M.S. Gnanasoundari vs Chief Commissioner of Income Tax and Others

Jayarama Chouta, J.—The prayer in this writ petition is to issue a writ of mandamus directing the respondents to forbear from taking any

steps for recovery of Income Tax against the petitioner, pursuant to an assessment order passed by them against Mr. M. J. Durairaj (petitioner''s

husband) in any manner without conducting a proper enquiry, after affording an opportunity to the petitioner to state her full case.

However, in the affidavit filed in support of the said writ petition, the petitioner, Smt. M. S. Gnanasoundari, has asked to grant stay of operation

of the notice issued under s. 226(3) of the IT Act dt. 25th January, 1987, in Ref. No. 47-039-PT. 8092 by the second respondent, viz., ITO,

Central Circle XV, Madras, to the tenants in occupation of the properties No. 829, Mount Road, Madras 2, and No. 11, Second Floor, Second

Street, III Main Road, C.I.T. Nagar, Madras, pending disposal of the above writ petition.

In support of the said relief, the petitioner has sworn to an affidavit, wherein she has stated that she is a practising advocate of the Madras High

Court and Notary Public and in December, 1980, she purchased the property in premises No. 829, Mount Road, Madras 2, from Express

Newspapers Pvt. Ltd., borrowing founds from the Bank of Tamil Nadu. The petitioner''s husband, one M. J. Durairaj, is also a law graduate who

has been doing business in steel scrap for some years and for that purpose, the petitioner wanted to purchase a building in central place in Madras

and accordingly she purchased the said property for a sale consideration of Rs. 36 lakhs inclusive of stamp duty and registration charges. She

borrowed a sum of Rs. 10,50,000 from the bank of Tamil Nadu by pledging the property of her minor children. Since the petitioner could not pay

back the loan amount, the Bank of Tamil Nadu had filed a suit C.S. No. 663 of 1983 for recovery of the said amount in this Court. She has further

stated that the property tax arrears outstanding are to the tune of Rs. 3,17,779 according to the demand notice uptodate. Similarly the Water

Supply & Sewage Board issued a notice to pay a sum of Rs. 2,26,035 which are payable by the petitioner, in addition to the urban land tax

arrears.

The affidavit further reads that in 1981, without any prior notice, the officials of the first respondent-Department raided the building and took

possession of all files, correspondence and documents concerning the trade of her husband for a decade and more. Basing on the said documents,

the second respondent passed an order dt. 5th March, 1985, reckoning the total tax payable to the tune of Rs. 13,65,778. According to the

petitioner, the said order of assessment had been passed without giving an opportunity to her husband. She has also stated that the assessment

order has been passed even for the years 1973 to 1977 which was time-barred.

Further, she averred in the said affidavit that without any prior notice to show cause or making any payment from her, a notice under s. 226(3) of

the IT Act was issued, to the occupant of the premises for recovery of the arrears of Income Tax of her husband for the period 1972 to 1979. She

has contended that the entire proceedings of the respondents starting from the initial assessment orders till the issue of notice to the tenants under s.

226(3) of the Act are illegal and liable to be quashed by his Court in these writ proceedings.

The main contentions raised in this writ petition were that the entire assessment proceedings initiated by the respondents treating the petitioner as

benami holder of the property was vitiated by an error apparent. Her further grievance was that the respondents have no power under the

provisions of the Act to foist action contemplated against the petitioner''s husband on the petitioner herself by attaching the rents payable to her by

her tenants occupying her properties owned by her exclusively. She has pointed out that the respondents have not only passed illegal assessment

orders, but issued notices to the tenants in occupation of the building No. 829, Mount Road, Madras, calling upon them to stop paying rents to her

which is not legally permissible. On these grounds, the petitioner has sought for the relief which was mentioned earlier.

The ITO has issued a notice under s. 226(3) of the Act which reads as follows :

NOTICE UNDER S. 226(3) OF THE IT ACT, 1961

47-037-PT-8092

Income Tax Officer,

Central Circle XV,

Dated 28/1/1987

To

Vasantham Restaurant,

Ist Floor, 829, Mount Road,

Madras-2.

A sum of Rs. 48,88,450 is due from M. S. Gnanasoundari, No. 11, 2nd Street, 3rd Main Road, C.I.T. Nagar Extension, Nandanam, Madras 35,

for and on behalf of M. J. Durairaj as a benami owner of 829, Mount road, Madras 2, on account of income tax/super-tax/penalty/interest/fine.

You are hereby required under s. 226(3) of the IT Act, 1961, to pay to me forthwith any amount due from you to or, held by you, for or on

account of the said ...... up to the amount of arrear shown above, and also request you to pay any money which may subsequently become due

from you to him/them or which you may subsequently hold for on account of him/them up to the amount of arrears still remaining unpaid, forthwith

on the money becoming due or being held by you as aforesaid as such payment is required to meet the amount due by the taxpayer in respect of

arrears of income tax/super tax/penalty/interest/fine. I am to say that any payment made by you in compliance with this notice is in law deemed to

have been made under the authority of the taxpayer and my receipt will constitute a good and sufficient discharge of your liability to the person to

the extent of the amount referred to in the receipt.

I am to observe that if you discharge any liability to the taxpayer after receipt of this you will be personally liable to me as ITO, Central Circle XV,

Madras-34, to the extent of the liability discharged, or to the extent of the liability of the taxpayer for tax/penalty/interest/fine referred to in the

preceding para, whichever is less.

Further, if you fail to make payment in pursuance of this notice to me as ITO, you 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 you for the realisation of the amount as if it were an arrear of tax due

from you in the manner provided in ss. 222 to 225 of the IT Act, 1961, and this notice shall have the same effect as an attachment of a debt by the

TRO in exercise of his powers under s. 222 of the said Act.

The necessary challans for depositing the money to the credit of the Central Government may be obtained from me. A copy of this notice is being

sent to Sri. M. J. Durairaj, No. 11, 2nd Street, III Main Road, CIT Nagar Extension, Nandanam, Madras 35.

Sd .....

Income Tax Officer,

Central Circle XV,

Madras.

A detailed counter has been filed on behalf of the IT Department denying all the allegations. I am not narrating all the facts in detail for the

disposal of this writ petition since there is no dispute by the IT Department that the assessment orders for the asst. yrs. 1973-74 to 1979-80 and

1982-83 have been set aside by the CIT(A) on 31st October, 1988, but, in respect of the assessment for the asst. yr. 1981-82, a sum of Rs.

13,65,778 is due to the Department from the assessee. Learned senior counsel appearing on behalf of IT Department very fairly submitted that the

notice issued by the second respondent under s. 226(3) of the Act may be confined to the said amount of Rs. 13,65,778 which is an assessment

for the year 1981-82 which has not been set aside in the appeal, instead of Rs. 48,68,400. In this connection, learned senior counsel placed

before me a copy of the counter-affidavit filed on behalf of the ITO, Central Circle XV, filed in Writ Appeal No. 368 of 1988 which arose out of

the same proceeding. To have a clear picture of the stand of the Department, I have extracted the said counter-affidavit below which reads thus :

I am the Asstt. CIT, Central Circle III(3), and the assessing authority of Sri. M. J. Durairaj. Though the second respondent impleaded in the

above writ appeal is ITO, Central Circle XV, the designation of the Asstt. CIT, Central Circle III(3), by virtue of the amendment made by the

Taxation Laws (Amendment) Act, 1987. I am, therefore, competent to file the present affidavit on behalf of the second respondent. I am well

acquainted with the facts of the case as seen from the records. I have already filed a detailed counter-affidavit in the writ petition and the present

additional counter-affidavit is filed only to submit that notwithstanding the setting aside of the assessments for certain assessment years by the

CIT(A), there is still tax arrear of Rs. 13,65,778 relating to the asst. yr. 1981-82, which has to be recovered.

The impugned proceedings under s. 226(3) of the IT Act, 1961, were initiated by the second respondent and notices were issued to various

tenants of the building at No. 829, Mount Road, Madras-2, for recovery of a total tax arrear of Rs. 48,68,400. The break-up details for this

amount are given below :

Assessment year Tax and interest (Rs.)

1973-74 98,359

1974-75 12,88,964

1975-76 5,19,964

1976-77 5,07,003

1977-78 2,12,283

1978-79 5,56,684

1979-80 1,50,369

1980-81 13,65,778

1982-83 1,68,990

-------------

Total 48,68,480

-------------

It is true that the CIT(A) has set aside the assessments for the asst. yrs. 1973-74 to 1979-80 and 1982-83 and the orders of the CIT(A) dt.

31st October, 1988, were received by the Department in January, 1989. It is, however, submitted that in respect of the assessment for the asst.

yr. 1981-82, there is a sum of Rs. 13,65,778 due from the assessee, Mr. M. J. Durairaj. It is, therefore, submitted that notice under s. 226(3) of

the IT Act, 1961, already issued will now be confined to the arrears for the asst. yr. 1981-82 amounting to Rs. 13,65,778.

It is respectfully submitted that the petitioner is not correct in stating that all the assessment orders have been cancelled by the CIT(A) and no

demand is outstanding. It is submitted that the order passed by the learned judge, which is now in appeal, does not call for interference, since the

notice under s. 226(3) of the IT Act, 1961, is valid to the extent of tax arrears of Rs. 13,65,778 relating to the asst. yr. 1981-82. It is, therefore,

prayed that the writ appeal filed by the appellant may be dismissed with costs to the respondents.

On the other hand, learned counsel appearing for the petitioner submitted that the notice issued under s. 226(3) of the Act for a sum of Rs.

48,68,400 cannot be treated as a notice for a sum of Rs. 13,65,778 which is the assessment amount for the year 1981-82, since the authorities

have to issue a separate notice following the procedure prescribed in the IT Act. In this connection, learned counsel invited my attention to a

decision of Lal Man Vs. Commissioner of Income Tax and Another, and placed reliance on the following passage :

The order of attachment issued under s. 226(3) cannot survive; it has no independent existence. Unless there is a provision in the Act or the Rules,

which keeps the order of attachment alive and subsisting notwithstanding the setting aside of the assessment order, it cannot survive Since there is

no such provision, it is not possible to say that such attachment order survives and remains effective, notwithstanding the setting aside of the

assessment order which gave rise to the attachment order.

Now, let me examine the rival contentions of the parties. It will be better to extract s. 226(3)(i) of the Act which is as follows :

The AO or TRO 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 held money for or on account of the assessee, to pay to the AO or TRO 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.

In this connection, it will also be necessary to consider ss. 224 and 225 of the Act. Sec. 224 of the Act reads as follows :

It shall not be open to the assessee to dispute the correctness of any certificate drawn up by the TRO on any ground whatsoever, but it shall be

lawful for the TRO to cancel the certificate if, for any reason, he thinks it necessary so to do, or to correct any clerical or arithmetical mistake

therein.

Sec. 225 of the Act reads thus :

Stay of proceedings in pursuance of certificate and amendment or cancellation thereof. - (1) It shall be lawful for the TRO to grant time for the

payment of any tax and when he does so, he shall stay the proceedings for the recovery of such tax until the expiry of the time so granted.

(2) Where the order giving rise to a demand of tax for which a certificate has been drawn up is modified in appeal or other proceeding under this

Act, and, as a consequence thereof, the demand is reduced but the order is the subject-matter of further proceeding under this Act, the TRO shall

stay the recovery of such part of the amount specified in the certificate as pertains to the said reduction for the period for which the appeal or other

proceeding remains pending.

(3) Where a certificate has been drawn up and subsequently the amount of the outstanding demand is reduced as a result of an appeal or other

proceeding under this Act, the TRO shall, when the order which was the subject-matter of such appeal or other proceeding has become final and

conclusive, amend the certificate, or cancel it, as the case may be.

A reading of these sections makes it clear that an amount specified in the certificate issued under s. 222 of the Act could be valid and if that is

so, a notice issued under s. 226(3) of the Act also could be amended. In the present case, there is no dispute that the petitioner is liable to pay a

sum of Rs. 13,65,778 and the IT Department is prepared to confine the notice to the said amount instead of Rs. 48,68,400 as mentioned in the

notice issued to the tenant under a copy to the petitioner and her husband. The second respondent has also filed a counter-affidavit before a

Division Bench of this Court in W.A. No. 368 of 1988 which arose out of these proceedings, a copy of which has been produced before me and

it has been extracted above.

As far as the decision cited by learned counsel for the petitioner is concerned, in the said case, the entire order of assessment was set aside in

appeal and the demand had fallen to the ground and there were no arrears to be paid. Under these circumstances, the Court has observed that the

order of attachment issued under s. 226(3) of the Act cannot survive; it has no independent existence. Further, there was no tax due to the

Department. Here, in the present case, the assessments for the years 1973-74 to 1979-80 and 1982-83 have been set aside. But, the assessment

for the year 1981-82 for a sum of Rs. 13,65,778 was upheld and, hence, the said decision has no application to the facts of the present case.

Hence, for the reasons stated above, I modify the notice issued by the second respondent and now the notice will read to a sum of Rs.

13,65,778 instead of a sum of Rs. 48,68,400. Accordingly, with the above modification, this writ petition is disposed of. There will be no order as

to costs.