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2001(4) Supreme 544
SUPREME COURT OF INDIA
(From Allahabad High Court)
Dr. A.S. Anand, CJI., R.C. Lahoti & Doraiswamy Raju, JJ.
Sri Mohan Wahi -Appellant
versus
Commissioner, Income Tax, Varanasi & Ors. -Respondents
Civil Appeal No. 2488 of 2001
(Arising out of SLP (C) No. 7306 of 2000)
Decided on 30-3-2001
Counsel for the Parties :
For the Appearing Parties : M.L. Verma, N.N. Goswami, Dr. A.M. Singhvi, Senior Advocates, Ranbir Chandra, Ms. Suruchi Agarwal, Rajiv Tyagi, B.V. Balram Das, Ms. Sushma Suri, Sushil Kumar Jain, Rajesh Kumar, Ms. Neera Gupta, Advocates.
Held : The combined effect of sub-section (3) of Section 225 of the Act and Rule 56 and Rule 63 of Second Schedule is that if before an order confirming the sale is actually passed by the Tax Recovery Officer, the demand of tax consequent upon an order made in appeal or other proceedings under the Act has been reduced to nil, the Tax Recovery Officer is obliged to cancel the certificate and as soon as the certificate is cancelled, he shall have no power to make an order confirming the sale. The sale itself being subject to confirmation by the Tax Recovery Officer, would fall to the ground for want of confirmation. (Para 9)
Rule 56 in Second Schedule of the Income Tax Act, 1961 is neither a redundant nor a formal provision. It casts an obligation on the Tax Recovery Officer to pass an order confirming the sale consciously and with due application of mind to the relevant facts relating to sale by public auction which is to be confirmed. Under Rule 63, confirmation of sale is not automatic. An order confirming the sale is contemplated to make the sale absolute. Ordinarily, in the absence of an application under Rule 60, 61 or 62 having been made, or having been rejected if made, on expiry of 30 days from the date of sale the Tax Recovery Officer shall pass an order confirming the sale. However, between the date of sale and the actual passing of the order confirming the sale if an event happens or a fact comes to the notice of the Tax Recovery Officer which goes to the root of the matter, the Tax Recovery Officer may refuse to pass an order confirming the sale. The fact that sale was being held for an assumed demand which is found to be fictitious or held to have not existed at all, in fact or in the eyes of law, is one such event which would oblige the Tax Recovery Officer not to pass an order confirming the sale and rather annual the same. The High Court in our opinion, clearly fell in error in not allowing relief to the petitioner-appellant by setting aside the sale. (Para 10)
The sale having fallen to the ground, the purchase money deposited by the respondent No. 3 shall, obviously, be liable to be refunded to her. She also needs to be compensated by awarding suitable interest for the period for which she has been deprived of the use of her money for no fault of her. In our opinion, it would meet the ends of justice if the amount of Rs. 1,70,000/- deposited by her with the Tax Recovery Officer is directed to be refunded and she is also awarded interest @ 12 per annum. Who should bear the liability for payment of interest? For the period for which the sale was not vitiated on account of the demand having not been adjudged to be non-existent, in our opinion, the assessee should pay the interest. Once the demand ceased to exist and that fact was brought to the notice of the Tax Recovery Officer by the assessee, the former should have cancelled the recovery certificate and, therefore, with effect from that date till the date of refund, the interest should be paid by the Union of India, i.e., the Income Tax Department, represented by respondent Nos. 1 and 2, which has also kept the money and made use of it. It is, therefore, directed that the amount of Rs. 1,70,000/- shall be refunded to the respondent No. 3 by the respondent Nos. 1 and 2 within a period of two months from the date of this judgment. For the period commencing from 11.1.1980 on an amount of Rs. 42,500/-, and from 25.1.1980, on an amount of Rs. 1,27,500/-, calculating upto 22.11.1996 the appellant shall pay the interest @ 12 per annum to the respondent No. 3 which may, in default of payment, be recovered from the house property. With effect from 23.11.1996 upto the date of refund, the respondent No. 3 shall be entitled to recover interest at the same rate from respondent Nos. 1 and 2. The amount of interest shall also be calculated and paid within a period of two months from today. We make it clear that the interest is being awarded purely on equitable considerations, in the facts and circumstances of this case, and in doing so we are not laying down any principle of law to be followed as a precedent. (Para 21)
(ii) Income Tax Act, 1961-Section 156-Notice of demand-Service of-Mandatory before initiating recovery proceedings-Effect of a notice of demand having not been served on assessee on sale held for recovery of arrears of income-tax-Held, a sale held in recovery proceedings initiated without serving notice of demand shall be invalid and hence shall be liable to be annulled on being called in question.
Held : Service of notice of demand on the assessee under Section 156 of the Act, is mandatory before taking steps for recovery under Second Schedule. Non-service of notice of demand goes to the root of the validity of subsequent proceedings for recovery. A sale held in recovery proceedings initiated without serving the notice of demand shall be invalid and hence shall be liable to be annulled on being called in question. (Para 17)
In the present case, the plea as to non-service of demand notice having been raised before the High Court, in our opinion the High Court should not have adopted too technical an approach by refusing to deal with the plea because it was not raised in the manner in which the High Court thought it should have been raised. The plea went to the root of the matter. The plea was raised before the departmental authorities right from the ITO to the Tribunal and was not given up before the High Court also. It would not have been difficult for the High Court to ask the Income Tax Department to produce the record of the proceedings and to show if the demand notice was at all served on the assessee. A little more sensitive approach is required to be adopted in the process of dispensing justice when it is found that valuable property of a person was sought to be sold away for recovery of such arrears as did not exist at all. (Para 19)
ORDER
R.C. Lahoti, J.-The relevant facts are jejune and beyond any pale of controversy. Late Bhagwati Prasad owned a house property described as D-53/91-D, Luxa, Varanasi (hereinafter referred to as the house property). He had four sons - namely, P, S, R and K. Under his Will of the year 1962, probated in the year 1965, the house property devolved upon his four sons. The elder two sons - P and S, had entered into a partnership known as M/s. United Provinces Commercial Corporation, Luxa, Varanasi (UPCC, for short) dealing in import and sale of heavy machinery and road rollers. The labour troubles resulted in the firm s business collapsing in the year 1967. The partners left Varanasi and migrated elsewhere. In the year 1972, income-tax assessments of the firm UPCC were finalised for the assessment years 1967-1968 to 1969-1970. Recovery certificates were issued in 1973-1974 pursuant whereto the house property was attached. On 3.12.1979 a proclamation for sale of the property was issued setting out a demand of Rs. 30,82,000/- and upset price at Rs. 1,70,000/-. On 11.1.1980, at the public auction, respondent No. 3 made a bid proposing to purchase the property for Rs. 1,70,000/- (which was the upset price). The bid was accepted by the officer conducting the sale. An amount of Rs. 42,500/- being 1/4th of the auction money, was deposited by the auction-purchaser on 11.1.1980 simultaneously with the acceptance of the bid. The balance amount of R. 1,27,500/- was deposited on 25.1.1980 within the prescribed period of 15 days.
2. R, the third brother had died. His widow, Padma, filed a civil suit in the Court of Civil Judge, Varanasi submitting that the undivided property of the four brothers and in any case the share of the brothers, who were not the partners in the firm, could not have been attached and advertised for sale for recovery of dues against the firm. She also sought for an ad interim restraint on sale. On 9.1.1980, the Court of Civil Judge deemed it not proper to stay the auction sale but nevertheless felt a prima facie case having been made out to stay the confirmation of the auction sale. Accordingly, the Union of India and the authorities of the Income Tax Department were directed, through an ad interim injunction, not to confirm the sale. In the year 1984 the auction-purchaser, respondent No. 3 herein, was also impleaded as a party to the suit. The ad interim injunction continued to operate until the suit itself came to be dismissed in default of appearance on 12.1.1998. On 13.1.1988 an application for restoration of the suit was filed. On 30.7.1999 the suit was restored to file.
3. The assessments made against the firm UPCC were all ex parte and a substantial part of the demand raised against the firm consisted of penalty and interest. The firm agitated the matter in the hierarchy of Income Tax Department. The challenge to the orders of assessment failed before the Commissioner of Income Tax (Appeals) who dismissed the appeals relevant to assessment years 1967-1968 to 1970-1971 as having been filed beyond the prescribed period of limitation. Four appeals were filed before the Income Tax Appellate Tribunal, Bench Allahabad. By an order dated 11.12.1987 all the four appeals were allowed. The Tribunal formed an opinion that there was sufficient cause which had prevented the assessee from filing the appeals before the CIT (A) in time and therefore the appeals were liable to be restored on the file of CIT(A) to be dealt with on merits. It was ordered accordingly. During the course of its order the Tribunal upheld a finding of fact recorded by the CIT (A) that "the assessee could not be said to have been served with the demand notice". On being so remanded, the appeals were heard on merits by the CIT (A). Most of the matters relating to demand on account of tax, penalty and interest were resolved at the stage of CIT (Appeals) while the tax demand referable to 1967-1968 was resolved before the Tribunal. The fact remains that on di
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