1981 (7) TMI 1 - SC - Income Tax

Interpretation of s. 226(3) - Objection by garnishee in as a result when ITO issued garnishee notice under s. 226(3)(I) - accountant is competent to file statement in affidavit - petitioners would be personally liable to pay such amount to the ITO and in case of default, the ITO would be entitled to treat. the petitioners as assessee in default under cl. (x) of s. 226, sub-s. (3).

Summary

Issues Involved:
1. Validity of the notice dated 21st May, 1966, under Section 226(3)(i) of the Income Tax Act, 1961.
2. Requirement of inquiry by the Income Tax Officer (ITO) under Section 226(3)(vi).
3. Validity of the recovery proceedings initiated by the Tax Recovery Officer (TRO).

Issue-wise Detailed Analysis:

1. Validity of the Notice Dated 21st May, 1966, under Section 226(3)(i) of the Income Tax Act, 1961:

The petitioners contended that the notice issued by the ITO on 21st May, 1966, was invalid as it did not specify the amount alleged to be due from the petitioners to B. R. Sons Ltd. The High Court accepted that the notice should mention or give some specific indication of the amount which the ITO believes is due. However, it held that since the petitioners knew the amount being referred to and no prejudice was caused by the non-specification, the notice could not be invalidated on this ground. The Supreme Court supported this view, noting that the petitioners had responded to the notice on merits, indicating their awareness of the amount in question. Thus, the notice was deemed valid despite the lack of specific amount mentioned.

2. Requirement of Inquiry by the Income Tax Officer (ITO) under Section 226(3)(vi):

The principal question was whether the ITO was bound to hold an inquiry before concluding that the statement on oath in the affidavit filed by the petitioners was false in any material particular. Section 226(3)(vi) provides that if a person objects to the notice by a statement on oath, they are not required to pay unless it is discovered that the statement was false in any material particular. The Supreme Court emphasized that the discovery by the ITO must be a quasi-judicial decision preceded by a quasi-judicial inquiry, involving the observance of principles of natural justice. The ITO must give notice, hold an inquiry, and follow principles of natural justice before determining the falsity of the statement on oath. The burden of proof lies on the revenue to show that the statement is false based on relevant evidence or material. In this case, the ITO did not hold any such inquiry and directly concluded that the statement was false, making the notices dated 31st December, 1966, and 11th January, 1967, invalid. The Supreme Court quashed these notices, allowing the ITO to hold a proper inquiry if desired.

3. Validity of the Recovery Proceedings Initiated by the Tax Recovery Officer (TRO):

The High Court held that the recovery proceedings initiated by the TRO were invalid as no recovery certificate under Section 222 was issued by the ITO. The Supreme Court did not specifically address this issue in detail but upheld the High Court's decision to quash the recovery proceedings due to the lack of a recovery certificate. Consequently, the recovery proceedings adopted by the TRO were deemed invalid.

Conclusion:

The Supreme Court dismissed the appeal concerning the validity of the notice dated 21st May, 1966, but allowed the appeal regarding the notices dated 31st December, 1966, and 11th January, 1967, quashing them. The ITO was permitted to conduct a proper inquiry to determine the falsity of the statement on oath if desired. The recovery proceedings by the TRO were invalidated due to the absence of a recovery certificate. Each party was ordered to bear its own costs throughout. The appeal was allowed in part.