CHERIAN Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) This is a petition under Art.226 of the Constitution for quashing certain orders passed in Income Tax proceedings against an unregistered Firm of which the partners were the petitioner and one P. J. George. They were conducting distillery business in the year 1124, the petitioner having a four annas share in the business. The 1st Respondent is the Income Tax Officer, Ernakulam and the 2nd Respondent, the Commissioner of Income Tax, Kerala and Coimbatore. The petitioner was served with a letter Ext. P. 1. dated 27101955 by the 1st respondent together with a notice of demand to remit a sum of Rs. 9,851110 alleged to be the tax due pursuant to an assessment in the name of P. J. George for the year 195051. On receipt of Ext. P. 1 the petitioner filed an appeal before the Appellate Assistant Commissioner, Ernakulam. He also applied to the Inspecting Assistant Commissioner of Income Tax, Ernakulam to stay the collection of the tax covered by the demand till the disposal of the appeal and the latter directed the petitioner to remit the sum of Rs. 2, 463 pending final disposal of the petition. The petitioner complied with this direction. P. J. George had also filed an appeal from the order of assessment and the two appeals were heard and disposed of together, setting aside the assessment and directing reassessment after proper enquiry. Ext. P. 2. is copy of the order passed in appeal. As the order of assessment was set aside in appeal, the petitioner applied for refund of the sum of Rs. 2,463 paid by him pursunt to order of the Inspecting Assistant Commissioner of Income Tax. The 1st respondent passed an order Ext. P. 3. dated 491957 stating that a sum of Rs. 1,000/ out of the amount remitted by the petitioner was adjusted towards penalty levied by him for non payment of the tax in time and that the balance would be refunded. A refund order for Rs. 1,463 was sent to the petitioner along with a covering letter Ext. P. 4, The petitioner was unaware that penalty had been imposed and on his requisition, a copy of the order levying penalty was supplied to him. Ext. P. 5 is the said copy. On 1691957 the petitioner filed a revision petition before the 2nd respondent who dismissed the same by order Ext. P. 6. dated 20121957. The orders Ext. P. 3, P. 5 and P. 6 are sought to be quashed. The grounds relied on by the petitioner are that the order imposing the penalty was not validly passed, that the same could not stand as the order of assessment was set aside, that the 1st respondent had no jurisdiction to pass the order Ext. P. 3, that the petitioner was not a defaulter as contemplated by S.46(1) of the Income Tax Act, that no notice had been served on him for payment of the tax before imposing penalty, that no notice of the order imposing penalty was given to him, that in view of the appellate decision setting aside the order of assessment, the amount remitted by him as a condition for stay of proceedings could not be adjusted against the penalty and that the amount remitted by him was not towards tax due from the partnership but in his individual capacity. On these grounds the petitioner seeks for quashing the orders imposing the penalty and appropriating the sum of Rs. 1,000/ towards the same. The 1st Respondent has filed a counter affidavit stating that the notice of demand was served on P. J. George who was the managing partner of the Firm, that such service was binding on the petitioner and that the penalty was imposed on account of the default of the Firm. It is also contended that the sum of Rs. 2,463 was paid by the petitioner on behalf of the firm, that the imposition of penalty was proper and that he was competent to adjust the sum of Rs. 1,000 towards penalty. The other contentions are that the order of the Appellate Assistant Commissioner does not ipso facto amount to cancellation of the order imposing penalty and that there is no lack of jurisdiction or error apparent on the face of the record justifying cancellation of the impugned orders. The petitioner filed an affidavit in reply stating that the Firm bad become dissolved at the time of the assessment and that the assessment and penalty could be made only in the name of the individuals and not the Firm.

(2.) The point for decision is whether the petitioner is entitled to refund of the whole sum paid by him and Whether the Income Tax Officer was justified in adjusting Rs. 1,000/- against the penalty levied by him. This depends on the question whether the levy of the penalty in the circumstances is proper. It is urged on behalf of the petitioner that there was no demand on him to pay tax and that he cannot therefore deemed to be in default. S.46 of the Income Tax Act provides that when an assessee is in default in making a payment of Income Tax the Income Tax Officer may in his discretion direct that in addition to the amount of the arrears a sum not exceeding that amount shall be recovered from the assessee by way of penalty. The argument advanced is that the petitioner could not be treated as a defaulter so long as notice of demand of tax or penalty was not served on him and that there was no valid order levying penalty.

(3.) It is necessary to state a few facts for the decision of this question. The assessee in this case was an unregistered Firm and the name of the assessee is described in the order of assessment as "Messrs. P. J. George and T. J. Cheriyan." The first notice of demand was sent on 30-3-'55 to "P.J. George for P. J. George and T. J. Cheriyan". There was no response and on 3-10-1955 the order Ext. P. 5 levying a sum of Rs. 1,000/- as penalty was passed by the 1st Respondent. It appears from Ext. P. 5 that the penalty was imposed on the Firm. The first notice of demand to the petitioner is Ext. P. 1 which was issued on 27-10-1955 i. e., 24 days after the order levying penalty was passed. Even though penalty had been levied before that date, Ext. P. 1 does not contain any reference to the same and it is a demand for payment of tax only. In fact no demand for payment of penalty has ever been made on the petitioner.