The Delhi High Court has dismissed a partnership firm’s plea for refund of ₹1 crore paid towards the outstanding income tax demands of one of its partners, holding that the payment was voluntary and that the Income Tax Department had not been informed about the business’s conversion from a proprietorship into a partnership when the amount was tendered.

The bench of Justice Dinesh Mehta and Justice Aditi Choudhary found no illegality, error or arbitrariness in the Department’s action. It observed that the firm’s grievance over payment of a partner’s individual tax liability was, in the circumstances of the case, essentially a dispute between the partners. 

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The dispute concerned a liquor business operating under the name M/s. Surender Gupta, which was initially a proprietorship of petitioner.

On June 8, 2017, Mahavir Mittal and Anu Mittal entered the business through a partnership deed. The petitioner retained a 1% share, while the remaining 99% was jointly held by the two incoming partners.

The firm approached the High Court seeking refund of ₹1 crore, along with interest, contending that the amount had been recovered from it against the petitioner’s individual income tax demands for assessment years 2011–12 and 2016–17.

The amount comprised two fixed deposit receipts of ₹40 lakh each and a cheque for ₹20 lakh.

The firm argued that petitioner, in his individual capacity, had a different Permanent Account Number, while the partnership was a separate assessee with its own PAN. It maintained that its funds had therefore been used to discharge tax demands belonging to another assessee.

During the hearing, the bench asked whether any document on record established that the Department had been informed about the change in the business’s constitution under the partnership deed dated June 8, 2017.

According to the judgment, counsel for the firm could not identify any such document.

The bench also questioned the assertion that the amount had been forcibly recovered, noting that ₹80 lakh had been realised through the fixed deposit receipts and ₹20 lakh had been paid by cheque.

The firm’s counsel responded that a notice had been sent to the bank and that the firm had handed over the fixed deposit receipts and cheque under coercion.

The firm relied on a complaint submitted through the Centralised Public Grievance Redress and Monitoring System, or CPGRAMS, on February 6, 2019, and the corresponding response dated March 18, 2019.

Its counsel submitted that these proceedings showed that the Department had subsequently examined and accepted that the business was being run by a partnership firm in which  petitioner was a sleeping partner with a 1% share.

However, the court focused on whether the Department had been informed of the partnership’s existence when the payment was made, rather than whether it became aware of the arrangement later.

The Department argued that the partners had handed over the fixed deposit receipts and cheque of their own will. It denied the allegation of coercion and submitted that, had coercion occurred, the firm could have lodged a police complaint.

Revenue counsel also referred to the grievance redressal report, arguing that there was a serious dispute between petitioner and the other two partners and that they had taken inconsistent positions.

The Department additionally suggested the possibility of collusion to defraud the Revenue. This was a submission made by its counsel; the judgment did not record a finding that fraud had been established.

After considering the rival submissions, the bench concluded that the firm had voluntarily tendered the two fixed deposit receipts and cheque on June 8, 2017.

The court acknowledged that the payment might have followed attachment of the bank account. Nevertheless, it held that this did not establish that the amount had been forcibly recovered in the circumstances before it.

A central factor was the absence of evidence showing that the Department had been informed of the conversion from proprietorship to partnership before or at the time of payment.

The bench noted that the business continued to operate under the  petitioner’s name and that the authorities had not been told, when the amount was handed over, that it was a partnership comprising three partners.

The court further reasoned that if the demand did not belong to the firm, there was no compulsion for the firm to deposit the amount. If the firm had paid a tax demand belonging to one of its partners, the resulting grievance was essentially an internal dispute between the partners, whom the judgment described as family members.

The bench held that writ proceedings were not the appropriate forum for resolving the partners’ inter se dispute.

Finding no illegality, error or arbitrariness in the Department’s conduct, the court declined to grant the requested refund and interest. It dismissed the writ petition as being without merit and disposed of the pending applications.

The decision turned on the particular facts: the court’s finding that the payment was voluntary, the continued use of the same business name, and the failure to notify the Department of the changed constitution when the amount was tendered. It did not lay down a general rule that a partnership firm is automatically liable for a partner’s individual income tax dues.

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