1988 (4) TMI 25 - HC - Income Tax

Summary

Issues:
1. Tax liability of expatriate employees working on a contract in India.
2. Validity of notice issued by Income-tax authorities for penalty and recovery of tax.
3. Interpretation of Sections 201, 222, and 226 of the Income-tax Act, 1961.
4. Compliance with legal requirements for issuing notices under Section 226(3).

Analysis:
1. The petitioner, a foreign company, entered into a contract with the Oil and Natural Gas Commission to work in India. The expatriate employees worked in India for less than 90 days, leading the petitioner to believe their salaries were exempt from income tax under specific sections of the Income-tax Act, 1961.

2. Seven years later, the Income-tax Officer issued a notice for penalty under section 221(1) for the assessment year 1979-80. Subsequently, a notice was sent to a third party, Mazgaon Dock Ltd., demanding payment on behalf of the petitioner. The petitioner challenged these actions as no assessment order, interest, or penalty had been issued against them.

3. The judgment delves into the provisions of Sections 220, 221, 222, and 226 of the Income-tax Act, 1961. It highlights that before issuing a notice under section 226(3) for recovery, the assessee must be in default in tax payment. The absence of a notice of demand or assessment order against the petitioner raises doubts on the validity of the notices issued by the Income-tax authorities.

4. The respondents relied on a Supreme Court decision regarding recovery methods under section 226. However, the judgment emphasizes the necessity of an order of assessment against the assessee before initiating recovery proceedings. In this case, the absence of an assessment order or quantification of tax dues renders the notices issued to the third party invalid.

Conclusion:
The court found the actions of the Income-tax authorities to be in violation of the Income-tax Act, 1961. The absence of an assessment order against the petitioner rendered the notices for recovery invalid. The judgment directed the respondents to return the amount demanded from the third party and pay interest. The court ruled in favor of the petitioner, emphasizing compliance with legal requirements for issuing recovery notices under the Income-tax Act.