Hon'ble Mahesh Chandra Tripathi, J.
(Per: Tarun Agarwala,J.) We have heard Sri S.P.Gupta, the learned senior counsel assisted by Sri R.P.Agarwal, the learned counsel for the petitioner, Sri Bharatji Agarwal, the learned senior counsel assisted by Sri Govind Krishna for the Income Tax Department and Sri Rakesh Ranjan Agarwal, the learned senior counsel assisted by Sri Suyash Agarwal for the private respondent M/s Rich Capital and Financial Services Limited.
The facts, which has been culled out from the pleadings of the parties is, that the petitioner is a Public Limited Company incorporated under the Companies Act and is engaged in the business of Financial Services. Initially the registered office of the Company was situated at Kanpur, but, w.e.f. 1.3.2006 the registered office was shifted to Varanasi and, since then for the assessment years 2007-08 onwards, the income tax returns were being filed with the Income Tax Department at Varanasi.
It transpires that M/s Rich Capital and Financial Services Ltd. became a defaulter of income tax dues with the Income Tax Department and that a demand of approximate Rs.3.2 Crores was raised against the said assessee. The said assessee alleged that the petitioner is a debtor and owed to him a sum of Rs.1.55 Crore. On the basis of this assertion made by the said assessee to the Tax Recovery Officer, it transpires that the Tax Recovery Officer issued a notice dated 22.11.2007, under Section 226(3) of the Income Tax Act (hereinafter referred to as "the Act") to the petitioner indicating that certain amount was due from the garnishee (i.e. the petitioner) to the assessee and accordingly, required the garnishee to pay within the time specified in the notice so much of the amount as was sufficient to pay the amount due from the assessee in respect of arrears of tax. This notice was alleged to have been sent at the previous registered office of the petitioner at Kanpur, which was not received by the petitioner. Since no reply was received from the petitioner nor any amount was deposited, the Tax Recovery Officer issued a notice dated 17.3.2008 treating the assessee in default in respect of the amount specified in the notice holding that further proceedings would be taken against the petitioner for realisation of the amount as if it were an arrears of tax due from it in the manner provided under Sections 222 to 225 of the Act. It further transpires, that the Tax Recovery Officer attached 4,24,910 equity shares of Rs.10/- each of Jhunjhunwala Vanaspati Ltd. from the Demat Account of the petitioner held with Karvi Stock Broking Ltd., which was subsequently transferred to the Demat Account of the Tax Recovery Officer. The petitioner also had a Savings Bank Account with the ICICI Bank in which there was a balance of Rs.28,988.78. The petitioner contended that the said amount was also attached and transferred to the Tax Recovery Officer's Account.
The petitioner, upon coming to know of the action taken by the Tax Recovery Officer, wrote a letter dated 8.4.2008 alleging that no notice under Section 226(3) of the Act was ever received or served upon the petitioner and consequently contended that the entire proceedings initiated by the Tax Recovery Officer was void. In response to the said letter, the Tax Recovery Officer issued a summon dated 10.4.2008 directing the petitioner to appear on 15.4.2008 and produce the books of account relating to the financial years 2004-05, 2005-06, 2006-07 and 2007-08 as well as the details of the liability payable to M/s Rich Capital and Financial Services Ltd. for the financial years 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09.
It transpires, that upon receipt of the summons the petitioner appeared and produced the relevant books of account as demanded by the Tax Recovery Officer and submitted that no amount was due or payable to the defaulter, namely, M/s Rich Capital and Financial Services Ltd.
On 17.4.2008 the petitioner filed an affidavit in terms of Section 226(3)(vi) of the Act stating specifically that the petitioner Company does not owe any sum to the assessee M/s Rich Capital and Financial Services Ltd. and that the acquisition of 4,24,910 equity shares of M/s Jhunjhunwala Vanaspati Ltd. acquired by the petitioner Company was not from M/s Rich Capital and Financial Services Ltd. Inspite of this affidavit being filed, the respondents continued to issue summons dated 16.4.2008 and again on 1.5.2008 directed the petitioner to appear. Since the petitioner feared that the shares of Jhunjhunwala Vanaspati Ltd. held by the petitioner, which was attached and subsequently transferred to the Demat Account of the Tax Recovery Officer could be sold, the petitioner, at this stage approached the Writ Court by filing the present writ petition praying for a writ of mandamus commanding the respondents to restore 1,70,000 equity shares of Jhunjhunwala Vanaspati Ltd. in the Demat Account of the petitioner with Karvi Stock Broking Ltd. and further restore the amount of Rs.28,988.78 in the bank account of the petitioner with ICICI Bank, Chowk Branch, Varanasi along interest, etc. The petitioner also prayed for the quashing of the notice dated 17.3.2008 whereby the Tax Recovery Officer treated the petitioner as an assessee in default. The petitioner has also prayed for the quashing of the entire proceedings initiated under Section 226(3) of the Act.
The learned senior counsel for the petitioner contended that the initial notice under Section 226(3) of the Act was never served upon the petitioner and consequently the entire proceedings initiated by the Tax Recovery Officer attaching the bank account and the Demat Account and thereafter transferring the same in the accounts of the Tax Recovery Officer was wholly illegal and without any authority of law and was liable to be quashed. The learned counsel further contended that the order of the Tax Recovery Officer treating the assessee in default as a consequence of non-appearance was also illegal and was liable to be set aside. The learned counsel further contended that once the petitioner had given an affidavit in terms of Section 226(3)(vi) of the Act denying its liability to pay any amount and contending that no amount was payable to the defaulter then no further proceedings could be initiated or proceeded by the Tax Recovery Officer and that the entire proceedings was liable to be dropped.
The learned counsel submitted that the Tax Recovery Officer had no jurisdiction to decide any dispute, if any, arising out of business transaction between the petitioner and the defaulter, namely, M/s Rich Capital and Financial Services Ltd. and that such dispute could only be adjudicated in an appropriate forum such as the Civil Court. The learned counsel submitted that the recovery proceedings against a garnishee under Section 226(3) of the Act could only be initiated against an admitted liability and not in relation to an amount which is disputed or not payable.
In support of his submission the learned counsel for the petitioner has placed reliance upon a Division Bench decision of this Court in Jitendra Kumar Shaw Alias Aditya Kumar vs. Union of India and others, 2012 UPTC 547.
On the other hand, the contention of the learned counsel for the Income Tax Department is, that the notice under Section 226(3) was sent by Speed Post at the last known address available with the Income Tax authorities and the same was deemed to be served upon the petitioner. Since the petitioner did not appear nor paid the amount, it was treated to be an assessee in default and, accordingly, the Tax Recovery Officer proceeded to attach the Demat Account and Savings Bank Account of the petitioner towards recovery of the dues of the defaulter.
The learned senior counsel submitted, that the question whether the initial notice under Section 226(3) of the Act was served or not has now become irrelevant in view of the fact that the petitioner subsequently appeared and filed an affidavit denying its liability. The learned counsel submitted that in view of Section 292-BB of the Act, the initial notice under Section 226(3) shall be deemed to be served to the petitioner in accordance with the provisions of the Act and that the petitioner is now precluded from taking any objection in the proceedings initiated under Section 226 of the Act, on the ground, that the notice was not served upon him. The learned counsel submitted that in view of the provisions of Section 226(3)(vi) of the Act, the Tax Recovery Officer has the power and the jurisdiction to make an inquiry into the genuineness of the affidavit filed by the petitioner and, if it was found that a certain definite amount was due from the garnishee to the assessee, then the Tax Recovery Officer could hold the petitioner to be personally liable for payment under Section 226(3)(vi) of the Act.
The learned counsel contended that the remedy of filing a suit was barred under Section 293 of the Act and that the Tax Recovery Officer was competent to decide the dispute between the garnishee and the assessee. In support of his submission, the learned counsel placed reliance upon a decision of the Supreme Court in Bihari Lal Ramcharan vs. Income Tax Officer, Special Circle 'B' Ward, Kanpur and another, 1981(3)SCC 471.
The defaulter, namely, M/s Rich Capital and Financial Services Ltd. has filed an Impleadment Application, which was disposed of permitting the said applicant to be heard. The defaulter has filed an affidavit contending that it had advanced a sum of Rs.1,44,60,000/- to the petitioner through bank between the period 17.4.2003 to 21.8.2004, which was payable by the petitioner to it. It was also contended that they had delivered 1,05,000 shares of Jhunjhunwala Vanaspati Ltd. through their Demat Account to the petitioner and that the sale consideration has not been paid by the petitioner to it till date and therefore, the petitioner Company is a debtor and the amount can be recovered by the Tax Recovery Officer from the petitioner under Section 226(3) of the Act. The petitioner has denied these allegations contending that the alleged advance given by the defaulter was in relation to the purchase of shares of the petitioner Company for which requisite share certificates were issued to them. The petitioner also denied any amount payable towards the alleged shares transferred by them in the Demat Account of the petitioner in relation to the shares of Jhunjhunwala Vanaspati Ltd. The petitioner categorically submitted that no amount was payable to them.
In order to appreciate the rival contentions of the parties, it would be essential to have a look at the provisions of Section 226(3) of the Act. For facility, the said provision is extracted hereunder:-
"226(3)(i) The [Assessing] Officer [or Tax Recovery 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 [Assessing] Officer [or Tax Recovery 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.
(ii)A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of this sub-section, the shares of the joint holders in such account shall be presumed, until the contrary is proved, to be equal.
(iii)A copy of the notice shall be forwarded to the assessee at his last address known to the [Assessing] Officer [or Tax Recovery Officer], and in the case of a joint account to all the joint holders at their last addresses known to the [Assessing] Officer [or Tax Recovery Officer].
(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 a 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.
(v)Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice.
(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 [Assessing] Officer [or Tax Recovery Officer] 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 any sum due under this Act, whichever is less.
(vii)The [Assessing] Officer [or Tax Recovery Officer] may, at any time or from time to time, amend or revoke any notice issued under this sub-section or extend the time for making any payment in pursuance of such notice.
(viii)The [Assessing] Officer [or Tax Recovery 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.
(ix)Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be personally liable to the [Assessing] Officer [or Tax Recovery Officer] to the extent of his own liability to the assessee so discharged or to the extent of the assessee's liability for any sum due under this Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the [Assessing] Officer [or Tax Recovery 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."
From a perusal of the aforesaid provisions, it is apparently clear, that Section 226(3) deals with recovery and 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, namely, the garnishee to pay to the Income Tax Officer so much of the money as it sufficient to pay the amount due by the assessee in respect of arrears or whole of the money when it is equal to or less than that amount. In such a situation the Income Tax Officer may issue a notice requiring the person to pay the amount directly to the Tax Recovery Officer or the assessing officer instead of paying it to the assessee. Sub clause (iv) of Section 226(3) of the Act provides that every person to whom a notice is issued is bound to comply with such notice. Sub clause (vi) provides that in the event the amount is not payable, it would be open at that stage for the garnishee to make a statement on oath indicating 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. Sub-clause (x) of Section 226(3) of the Act provides that if a person to whom a notice is sent fails to make the payment, 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 realization of the amount as if it was an arrears of tax due from him. Sub clause (vi) further provides that in the event an affidavit is filed by the garnishee denying any amount payable by him to the assessee and if it is discovered subsequently that such statement was false in any material particular, in that event, such person shall be personally liable to the Income Tax Officer to the extent of his own liability to the assessee.
In view of the assertions made by the assessee that the petitioner is a debtor and, therefore, part of the recovery can be recovered from him that the Tax Recovery Officer issued a notice dated 20.11.2007 under Section 226(3) of the Act to the petitioner at the Kanpur address. Admittedly the petitioner had shifted its registered office from Kanpur to Varanasi and, accordingly, the said notice was not delivered or served upon the petitioner. Subsequently, the petitioner appeared before the Tax Recovery Officer on 15.4.2008 and produced all the relevant documents as demanded since there is no denial to that effect by the respondents in their counter affidavit. The petitioner also filed an affidavit on 17.4.2008 denying that it owes any amount to the assessee.
We also find that the Tax Recovery Officer had issued a notice dated 17.3.2008 treating the petitioner to be an assessee in default on account of non-payment of the amount as per the notice under Section 226(3) of the Act. This summons was apparently sent at the Varanasi address. Consequently, we are of the opinion that the respondents knew about the petitioner's address at Varanasi but chose to sent the notice at Kanpur's address. The initial notice sent under Section 226(3) of the Act was not served as it was not sent at the appropriate address and consequently the action taken by the respondents pursuant to the notice under Section 226(3) of the Act without ensuring service becomes bad in law. However, the proceedings initiated under Section 226(3) of the Act cannot be quashed now at this stage in view of the provision of Section 292 (BB) of the Act, which is reproduced hereunder:
"292 BB - Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or re-assessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was -
(a) not served upon him; or
(b) not served upon him in time; or
(c) served upon him in an improper manner:
Provided that nothing contained in this section shall apply where the assessee has raised such objection before the completion of such assessment or reassessment."
From a perusal of the aforesaid provision, the irregularity, if any, in non-service of the notice under Section 226(3) of the Act is deemed to be cured upon the petitioner's subsequently appearing on 15.4.2008 and participating in the proceedings by production of its books of account and filing an affidavit of denial on 17.4.2008.
We, accordingly, hold that the proceedings under Section 226(3) of the Act cannot be quashed at this stage, on the ground of non-service of notice under Section 226(3) of the Act, inasmuch as, the invalidity of the said notice was cured and the defect, if any, was removed by the petitioner's by participating in the proceedings subsequently.
Under clause (vi) of Section 226(3) of the Act the petitioner has objected to the payment and has filed an affidavit stating that the sum demanded or any part thereof was not due to the assessee nor payable by the petitioner and that the petitioner was not required to pay any such sum or any part thereof to the Tax Recovery Officer in compliance with the requisition contained in the notice. Once that is done, no further proceeding for recovery can be made against the petitioner. However, in view of the decision of the Supreme Court in Bihari Lal Ram Charan's case (supra), it is apparently clear that under Clause (vi) of Section 226(3) of the Act a limited enquiry can be conducted by the Tax Recovery Officer to find out about the genuineness of the affidavit for which he is required to give a notice to the person giving the affidavit that he is going to hold an enquiry for the purpose of determining whether the statement made on oath on behalf of the garnishee is correct or false. The Income Tax Officer cannot discover on its own that the statement on oath made on behalf of the garnishee was false in any material particular and cannot subjectively reach to a conclusion that in his opinion the affidavit filed by the garnishee was false in any material particular. The Supreme Court held that such inquiry must be held after following the principles of natural justice.
It may be stated here that the provisions of Section 226(3) of the Act is intended to apply only to an admitted liability where a person admits by word or by conduct that any money is due to the assessee or is held by him for on account of the assessee, he becomes liable to pay.
The Division Bench of this Court in the case of Jitendra Kumar (supra) held that the power under Section 226(3) of the Act could not be invoked for effecting a recovery of a claim which is disputed and the condition precedent for exercising the power under Section 226(3) of the Act is, that the money is due and payable by the person concerned to the assessee.
The inquiry as contemplated by the Supreme Court under Sub-clause (vi) of Section 226(3) of the Act was only to find out the genuineness of the affidavit submitted by the garnishee. The authorities under the garb of the inquiry cannot adjudicate upon a bonafide dispute between the garnishee and the assessee. Section 226(3) of the Act is not a charging Section nor does it gives any power to the Tax Recovery Officer to adjudicate a dispute. This Court is of the opinion that bonafide disputes, if any, between the garnishee and the assessee cannot be adjudicated by the authorities under Section 226(3) of the Act. The legislature could not have meant to entrust the authority with the jurisdiction to decide the questions relating to the quantum of such liability between the garnishee and the assessee, which matter is within the purview of the civil courts. The powers under Section 226(3) of the Act have not been given to the assessing officer or the Tax Recovery Officer to adjudicate private disputes between the garnishee and the assessee.
In the instant case, we find that the assessee, who has come up before the Court has contended that it had advanced certain sums of money to the petitioner and, therefore, the petitioner is its debtor, but, the petitioner has denied this assertion. We find from a perusal of the affidavit that no steps have been taken by the assessee, namely, M/s Rich Capital and Financial Services Ltd. initiating any proceeding for recovery of that amount before any forum or any appropriate court of law.
We also find that pursuant to the affidavit filed by the petitioner before the Tax Recovery Officer denying its liability to pay any amount and further denying that any sum is or was payable to the assessee, no steps have been taken by the Tax Recovery Officer to cross check with the assessee and/or inquire into the genuineness of the affidavit filed by the petitioner.
Since the petitioner had appeared and participated in the proceedings, the order of the Tax Recovery Officer treating the petitioner as an assessee in default cannot continue any longer.
We are, also of the opinion that in view of the categorical denial by the petitioner to pay any amount, the attachment made by the Tax Recovery Officer cannot continue any further, especially when the Court finds that till date no inquiry has been made by the respondents into the genuineness of the affidavits filed by the petitioner. This Court, by an interim order, had restrained the Income Tax Department from alienating the shares, which were transferred to the Demat Account of the Tax Recovery Officer.
We, accordingly, hold that the order of the Tax Recovery Officer dated 17.3.2008 treating the petitioner as an assessee in default cannot be sustained and is quashed. We further find no justification in continuing with the attachment order and the same is also quashed. A writ of mandamus is issued commanding the Tax Recovery Officer to ensure that 1,70,000 equity shares of Jhunjhunwala Vanaspati Ltd. is transferred again in the Demat Account of the petitioner with Karvy Stock Broking Ltd. within two weeks from the date of the production of a certified copy of the order. If any dividend was received by the Tax Recovery Officer on these shares, the said amount shall also be transferred to the petitioner.
We further quash the direction attaching the bank account of the petitioner with ICICI Bank, Chowk Branch, Varanasi. We further issue a mandamus directing the Tax Recovery Officer to refund the amount of Rs.28,988.78 along with interest payable as per the rates payable by the bank in the Savings Bank Account during the period in question, which amount shall be paid again by the Tax Recovery Officer to the petitioner within two weeks from the date of the production of a certified copy of this order. In view of the aforesaid, writ petition is allowed. In the circumstances of the case the parties shall bear their own cost.
Dated: 23.7.2014.
AKJ.