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TMI Blog2004 (1) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... CL) as debtor of SWCL, the garnishee against whom a notice under section 226(3) of the Act was issued, seeking to recover the tax due and payable by Visisth Chay Vyapar Limited (VCVL) in respect of the amount due and payable by SWCL, the garnishee to VCVL, the decree-holder, pursuant to a decree obtained by the latter against the former. The case has a chequered history. A brief reference to the facts would be of great assistance to understand the situation and follow the erudite arguments advanced respectively by Mr. Sudipta Sarkar, senior counsel for the appellants, Mr. S.K. Kapoor, Additional Solicitor General for the Income-tax Department, and Mr. Anindya Mitra, senior advocate for VCVL. Facts: It appears that SWCL obtained a loan from the decree-holder, VCVL. This loan, reflected in the return of SWCL, was held to be a sham transaction and was assessed and charged to income tax in the assessment of income of SWCL made by the income tax authority at Calcutta. The tax payable on the said loan amount held to be an income of the assessee/appellant was being recovered from the appellant, SWCL, in instalments. Claiming to recover the said loan amount since held to be a sham trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er shall take steps to sell the attached debt. Submissions on behalf of the appellant: Mr. Sarkar had assailed this judgment on various grounds: (1) Section 226(3) cannot be proceeded with when the garnishee SWCL has disputed the liability under the decree since put to execution, the stay whereof has been asked for and granted in the appeal against the decree filed by SWCL, in view of section 226(3)(vi); (2) Assuming but not admitting that section 226(3) is maintainable against SWCL, even then on account of default of SWCL, the Tax Recovery Officer cannot exercise his power under section 226(3) against the garnishee/debtor of the garnishee SWCL in view of the express provision contained in section 226(3)(x). In support of this contention, Mr. Sarkar relied on Smt. Tejal R. Amin v. Asst. CIT [1994] 208 ITR 103 (Guj); (3) Section 226(3)(x) contemplates recovery of tax in default by a garnishee in the manner prescribed in sections 222 to 225 and not in the manner provided under section 226 since expressly omitted by the Legislature in the clause itself; (4) Except as provided in the Act and the Rules, no step can be taken to recover the dues as against the debtor of the garnishee ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed then a 15 days notice in terms of rule 2 for recovery of tax due as prescribed in the Second Schedule of the Act is to be given and then a warrant under rule 20 is required to be issued for effecting attachment in terms of rule 22 thereof; (10) The attachment contemplated in section 222, refers to the debt due to the defaulter as contemplated in rule 4 of the Second Schedule since defined in rule 1(b) meaning the assessee mentioned in the certificate; (11) Under section 226(3)(vi) the jurisdiction of the Tax Recovery Officer is confined only to the adjudication as to the genuineness of the claim and excepting falsity of the claim it cannot proceed under section 226(3) and then again the recovery is limited to the amount mentioned in the certificate. In support he relied on Mohamedaly Sarafaly and Co. v. ITO [1968] 68 ITR 128 (Mad) and P.K. Trading Co. v. ITO [1970] 78 ITR 427 (Cal), which followed Mohamedaly Sarafaly and Co.; (12) The law being crystal clear the court could not convert a notice under section 226(3) issued to the debtor of the garnishee as a notice of attachment of debt not contemplated in clause (x) thereof nor can it direct nor can it grant liberty either to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he enactment; (4) Section 222 empowers the Tax Recovery Officer to recover tax in any of the modes mentioned in clauses (a) to (d) of section 222 in accordance with the rules laid down in the Second Schedule, which includes attachment and sale of the assessee's movable property and attachment and sale of the assessee's immovable property. Since the definition of "assessee" provided in section 2(7) includes an assessee in default, non-compliance with the notice under section 226(3) makes the garnishee an assessee in default attracting the mischief of section 222. Section 223(2) empowers the Tax Recovery Officer to recover the amount under Chapter XVII as if the due is a certificate due in the manner prescribed. Admittedly, VCVL was in default and it has offered the decree against SWCL for recovery and, therefore, there is no bar in recovering the amount from SWCL pursuant to the decree even to the extent of attachment of the debt payable by the debtor of the garnishee SWCL; (5) In this case a certificate has already been issued against the assessee VCVL, which satisfies the test for proceeding to recover the amount pursuant to such certificate against the garnishee as well as the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice under section 226(3) is issued, a deemed assessee in default upon non-compliance with the notice in respect of the sums specified in the notice and the same can be recovered as if it were an arrear of tax due from such garnishee in the manner prescribed in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his power under section 222. Since section 226 is in addition to section 222, the omission of section 226 in clause (x) would not denude the Tax Recovery Officer from exercising its power under section 226 in addition to its power under sections 222 to 225; (11) There is no infirmity in the judgment appealed against and the notice being a notice of attachment by fiction created by clause (x), the debtor of the garnishee is bound by the same and the debt payable by the debtor to the garnishee becomes attached with the issue of the notice under section 226(3) in the same manner such notice operates as a notice of attachment under section 222. To support his contention, he relied on the decision in Life Insurance Corporation of India v. Gangadhar Vishwanath Ranade [1989] 180 ITR 1 (SC) pages 12, 15, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h we are not supposed to hold otherwise. The learned single judge appears to have held the law correctly. That apart, in Smt. Tejal R. Amin [1994] 208 ITR 103 (Guj), it was held that section 226(3) does not apply to a debtor of garnishee and that in default of the garnishee the amounts specified in the notice can be recovered as if a tax due from him deeming the garnishee an assessee in default in the manner provided under sections 222 to 225 on the reasoning that if the Legislature had intended that section 226 would also be applicable, in that event, it would have stopped before the phrase "in the manner provided under sections 222 to 225". We do not find any reason to differ from the view taken by the Gujarat High Court. We may buttress the said view with the reason following. Since clause (x) prescribes a particular mode of recovery through the procedure prescribed under sections 222 to 225 in case of default by a garnishee, the recovery is to be made in accordance with those provisions and not otherwise, as was held in Nazir Ahmad, AIR 1936 PC 253 (II), followed in Chandra Kishore Jha [1999] 8 SCC 266. When clause (x) does not include section 226, it is to be presumed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the notice under section 226(3) treating the same to be a notice under section 222 attaching the debt payable by the garnishee to the assessee. This attachment cannot extend to any other debt, which was not contemplated in the notice under section 226(3). The attempt to extend the attachment effected under section 226(3) deeming it to be a notice under section 222 to the debt due to the garnishee from its debtor would be stretching the provision too far beyond the comprehension of the express provision contained in clause (x). It is the garnishee, who is deemed to be the assessee in default from whom the tax can be recovered as an arrear of taxes due from him, but until the provisions of sections 222 to 225 are resorted to against the garnishee and a certificate is drawn against him, we do not think that there is any scope of resorting to section 226(3) as against the debtor of the garnishee or attach the debt payable by the debtor of the garnishee to the latter without following the provisions provided in sections 222 to 225 read with the provisions contained in the Second Schedule providing detailed procedure related to recovery of tax due. Therefore, the notice under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (II), the provisions contained in the Second Schedule are to be followed. This is clear because of the omission of section 226 in clause (x) of section 226(3). The certificate issued against the assessee in default cannot be treated as a certificate issued against a person deemed to be in default. Admittedly, no certificate has been issued against SWCL under section 222 as an assessee deemed to be in default. Rule 2 of the Second Schedule prescribes issue of notice upon the defaulter requiring the defaulter to pay the amount specified in the certificate within 15 days from the date of service of the notice, intimating the defaulter that in default, steps would be taken to realise the amount under the Second Schedule. Rule 2 prescribes that no step in execution of a certificate shall be taken until the period of 15 days elapses from the date of the service of the notice issued under rule 2 except in exceptional cases mentioned in the proviso. In the present case, no such exceptional case has been made out by the Department for attracting the provisions provided in the proviso. Rule 20 prescribes that when a movable property is to be attached a warrant written and signed by the Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (x) may be deemed to be a notice under section 222 as soon he becomes a defaulter and a deemed assessee in default, yet that will not enable the Tax Recovery Officer to attach the debt due to the garnishee from its debtor without following the provisions contemplated in section 222 read with the Second Schedule following rules 2, 3, 20, 21, 22 and 26. Therefore, by no stretch of imagination could the notice under section 226(3) be issued upon the debtor of the garnishee. A notice could be issued on the debtor of the garnishee only after compliance with section 222 and the rules contained in the Second Schedule as discussed above and not otherwise. Therefore, the alleged notice served upon the debtor of the garnishee APBCL under section 226(3) cannot be treated to be a notice of attachment under section 222. Therefore, the notices under section 226(3) issued upon the debtors of the garnishee cannot be sustained and are liable to be quashed. However, the amount already paid by APBCL and realised by the Tax Recovery Officer shall grant full discharge with regard to the debts due to SWCL so far as APBCL is concerned. The recovery of such amount shall be subject to the final det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the scope and ambit of clause (vi) of section 226(3). Whereas Mr. Sarkar pointed out from the materials from the paper book that such objection was raised on oath and that there is no finding that this objection was false. On the other hand, the Tax Recovery Officer had gone into the merits of the objection so raised. The Tax Recovery Officer is not competent to go into such question. He can only look into as to whether the claim is a genuine one or false. He cannot decide the merits of the claim raised. In support of his contention Mr. Kapoor had relied on the decision in Life Insurance Corporation of India v. Gangadhar Vishwanath Ranade [1989] 180 ITR 1 (SC). But this decision does not help us in the context. Inasmuch as in the said decision, the LICI had informed the Tax Recovery Officer only about the assignment of the policy but did not make any statement on oath denying its liability in the manner as specified in clause (vi). Since the objection was not raised in the manner it ought to be, the objection was held to be invalid. This invalidity was arrived at also on another ground that the objection was raised after inordinate delay. Whereas the Madras High Court in Moha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on Rachakonda Narayana v. Ponthala Parvathamma [2001] 8 SCC 173 to contend that an appeal is a continuation of the suit and the whole matter becomes at large before the appellate court and as such there is no finality of the decree. The same principle was laid down in Dayawati v. Inderjit, AIR 1966 SC 1423. In the present case, thus the pendency of the appeal has opened the decree at large before the appeal court and until the stay is vacated, the decree cannot be executed and until the decree becomes executable, the same cannot be proceeded against by the Tax Recovery Officer unless admitted by the SWCL. Admission of one officer whether binding on other officer of the same Department: We are unable to accept the contention of Mr. Sarkar that when one officer of the Department has held the transaction to be a sham transaction, another officer of the same Department would be bound by such decision in the context of this case. Inasmuch as in the proceeding for assessment of SWCL, VCVL was not a party, any finding by the income-tax authority in an assessment against SWCL would not bind VCVL. The relation between VCVL and SWCL is independent of the decision by the income-tax author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the action taken by the income-tax authority was in clear violation of the jurisdiction conferred on it and as such despite rules 86 and 87 of the Second Schedule providing adequate alternative remedy, the writ petition is maintainable. Order: In these circumstances, the notice under section 226(3) (annexures P29 to P34 of the writ petition) issued upon APBCL and the other debtors of SWCL (respondents Nos.9 to 18) in the facts and circumstances of the case, is incompetent and cannot be treated to be a notice of attachment as discussed above. But since, however, some amount has already been recovered by reason of voluntary payment by APBCL, the same may not be interfered with at this stage. However, this amount shall be held by the Income-tax Department without prejudice to the rights and contention of the parties and subject to the ultimate decision in the appeal filed by SWCL in relation to the decree obtained against it by VCVL and the ultimate decision in the proceeding, under section 226(3) of the Act as against SWCL. It would be open to the Income-tax Department to proceed to recover the amount from SWCL pursuant to the decree if the appeal is decided in favour of VCVL, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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