1970 (1) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Validity of notices issued under Section 226(3) of the Income-tax Act, 1961.
2. Constitutional validity of Section 226(3) of the Income-tax Act, 1961.
3. Jurisdiction and authority of the Income-tax Officer to issue the impugned notices.
4. Determination of the benami character of the petitioner's business.

Detailed Analysis:

1. Validity of Notices Issued Under Section 226(3):
The petitioner challenged the notices issued by the Income-tax Officer to Union Bank of India Ltd. and Messrs. Andrew Yule & Co. Ltd., directing them to pay any amount due to the petitioner to meet the tax liability of Messrs. Dunichand Sons & Co. The petitioner argued that it was not the taxpayer in default and that the notices were illegal and ultra vires.

The court observed that Section 226(3) allows garnishee orders to be issued only where tax or penalty is due from a taxpayer. The taxpayer in this case was Dunichand Sons & Co., not the petitioner. The Income-tax Officer's assumption that the petitioner's business was a benami business of Dunichand Sons & Co. did not justify issuing garnishee orders to the petitioner's debtors. The court cited previous judgments, including those from the Andhra Pradesh and Madras High Courts, which held that garnishee orders could not be issued if the third party denied owing any money to the assessee.

2. Constitutional Validity of Section 226(3):
The petitioner argued that Section 226(3) was ultra vires Articles 14 and 19 of the Constitution of India, as it conferred arbitrary power on the Income-tax Officer without any right to appeal. However, the court did not find it necessary to address the constitutional validity of Section 226(3) in this case, as the notices were quashed on other grounds.

3. Jurisdiction and Authority of the Income-tax Officer:
The petitioner contended that the Income-tax Officer had no jurisdiction to issue the impugned notices, as the petitioner was neither an assessee in default nor the taxpayer. The Income-tax Officer's unilateral decision regarding the benami character of the petitioner's business did not grant him the authority to issue notices under Section 226(3).

The court held that the Income-tax Officer's assumption that the petitioner's business was a benami business of Dunichand Sons & Co. did not provide a legal basis for issuing garnishee orders. The court emphasized that Section 226(3) requires the taxpayer to be the entity in default, and the notices should be issued to the taxpayer's debtors, not to those of a firm assumed to be a benamidar.

4. Determination of the Benami Character of the Petitioner's Business:
The Income-tax Officer had assessed the petitioner's firm as a protective measure, assuming it was a benami business of the partners of Dunichand Sons & Co. However, the court noted that neither in the assessments of Dunichand Sons & Co. nor in the individual assessments of the partners had it been determined that the petitioner's income was benami income of the firm or its partners.

The court concluded that the Income-tax Officer's assumption of the benami character of the petitioner's business was not sufficient to issue garnishee orders under Section 226(3). The court quashed the impugned notices and directed the respondents to refrain from giving effect to them.

Conclusion:
The rule was made absolute, and the impugned notices and all proceedings thereunder were quashed. The respondents were directed to forbear from giving any effect to the impugned notices. There was no order as to costs, and the operation of the order was stayed for four weeks.