1986 (11) TMI 20 - HC - Income Tax

Summary

Issues:
- Validity of attachment by Income-tax Officer
- Priority of income-tax arrears in recovery proceedings
- Effect of notice under rule 2 of the Second Schedule to the Income-tax Act

Analysis:
The appeal challenged the order in Application No. 2736 of 1978, where the plaintiff sought a declaration that the attachment by the Income-tax Officer of monies in a suit was invalid. The plaintiff had obtained a decree in a suit against three defendants, including attachment of a picture titled "Ennaippol Oruvan." However, both Sri Vinayaka Pictures and R. R. Pictures, related to the defendants, were in arrears of income tax. The Tax Recovery Officer issued notices under the Income-tax Act to both entities. The Income-tax Department claimed priority in the recovery of the attached money on the basis of income-tax arrears being Government debts.

The court noted that under rule 16 of the Second Schedule to the Income-tax Act, once a notice is served on a defaulter, the defaulter cannot deal with the attached property without permission. The decree in the plaintiff's suit could not be executed against the attached property due to the Income-tax notice. It was established that the Income-tax Department did not need a separate decree to proceed against the defaulter's properties. The court upheld the view that the Income-tax Department's claim could not be resisted, as the notice was served before the suit was filed.

Regarding the recovery proceedings, the court ruled that the Department could only recover the amount due from Sri Vinayaka Pictures, not R. R. Pictures, from the money in court deposit. Any remaining amount after settling income-tax arrears would be subject to further orders for apportionment among creditors in execution proceedings. The appeal was dismissed, with no order as to costs.