2013 (1) TMI 131 - HC - Income Tax

Assessee in default u/s 220 Validity of demand notice u/s 156 - Service of demand notice - Initiation of Penalty proceedings before issuing order of penalty Held that - Section 156 provides for a vital step to be taken by the A.O. without which the assessee cannot be termed a defaulter. The use of the term shall in section 156 implies that service of demand notice is mandatory before initiating recovery proceedings and constitutes foundation of subsequent recovery proceedings. As no notice of demand has been served upon the petitioner. In the absence of service of a demand notice u/s 156 on the petitioner, prior to initiating recovery proceedings, which is mandatory, the very foundation of the recovery proceedings stands vitiated and as such, the same cannot be sustained. In favour of assessee

Summary

Issues Involved:
1. Whether any legally valid demand notice had been served upon the petitioner.
2. Whether, in the absence of a legally valid demand notice, the recovery proceedings initiated by the respondents are legal and valid.

Detailed Analysis:

Issue 1: Whether any legally valid demand notice had been served upon the petitioner.

The petitioner filed a declaration under section 184(7) of the Income-tax Act, 1961, for the assessment year 1985-86. Subsequently, the petitioner received various notices and communications from the Income-tax authorities regarding the recovery of dues. The petitioner consistently requested copies of the assessment order and demand notice, asserting that no such documents had been received. Despite multiple communications and objections from the petitioner, the respondents failed to provide evidence of a demand notice under section 156 being served.

The court noted that no demand notice, as contemplated under section 156 of the Act, appeared to have ever been served upon the petitioner. The respondents contended that due to the delay in filing the petition, records were not available to confirm whether a demand notice had been served. However, the court found this argument unconvincing, given the petitioner's consistent objections and requests for the assessment order and demand notice over the years.

Issue 2: Whether, in the absence of a legally valid demand notice, the recovery proceedings initiated by the respondents are legal and valid.

The court examined the statutory provisions of section 220 of the Income-tax Act, which outlines the conditions for an assessee to be deemed in default. A notice under section 156 specifying the amount, place, and person to whom payment is to be made is a prerequisite for invoking section 220. The court emphasized that without such a notice, it is not possible to determine the due date for payment, compute interest, or extend the payment period.

Given that no demand notice under section 156 had been served, the petitioner could not be treated as an assessee in default. Consequently, the subsequent recovery proceedings under sections 220 to 226 of the Act were deemed to be without jurisdiction.

The court referred to the Supreme Court's ruling in Sri Mohan Wahi v. CIT, which underscored the mandatory nature of serving a demand notice under section 156 before initiating recovery proceedings. The absence of such a notice invalidates the foundation of the recovery proceedings.

Judgment:

The petition was allowed, and the impugned notice dated February 26, 2010, along with the recovery proceedings initiated by respondent No. 2 for the assessment year 1985-86, were quashed and set aside. The attachment of the petitioner's bank account was also vacated. The rule was made absolute with no order as to costs.