2001 (3) TMI 4 - SC - Income Tax

Recovery of Tax - Once the demand ceased to exist and the fact was brought to the notice of the Tax Recovery Officer by the assessee the former should have cancelled the recovery certificate and therefore with effect from that date till the date of refund the interest should be paid by revenue - For the period for which the sale was not vitiated on account of the demand having not been adjudged to be non-existent in our opinion the assessee should pay the interest.

Summary

Issues Involved:
1. Confirmation of sale by the Tax Recovery Officer despite the demands ceasing to exist.
2. Effect of non-service of notice of demand under section 156 of the Income-tax Act, 1961, on the sale held for recovery of arrears of income-tax.

Issue-wise Detailed Analysis:

1. Confirmation of Sale by the Tax Recovery Officer Despite the Demands Ceasing to Exist:
The court examined whether the Tax Recovery Officer could have confirmed the sale on March 25, 1998, when the demands on account of tax had ceased to exist. According to section 222 of the Income-tax Act, if an assessee is in default, the Tax Recovery Officer may issue a certificate and proceed to recover the amount by attachment and sale of immovable properties. The relevant rules from the Second Schedule, particularly Rule 56, state that the sale is subject to confirmation by the Tax Recovery Officer. The court noted that the sale proceedings terminate upon confirmation, making the sale absolute and necessitating the issuance of a sale certificate.

The court emphasized that under section 225(3), if the outstanding demand is reduced to nil as a result of an appeal or other proceedings, the Tax Recovery Officer must cancel the certificate. The court held that if the demand is reduced to nil before the confirmation of the sale, the Tax Recovery Officer is obliged to cancel the certificate and cannot confirm the sale. In this case, the demand against the assessee had been reduced to nil before March 25, 1998, and the Tax Recovery Officer was aware of this fact. Therefore, the confirmation of the sale was invalid.

The court referenced previous judgments, including Janak Raj v. Gurdial Singh and Sardar Govindrao Mahadik v. Devi Sahai, which discussed the confirmation of sales under different circumstances. However, the court distinguished these cases as they were under the Code of Civil Procedure, not the Income-tax Act. The court concluded that the High Court erred in not setting aside the sale, given the reduction of the demand to nil before the confirmation of the sale.

2. Effect of Non-Service of Notice of Demand Under Section 156 of the Income-tax Act, 1961:
The court addressed the mandatory requirement of serving a notice of demand under section 156 before initiating recovery proceedings. The court noted that section 156 requires the Assessing Officer to serve a notice specifying the sum payable. If the amount is not paid within the prescribed time, the assessee is deemed to be in default, allowing the issuance of a tax recovery certificate under section 222.

The court found that the notice of demand was not served on the assessee, as confirmed by the Commissioner of Income-tax (Appeals) and the Tribunal. The court emphasized that non-service of the notice of demand invalidates the recovery proceedings. The court referenced previous judgments, including ITO v. Seghu Buchiah Setty and Homely Industries v. STO, which highlighted the importance of serving a notice of demand before initiating recovery proceedings.

The court concluded that the non-service of the notice of demand rendered the recovery proceedings invalid, and any sale held in such proceedings was null and void. The court criticized the High Court for adopting a technical approach and not addressing the plea of non-service of the notice of demand, which went to the root of the matter.

Conclusion:
On both grounds, the court held that the sale of the property was liable to be set aside. The appeal was allowed, and the impugned judgment of the High Court was set aside. The writ petition filed by the appellant was allowed, and all proceedings for the sale of the disputed property, as well as the order confirming the sale, were quashed.

The court directed that the purchase money deposited by the auction purchaser be refunded with interest. The assessee was ordered to pay interest for the period before the demand was adjudged non-existent, and the Income-tax Department was ordered to pay interest for the period after the demand ceased to exist. The appeal was allowed with no order as to costs.