1971 (11) TMI 22 - HC - Income Tax

Court quashes ultra vires notice under Income-tax Act, directs amendment to name individual partner as defaulter.

The court held that the notice issued under Rule 73 of the Second Schedule of the Income-tax Act was ultra vires and had to be quashed. It directed the ... Recovery of tax – certificate is in the name of the firm – can recovery be made against individual partners – Held, no - Tax Recovery Officer's power to act under the Schedule is limited to the assessee named in the certificate Issues Involved:1. Validity of the notice under Rule 73 of the Second Schedule of the Income-tax Act.2. Requirement of naming the petitioner in the certificate under Section 222 of the Income-tax Act.3. Jurisdiction of the Tax Recovery Officer to proceed against the petitioner based on the certificate naming only the firm.4. Applicability of the coercive process under the Second Schedule to individual partners of a firm.Detailed Analysis:1. Validity of the notice under Rule 73 of the Second Schedule of the Income-tax Act:The petitioner argued that the notice issued under Rule 73 is devoid of jurisdiction because he is not a defaulter within the meaning of Rule 1 of the Second Schedule. The court examined the provisions of the Second Schedule and concluded that the Tax Recovery Officer's competence to act under the Schedule is limited to the assessee named in the certificate. The court emphasized that the omission of the assessee named in the certificate to comply with the direction as to payment in accordance with the notice served under Rule 2 is an essential prerequisite for the exercise of the power by the Tax Recovery Officer. The coercive process under Schedule 2 is not to be invoked against any person other than the assessee named in the certificate and except after he has failed and neglected to satisfy the demand before the expiry of 15 days from the date of service of notice.2. Requirement of naming the petitioner in the certificate under Section 222 of the Income-tax Act:The petitioner contended that the certificate issued under Section 222 of the Act mentions the name of the firm alone as the defaulter. The court noted that the definition of 'defaulter' in Rule 1 is clear and express, stating that it is only the person named in the certificate that can be treated as a defaulter. The court held that the mandatory requirement is that there should be notice to the defaulter under Rule 2 before further action can be taken. The court rejected the doctrine of constructive notice, stating that actual notice to the assessee is required, not constructive notice which may be imputed to him in his capacity as a partner.3. Jurisdiction of the Tax Recovery Officer to proceed against the petitioner based on the certificate naming only the firm:The court examined whether a partner can be proceeded against or be detained in civil prison under the Second Schedule on the strength of a certificate that has named the firm alone as the assessee. The court concluded that the Tax Recovery Officer's competence is attributable only to the certificate, which is the foundation of his jurisdiction to proceed against the assessee's person or property. The court held that the coercive process of recovery specified in Schedule 2 can be applied only on the proved default or omission of the person against whom a coercive process is sought. Therefore, the Tax Recovery Officer cannot proceed against the petitioner on the strength of a certificate naming only the firm.4. Applicability of the coercive process under the Second Schedule to individual partners of a firm:The court examined the argument that all partners are jointly and severally liable for the tax and that naming the firm in the certificate is tantamount to naming all the partners. The court rejected this argument, stating that the arrest and detention in civil prison can be ordered only on proof of deliberate or wilful or culpable avoidance of the obligation to pay the tax by the individual partner. The court held that the scheme of the enactment is incompatible with the idea that a partner can be subjected to arrest and detention in civil prison on the strength of a certificate which does not name him eo nomine as the assessee.Conclusion:The court held that the notice issued under Rule 73 on August 21, 1971, is ultra vires and has to be quashed. The court directed that it is open to the Income-tax Officer to amend the certificate already issued by him, naming the individual partner also as a defaulter. The rule nisi was made absolute, and each party was directed to bear its own costs.