The Tax Recovery Officer cannot exercise jurisdiction under Section 226(3) of the Income Tax Act, 1961 to recover tax due from an assessee-in-default from a garnishee if the IT authority has held the transaction between the assessee and the garnishee to be ingenuine, and the TRO must consider any objection raised by the garnishee under Section 226(3)(vi) of the Act before proceeding to recover the tax.

( 1 ) A notice under Section 226 (3) of the IT Act, 1961 (Act), issued by the Tax Recovery Officer, Delhi (TRO), has since been challenged by the petitioners/appellants herein. Initially this Court remitted the matter to the TRO, which had issued the said notice. The matter was adjudicated upon and the claim of the petitioners was rejected. Against this order the petitioners had moved the present writ petition since dismissed by the learned Single Judge. Out of the said order, the present appeal arises.

( 2 ) IT is contended on behalf of the appellants that the IT authority in a proceeding against the petitioners had held that the transaction between the petitioners and one Visisth Chay Vyapar Ltd. (hereinafter termed as "vcvl") was an ingenuine transaction and, therefore, disallowed the deduction of interest on borrowed capital and then directed addition of the amount under Section 68a (68) of the IT Act. The CIT (A) had affirmed the order of the AO and had held that the explanation was not satisfactory and despite opportunity being given, the petitioners did not avail of the same to satisfactorily prove their contention. On the other hand, VCVL had obtained a decree, though ex pane, under Chapter 13 of the Original Side Rules from this Court in respect of the self-same transaction as against the petitioners in December, 1997. Admittedly, till the writ petition was dismissed by the learned Single Judge out of which the present appeal arises, the decree obtained by VCVL was never challenged. On the other hand, the TRO sought to recover the income-tax dues payable by VCVL through a recovery proceeding. In the process, the notice under Section 226 (3) of the Act came to be issued on the petitioners seeking recovery from the decree obtained by VCVL against the petitioners.

( 3 ) MR. Sudipto Sarkar, learned senior counsel for the appellants, raised three points. First that the IT authority at Calcutta had found in a judicial decision that the transaction was ingenuine whereas its counterpart at Delhi, attempted to treat the same as a genuine one by virtue of a decree obtained by VCVL. When the IT Department itself had knowledge about the judicial finding, which was binding on the parties, it was estopped from treating the amount due for the purpose of exercising jurisdiction under Section 226 (3) of the Act. The second contention was that under Section 226 (3) of the Act, there is a provision in Clause (vi) through which the garnishee can raise an objection and until the objection is discovered to be false, the garnishee is not liable to pay and the TRO cannot treat such garnishee as an assessee-in-default and proceed to recover the amount. The third contention was that the provisions of Section 226 (3) of the Act cannot be applied in respect of a liability arising out of a decree until the decree becomes final. Inasmuch as in the present case an appeal having been preferred, the decree has not reached finality and, therefore, provisions of Section 226 (3) of the Act cannot be invoked.

( 4 ) MR. Pradip Ghosh, learned senior counsel for the Revenue, on the other hand, contends that no appeal was preferred until the order appealed against was passed. It is only after the dismissal of the writ petition, the appeal seems to have been preferred. Therefore, the question of finality could not be raised before the learned Single Judge. As such, in this appeal the said order cannot be challenged on that ground. He next contends that despite opportunity the petitioners have not produced the materials before the authority concerned. At the same time, the petitioners are estopped from disputing the dues under the decree when it is still claiming the transaction to be a genuine one in the proceedings before the Tribunal at Calcutta. Therefore, they are estopped from challenging the garnishee proceedings either on the ground of finality of the decree or on any other ground. He further contended that the question cannot be rai