Kerala High Court
Kurumber Betta Estate vs Fourth Income-Tax Officer And Ors. on 19 November, 1991
Equivalent citations: [1992]197ITR499(KER)
JUDGMENT S. Padmanabhan, J.
1. The petitioner is a partnership-firm represented by its managing agent. Exhibit P-1 is the deed of partnership. There were four partners. Plantation is the main business. Clause 12 of exhibit P-l provided that, if a partner dies, the partnership shall accept his legal representative as a partner in his place ; but if the legal representative is unwilling to join, he or she shall be entitled to the same reliefs as a partner willing to retire. Till such intimation, the other partners shall have full right of deciding all questions connected with the working of the partnership. Channiah, one of the four partners, died in 1971. His legal representative, Pramila Krishna, readily joined as a partner. In 1973, another partner, Bharathi Udayabhanu retired by mutual agreement and the other partners continued. Another partner, Devaki Amma, then died and her legal representative, Sarada Vijayan, was admitted as a partner. At present, the three partners are Pramila Krishna, Sarada Vijayan and Pavizham Madhavan Nair, among whom the last mentioned alone is an original partner.
2. Though the firm as such did not have any income-tax liability, Channaiah was indebted to the Income-tax Department for arrears due in respect of a certificate dated June 12, 1968, forwarded by the Income-tax Officer, Central Circle-I, Bangalore, and the interest payable under Section 220(2). One-third share of Channaiah in the partnership assets was kept under attachment by exhibit P-2 order dated December 28, 1968, issued under Rule 32 of the Second Schedule to the Income-tax Act, 1961, before the death of Channaiah. Exhibit P-2 was not pursued further. On January 5, 1978, long after the death of Channaiah, the Income-tax Officer, Mysore, issued exhibit P-7 notice to the firm under Section 226(3) demanding the tax due from Channaiah. The firm was informed that on failure it will be treated as a defaulter. That was followed by long correspondence, but nothing took place.
3. The firm wanted to sell its estate in Tamil Nadu for Rs, 35 lakhs. For that purpose, a clearance certificate from the Income-tax Department was necessary. The petitioner offered to deposit one-third share of Channaiah out of the net surplus after deducting the liabilities of the firm. The request was rejected. But then, by exhibit P-14, the Income-tax Commissioner informed the firm that the proposed sale could be had provided one-third sale proceeds is deposited or an irrevocable bank guarantee secured for the amount. By exhibit P-16, the petitioner informed the Tax Recovery Officer that one-third of the amount will be deposited without prejudice to the contention that the liability is only to deposit one-third of the net amount after deducting all liabilities of the firm incurred for running and maintaining the estate. By exhibit P-17, dated March 24, 1987, the Tax Recovery Officer, after consultation with the Commissioner of Income-tax, directed remittance of the amount by a demand draft offering to keep it in deposit to be appropriated towards income-tax after final settlement of the matter of liabilities of Channaiah towards the firm. The amount was sent with exhibit P-18 covering letter stating that appropriation could be had only after settlement of liabilities. It was further made clear that the question whether the Department is entitled to get one-third of the total sale proceeds or only one-third of the balance after deducting the liabilities of the estate has to be decided. The same stand was taken in exhibit P-19 also. By exhibit P-23, the firm informed the Commissioner that out of Rs. 11.67 lakhs deposited, the net one-third share of Channaiah will be only Rs. 1.46 lakhs after meeting the liabilities of Rs. 30,59,388.39 as on March 31, 1985. The excess amount was requested to be returned. By exhibit P-25 letter dated January 18, 1990, the Income-tax Commissioner informed the petitioner that, as per instructions received from the Central Board of Direct Taxes, there is no question of deducting liabilities. By exhibit P-29 letter dated March 12, 1990, the Tax Recovery Officer informed the petitioner that the entire amount remitted by demand draft was appropriated towards the income-tax liability of Channaiah with effect from February 17, 1989, as per instructions of the Central Board of Direct Taxes.
4. The prayers in the original petition are to quash exhibits P-25 and P-29 and direct the respondents to refund the amount necessary to meet one-third share of the liabilities of the estate including the expenses met for maintaining and upkeeping the estate after the death of Channaiah.
5. The main objection is that this court is not having jurisdiction to entertain the original petition. Other contentions are : (1) Attachment evidenced by exhibit P-2 was not challenged and hence original petition will not lie for that reason also, (2) the petitioner is estopped from claiming back any amount as the clearance certificate was obtained and deposit made on agreed basis, and (3) the claim of the Department has preference over all liabilities.
6. I do not think that want of jurisdiction is a fair contention. It is true that, as contended by the Department, the liability arose and the attachment was made outside the jurisdiction of this court. The respondents are residing outside the State and the property is also in Tamil Nadu. Basing on the decision in Election Commission v. Saka Venkata Rao, AIR 1953 SC 210 and K. S. Rashid and Son v. I. T. Investigation Commission [1954] 25 ITR 167 ; AIR 1954 SC 207, Mr. N. R. K. Nair, on behalf of the respondents, said that Article 226 of the Constitution places a two-fold limitation upon the exercise of the right. In the first place, the power is to be exercised only throughout the territories in relation to which it exercises jurisdiction, i.e., the writs issued by courts cannot run beyond the territories subject to its jurisdiction, and, secondly, the person or authority to which the High Court is empowered to issue such writs must be within the territories which clearly implies that they must be amenable to its jurisdiction either by residence or location within those territories. The decisions in Seth Paluram Dhanania v. ITO [1960] 39 ITR 429 (MP) and Oil and Natural Gas Commission v. Union of India [1991] 188 ITR 368 (Delhi) were also relied on in this context. I do not think that they are of any help.
7. The two limitations mentioned above were imposed by Clause (1) of Article 226. But Clause (2) says that the power conferred by Clause (1) may also be exercised in relation to territories within which the cause of action, wholly or in part, arises notwithstanding the territorial or residential limitation. That means that, if the cause of action at least in part has arisen within the jurisdiction of this court, it can entertain the original petition without fear of want of jurisdiction. Liability for income-tax and the attachment made for enforcing the liability alone are not the factors involving cause of action. Further, the petitioner is not concerned with those aspects of the cause of action because liability is admitted. It is true that exhibit P-2 attachment was issued outside the State and forwarded to the firm in Tamil Nadu. But that was under Rule 32 of the Second Schedule. Nothing took place consequent on exhibit P-2. That was only one of the modes of recovery which was not pursued further. The second mode of recovery which was available after the death of Channaiah was the one under Section 226(3) which is rather in the form of a gar-nishee proceeding by seeking enforcement from the person holding the assets. Exhibit P-7 notice was issued to the Cochin office of the firm and all the subsequent correspondence and remittance which gave rise to the claim were all from Cochin or addressed to the Cochin office.
8. Cause of action has not been defined in the Constitution or in the Code of Civil Procedure. In Section 20(c) of the Code of Civil Procedure as also in Article 226(2) of the Constitution, it is provided that jurisdiction lies where cause of action, wholly or in part, arises. A liberal interpretation is necessary. Cause of action means a bundle of essential facts which it is necessary for the party seeking relief to prove, if denied by the opposite party, in order to secure the relief prayed for. If one of such essential facts required to be proved to secure an order has arisen within the territory of this court, it will definitely have jurisdiction to entertain the original petition. Cause of action is thus a bundle of facts enabling a party to maintain a legal proceeding. I am in full agreement with the views in this respect expressed in the decisions in Veeri Chettiar (L V.) v. STO, [1970] 26 STC 579 ; AIR 1971 Mad 155 and D.L. Suresh Babu v. Institute of Chartered Accountants of India, AIR 1983 Kar 43. If, at least, a limb of the bundle of facts is available, seen or discernible in one particular place which is a seat of the High Court, then, such court can exercise all the powers conferred under Article 226 notwithstanding the fact that the authority against whom the rule is to be ultimately issued and whose act has created a cause of action in whole or in part is situate outside its territorial limits.
9. Remittance of the amount by the petitioner was on the basis of exhibit P-2. The starting point could be traced to the garnishee proceedings initiated consequent on exhibit P-7. In fact, the basis of the deposit which gave rise to the cause of action in favour of the petitioner was the request made from Cochin for permission to sell the estate. Permission was given to the Cochin office and the deposit was made from that office. The conditions of deposit and appropriation were negotiated by correspondence between the Cochin office and the Department. Exhibits P-25 and P-29 which are sought to be quashed are letters or order addressed to the Cochin office of the petitioner and accepted in that office. Identical situations were considered in the decisions in General Saw and Blades Co. v. Bharat Coking Coal Ltd., AIR 1990 Cal 96, Kunhabdulla v. Union of India [1983] KLT 1017, Damomal Kausomal Raisinghani v. Union of India, AIR 1967 Bom 355, Minerals and Metals Trading Corporation of India Ltd. v. Indian Metals and Ferro Alloys Ltd., AIR 1981 Orissa 76, Jagat Nath Wahal v. U. P. State Road Transport Corporation, AIR 1977 All 83, and many other decisions. I have no hesitation to hold that this court has jurisdiction. It cannot be said that even a part of the cause of action did not arise at Cochin. In my opinion, the cause of action of the petitioner solely arose at Cochin.
10. There is no fallacy in the contention that omission to challenge exhibit P-2 will disentitle the petitioner to the reliefs prayed for. As I have earlier stated, exhibit P-2 was not pursued further. What was attached under exhibit P-2 was the interest of Channaiah in the firm. The petitioner could no,t have challenged the attachment. The question is not whether the attachment is valid, but only what exactly is the amount that could be recovered as the share of Channaiah. There cannot be any question of estoppel also. It was the unreasonable stand of the Department under the cover of powers under Section 230A of the Income-tax Act, 1961, that forced the petitioner to deposit the whole amount of the one-third share. But the petitioner always made it clear that the deposit was made subject to the right to claim liabilities. The Department in fact offered to consider that question and offered to keep the amount in deposit subject to determination of that question. The question of estoppel, if at all, is applicable only against the Department. It made the unilateral appropriation without even observing the principles of natural justice quite against the tenor of the understanding between the parties as is evident from the correspondence. The petitioner did not obtain the clearance certificate on the agreement to pay the entire amount without claiming any liability. It was only forced to remit the amount because it was in need and the Department was in a commanding position.
11. The plea that the Department is having preference also cannot be heard on the facts of this case. Preference, if any, could only be against other creditors. The Department cannot have any better claim as against the firm than Channaiah into whose shoes it stepped by the notice under Section 226(3). The maximum that could be claimed by the Department is only what Channaiah himself could have claimed from his share.
12. Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The relationship arises from contract and not from status. When one partner dies, there is a reconstitution of the firm by the remaining partners or by admission of legal representatives or new partners. The new firm takes over the assets and liabilities. Under Section 37 of the Partnership Act, as held in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, the outgoing partner or the estate of the deceased partner, in the absence of a contract to the contrary, would be entitled, at the option of himself or his representative, to such share of profits made since he ceased to be a partner, as may be attributable to the property of the firm or to interest at the rate of 6 per cent. per annum on the amount of his share in the property of the firm. 'On dissolution of the firm, under Section 48, in settling the accounts, certain rules shall apply. Losses of the firm including deficiencies will have to be paid first. From the remaining assets, the debts of the firm will have to be paid. Advances paid by partners will have to be then paid. As held in Suganchand Hazarilal Parwar v. Lukhe More Kori, AIR 1938 Nag 182, if the surviving partners alienate any property, the representatives of the deceased partner will have, in respect of that property, only a lien for the amount due to them in the taking of accounts. On a dissolution by the death of a partner, the representative of a deceased partner is entitled to call upon the surviving partners to account for the deceased partner's share as it stood on his death and to have his claim satisfied out of the assets of the dissolved partnership after discharging all the liabilities incurred before dissolution and such only of the liabilities incurred thereafter by the surviving partners, as are incidental to and necessary for the winding up of the business (Kasi v. Rm. A, Rm. V. Ramanathan Chettiar, AIR 1949 Mad 693).
13. It is true that the firm is not dissolved so far and it is continuing. What is sold is only one of the assets of the firm. The case of the petitioner is that it is the only asset. There cannot be any dispute that, from the sale consideration, the liabilities of the firm as on the date of death of Channaiah will have to be paid and the balance alone will be available for distribution among the partners. It is admitted that the share of Channaiah was one-third. Both sides agreed at the time of arguments that the liabilities of the firm as on the date of death of Channaiah will have to be paid and the balance alone could be divided and appropriated by the Department. The petitioner claims that expenses incurred by the firm after the death of Channaiah for maintaining and improving the estate till the date of sale also will have to be deducted. But, normally, such expenses must have been met only from the profits of the estate. The contention of the petitioner is that there was no such income as the estate was not yielding and there was strike. The claim made by the petitioner may be exaggerated. That is the factual question to be considered by the Income-tax Department while settling accounts. Anyhow, there cannot be any dispute regarding the fact that, on principles of law, the respondents are entitled to appropriate out of the amounts in deposit only the net amount due to Channaiah after deducting the expenses and liabilities in the light of what is stated above. Exhibits P-25 and P-29 at any rate are liable to be quashed.
14. The original petition is, therefore, allowed. Exhibits P-25 and P-29 are hereby quashed. The respondents are hereby directed to settle the accounts in the light of what is stated in the previous paragraph. After such settlement, the net amount found due to Channaiah as his one-third share alone will be appropriated towards his income-tax arrears. The balance amount will be refunded to the petitioner-firm. The respondents will see that the settlement and refund, if any, are made as early as possible, at any rate not later than six months from today. No costs.