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Issues:
Challenge to legality of action by ITO under Section 226(3) of the I.T. Act, 1961 regarding recovery of tax arrears from a petitioner-company. Detailed Analysis: The petitioner-company challenged the legality of the actions taken by the Income Tax Officer (ITO) in issuing notices under Section 226(3) of the Income Tax Act, 1961, demanding tax arrears from the partnership firm and its partners. The petitioner-company was formed to take over a partnership concern, and the machinery had already been transferred to the petitioner-company before the formal agreement. The petitioner-company and the partnership firm were sister concerns. The ITO issued a notice demanding an amount of Rs. 1,61,000 as arrears of income tax on July 1, 1974, and also issued prohibitory orders on June 24, 1974, restraining the petitioner-company from disposing of their property. The petitioner-company claimed that they provided a certificate from a chartered accountant stating no amount was due from them to the partnership concern. Despite this, the Tax Recovery Officer issued a notice on July 20, 1974, threatening to recover the arrears in accordance with the Second Schedule to the I.T. Act, 1961. The Tax Recovery Officer attempted to recover the amount on July 25, 1974, leading the petitioner-company to approach the court and file a petition, obtaining interim orders. The court examined Section 226(3) of the I.T. Act, which allows the ITO to recover tax from a garnishee of the assessee. It was highlighted that if a person objects to the notice and states on oath that the demanded sum is not due, they are not required to pay unless the statement is found to be false. The petitioner had submitted affidavits under this provision, and the court emphasized that unless the ITO determines the statements to be false, recovery proceedings cannot be initiated. The court directed that the ITO should ascertain the correctness of the statements made in the affidavits before proceeding with recovery. If the statements are found to be false, the ITO is entitled to recover the arrears in accordance with Section 226 of the Act. The court discharged the rule but prohibited enforcement of recovery until the correctness of the statements was determined. A Chamber Summons taken out by former partners of the partnership firm was dismissed, and an inquiry was ordered to determine why the petition had remained pending since 1974.
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