2007 (10) TMI 96 - SC - Income Tax

Recovery to tax u/s 226 assessee purchased units in 2001 department issued notice to UTI for recovery in 2002 assessee did not exercise the option for repurchase unit transferred the amount to revenue held UTI has acted in haste and illegally, assessee is entitled for dividend.

Summary

Issues Involved:
1. Interpretation of sub-section (3) of Section 226 of the Income Tax Act, 1961.
2. Validity of the appellant's action in selling the respondent's units without consent.
3. Entitlement of the respondent to the redemption value and dividends of the units.

Issue-Wise Detailed Analysis:

1. Interpretation of sub-section (3) of Section 226 of the Income Tax Act, 1961:
The core issue revolves around the interpretation of sub-section (3) of Section 226 of the Income Tax Act, 1961. This provision allows the Assessing Officer or Tax Recovery Officer to issue a notice requiring any person who owes money to the assessee or holds money on their behalf to pay the amount due to the Income Tax Department. The provision specifies that payment should be made either when the money becomes due or is held by the person, and it creates a legal fiction that the person making the payment is doing so under the authority of the assessee.

2. Validity of the appellant's action in selling the respondent's units without consent:
The appellant, Unit Trust of India (UTI), received a notice from the Income Tax Department to pay the amount due from the respondent, who was a defaulter in income tax payments. The UTI acted on this notice and sold the respondent's units at a lower value without his consent. The High Court held that the respondent was entitled to the redemption value of the units at Rs.10 per unit after five years. The Supreme Court affirmed this, stating that the lock-in period of five years was a contractual term, and the option to repurchase at NAV-based prices could only be exercised by the respondent. The UTI, acting on the notice, could not unilaterally opt for the repurchase value without the respondent's consent. The Court emphasized that the terms of the contract should be adhered to strictly and reasonably.

3. Entitlement of the respondent to the redemption value and dividends of the units:
The respondent argued that he should also receive the dividends declared on the units during the period in question. The Supreme Court agreed, noting that the respondent had made sincere efforts to pay the tax and had offered to transfer the bonds at their face value. The Income Tax Department failed to respond to his request and acted hastily in selling the units at a lower price. The Court held that the respondent was entitled to the redemption value of Rs.10 per unit and the dividends declared from the date of allotment. The Court concluded that the UTI's action was not only hasty but also illegal, and the respondent should be restituted accordingly.

Conclusion:
The Supreme Court dismissed the appeal filed by the Administrator, Unit Trust of India, and allowed the appeal filed by the respondent. The respondent was entitled to the redemption value of the units at Rs.10 per unit and the dividends declared during the period from the date of allotment. The Court also awarded costs to the respondent, assessing counsel's fee at Rs.25,000.