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Section 226 of the Income-tax Act, 1961 - Collection and recovery of tax

Court : SUPREME COURT OF INDIA


Brief : : Section 226 of the Income-tax Act, 1961 - Collection and recovery of tax - Other modes of recovery - Whether section 226(3) would be applicable when a money is due to assessee from any person - Held, yes Section 226 of the Income-tax Act, 1961 - Collection and recovery of tax - Other modes of recovery - Assessee had invested certain amount in unit of monthly income plan (III) offered by appellant-Unit Trust of India - Since a certain sum was due from assessee on account of income-tax, Department issued a notice dated 8-2-2002 to appellant under section 226(3) - In compliance of demand made, appellant paid certain sum to department wherefor value of unit at relevant time was calculated at rate of Rs. 6.93 per unit - Assessee filed writ petition questioning said action of appellant in resorting to sale of said units without his consent - Lock-in-period of plan was for a period of five years - Repurchase of units was allowed from 1-9-2001 at NAV based repurchase price - Said option of purchase was to be exercised by assessee but assessee did not opt therefor - Whether section 226(3)(vi) cannot be interpreted to mean that Unit Trust of India was fully authorised to dispose of units on its own without any notice to holder of units - Held, yes - Whether in absence of any right of option having been exercised by assessee, appellant could not have transferred units without consent of assessee - Held, yes - Whether since eventhough assessee never authorised appellant to sell units in market at lower price, appellant sold same in market without any intimation to assessee, appellant’s action was unjustified - Held, yes FACTS The assessee had invested on amount of Rs. 65 lakhs in units of monthly income plan (III) offered by the appellant- Unit Trust of India under capital gain scheme. Said plan was a five year close ended income plan. Since certain sum was due from assessee on account of income-tax, department issued a notice dated 8-2-2002 to the appellant under section 226(3) to pay amount due. In compliance of the demand made, appellant paid certain amount to department wherefor value of unit at relevant time was calculated at the rate of Rs. 6.93 paise per unit. The assessee filed a writ petition questioning the action of the appellant in resorting to sale of the said units without his consent. The High Court held that although the units were transferred, their value had not become due to the assessee on date on which such notice was given and, therefore, such transfer of units was to be quashed and assessee was entitled to redemption value of units at rate of 10 per unit after five years.


Citation : Administrator, Unit Trust of India v. B. M. Malani


Judgment :


HELD Whether the action on the part of the appellant to act thereupon was valid was the question. The scheme, the relevant provision whereof went to show that the lock-in-period was for a period of five years. Purchase of the units, however, was allowed from 1-9-2001 at NAV based repurchase price. The scheme constituted a contract between the parties. The option of the purchase was to be exercised by the assessee. Appellant, on the basis of the said purported notice dated 8-2-2002, could not have placed itself in the shoes of the assessee. It was not in dispute that the assessee was a defaulter to the extent of Rs. 157.77 lacs. He had sold some of his properties in 1998. A portion of the sale proceeds, namely, 65 lacs had been invested with the appellant. He had sought for exemption under section 54AE. The amount of 65 lacs was secured under the said units with the appellants. It was not in dispute that an application for settlement was filed before the Settlement Commissioner by the assessee. He had deposited a sum of Rs. 25 lacs when moving an application for deposit of the amount. Upto October 2000, he had already paid a sum of Rs. 92.04 lacs. Only a sum of Rs. 48,08,000 were due from him. [Para 12] Section 26(3) applicable only when a money is due to the assessee from any person. [Para 13] The appellant was a statutory authority. It had floated the scheme. It knew the terms and conditions thereof. On a plain reading of the highlights of the scheme, it was evident that repurchase was allowed only from 1-9-2001. Indisputably, the assessee did not opt therefor. In absence of any right of option having been exercised by the assessee, the appellant, could not have transferred the amount in question. It was wholly incorrect to contend that the scheme itself provided the repurchase was allowed from 1-9-2001 even without the consent of the assessee. It was for the assessee to give his option. The ITO could not have exercised the said option on behalf of the assessee. [Para 14] The assessee made all sincere efforts to pay the tax. It made an offer to the ITO to transfer the bonds at their face value at Rs. 10 per unit. Unfortunately, the Income Tax Department neither replied to the said letter nor paid and heed to his request. The assessee had invested a sum of Rs. 65 lacs. He, therefore, was entitled to, at least, that amount. Government of India had already been considering the matter of reimbursement to the holders of the units at least at the purchase rate. In that view of the matter, it must be held that it not only acted hastily but also illegally. As a State, within the meaning of article 12 of the Constitution of India, it was required to exercise restraint and give effect to the provisions of the contract in reasonable manner. Section 226(3)(vi) in categorical terms created a legal fiction to the effect that when an amount is not payable, the assessee is not required to pay any such amount or part thereof. Appellant being a statutory authority should have acted strictly in terms of the conditions of the contract. It was to act reasonably and fairly. [Para 16] The assessee never authorised the appellant to sell the same in the market at the lower price as assessee had stated that due to the fall in the prices in the market, he was not able to dispose of the units. The assessee further prayed time till May 2002 to clear the dues and was awaiting information from ITO but in the meantime the appellant sold the same in the market without any intimation to assessee. Section 226(3)(vi) cannot be interpreted to mean that the Unit Trust of India was fully authorised to dispose of the units on its own without any notice to the holder of the units. [Para 18] The banker becomes a debtor of the assessee-in-default on maturity of the fixed deposit scheme. The fixed deposit itself could have been a subject matter of the judgment. [Para 22] Therefore, there was no error in the judgment of the High Court as the assessee was entitled to be restituted. [Para 23] For the reasons aforementioned, the appeal filed by the appellant, was to be dismissed.





Posted by : [Scorecard : 18380] Posted on 18 October 2007


Tags :- section 226 income act1961 collection recovery
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