B. P. Jeevan Reddy, J. - (1.) The question in these appeal is, whether an erstwhile partner is liable to pay the tax arrears due from the partnership firm pertaining to the period when he was a partner. The Madras High Court has held that he is not. The Revenue is disputing the correctness of that holding.
(2.) The respondent-assessee was a partner in the firm, Sannanna Chettiar and Sons. He retired therefore on April 19, 1963. On his retirement, the firm was continued by taking in two new partners. The said firm too was dissolved with effect from April 12, 1972. The assessment for the Assessment Years 1962-63 and 1963-64 were completed on March 25, 1967 and March 29, 1968. (For the two accounting years relevant to the said assessment years accounts were duly made up by the partners and the share of profits due to the respondent paid to him before his retirement.) On February 23, 1972, the Income Tax Officer sent a communication to the respondent that in respect of the arrears of tax due from the firm for the aforesaid assessment years, he too is jointly and severally liable along with the other partners inasmuch as he has a partner of the firm during the relevant accounting years. The respondent denied his liability on the ground that he ceased to be a partner long ago, that there was a change in the constitution of the firm after his retirement and that such re-constituted partnership alone is responsible for paying the said arrears. The Income Tax Officer did not agree with the respondent's contentions. Recovery proceedings were initiated and the respondent's properties attached, whereupon he approached the Madras High Court by way of two writ petitions. The High Court allowed the writ petitions mainly relying upon and following the decision of a Full Bench of the Kerala High Court in Income Tax Officer, Assessment II, Calicut v. C.V. George, (1976) 105 ITR 144 which dissented from the decision of the Allahabad High Court in Sahu Rajeshwar Nath v. Income Tax Officer, Meerut, (1964) 54 ITR 755. The reasoning of the High Court, in short, is this:Section 189 (3) has no application to the facts of the case inasmuch as the respondent was not a partner of the firm at the time of its dissolution; he ceased to be a partner long prior to the dissolution. Further, because the Income-tax Act, 1961 did not contain a provision corresponding to the proviso to sub-section (2) of Section 46 of the Indian Income-tax Act, 1922, the arrears of tax due from the firm cannot be recovered from an erstwhile partner.
(3.) Sri. B. B. Ahuja, learned counsel for the appellant-Revenue, assailed the correctness of the judgment under appeal and also that of the Full Bench decision of the Kerala High Court aforesaid. Learned Counsel pointed out that the decision of the Allahabad High Court in Sahu Rajeshwar Nath, (1964) 54 ITR 755 (which was dissented from by the Full Bench of the Kerala High Court) has actually been affirmed by this Court in Sahu Rajeshwar Nath v. Income Tax Officer, C-Ward, Meerut, (1969) 72 ITR 617 and that the reasoning and approach of the Allahabad High Court and of this Court is clearly at variance with the reasoning of the judgment under appeal. Since the respondent assessee was unrepresented, we requested Mrs. Ramachandran to assist us in this matter, to which she has agreed gracefully. We are grateful for her valuable assistance. Learned counsel supported the reasoning and conclusion of the Madras and Kerala High Courts. Learned counsel submitted that the decision of this Court in Sahu Rajeshwar Nath does not in any manner affect the correctness of the reasoning contained in judgment under appeal. Clause (23) of Section 2 of the Income Tax Act, 1961 (1961 Act) says that "'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932; but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefit of partnership". (Since we are concerned with the position obtaining prior to April 1, 1989 (i.e. prior to the introduction of Section 188-A by the Direct Tax Laws (Amendment) Act, 1989) we shall refer to the relevant provisions as they stood prior to April 1, 1989). Chapter XVI contains special provisions applicable to firms. Section 182 provides for assessment of registered firms while Section 183 provides for assessment of un-registered firms. Section 184 provides for application for registration and Section 185 prescribes the procedure to be followed on receipt of such application. Section 186 deals with cancellation of registration. Section 187 to 189 deal with changes in the constitution of the firm, succession of one firm by another and with the dissolution of the firm. Sub-section (10 of Section 187 provides that "where at the time of making an assessment under Section 143 or Section 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time making the assessment". Sub-section (2) of Section 187 specifies what does the expression "change in the constitution of the firm" mean in the said section.;