1970 (2) TMI 2 - SC - Income Tax

ITO filed a complaint for certain offences and under a search warrant seized the books of account of the company for 1945 to 1950. This was on July 3, 1951 - shareholders and the company then disclosed on July 31, 1951, a concealed income of Rs. 42,52,501 during the years 1945 to 1948 - Certificate for recovery issued on March 14, 1956 - recovery proceedings not barred by limitation

Issues Involved:

1. Limitation period for recovery proceedings under Section 46(7) of the Indian Income-tax Act, 1922.
2. Applicability of the proviso to Section 46(7) regarding instalments.
3. Interpretation of agreements between the assessees and the Income-tax Department.
4. Validity of recovery certificates issued under Section 46(2) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Limitation Period for Recovery Proceedings under Section 46(7):

The primary issue in this case concerns the limitation period for initiating recovery proceedings as stipulated under Section 46(7) of the Indian Income-tax Act, 1922. The appellants argued that the recovery proceedings were time-barred since they were commenced after the expiration of one year from the last day of the financial year in which the demand was made. The demands were made on September 22, 1952, and thus, according to the appellants, the recovery proceedings should have been initiated before March 31, 1953. However, the proceedings commenced on March 14, 1956, which the appellants contended was beyond the limitation period.

2. Applicability of the Proviso to Section 46(7) Regarding Instalments:

The department argued that the case falls under clause (iv) of the first proviso to Section 46(7), which allows the limitation period to be calculated from the date on which the last instalment was due. The agreements between the parties provided for the payment of tax in instalments, with the last instalment due on March 31, 1957. Therefore, the department contended that the limitation period should be calculated from this date, making the recovery proceedings initiated on March 14, 1956, within the permissible period.

3. Interpretation of Agreements Between the Assessees and the Income-tax Department:

The agreements set out a scheme of payment by instalments, with a total sum of Rs. 67,48,841-11-0 payable in instalments from 1952 to March 31, 1957. The agreements included a clause that if any instalment was not paid on time, the entire amount would become due and payable immediately. The appellants argued that upon default of the instalment due on March 31, 1953, the entire amount became exigible, and thus, the recovery proceedings should have been initiated within one year from that date.

4. Validity of Recovery Certificates Issued under Section 46(2):

The appellants challenged the validity of the recovery certificates issued under Section 46(2) on the grounds of limitation. They argued that the certificates were issued beyond the permissible period and were thus invalid. The High Court, however, held that the certificates were issued within the period of limitation as prescribed by law, considering the instalment scheme and the applicability of clause (iv) of the proviso to Section 46(7).

Judgment Analysis:

Majority Opinion:

The majority held that the High Court was correct in concluding that the certificates were issued within the period of limitation. The court emphasized that clause (iv) of the proviso to Section 46(7) applied to the case, allowing the limitation period to be calculated from the date on which the last instalment was due, i.e., March 31, 1957. Therefore, the recovery proceedings initiated on March 14, 1956, were within the permissible period. The court also noted that the agreements and the letters accompanying the assessment orders and notices of demand indicated a scheme of payment by instalments, and the default clause made the entire amount exigible upon non-payment of any instalment. However, the proviso to Section 46(7) allowed the department to wait until the last instalment was due before initiating recovery proceedings.

Separate Judgment by Hegde J.:

Justice Hegde dissented, holding that the impugned certificates were barred under Section 46(7). He argued that the default clause in the agreement made the entire tax recoverable forthwith upon default of any instalment, and thus, the recovery proceedings should have been initiated within one year from the last day of the financial year in which the demand was made, i.e., before March 31, 1953. He contended that the agreement between the assessees and the department was irrelevant for determining the limitation period under Section 46(7), which should be based on the demand notices issued in September 1952.

Final Order:

In accordance with the majority opinion, Civil Appeals Nos. 564, 566, 568, and 570 of 1966 were dismissed with costs. The other appeals were dismissed as infructuous with no separate order as to costs.

Appeals dismissed.

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