Individual Notice To Partners Not Needed For Firm's Tax Recovery: Madras High Court

The Madras High Court on 24 August held that individual notice to partners is not required when the Income Tax Department initiates recovery proceedings against the assets of a defaulting partnership firm. It clarified that individual notice is necessary where recovery proceedings are initiated against the personal assets of an individual partner.

Justice Senthilkumar Ramamoorthy disposed of four connected writ petitions concerning the recovery of income tax dues from RJK Investments and the auction of its properties The Bench held:

“A notice under Rule 2 of the II Schedule is required to be issued to the defaulter and defaulter is defined in Rule 1(b) as meaning “the assessee mentioned in the certificate”. Therefore, notices under Rule 2 of the II Schedule were issued to the partnership firm. Said notices were served on the partnership firm”

Assessment orders had been passed against RJK Investments for the assessment years 2007-08 to 2011-12. After the firm failed to discharge the tax demands, the Tax Recovery Officer issued recovery certificates and initiated proceedings under the Second Schedule of the Income Tax Act for attachment and sale of the firm's immovable properties.

The four petitions were filed by three individuals. S. Venkataramanan, a partner of RJK Investments, filed two petitions. Co-partner Kamalesh Kumar Sheth filed another petition, while S. Sajin Kumar, the successful auction purchaser, filed the fourth petition.

Venkataramanan challenged the sale proceedings, contending that notices under the Second Schedule had not been served upon him. He also questioned the valuation of the properties, the auction process and the limitation for initiating recovery proceedings.

On the limitation issue, the Court referred to its earlier decision in TASC Jawahar Ayya v. Principal Commissioner of Income Tax-4. It held that the amendment to Rule 68B of the Second Schedule cannot apply where the original limitation period had already expired before the amendment came into force. However, the amended provision would apply where the limitation period was still alive when the amendment came into force.

It then examined Venkataramanan's objection regarding notice. It noted that the recovery certificates had been issued against RJK Investments and that the properties put to auction belonged to the partnership firm.

The Bench observed that Rule 2 of the Second Schedule requires notice to be issued to the “defaulter”, which Rule 1(b) defines as the taxpayer mentioned in the recovery certificate. Since the recovery proceedings concerned the firm's assets, notice to RJK Investments was sufficient. It however, distinguished proceedings against the personal assets of an individual partner. It observed:

“Insofar as proceedings under the II Schedule relate to measures for the sale of an individual partner's property, it would certainly become necessary to serve notice on such partner,”

On the facts, the Court noted that notices relating to the recovery proceedings and sale were issued to the firm, while copies of the sale-related notices were also sent to the partners. Venkataramanan had himself raised objections after receiving the notice concerning the sale proclamation. It therefore found no violation of the statutory rules or principles of natural justice.

It also rejected the challenge to the valuation of the properties. It noted that the auction prices of Rs. 2.36 crore for the 26-cent property and Rs. 3.11 crore for the 33-cent property were higher than the guideline value and the market value disclosed in an affidavit executed by the firm's partners. In the absence of evidence showing that the properties were sold below their fair market value, the Bench declined to interfere with the auction.

It further rejected the objection that the auction was invalid because the demand drafts used for payment by successful bidder S. Sajin Kumar had been purchased from the bank account of his father, Sivakumar. It said:

“...As long as the earnest money deposit and other payments were made by the bidder/successful auction purchaser as per the terms and conditions of auction sale, it is immaterial that the demand drafts were issued by the issuing bank from and out of the bank account of Mr.Sivakumar…”

The Bench dismissed Venkataramanan's challenge to the sale proceedings. It disposed of his other petition with a direction to the Income Tax Department to provide him with a signed copy of the order rejecting his objections, enabling him to compute the limitation period for any further challenge. Sheth's petition was closed in view of the orders passed in Venkataramanan's petitions.

Accordingly, the High Court allowed Sajin Kumar's petition, confirmed the auction sale conducted on 28 January 2026 in his favour and directed the Tax Recovery Officer to execute the sale certificate in his favour.

For S. Venkataramanan: P.C. Harikumar for M/s Harikumar and Associates.

For Kamalesh Kumar Sheth: S. Vanithalakshmi.

For S. Sajin Kumar: M. Ravi Kiran for M/s Mothilal and Goda.

For the Income Tax Department: S. Premalatha, Senior Standing Counsel.