M VEDACHALA MUDALIAR Vs. S RANGARAJU NAIDU

JUDGEMENT

(1.) THE plaintiff appeals from the judgment and decree dated 30th November, 1955, on the file of the Subordinate Judge of Pudukottai, in O.S. 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 Co. THE firm had its headquarters at Pudukottai and branches 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 the defendant were the partners. This partnership was registered under the Partnership Act, 1932. 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, wore 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

(2.) IN assessing the profits of the firm of Vedachala Mudaliar and Rangaraja 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 and 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 accordinglyAfter the proceedings relating to the assessment of the partners to tax were completed, the INcome-tax Officer proceeded to take, action under section 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 income, 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 under section 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 under section 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 under section 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 himThe 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 under section 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

(3.) 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 expensesTHE 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 under section 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 under section 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 liableTHE first question for decision in this appeal is whether the Income-tax Officer acted without jurisdiction in taking action under section 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 defendant's 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 under section 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 Veerappan Chettiar v. Commissioner of Income-tax. On facts not distinguishable from the facts of this case, it was held in Veerappan Chettiar v. Commissioner of Income-tax 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 under section 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 form, the order may be set aside. That is what happened in Veerappan Chettiar's case. 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 contributionTHE next contention urged on behalf of the plaintiff, 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 under section 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 under section 28(1) against a firm, notice required under section 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 under Section 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