Landmark Judgements of Supreme Court on Section 226 [Other modes of recovery]

SLP dismissed against High Court ruling that section 226(3)(x) does not confer arbitrary power on Income-tax department to recover amount of tax liability of mining department from innocent assessee who was awarded tender for settlement of sand ghats by Mining department

Other modes of recovery (Garnishee proceedings) - High Court by impugned order held that section 226(3)(x) does not confer arbitrary power to Income-tax department to recover amount of tax liability of mining department from innocent assessee who was awarded tender for settlement of Sand Ghats by mining department. SLP filed against impugned order was to be dismissed. [In favour of assessee] [Principal Chief Commissioner of Income-tax v. Sainik Food (P) Ltd. (2019) 264 Taxman 28 : 106 taxmann.com 112 (SC)]

Where revenue sought recovery of dues against assessee-sick industry who put on sale its property, as scheme of rehabilitation had expired, action of revenue was justified

Section 226 of the Income-tax Act, 1961, read with section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 - Collection and recovery of tax - - Assessee-sick industry was de-registered from Sick Industrial Companies Act as and when its net worth became positive - Years later, assessee put on sale one of its property - Revenue demanded tax dues on coming to know said information. Meanwhile scheme of rehabilitation came to an end - High Court held that revenue could not proceed to recover dues as bar on said recovery was in operation under section22 of SICA. High Court also observed that appropriate remedy for revenue was to move to Board of Industrial and Financial Reconstruction. Since scheme of rehabilitation came to an, revenue was entitled to recover tax dues. Parties were to be permitted to approach Board for determination of quantum of dues. [In favour of revenue] - [Director General of Income-tax(Admn.) v. GTC Industries Ltd. (2016) 240 Taxman 209 : 69 taxmann.com 223 (SC)]

Sale by auction of property of defaulter – Protection for bona fide purchaser - a bona fide purchaser of the property of the appellants in the valid auction could not be disturbed as according to an established principle of law, a third party auction purchaser continues to be protected, notwithstanding that the underlying decree might be set aside. The appellants ought to have availed the statutory remedy for ventilating their grievances under Rules 60 and 61 of Schedule II Appellant was a registered firm with four partners - For relevant assessment year, a total amount of Rs. 12,55,150 was due from appellant towards tax, interest and penalty, for recovery of which agricultural lands owned by partners of appellant had been attached and sold in a public auction by department and sale was confirmed in favour of ‘L’. Facts revealed that arrears of tax and interest had been accepted by appellant; that no procedural irregularity or illegality in public auction process was even alleged by appellants; and that amount fetched in public auction was much more than reserve price fixed by Assessing Officer which had never been challenged by appellants. On facts, High Court confirmed action of department in auctioning attached property for recovery of debts. High Court was justified in its view. Even otherwise, since ‘L’ had purchased said property in a valid auction and he was a bona fide purchaser of property for value, sale could not be disturbed. (Related Assessment year : 1985-86) – [Janatha

Textiles & Others v. TRO (2008) 301 ITR 337 : 216 CTR 371 : 206 Taxation 150 : 170 Taxman 221 : 7 DTR 133 (SC)]

Assessee, a member of stock exchange, died - He was declared as deemed defaulter under relevant rules of stock exchange and his membership card vested in stock exchange which disposed of same to another for consideration - Income-tax authorities issued garnishee notice to stock exchange in respect of arrears of income-tax of assessee - Membership right was not a property of assessee so as to justify invocation of section 226(3)

Rule 9 of the Ahmedabad Stock Exchange Rules deals with the right of nomination of deceased or defaulter member. It provides that “On the death or default of a member his right of nomination shall cease and vest in the Exchange.” Rule 10 of the said Rules provides that “When a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-law or Regulation of the exchange for the time being in force it shall belong absolutely to the exchange free of all rights, claims or interest of such member or any person claiming through such member and the Governing Board shall be entitled to deal with or dispose of such right of membership as it may think fit.”

The Stock Exchange Rules, Bye-laws and Regulations have been approved by the Government of India under the Securities Contracts (Regulations) Act. There was no challenge to these Rules. The question whether right of membership confers upon the member any right of property was, therefore, to be examined within the framework of the Rules, Bye-laws and Regulations of Exchange. On a plain and combined reading of the rules, it is clear that right of membership is merely a personal privilege granted to a member, it is non-transferable and incapable of alienation by the member or his legal representatives and heirs except to the limited extent as provided in the rules on fulfilment of conditions provided therein. The nomination wherever provided for is also not automatic. It is hedged by rules. On right of nomination vested in the stock exchange under the rules, that right belongs to the stock exchange absolutely. The consideration received by the stock exchange on exercise of the right of nomination vesting in it, is to be applied in the manner provided in rule 16.

The heirs and legal representatives of R had informed the stock exchange that they were unable to meet the liabilities of the deceased and that the appropriate decision in that behalf may be taken by the stock exchange. It was evident that that they did not exercise the right of nomination under rule 11 read with Appendix C. They did not pay or satisfy the dues and the claims as required under rule 15 of the Rules. Under these circumstances the Governing Board exercised the right of nomination in respect of membership of R which had vested in the stock exchange.

In the present case rule 16 of the said rules was properly applied by the stock exchange. The membership right in question was not the property of the assessee and, therefore, it could not be attached under section 281B. No amount on account of R was due from or held by the stock exchange and, therefore, section 226(3) could not be invoked. Decision of the High Court set aside. – [Stock Exchange v. ACIT (2001) 248 ITR 209 : 166 CTR 285 : 115 Taxman 471 (SC)]

Provisions of Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 shall prevail over Income Tax Act

The language of section 13 of the Special Courts Act is similar to section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985. The Apex Court, following the ratio laid down in Solidaire India Ltd. v. Fair Growth Financial Services Ltd. (2001) 3 SCC 71 held that the provisions of the Special Court Act, wherever they are applicable, shall prevail over the provisions of the Income-tax Act, 1961. – [Tax Recovery Officer (TRO) v. Custodian Appointed under Special Court Act, 1992 (2007) 293 ITR 369 : 211 CTR 369 : 163 Taxman 441 (SC)]

Money belonging to assessee lying in Court deposit - Appellant-creditors filed petition for rateable distribution - Application was moved by Union of India under section 226(4), before actual distribution - Court dismissed petition of Union of India on ground that money lying with executing court ceased to belong to judgment debtor and, hence, section 226(4) had no application - Money would cease to be property of judgment-debtor only on its being distributed among decree-holders and till it is not distributed it continue to remain money of judgment-debtor in custody of Court - Since on date of filing of application under section 226(4), money had not been distributed, executing court erred in rejecting application - Payment of money to appellant after filing of application would not render said application infructuous

The appellant along with others held decrees against a company and they moved an application for rateable distribution under section 73 of the Code of Civil Procedure of the various sums of money which were lying in Court deposit to the credit of the judgment-debtors. On 28.05.1973, the Civil Judge sent the cheque to the executing court for payment to the decree-holder. On 31.08.1973, the Union of India moved an application under section 226(4) to attach and realise towards tax dues the amounts lying in the Court to the credit of the judgment-debtors. The application was contested by the appellant and other decree-holder and the Civil Sessions Judge dismissed the Government's application on 04.03.1974, holding that the money which was brought to the executing court for the satisfaction of the decree by the decree-holders had ceased to belong to the judgment debtor and, hence, the provisions of section 226(4) could not have any application. The Union of India, thereupon filed a revision petition and the High Court held that until the money was disbursed and appropriated by the decree-holders or creditors of the judgment-debtors in accordance with law, the money held by the Court continued to be liable to be proceeded against under section 226(4). On appeal to the Supreme Court :

Held : Under section 226(4), the Assessing Officer or the Tax Recovery Officer can move the Court having custody of money belonging to the assessee, for payment to him of such money for discharging the tax liability of the assessee. What is necessary is that on the date when the application is made, the Court should have custody of money belonging to the assessee. Under section 73, Civil Procedure Code, the money lying in the executing court continues to belong to the judgment-debtor till it is disbursed among the decree-holders or other creditor of the judgment-debtor.

On 31.08.1973, the date on which the application under section 226(4) was filed by the Union of India, cheques sent by the Civil Judge, to the executing court were lying with the executing court. The payment was actually made to the appellant on 23.04.1974, i.e., after the passing of the order dated 04.03.1974, rejecting the application under section 226(4) filed by Union of India. The High Court was, therefore, right in holding that on the date of filing of the application under section 226(4) the money had not been distributed to the appellant decree-holders and was lying with the executing court. The executing court

was, therefore, in error in rejecting the application filed by the Union of India under section 226(4) on the view that the money had ceased to be the property of the judgment-debtors on the date of the filing of the said application. The money could have ceased to be the property of the judgment-debtor only on its being distributed among the decree-holders and till it was so distributed it continued to remain the money of the judgment-debtor in the custody of the Court.

It was submitted that after the passing of the order dated 04.03.1974 by the executing court, the Union of India did not take any steps to obtain stay of the payment of the amount to the appellant and the appellant had obtained the cheque from the executing court and had encashed the same on 23.04.1974, and that the bank guarantee furnished by the appellant had also been discharged on 31.05.1974. That had no effect on the maintainability of the application under section 226(4) which was submitted on 31.08.1973, prior to such payment. The payment of money to the appellant after the filing of the application would not render the said application infructuous. No merit was, therefore, found in the appeal and the same was dismissed.

– [Lakshman Swarup Om Prakash v. Union of India (1998) 229 ITR 662 : 97 Taxman 354 (SC)]

It is open to a Court, to whom an application is made under section 226(4) to decide whether there has been proper notice of demand served on decree holder according to law

Decreed amount was deposited in the Court by the judgment debtor to the credit of the decree obtained by the decree holders (the petitioners). On the ITO making an application under section226(4) to the Court, the sub-judge found that no proper notices of demand were served on the respective decree holders from whom the amounts were claimed, as required under section 156 and in view of this he rejected the application of the ITO. On revision petition, the single judge held that a civil court to which a petition or application had been made under section 226(4), had no jurisdiction to decide the questions of fact, such as absence of service of a notice of demand for arrears of tax. It was held by the single judge that if the assessee had any objection against the amount claimed by the ITO he would have to satisfy the TRO about the same. On appeal:

Held : A perusal of the provisions of sections 222 and 226 clearly shows that the TRO has nothing to do with an application under section 226(4) made by the ITO to a Court in which there is money lying to the credit of the assessee in default. If such an application is made, it is certainly open to the Court to determine as to whether there has been a proper notice of demand served on the decree holder (assessee in default) according to law. It is only after the Court is satisfied of this that the Court can proceed to pay over the amount demanded to the ITO. It is well settled that tax can be recovered from an assessee only when it becomes a debt due from him, and that becomes a debt due when a notice of demand calling for payment of the tax has been served on the assessee. If an assessee objects to the recovery proceeding taken under section 226(4) on the ground that there has been no valid service of a notice of demand and that, therefore, no debt is due, the Court must decide the objection and if it upholds the objection it cannot permit recovery of the tax claimed. In view of the above, the judgment of the single Judge was set aside. – [Manmohanlal v. ITO (1987) 34 Taxman 320A (SC)]

On a true interpretation of section 226(3)(vi), ITO is bound to hold a quasi-judicial inquiry involving observance of principles of natural justice before he comes to conclusion that statement contained in affidavit filed by a person in response to notice under section 226(3)(i) is false in any material particular - Affidavit under section 226(3)(vi) need to not be filed by person alone on whom notice under section 226(3)(i) is served - Notice under section 226(3)(i) did not mention

specific amount due from appellants - Appellants had knowledge of that amount and at no time they complained of defect in notice - Whether impugned notice was not invalid-held, on facts

The appellants, a firm carrying on business as bankers and cloth dealers, had a running account with B Ltd., against whom substantial sums were due on account of income-tax, super tax, etc. A notice under section226(3)(i) was issued to the appellants requiring it to pay any amount due from it to B Ltd. to the extent of the tax arrears due from B Ltd. However, the specific amount due from the appellants to B Ltd. was not specified in the notice. The appellants informed the ITO (i) that, according to the state of the account between it and B Ltd., there was no credit balance in favour of B Ltd.; and (ii )that on the contrary, B Ltd. owed a large amount to it and in the circumstances the notice should be discharged. On the ITO's request for sworn affidavit, the appellants' accountant filed a sworn affidavit reiterating the aforesaid position and stating that the position stated was true to his knowledge and was based on the petitioner's accounts books. However, the ITO rejected the appellants' sworn affidavit as false on the grounds that while certain cash books in other languages seized in a search of B Ltd.'s premises showed that the appellants had made a substantial payment to B Ltd., the Hindi Cash book seized in the same search did not show the said payment. The ITO through a letter to the appellants pointed out that they owed a sum of Rs. 8 lakhs to B Ltd. The ITO, therefore, held the appellants personally liable to make payment to the extent of their liability to B Ltd. as on the date of issue of the notice to them under section226(3)(i ). Thereupon, the appellants reiterated their earlier stand. Consequently, through a letter, the ITO treated the appellants as assessee-in-default under section226(3)(i) and copy of the said letter was forwarded to the TRO who, under rule 48 of the Second Schedule, attached some of the appellants' property. On writ, though the High Court sustained the impugned notice, it held that since no recovery certificate was issued by the ITO, the recovery proceedings adopted by the TRO were invalid and they were, accordingly, quashed. On appeal:

Held : 1. The High Court was justified in holding that even though the notice issued to the appellants under section 226(3)(i) did not mention or give indication of any specific amount alleged to be due from the appellants to B Ltd., it was not invalid since the appellants knew that was the amount which was being referred to by the ITO in his notice and no prejudice was caused to the appellants by the reason of non-specification of the amount in the notice issued by the ITO.

2.It is not necessary under section 226(3)(vi) that the statement on oath contemplated in that pro vision should be made only by the person to whom the notice under section 226(3)(i) is sent by the ITO. It is sufficient if the objection to the requisition contained in the notice is made by the person to whom the notice is sent and such objection is supported by the statement on oath made by a person competent to make such statement. In the instant case, the affidavit was filed on behalf of the appellants by their accountant and not by one of their partners; but on that account the affidavit could not be disregarded by the ITO. Since the accountant of the appellants would obviously have knowledge of the state of the account between the appellants and B Ltd., and he would be competent to make statement on oath in regard to the position of such account. There was, therefore, sufficient compliance with the requirement of section 226(3)(vi) .

3.  It is obvious that, under section 226(3)(i) , the discovery by the ITO that the statement on oath made on behalf of the garnishee is false in any material particular has the consequence of imposing personal liability for payment on the garnishee and it must, therefore, be a quasi-judicial decision preceded by a quasi-judicial inquiry involving observance of the principles of natural-justice. The ITO cannot