1981-VIL-32-SC-DT

Equivalent Citation: [1981] 131 ITR 129 (SC)

Supreme Court of India

Date: 21.07.1981

BEHARILAL RAMCHARAN

Vs

S INCOME-TAX OFFICER, SPECIAL CIRCLE, ´ B ´ WARD, KANPUR, AND ANOTHER

BENCH

Judge(s)  : E. S. VENKATARAMAIAH., P. N. BHAGWATI. and A. P. SEN.

JUDGMENT

The judgment of the court was delivered by

BHAGWATI J.-This appeal by certificate raises a short question of law relating to the interpretation of s. 226(3) of the I.T. Act, 1961. The petitioners were at all material times a partnership firm carrying on business as bankers and dealers in cloth and over the years, they had dealing with a limited company called B. R. Sons Ltd., which at one time acted as the sole selling agent of Laxmi Ratan Cotton Mills Company Ltd. There was a running account between the petitioners and B. R. Sons Ltd. in respect of these dealings and according to the petitioners, there was a debit balance of Rs. 76,436.23 against B. R. Sons Ltd. in this account as on 24th May, 1966. On 21st May, 1966, the ITO, Central Circle, Kanpur, issued a notice to the petitioners under s. 226(3)(i) stating that a sum of Rs. 22,89,281.97 was due from B. R. Sons Ltd. on account of income-tax, super-tax, penalty, etc., and requiring the petitioners to pay to him forthwith any amount due from the petitioners to B.R. Sons Ltd. or held by the petitioners for or on account of B. R. Sons Ltd. to the extent of the aforesaid arrears of tax due from B. R. Sons Ltd. The petitioners were warned that if they failed to make payment pursuant to this notice, they would be deemed to be assessee in default and proceedings would be taken against them for realisation of the amount as if it were an arrear of tax due from them. This notice was served on the petitioners on 24th May, 1966, and the petitioners replied to it on 1st July, 1966, pointing out that according to the state of the account between the petitioners and B. R. Sons Ltd., there was no credit balance in favour of B. R. Sons Ltd. and that on the contrary B. R. Sons Ltd. owed a large amount to the petitioners and in the circumstances the notice should be discharged. The ITO by his letter dated 11th October, 1966, intimated to the petitioners that they should file a sworn affidavit setting out their contention that they did not owe any amount to B. R. Sons Ltd. This was followed by another letter dated 14th December, 1966, addressed by the ITO to the petitioners in which the ITO pointed out that he had in his possession evidence to show that the petitioners still owed money to B. R. Sons Ltd. to a substantial extent and requesting the petitioners to pay up the amount due to B. R. Sons. Ltd. on or before 21st December, 1966. The petitioners thereupon filed an affidavit sworn to by their accountant, Shiv Kumar Arora, on 22nd December, 1966, setting out the position of the account of B. R. Sons Ltd. and stating that far from any amount being due from the petitioners to B. R. Sons Ltd., there was a debit balance of Rs. 76,436.23 against B. R. Sons Ltd. as on 24th May, 1966, and the notice issued against the petitioners under s. 226(3)(i) was, therefore, unjustified. The affidavit was forwarded to the ITO along with a letter addressed by the petitioners. The ITO replied to the petitioners by his letter dated 31st December, 1966, in which he pointed out that during the course of search of Bihari Niwas, the I.T. authorities has seized account books in Hindi, Muriya and English pertaining to the year commencing from 1st July, 1965, and that the account of B. R. Sons Ltd. in the Muriya and English cash book showed that payments aggregating to Rs. 8,69,000 had been made to B. R. Sons Ltd. prior to 24th May, 1966, but the original cash book in Hindi did not show any such payments having been made and he had, therefore, reason to believe that the affidavit filed on behalf of the petitioners showing that B. R. Sons Ltd. had a debit balance against them in the books of the petitioners as on 24th May, 1966, was false in material particulars. The ITO accordingly held the petitioners to be personally liable to make payment to the extent of their liability to B. R. Sons Ltd. as on 24th May, 1966, and intimated to the petitioners that if they failed to make such payment on or before 10th January, 1967, the ITO would treat them as assessee in default under s. 226(3)(x) and proceed to take recovery proceedings against them. The petitioners, however, reiterated their stand and reaffirmed the correctness of their affidavit by their letter dated 10th January, 1967. The ITO thereupon addressed a letter dated 11th January, 1967, stating that the petitioners had not furnished any material or evidence to rebut his conclusion that the affidavit filed on behalf of the petitioners was false in material particulars and since the petitioners had failed to pay up the amount due from them to B. R. Sons Ltd., they were " assessee in default " within the meaning of s. 226(3)(x) and, consequently, appropriate coercive steps were being taken for realising the amount of the tax. A copy of this letter was forwarded to the Tax Recovery Officer, Kanpur, for information and necessary action. The TRO, on the basis of this letter issued an order dated 27th January, 1967, under r. 48 of the Second Schedule to the Act attaching some of the immovable properties belonging to the petitioners and following upon this order of attachment, he issued a notice on 7th February, 1967, for setting the proclamation in respect of the sale of these immovable properties. The petitioners thereupon filed a writ petition in the High court of Allahabad for quashing and setting aside the notice dated 21st May, 1966, and the subsequent proceedings adopted by the ITO and the TRO against the petitioners.

The writ petition came up for hearing before a Division Bench of the High Court. One of the contentions advanced on behalf of the petitioners before the High Court was that the notice dated 21st May, 1966, issued against the petitioners under s. 226(3)(i) was invalid, since it did not specify the amount alleged to be due from the petitioners to B. R. Sons Ltd. The High Court accepted the contention of the petitioners that the notice issued by the ITO under s. 226(3)(i) " should mention or give some specific indication of the amount which he believes is due or may fall due from such person to the assessee or which he holds or may subsequently hold for or on account of the assessee " but held that since the petitioners knew what was the amount which was being referred to by the ITO in his notice and no prejudice was caused to the petitioners by the reason of non-specification of the amount in the notice issued by the ITO, the notice could not be said to be invalid on that ground. The petitioners also contended before the High Court that if the ITO was not inclined to accept the statement contained in the affidavit filed on behalf of the petitioners and he was disposed to take the view that the affidavit was false in materials particulars, he should have summoned the deponent of the affidavit for cross-examination and held an inquiry before coming to the conclusion that the statement contained in the affidavit was false. This contention was quite clearly a formidable one, based as it was on the language of s. 226(3)(vi) but the High Court negatived it on the ground that the affidavit filed on behalf of the petitioners was not in compliance with the terms of s. 226(3)(vi) since it was not sworn by any of the partners of the petitioners but was made only by an accountant of the petitioners and when the accountant stated in the affidavit that a sum of Rs. 76,436.23 was due and owing to the petitioners from B.R. Sons Ltd. on 24th May, 1966, there was nothing to indicate as to which part of this averment was true to his personal knowledge and which, on the basis of the account books. The High Court accordingly repelled the challenge against the validity of the notice dated 21st May, 1966, and held that the ITO was justified in treating the petitioners as " assessee in default " on the ground of non-payment of the amount due and owing from them to B. R. Sons Ltd. But so far as the recovery proceedings adopted by the TRO were concerned, the High Court took the view that no recovery proceedings could be adopted without issue of a recovery certificate by the ITO under s. 222 and since in the present case, no such recovery certificate was issued by the ITO, the recovery proceedings adopted by the TRO were invalid and they were accordingly quashed. This was the only limited relief granted by the High Court to the petitioners and the rest of the reliefs claimed were rejected. The petitioners thereupon preferred the present appeal in this court after obtaining a certificate from the High Court.

The principal question that arises for determination in this appeal is as to whether, on a true interpretation of s. 226(3)(vi), the ITO was bound to hold an inquiry before he came to the conclusion that the statement contained in the affidavit filed on behalf of the petitioners was false in any material particular. Section 226(3) deals with recovery of arrears of tax from an assessee by requiring " any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee " (hereinafter referred to as the garnishee) to pay to the ITO " so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount ". There are ten clause & in which section 226(3) is divided and, these clauses, in so far as material, provide, inter alia, as follows:

(i) The Income-tax Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee, to pay to the Income-tax Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount .......

(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy, or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary....

(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for Or on account of the assessee, then, nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Income-tax Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of assessee's liability for any sum due under this Act, whichever is less....

(viii) The Income-tax Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to the assessee to the extent of the amount so paid...

(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the, Income-tax Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided 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 powers under section 222."

It was in exercise of the power conferred under cl. (i) that the notice dated 21st May, 1966, was issued by the ITO to the petitioners. This notice did not mention or even indicate any specific amount alleged to be due from the petitioners to B. R. Sons Ltd. and it was, therefore, observed by the High Court that the notice was not in accordance with the provisions of cl. (i). We are not sure whether, on a true interpretation of cl. (i) in the light of the other clauses of s. 226, sub-s. (3), it is necessary that the notice under cl. (i) should set out a specific amount as due from the garnishee to the assessee or it is enough if the notice merely reproduces the language of cl. (i) and requires the garnishee to pay " at or within the time specified in the notice " so much of the money as is sufficient to pay the amount due from the assessee in respect of arrears of tax. It is a debatable question on which we do not wish to express any opinion, since the High Court has taken the view that even though the notice dated 21st May, 1966, issued to the petitioners did not mention or give an indication of any specific amount alleged to be due from the petitioners to B. R. Sons Ltd., it was not invalid, since no prejudice was caused to the petitioners by reason of non-specification of such amount and this view taken by the High Court was plainly correct, because the petitioners at no time complained that the notice did not specify the amount alleged to be due from the petitioners to B. R. Sons Ltd. or that it was vague and indefinite and in fact replied to the notice on merits by raising an objection that, according to the statement of account between the petitioners and B. R. Sons Ltd., there was no credit balance in favour of B. R. Sons Ltd. and on the contrary B. R. Sons Ltd. owed a large amount to the petitioners and also filed an affidavit sworn to by their accountant, Shiv Kumar Arora, stating that on 24th May, 1966, when they received the notice dated 21st May, 1966, there was nothing due from the petitioners to B. R. Sons Ltd. but on the contrary B. R. Sons Ltd owed a sum of Rs. 76,436.23 to the petitioners. The view taken by the High Court could also be sustained additionally on the ground that, in any event, by his letter dated 31st December, 1966, the ITO pointed out to the petitioners that, according to him, B. R. Sons Ltd. had a credit balance of over Rs. 8 lakh as on 24th May, 1966, and the petitioners had, therefore, clear notice of what was the amount alleged to be due from the petitioners to B. R. Sons Ltd. So far as the affidavit of the accountant filed on behalf of the petitioners was concerned, it was disputed before us on behalf of the revenue whether this affidavit could be regarded as a " statement on oath " within the meaning of cl. (vi) so as to attract the applicability of that clause. The argument of the revenue was, and this argument was accepted by the High Court, that though this affidavit was undoubtedly made on oath, it was not a " statement on oath " within the contemplation of cl. (vi), because it was not a statement of any of the partners of the petitioners but was merely a statement of an accountant of the petitioners. Now, it is true that this affidavit filed on behalf of the petitioners was sworn to by an accountant of the petitioners and not by one of their partners but we do not think that on that account it could be disregarded by the ITO. The accountant of the petitioners would obviously have knowledge of the state of the account between the petitioners and B. R. Sons Ltd. and he would be competent to make a statement on oath in regard to the position of such account. In fact, the accountant of the petitioners stated in para. 1 of the affidavit that he was acquainted with the facts deposed to in the affidavit and he also mentioned in the verification clause that so far as the averments in paras. 2 and 3 of the affidavit were concerned, which related to the position of the account between the petitioners and B. R. Sons Ltd., they were " true to his knowledge and based on the account books " of the petitioners. The state of the account between the petitioners and B. R. Sons Ltd., detailed by the accountant in the affidavit was thus based both on the account books of the petitioners as also on his personal knowledge and he was, therefore, competent to state on oath what was the position of that account. Moreover, the affidavit containing the statement of the accountant on oath was filed by the petitioners in support of their objection that far from there being any money due from them to B. R. Sons Ltd. a sum of Rs. 76,436.23 was, in fact, due from B. R. Sons Ltd. to them. There was, therefore, sufficient compliance with the requirement of cl. (vi). It is not necessary under cl. (vi) that the statement on oath contemplated in that provision should be made only by the person to whom the notice under cl. (i) is sent by the ITO. It is in our opinion sufficient if the objection to the requisition contained in the notice is made by the person to whom the notice is sent and such objection is supported by a statement on oath made by a person competent to make such statement. Here, as we have pointed out above, the accountant of the petitioners was competent to state on oath as to what was the true state of the account between the petitioners and B. R. Sons Ltd. and, since an affidavit containing this statement on oath made by the accountant was filed on behalf of the petitioners in support of their objection, the requirement of cl. (vi) was satisfied and its provisions were attracted.

Now under cl. (vi), where a garnishee, to whom a notice under cl. (i) is sent, objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, he is not required to pay such sum or any part thereof to the ITO in compliance with the requisition contained in the notice. But if it is discovered by the ITO that such statement on oath was false in any material particular, the garnishee is made personally liable to the ITO to the extent of his own liability to the assessee on the date of the notice or to the extent of the assessee's liability for arrears of tax, whichever is less. The petitioners having objected to the requisition contained in the notice dated 21st May, 1966, by filing an affidavit of their accountant that nothing was due from the petitioners to B. R. Sons Ltd., were not bound to comply with the requisition contained in such notice, but if the ITO discovered that such statement on oath was false in material particular and that some amount was due from the petitioners to B. R. Sons Ltd., the petitioners would be personally liable to pay such amount to the ITO. The question is whether the ITO could be said to have discovered that the statement on oath made in the affidavit of the accountant of the petitioners that nothing was due from the petitioners to B. R. Sons Ltd. was false in any material particular, as claimed by the revenue in the notices dated 31st December, 1966, and 11th January, 1967. Now, it is obvious that under cl. (vi) the discovery by the ITO that the statement on oath made on behalf of the garnishee is false in any material particular has the consequence of imposing a personal liability for payment on the garnishee and it must, therefore, be a quasi-judicial decision preceded by a quasi-judicial inquiry involving observance of the principles of natural justice. The ITO cannot subjectively reach the conclusion that in his opinion the statement on oath made on behalf of the garnishee is false in any material particular. He would have to give notice and hold an inquiry for the purpose of determining whether the statement on oath made on behalf of the garnishee is false and in which material particular and what amount is in fact due from the garnishee to the assessee and in this inquiry he would have to follow the principles of natural justice and reach an objective decision. Once a statement on oath is made on behalf of the garnishee that the sum demanded or any part thereof is not due from the garnishee to the assessee, the burden of showing that the statement on oath is false in any material particular would be on the revenue and the revenue would be bound to disclose to the garnishee all such evidence or material on which it proposes to rely and it would have to be shown by the revenue on the basis of relevant evidence or material that the statement on oath is false in any material particular and that a certain definite amount is due from the garnishee to the assessee. Then only can personal liability for payment be imposed on the garnishee under cl. (vi). Here, what happened was that an affidavit of the accountant containing a statement on oath that on 24th May, 1966, nothing was due from the petitioners to B. R. Sons Ltd. but on the contrary a sum of Rs. 76,436.23 was due from B. R. Sons Ltd. to the petitioners was filed on behalf of the petitioners some time after 22nd December, 1956, and on receipt of this affidavit, the ITO pointed out to the petitioners by his notice dated 31st December, 1966, that this statement on oath contained in the affidavit was false in material particulars, because on 24th May, 1966, B. R. Sons Ltd. had a credit balance of over Rs. 8 lakhs in the books of the petitioners and concluded that the petitioners were, therefore, personally liable to the ITO to the extent of their liability to B. R. Sons Ltd. This notice clearly embodied the decision of the ITO that the statement on oath made by the accountant in the affidavit filed on behalf of the petitioners was false in material particulars and that the petitioners were personally liable to make payment under cl. (vi). The petitioners by their letter dated 10th January, 1967, disputed the conclusion reached by the ITO in his notice dated 31st December, 1966 , and reiterated that nothing was due from the petitioners to B. R. Sons Ltd. as on 24th May, 1966. The ITO, however, adhered to the decision reached by him and his notice dated 11th January, 1967, intimated to the petitioners that he was treating them as assessee in default within the meaning of cl. (x) and proceeding to take appropriate coercive steps for realising the amount of tax due from them. It will thus be seen that after receipt of the affidavit of the accountant, the ITO did not give any notice or hold any inquiry for the purpose of determining whether or not the statement on oath made by the accountant in the affidavit was false in any material particular and whether any and, if so, what amount was due from the petitioners to B. R. Sons Ltd. but straightaway reached the conclusion that the statement on oath that nothing was due from the petitioners to B. R. Sons Ltd. was false in material particulars and, without even determining what precise amount was due from the petitioners to B. R. Sons Ltd., held that the petitioners were personally liable to the ITO under cl. (vi). The ITO did set out in his notice dated 31st December, 1966, the reasons which prevailed with him in reaching this decision but he did not offer any opportunity to the petitioners to show that the reasons which weighed with him were not correct. The decision reached by the ITO that the statement on oath made in the affidavit of the accountant was false in material particulars as set out in the notices dated 31st December, 1966, and 11th January, 1967, was, therefore, clearly invalid and the notices dated 31st December, 1966, and 11th January, 1967, must consequently be set aside.

We, accordingly, dismiss the appeal in so far as it is directed against the validity of the notice dated 21st May, 1966, but so far as the notices dated 31st December, 1966, and 11th January, 1967, are concerned, we allow the appeal and issue a writ quashing and setting aside the said two notices. We may make it clear that it will be open to the ITO to proceed to hold an inquiry for the purpose of determining whether the statement on oath contained in the affidavit of the accountant of the petitioners that nothing was due from the petitioners to B. R. Sons Ltd. as on 24th May, 1966, was false in material particulars, and if as a result of such inquiry, carried out in accordance with the principles of natural justice, the revenue is able to show, the burden being upon it, that the statement on oath made by the accountant was false in material particulars and that certain definite amount was due from the petitioners to B. R. Sons Ltd. on 24th May, 1966, the 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).

Since the petitioners have partly succeeded and partly failed, the fair order of costs would be that each party should bear and pay its own costs throughout.

Appeal allowed in Part.

 

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