1999 (4) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the demand notice for penalty under section 271(1)(c) of the Income-tax Act.
2. Liability of the petitioner as a surety for the penalty imposed on the firm.
3. Entitlement of the petitioner for the release of the title deed of his property.

Issue-wise Detailed Analysis:

1. Validity of the Demand Notice for Penalty under Section 271(1)(c):
The petitioner argued that the surety bond executed on May 7, 1974, was only for the income-tax, wealth-tax, and/or gift-tax liability of the firm and its partners, not for any penalty. The court noted that the surety bond specifically mentioned the petitioner's liability for tax but did not include penalties. The court observed that the terms of the surety bond did not cover penalties, and thus, the demand notice for the penalty amount was not valid against the petitioner.

2. Liability of the Petitioner as a Surety for the Penalty Imposed on the Firm:
The court analyzed the definitions and provisions under the Income-tax Act, particularly section 2(43), section 156, and Chapter XXI, which differentiate between tax and penalty. The surety bond explicitly covered tax liabilities and not penalties. The court held that the petitioner could not be held liable for the penalty imposed on the firm under section 271(1)(c) since the bond did not encompass such liabilities. The court also rejected the respondents' argument that the petitioner, as a surety, could be equated to a representative assessee under section 161 of the Act or that section 221, dealing with penalties for tax default, was applicable.

3. Entitlement of the Petitioner for the Release of the Title Deed of His Property:
Given that the petitioner's surety bond did not cover penalties, the court found that the petitioner was entitled to the release of his property's title deed. The court noted that the firm had already paid the assessed tax and received a refund for the excess amount, further discharging the petitioner from any surety obligations. Additionally, the court referenced sections 134 and 139 of the Indian Contract Act, 1872, which support the discharge of a surety when the creditor acts inconsistently with the surety's rights. The court directed the release of the title deed of the property No. 18/183-A, Kurswan, Kanpur, to the petitioner.

Conclusion:
The court quashed the order dated April 29, 1987, and the notice dated July 27, 1987, issued by the Income-tax Officer and the Tax Recovery Officer, respectively. The court directed the Commissioner of Income-tax to release the title deed of the petitioner's property. The writ petition was allowed with costs, concluding that the petitioner was not liable for the penalty imposed on the firm and was entitled to the release of his property's title deed.