2014 (7) TMI 1004 - HC - Income Tax

Notice u/s 226(3) Amount due from garnishee as tax arrears Held that - The Tax Recovery Officer had issued a notice dated 17.3.2008 treating the assessee to be an assessee in default on account of non-payment of the amount as per the notice u/s 226(3) of the Act - revenue knew about the petitioner's address at Varanasi but chose to sent the notice at Kanpur's address - The initial notice sent u/s 226(3) of the Act was not served as it was not sent at the appropriate address and consequently the action taken by the revenue pursuant to the notice u/s 226(3) of the Act without ensuring service becomes bad in law - the irregularity, if any, in non-service of the notice u/s 226(3) of the Act is deemed to be cured upon the assessee's subsequently appearing on 15.4.2008 and participating in the proceedings by production of its books of account and filing an affidavit of denial on 17.4.2008. The assessee has contended that it had advanced certain sums of money to the petitioner and, therefore, the petitioner is its debtor, but, the petitioner has denied this assertion - no steps have been taken by the assessee, namely, M/s Rich Capital and Financial Services Ltd. initiating any proceeding for recovery of that amount before any forum or any appropriate court of law - Since the petitioner had appeared and participated in the proceedings, the order of the Tax Recovery Officer treating the petitioner as an assessee in default cannot continue any longer. The denial by the petitioner to pay any amount, the attachment made by the Tax Recovery Officer cannot continue any further, especially when the Court finds that till date no inquiry has been made by the revenue into the genuineness of the affidavits filed by the petitioner - the order treating the petitioner as an assessee in default cannot be sustained and is quashed there was no justification in continuing with the attachment order and it is also quashed - A writ of mandamus is issued commanding the Tax Recovery Officer to ensure that 1,70,000 equity shares of Jhunjhunwala Vanaspati Ltd. is transferred again in the Demat Account of the petitioner with Karvy Stock Broking Ltd. within two weeks from the date of the production of a certified copy of the order. If any dividend was received by the Tax Recovery Officer on these shares, the said amount shall also be transferred to the petitioner Decided in favour of Assessee.

Issues Involved:
1. Validity of notice under Section 226(3) of the Income Tax Act.
2. Jurisdiction of the Tax Recovery Officer to adjudicate disputes.
3. Attachment and transfer of petitioner's assets by the Tax Recovery Officer.
4. Petitioner's liability towards the defaulter, M/s Rich Capital and Financial Services Ltd.
5. Refund of attached amounts and restoration of shares.

Detailed Analysis:

1. Validity of Notice under Section 226(3) of the Income Tax Act:

The petitioner contended that the initial notice under Section 226(3) of the Income Tax Act was never served upon them, rendering the proceedings initiated by the Tax Recovery Officer void. The court noted that the notice was sent to the petitioner's previous address in Kanpur, despite the registered office having been shifted to Varanasi. The court held that the action taken by the respondents pursuant to the notice under Section 226(3) without ensuring proper service was invalid. However, the court also stated that the proceedings could not be quashed at this stage due to the provisions of Section 292(BB) of the Act, which deems the notice served if the petitioner subsequently participated in the proceedings.

2. Jurisdiction of the Tax Recovery Officer to Adjudicate Disputes:

The petitioner argued that the Tax Recovery Officer had no jurisdiction to decide disputes arising out of business transactions between the petitioner and the defaulter. The court agreed, stating that Section 226(3) is intended to apply only to admitted liabilities and not to disputed claims. The court emphasized that the Tax Recovery Officer cannot adjudicate bona fide disputes between the garnishee and the assessee, which fall within the purview of civil courts. The court cited the Supreme Court's decision in Bihari Lal Ramcharan vs. Income Tax Officer, which held that such inquiries must follow the principles of natural justice.

3. Attachment and Transfer of Petitioner's Assets by the Tax Recovery Officer:

The Tax Recovery Officer had attached 4,24,910 equity shares of Jhunjhunwala Vanaspati Ltd. and a balance of Rs. 28,988.78 from the petitioner's savings bank account. The petitioner contended that these actions were illegal as no notice was served. The court found that the attachment and transfer of assets could not continue, especially since no inquiry was made into the genuineness of the affidavits filed by the petitioner denying liability.

4. Petitioner's Liability Towards the Defaulter, M/s Rich Capital and Financial Services Ltd.:

The defaulter claimed that the petitioner owed Rs. 1.55 Crore. The petitioner denied this, stating that no amount was due. The court noted that the defaulter had not initiated any proceedings for recovery of the alleged amount. The court held that the Tax Recovery Officer had not conducted any inquiry into the genuineness of the petitioner's affidavit denying liability, and therefore, the order treating the petitioner as an assessee in default could not be sustained.

5. Refund of Attached Amounts and Restoration of Shares:

The court issued a writ of mandamus directing the Tax Recovery Officer to restore 1,70,000 equity shares of Jhunjhunwala Vanaspati Ltd. to the petitioner's Demat Account and refund the amount of Rs. 28,988.78 along with applicable interest. The court quashed the order treating the petitioner as an assessee in default and the attachment order, directing the Tax Recovery Officer to comply within two weeks of the production of a certified copy of the order.

Conclusion:

The court allowed the writ petition, quashing the order of the Tax Recovery Officer dated 17.3.2008 and the attachment of the petitioner's assets. The court directed the restoration of shares and refund of the attached bank amount, emphasizing that the Tax Recovery Officer had no jurisdiction to adjudicate disputes between the petitioner and the defaulter. The court held that the proceedings under Section 226(3) of the Act could not be sustained due to the lack of proper service of notice and the absence of an inquiry into the petitioner's affidavit denying liability.

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