1991 (5) TMI 28 - HC - Income Tax

Summary

Issues:
1. Validity of notices issued under section 226(3) of the Income-tax Act, 1961.
2. Effect of setting aside assessment orders on orders of attachment under section 226(3).

Analysis:

Issue 1: Validity of notices issued under section 226(3)
The petitioner challenged the validity of the notices issued under section 226(3) on the grounds that the order dated February 3, 1978, addressed to the firm lapsed when the appeals filed by the defaulter were allowed and the assessment orders were set aside. The petitioner argued that he could not remit the amount held on behalf of the defaulter due to stay orders and instructions from the defaulter. The Income-tax Officer contended that the order of attachment remained valid even after the assessments were set aside, as fresh assessments were made resulting in a substantial tax demand. The court noted that there is no provision in the Act or Rules to keep an attachment order alive after the assessment giving rise to it is set aside. The court held that the order of attachment under section 226(3) ceases to be effective once the assessment is set aside, as the attachment has no independent existence without a valid assessment order.

Issue 2: Effect of setting aside assessment orders on orders of attachment
The court referred to the decision in ITO v. Seghu Buchiah Setty [1964] 52 ITR 538, which mandated serving a fresh demand notice if the tax assessed was reduced on appeal. The court highlighted that there was no similar provision in section 226. The court emphasized that the attachment order does not survive when the assessment order is set aside, even if a direction for a fresh assessment is given. The court concluded that the attachment order dated February 3, 1978, ceased to be effective when the assessment orders were set aside, and subsequent notices were invalid. The court quashed the order under section 226(3) dated December 26, 1988, as there was no valid attachment in force when the amount was paid to the defaulter.

In conclusion, the court held that the notices issued under section 226(3) were invalid, and the order of attachment ceased to be effective once the assessment orders were set aside. The court quashed the impugned notice dated February 15, 1989, and the order under section 226(3) dated December 26, 1988. The writ petition was disposed of with no order as to costs.