2016 (1) TMI 1158 - HC - Income Tax

Recovery of dues u/s 226(3) - Mutual fund company directed to pay the amount due to the assessee to the Income tax department - Held that - The first petitioner in this case may be a person from whom money may become due to the proforma respondent assessee, but the event is not triggered off till such time that the first petitioner receives the notice of redemption from the assessee. In other words, the first petitioner is identified as a person from whom money becomes due to the assessee in future, but the first petitioner s liability to pay the assessee does not arise till such time that the assessee seeks the payment by applying for redemption of the units. In the circumstances, the first petitioner is under no obligation, till such time that the first petitioner is instructed by the proforma respondent assessee to redeem the units, to make over any money to the Income Tax Officer who has issued the notice to the first petitioner. The first petitioner has, as noticed above, done the next best thing possible. The first petitioner has undertaken not to allow the proforma respondent assessee to transact in the units. There is, thus, an effective order of attachment though the ITO may not be satisfied with the same to the extent the present money equivalent of the units covered by the order of attachment is left open to the vagaries of the market. As a consequence, the respondent authorities are restrained from taking any coercive action against the petitioners in respect of any notices issued pursuant to the original notice under Section 226(3) of the said Act dated July 15, 2015 unless the first petitioner is in breach of the undertaking recorded herein and allows the relevant units to be traded.

Summary

Issues:
1. Interpretation of Section 226(3) of the Income Tax Act, 1961 regarding notice issued to a mutual fund for payment of income tax arrears.
2. Determining whether a mutual fund holding units for a subscriber translates into money owed to the subscriber.
3. Analysis of relevant provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
4. Comparison with a Supreme Court judgment involving Unit Trust of India and premature encashment of units.
5. Identification of liability under Section 226(3) and obligation to pay income tax authorities.

Issue 1:
The case involved a notice under Section 226(3) of the Income Tax Act, 1961 issued to a mutual fund for payment of income tax arrears. The mutual fund argued that it did not hold any money for the subscriber mentioned in the notice, emphasizing that units held by the subscriber do not automatically translate into money unless redeemed.

Issue 2:
The petitioners contended that units held by a subscriber in a mutual fund represent an entitlement, not immediate money. They referred to relevant SEBI regulations defining mutual funds, units, transferability, and pricing. A Supreme Court judgment was cited where premature encashment of units by Unit Trust of India was deemed illegal.

Issue 3:
The petitioners relied on SEBI regulations to support their argument that units in a mutual fund do not equate to immediate money. The regulations highlighted the nature of mutual funds, unit holders' interests, transferability, pricing, and dividends.

Issue 4:
A comparison was drawn with a Supreme Court judgment involving Unit Trust of India, where encashment of units upon receiving a notice under Section 226(3) was deemed unlawful. The judgment emphasized the contractual nature of schemes and the necessity of subscriber consent for redemption.

Issue 5:
The judgment analyzed the liability under Section 226(3) of the Act, determining that the mutual fund was not obligated to pay income tax authorities until the subscriber requested redemption of units. The mutual fund's liability to pay the subscriber only arose upon redemption, not upon receipt of the notice.

In conclusion, the High Court ruled in favor of the mutual fund, stating that no obligation existed to pay income tax authorities until the subscriber sought redemption of units. The mutual fund's undertaking to restrict the subscriber from trading units was deemed sufficient, preventing coercive action by tax authorities unless the mutual fund breached the undertaking.