in respect of the assessment year 1988-89. The assessment of the firm for the assessment year 1985-86 had not been completed when Kanagasabai retired from the firm on September 30, 1991.
7. The mode of assessment of a registered firm has been laid down in Section 182 of the Income-tax Act. It is provided by Sub-section (1) of that section that notwithstanding anything contained in sections 143 and 144 of the Income-tax Act in the case of a registered firm after assessing the total income of the firm the income-tax payable by the firm itself shall be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Theliability of a partner to pay tax is his individual liability even while it relates to the share income from a registered firm. Thus the liability of the partner is distinct from the liability of the firm of which he is a partner. Prior to the introduction of Sub-section (4) of Section 182 in the Income-tax Act it had been held that the tax due individually from a partner could not be recovered from the firm or the other partners. The position in that regard has been summarised in Sampath Iyengar's Law of Income-tax, eighth edition, Vol. V, at page 4786, as follows :
'Withholding of 30 per cent. of the share income of each partner.--Where a firm is a registered firm, there was no specific provision in the pre-1961 Acts on the subject whether the tax payable by a partner in respect of the share income apportioned to him and taxed in his hands could in the event of non-recovery from him be recovered from the firm itself. It has been made clear in Radha Krishan's case (ITO v. Radha Krishan : [1967]66ITR590(SC) and decisions subsequently rendered that the tax payable by the partner is his individual liability even where it relates to the share income from a registered firm and on failure by a partner to pay such tax, it cannot be recovered from the firm or the other partners and that neither the provisions of Section 189 nor the general partnership law would help to fasten such liability. In Kalva Suryanarayana v. ITO : [1969]71ITR422(SC) , the Supreme Court held that the position will be no different where such assessment in respect of the firm's income is made after the dissolution of the firm. The Supreme Court pointed out in the two cases which have been referred to that the liability to pay income-tax is a statutory liability and that the liability of one person cannot be enforced against another in the absence of any specific statutory provision, and that a joint and several liability on all partners cannot be imposed on the general principle of contractual liability inter se partners of a firm. These observations are perhaps too wide and should be restricted to the issue that was being considered by the court in the cases before it. It will be appreciated that once the tax liability of a partner is postulated to be his individual liability, though his total income includes the share income from a firm, even the principles of partnership law will not permit a recovery thereof against the firm (except in the event of a dissolution) or the other partners. The distinction made between statutory and contractual liability vis-a-vis taxes was, therefore, perhaps unnecessary.'
8. It was to meet this situation that Section 182(4) of the Act had been introduced by the Income-tax Act, 1961. The said provision reads as follows :
'182. Assessment of registered firms.--(1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm,-- . . .
(4) 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 partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained.'
9. This sub-section enables the authority to recover from the firm the tax due from a partner not exceeding 30 per cent. of the income of the partner on the fulfilment of the conditions referred to in that sub-section. In the present case, therefore, the obligation of the petitioner firm was only to retain 30 per cent. of the share of the income that would have been due to Kanagasabai during the relevant year and the first respondent could proceed against the firm only to the said extent and only after attempting to recover the tax due for the assessment year 1989-90 directly from Kanagasabai. It appears to me that without recourse to Section 182(4) of the Income-tax Act, it is not open to the first respondent to adjust the sum of Rs. 58,663 from the amount of refund due to the firm for the assessment year 1988-89. In his counter-statement, the first respondent has taken the stand that he was not acting under Section 182(4) of the Income-tax Act. In my view, if the first respondent was not acting under Section 182(4) of the Act, he had no authority to recover from the firm or adjust the amounts from out of the amounts due to the firm by way of refund towards the liability of Kanagasabai, the retired partner. Even before invocation of Section 182(4) it was necessary for the first respondent to have attempted to collect the amounts from Kanagasabai himself before he could proceed under Section 182(4) of the Act. The condition precedent for proceeding against the reconstituted firm for recovery of the tax due from a partner who had retired is the failure of an attempt to recover the same from the partner has been laid down by the decision in Manoharlal Ahuja v. ITO : [1984]148ITR608(All) . To the same effect is the decision of the Madras High Court in CIT v. Sannanna Chetty and Sons : [1991]190ITR18(Mad) , wherein it has been stated thus (at page. 22) :
'Before the firm could be made liable, two conditions must coexist. The first is, their recover ability of tax from the partner on whomit is assessed ; and the second is, the tax sought to be realised ought not to be in excess of thirty per cent. of the defaulting partner's share in the profits of the firm. If the aforesaid conditions are fulfilled, then, under Section 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.'
10. Obviously, in this case, there is nothing to show that the first respondent had made any attempt to recover the tax due for the assessment year 1989-90 from the partner, Kanagasabai, before making the adjustment as shown in exhibit P-2.
11. The stand adopted by the first respondent that Kanagasabai had 50 per cent. interest in the firm and hence 50 per cent. of the refund amount due to the firm must be treated as that of Kanagasabai and hence was available for adjustment cannot be accepted in the light of the scheme laid down by Section 182 of the Income-tax Act and the position in law noticed earlier. Section 187 of the Act deals with cases where the constitution of a firm is changed before the assessment for a particular year is complete. Section 187 provides that the assessment can be made on the firm as constituted at the time of making the assessment. The proviso clarifies that the income of the concerned year can be apportioned between the partners who were partners during that year and proviso (ii) provides that when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment. Proviso (ii) to Section 187(1) which is attracted whenever there is a reconstitution of the firm provides for a condition for invocation of proviso (ii) to Section 187(1) and it is that the tax assessed upon the partner could not be recovered from him. There is nothing in this case to show that the tax due from Kanagasabai, the partner, who had retired at the time the assessment was completed could not be recovered from Kanagasabai himself so as to justify the attempted recovery from the petitioner firm. Here the refund to the firm itself was due in respect of an assessment year during which Kanagasabai continued to be a partner, though that assessment was completed only after Kanagasabai retired from the firm. Possibly Section 187 of the Act could have been invoked in such a situation since proviso (ii) to Section 187(1) of the Act contemplates recovery from the reconstituted firm that existed on the date of the assessment. Here the first respondent has no case that he is proceeding under Section 187 of the Income-tax Act. I, therefore, do not think it necessary to pursue this aspect of the matter any further. In the circumstances, I find that the adjustment of Rs. 58,663 by the Income-tax Officerfrom the refund due to the firm towards the arrears of tax due from Kanagasabai is not authorised by the provisions of the Act. In that view I quash that part of exhibit P-2 which purports to adjust the sum of Rs. 58,663 due to the petitioner firm towards refund for the assessment year 1988-89 against the amounts due from Kanagasabai for the assessment year 1989-90.
12. Once the adjustment of the refund is found to be not sustainable then certainly the request of the petitioner for adjustment of the sum of Rs. 58,663 towards the tax due from it for the assessment year 1985-86 cannot be denied. If it is given credit to, interest, if any, due from the petitioner firm under Section 220(2) of the Income-tax Act will also have to be recomputed. In that view the order, exhibit P-7, will also have to be set aside. I, therefore, quash the order, exhibit P-7, and direct the first respondent to recompute the interest due from the petitioner under Section 220(2) of the Income-tax Act after adjusting the amount of Rs. 58,663 as prayed for by the petitioner and calculating the interest accordingly. In view of this the proceedings under Section 226(3) of the Income-tax Act evidenced by exhibit P-1 also becomes unsustainable. I, therefore, set aside the said notice as well.
13. In the result I quash the orders, exhibits, P-1 and P-7, and also the adjustment of Rs. 58,663 due as refund to the petitioner firm towards the amounts due from Kanagasabai for the assessment year 1989-90. I direct the recomputation of the interest under Section 220(2) of the Act as stated above. I make it clear that it is open to the first respondent to invoke the provisions of Section 182(4) of the Act or Section 187(1) of the Act after fulfilling the condition precedent set out by the said provisions. In the circumstances, I make no order as to costs.