Kerala High Court
Vinod Babu vs District Collector on 7 September, 2005
Equivalent citations: 2005(4)KLT412
Author: K.S. Radhakrishnan
Bench: K.S. Radhakrishnan, K.T. Sankaran
JUDGMENT K.S. Radhakrishnan, J.
1. Whether an incoming partner could be made liable personally for the arrears of sales tax accrued prior to his induction as a partner of the firm is the question that has come up for consideration in this case.
2. Petitioner is a partner of M/s. Capital Builders, a registered partnership firm. Partnership firm was registered on 3-11-1993 by two partners by name Anitha Paul and Latha. Latha ceased to be a partner on 1-11-1996 and the petitioner was inducted as the partner on the said date in the partnership firm.
W.A. No. 1754 of 2005. Decided on 7th September, 2005.
3. The Tahsildar (RR), second respondent herein, issued a demand notice dated 2-5-2005 under Section 34 of the Revenue Recovery Act calling upon the petitioner to pay sales tax arrears of M/s. Capital Builders for an amount of Rs. 13,25,062/- for the assessment year 1995-96. Petitioner came to know about the demand notice only on 27-5-2005 when the notice was affixed on the petitioner's building at Karimpatta Road leased out to one Ganesh, Managing Director of Synergy Homes (P) Ltd. Second respondent issued notice of attachment dated 2-5-2005 to the said Ganesh requesting him to hold and pay the monthly rent of the said building to the second respondent so as to appropriate the said amounts towards sales tax arrears for the period 1995-96. Petitioner replied to the said demand notice stating that he was not a partner of the firm during the said period and not liable for payment of sales tax for that period. Petitioner, it was pointed out, was inducted into the partnership only on 1-11-1996 and he cannot be saddled with the liability towards sales tax for the period from 1-4-1995 to 31-3-1996. The second respondent, Tahsildar however, did not take any steps on the complaint filed by the petitioner. Consequently he has approached this Court and filed WP(C). No. 16841 of 2005. Writ Petition was dismissed by the learned single Judge holding that a new partner joining the firm would be equally liable like continuing partners under Section 21 of the KGST Act. Aggrieved by the same this appeal has been preferred.
4. Senior Counsel Sri. P. Balachandran submitted that the learned single Judge has committed a grave error in not properly appreciating the facts of the case as well as the law on the point. Counsel referred to Section 21 of the KGST Act as well as Section 31 of the Partnership Act and contended that a new partner cannot be held liable for the amount due before his entry as a partner of the firm. Special Govt. Pleader (Taxes) Sri. Raju Joseph on the other hand contended, since petitioner is the Managing Partner of the firm, he is also equally liable for the amount due towards sales tax.
5. Ext.P1 is the register of firms maintained under Section 59 of the Indian Partnership Act, 1932, which would indicate that petitioner joined as a partner of the firm only on 1-11-1996. Ext.P2 is the demand notice dated 2-5-2005, which would indicate that sales tax arrears of Rs. 13,25,062/- is due for the period 1995-96, i.e., for the period from 1-4-1995 to 31-3-1996 before the petitioner became a partner of the firm. Section 21 of the KGST Act deals with liability of the firms which reads as follows:
"21. Liability of firms:
(1) Where any firm is liable to pay any tax, fee or other amount under this Act, the firm and each of the partners of the firm shall be jointly and severally liable for such payment.
(2) Where a partner of a firm liable to pay any tax, fee or other amount under this Act retires, he shall, notwithstanding any contract to the contrary, be liable to pay the tax, fee or other amount remaining unpaid at the time of his retirement and any tax, fee or other amount due up to the date of retirement, though unassessed."
Section 21(1) stipulates that where any firm is liable to pay any tax, fee or other amount under the Act, the firm and each of the partners of the firm shall be jointly and severally liable for such payment. Section 21 of the KGST Act therefore makes the firm as well as its partners jointly and severally liable for the tax. Section 21(2) also stipulates that where a partner of a firm liable to pay any tax, fee or other amount under the Act retires, he shall, notwithstanding any contract to the contrary, be liable to pay the tax, fee or other amount remaining unpaid at the time of his retirement. This legal position is well settled by the decision of this Court in Rani Savithri v. Assistant Commissioner, 1992 (2) KLT 185.
6. The question that has come up for consideration in this case is whether an incoming partner can be held liable for the sales tax arrears due from the partnership firm as well as from the then existing partners before he was inducted into the partnership. Section 31 of the Partnership Act would answer the question raised, which we extract below for easy reference:
"31. Introduction of a partner--
(1) Subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.
(2) Subject to the provisions of Section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner."
Section 31(1) states that subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. Section 31(2) stipulates that subject to the provisions of Section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. Sub-section (2) provides that where a person has been introduced as a partner into an existing firm, he does not thereby become liable for any act of the firm done, any obligation of the firm incurred, before he becomes a partner therein. Each partner becomes a partner of the firm for the future and his present connection with the firm is no evidence that he ever expressly or impliedly authorised what may have been done prior to his admission. Even if an incoming partner agrees with his co-partners that the debts of the old firm shall be taken by the new firm, is as regards strangers, res inter alios acta, and does not confer upon them any right to fix the old debts on the new partner. In order to render an incoming partner liable to the creditors of the old firm, there must by some agreement, express or tacit, to that effect between him and the creditors and on some sufficient considerations. No materials have been produced to show that the incoming partner has agreed to honour liabilities of the old firm before he became a partner. Applying the above mentioned legal principles we are of the view the petitioner is not liable to pay sales tax arrears due from the firm for the year 1995-96 since petitioner was inducted to the partnership only on 1-11-1996.
7. We therefore allow this appeal and set aside Exts. P2 and P3 so far as petitioner is concerned and declare that petitioner cannot be held liable for the amount demanded for the period 1995-96. If any amount has been received from the petitioner on the basis of Exts. P2 and P3 the same would be refunded to the petitioner forthwith.