Penalty liability follows the discontinued firm's partners, not a later reconstituted partnership under income-tax law.

Penalty liability for a discontinued partnership under the Indian Income-tax Act, 1922 attached to the partners of the firm as it existed when the assessment-related liability arose. The original partnership had dissolved on the death of a partner, and a later firm was constituted under a separate instrument. Section 44 made the partners of the discontinued firm jointly and severally liable for assessment-related liabilities, including penalty, but it did not permit the penalty to be levied on a different, subsequently reconstituted firm. The penalty therefore could not be validly imposed on the firm as constituted at the time of levy, and the issue was answered for the assessee.

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Issues: Whether penalty under section 28(1)(c) of the Indian Income-tax Act, 1922 could validly be imposed on the firm as constituted at the time of levy, where the original partnership had dissolved and a new partnership had come into existence.

Analysis: The relevant partnership carrying on the business during the assessment year was found to have dissolved on the death of one partner, and a fresh partnership was later constituted between two other persons under a separate instrument. Section 44 of the Indian Income-tax Act, 1922 made the partners of the discontinued firm jointly and severally liable for assessment and for liabilities arising in the course of such assessment, including penalty. The statutory liability attached to the old firm and its partners, but the provision did not authorize imposition of that penalty on a different and subsequently constituted firm.

Conclusion: The penalty could not be validly levied on the firm as constituted at the time of the levy; the question was answered in the negative and in favour of the assessee.

Ratio Decidendi: Under section 44 of the Indian Income-tax Act, 1922, liability for penalty arising from assessment of a discontinued firm attaches to the partners of the firm as it existed when the liability arose, and cannot be shifted to a later reconstituted firm.

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