1998 (11) TMI 97 - HC - Income Tax

Issues Involved:
1. Legality of the Tax Recovery Officer's rejection of the petitioner's claim/objection without investigation.
2. Priority of statutory dues over contractual obligations.
3. Requirement for investigation under Rule 11 of the Second Schedule to the Income-tax Act, 1961.
4. Comparison of Rule 11 of the Second Schedule to the Income-tax Act with Order 21, Rules 58-63 of the Code of Civil Procedure.
5. Right to file a suit under Rule 11(6) of the Second Schedule to the Income-tax Act.

Issue-wise Detailed Analysis:

1. Legality of the Tax Recovery Officer's rejection of the petitioner's claim/objection without investigation:
The petitioner, State Bank of India, contended that the Tax Recovery Officer rejected its claim/objection without conducting the mandatory investigation as required under Rule 11 of the Second Schedule to the Income-tax Act, 1961. The petitioner argued that the Tax Recovery Officer summarily dismissed the claim on the basis of the opinion of the standing counsel for the Income-tax Department without affording an opportunity for a hearing or to adduce evidence. This procedural lapse was highlighted as a significant error of law.

2. Priority of statutory dues over contractual obligations:
The Income-tax Department asserted that its dues, being statutory in nature, have an overriding effect over the contractual obligations of the petitioner-bank. The Department argued that the petitioner-bank neither produced documentary nor oral evidence before the Tax Recovery Officer to support its claim/objection. The Department also emphasized that the petitioner-bank cannot be considered the owner or in possession of the properties in question, thus justifying the rejection of the claim/objection.

3. Requirement for investigation under Rule 11 of the Second Schedule to the Income-tax Act, 1961:
Rule 11 mandates that upon any claim or objection to the attachment or sale of property, the Tax Recovery Officer must investigate the claim. The petitioner highlighted that no such investigation was conducted in this case, contravening the procedural requirements. The court noted that the Tax Recovery Officer must investigate the claim unless it is deemed to be designedly or unnecessarily delayed, which was not the case here.

4. Comparison of Rule 11 of the Second Schedule to the Income-tax Act with Order 21, Rules 58-63 of the Code of Civil Procedure:
The court compared Rule 11 of the Second Schedule to the Income-tax Act with the erstwhile provisions of Order 21, Rules 58-63 of the Code of Civil Procedure. It found that the provisions are analogous and should be interpreted similarly. The court observed that the summary rejection of the petitioner's claim without investigation and evidence was not in accordance with the law, as the rules require a thorough examination of the nature of possession and interest in the property.

5. Right to file a suit under Rule 11(6) of the Second Schedule to the Income-tax Act:
The court emphasized that under Rule 11(6), the party against whom an order is made by the Tax Recovery Officer has the right to institute a suit in a civil court to establish its claim to the property in dispute. The court noted that the Tax Recovery Officer's order is subject to the outcome of such a suit, underscoring the importance of a fair investigation and hearing before reaching a decision.

Conclusion:
The High Court quashed the impugned orders of the Tax Recovery Officer, directing a fresh consideration of the petitioner's claim/objection on the merits. The court emphasized the necessity of adhering to the procedural requirements under Rule 11 of the Second Schedule to the Income-tax Act and ensuring a fair opportunity for the petitioner to present its case. The court did not make any order as to costs.

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