The judgment of the court was delivered by
BHAGWATI J.-This appeal by certificate raises a short
question of law relating to the interpretation of s. 226(3) of the I.T. Act,
1961. The petitioners were at all material times a partnership firm carrying on
business as bankers and dealers in cloth and over the years, they had dealing
with a limited company called B. R. Sons Ltd., which at one time acted as the
sole selling agent of Laxmi Ratan Cotton Mills Company Ltd. There was a running
account between the petitioners and B. R. Sons Ltd. in respect of these dealings
and according to the petitioners, there was a debit balance of Rs. 76,436.23
against B. R. Sons Ltd. in this account as on 24th May, 1966. On 21st May, 1966,
the ITO, Central Circle, Kanpur, issued a notice to the petitioners under s.
226(3)(i) stating that a sum of Rs. 22,89,281.97 was due from B. R. Sons Ltd. on
account of income-tax, super-tax, penalty, etc., and requiring the petitioners
to pay to him forthwith any amount due from the petitioners to B.R. Sons Ltd. or
held by the petitioners for or on account of B. R. Sons Ltd. to the extent of
the aforesaid arrears of tax due from B. R. Sons Ltd. The petitioners were
warned that if they failed to make payment pursuant to this notice, they would
be deemed to be assessee in default and proceedings would be taken against them
for realisation of the amount as if it were an arrear of tax due from them. This
notice was served on the petitioners on 24th May, 1966, and the petitioners
replied to it on 1st July, 1966, pointing out that according to the state of the
account between the petitioners and B. R. Sons Ltd., there was no credit balance
in favour of B. R. Sons Ltd. and that on the contrary B. R. Sons Ltd. owed a
large amount to the petitioners and in the circumstances the notice should be
discharged. The ITO by his letter dated 11th October, 1966, intimated to the
petitioners that they should file a sworn affidavit setting out their contention
that they did not owe any amount to B. R. Sons Ltd. This was followed by another
letter dated 14th December, 1966, addressed by the ITO to the petitioners in
which the ITO pointed out that he had in his possession evidence to show that
the petitioners still owed money to B. R. Sons Ltd. to a substantial extent and
requesting the petitioners to pay up the amount due to B. R. Sons. Ltd. on or
before 21st December, 1966. The petitioners thereupon filed an affidavit sworn
to by their accountant, Shiv Kumar Arora, on 22nd December, 1966, setting out
the position of the account of B. R. Sons Ltd. and stating that far from any
amount being due from the petitioners to B. R. Sons Ltd., there was a debit
balance of Rs. 76,436.23 against B. R. Sons Ltd. as on 24th May, 1966, and the
notice issued against the petitioners under s. 226(3)(i) was, therefore,
unjustified. The affidavit was forwarded to the ITO along with a letter
addressed by the petitioners. The ITO replied to the petitioners by his letter
dated 31st December, 1966, in which he pointed out that during the course of
search of Bihari Niwas, the I.T. authorities has seized account books in Hindi,
Muriya and English pertaining to the year commencing from 1st July, 1965, and
that the account of B. R. Sons Ltd. in the Muriya and English cash book showed
that payments aggregating to Rs. 8,69,000 had been made to B. R. Sons Ltd. prior
to 24th May, 1966, but the original cash book in Hindi did not show any such
payments having been made and he had, therefore, reason to believe that the
affidavit filed on behalf of the petitioners showing that B. R. Sons Ltd. had a
debit balance against them in the books of the petitioners as on 24th May, 1966,
was false in material particulars. The ITO accordingly held the petitioners to
be personally liable to make payment to the extent of their liability to B. R.
Sons Ltd. as on 24th May, 1966, and intimated to the petitioners that if they
failed to make such payment on or before 10th January, 1967, the ITO would treat
them as assessee in default under s. 226(3)(x) and proceed to take recovery
proceedings against them. The petitioners, however, reiterated their stand and
reaffirmed the correctness of their affidavit by their letter dated 10th
January, 1967. The ITO thereupon addressed a letter dated 11th January, 1967,
stating that the petitioners had not furnished any material or evidence to rebut
his conclusion that the affidavit filed on behalf of the petitioners was false
in material particulars and since the petitioners had failed to pay up the
amount due from them to B. R. Sons Ltd., they were " assessee in default
" within the meaning of s. 226(3)(x) and, consequently, appropriate
coercive steps were being taken for realising the amount of the tax. A copy of
this letter was forwarded to the Tax Recovery Officer, Kanpur, for information
and necessary action. The TRO, on the basis of this letter issued an order dated
27th January, 1967, under r. 48 of the Second Schedule to the Act attaching some
of the immovable properties belonging to the petitioners and following upon this
order of attachment, he issued a notice on 7th February, 1967, for setting the
proclamation in respect of the sale of these immovable properties. The
petitioners thereupon filed a writ petition in the High court of Allahabad for
quashing and setting aside the notice dated 21st May, 1966, and the subsequent
proceedings adopted by the ITO and the TRO against the petitioners.
The writ petition came up for hearing before a Division
Bench of the High Court. One of the contentions advanced on behalf of the
petitioners before the High Court was that the notice dated 21st May, 1966,
issued against the petitioners under s. 226(3)(i) was invalid, since it did not
specify the amount alleged to be due from the petitioners to B. R. Sons Ltd. The
High Court accepted the contention of the petitioners that the notice issued by
the ITO under s. 226(3)(i) " should mention or give some specific
indication of the amount which he believes is due or may fall due from such
person to the assessee or which he holds or may subsequently hold for or on
account of the assessee " but held that since the petitioners knew what was
the amount which was being referred to by the ITO in his notice and no prejudice
was caused to the petitioners by the reason of non-specification of the amount
in the notice issued by the ITO, the notice could not be said to be invalid on
that ground. The petitioners also contended before the High Court that if the
ITO was not inclined to accept the statement contained in the affidavit filed on
behalf of the petitioners and he was disposed to take the view that the
affidavit was false in materials particulars, he should have summoned the
deponent of the affidavit for cross-examination and held an inquiry before
coming to the conclusion that the statement contained in the affidavit was
false. This contention was quite clearly a formidable one, based as it was on
the language of s. 226(3)(vi) but the High Court negatived it on the ground that
the affidavit filed on behalf of the petitioners was not in compliance with the
terms of s. 226(3)(vi) since it was not sworn by any of the partners of the
petitioners but was made only by an accountant of the petitioners and when the
accountant stated in the affidavit that a sum of Rs. 76,436.23 was due and owing
to the petitioners from B.R. Sons Ltd. on 24th May, 1966, there was nothing to
indicate as to which part of this averment was true to his personal knowledge
and which, on the basis of the account books. The High Court accordingly
repelled the challenge against the validity of the notice dated 21st May, 1966,
and held that the ITO was justified in treating the petitioners as "
assessee in default " on the ground of non-payment of the amount due and
owing from them to B. R. Sons Ltd. But so far as the recovery proceedings
adopted by the TRO were concerned, the High Court took the view that no recovery
proceedings could be adopted without issue of a recovery certificate by the ITO
under s. 222 and since in the present case, no such recovery certificate was
issued by the ITO, the recovery proceedings adopted by the TRO were invalid and
they were accordingly quashed. This was the only limited relief granted by the
High Court to the petitioners and the rest of the reliefs claimed were rejected.
The petitioners thereupon preferred the present appeal in this court after
obtaining a certificate from the High Court.
The principal question that arises for determination in
this appeal is as to whether, on a true interpretation of s. 226(3)(vi), the ITO
was bound to hold an inquiry before he came to the conclusion that the statement
contained in the affidavit filed on behalf of the petitioners was false in any
material particular. Section 226(3) deals with recovery of 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 " (hereinafter referred to as the garnishee)
to pay to the ITO " 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 ". There are ten clause & in which
section 226(3) is divided and, these clauses, in so far as material, provide,
inter alia, as follows:
(i) The Income-tax 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 Income-tax 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 .......
(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
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....
(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
Income-tax Officer to the extent of his own liability to the assessee on the
date of the notice, or to the extent of assessee's liability for any sum due
under this Act, whichever is less....
(viii) The Income-tax 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...
(x) If the person to whom a notice under this sub-section
is sent fails to make payment in pursuance thereof to the, Income-tax 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."
It was in exercise of the power conferred under cl. (i)
that the notice dated 21st May, 1966, was issued by the ITO to the petitioners.
This notice did not mention or even indicate any specific amount alleged to be
due from the petitioners to B. R. Sons Ltd. and it was, therefore, observed by
the High Court that the notice was not in accordance with the provisions of cl.
(i). We are not sure whether, on a true interpretation of cl. (i) in the light
of the other clauses of s. 226, sub-s. (3), it is necessary that the notice
under cl. (i) should set out a specific amount as due from the garnishee to the
assessee or it is enough if the notice merely reproduces the language of cl. (i)
and requires the garnishee to pay " at or within the time specified in the
notice " so much of the money as is sufficient to pay the amount due from
the assessee in respect of arrears of tax. It is a debatable question on which
we do not wish to express any opinion, since the High Court has taken the view
that even though the notice dated 21st May, 1966, issued to the petitioners did
not mention or give an indication of any specific amount alleged to be due from
the petitioners to B. R. Sons Ltd., it was not invalid, since no prejudice was
caused to the petitioners by reason of non-specification of such amount and this
view taken by the High Court was plainly correct, because the petitioners at no
time complained that the notice did not specify the amount alleged to be due
from the petitioners to B. R. Sons Ltd. or that it was vague and indefinite and
in fact replied to the notice on merits by raising an objection that, according
to the statement of account between the petitioners and B. R. Sons Ltd., there
was no credit balance in favour of B. R. Sons Ltd. and on the contrary B. R.
Sons Ltd. owed a large amount to the petitioners and also filed an affidavit
sworn to by their accountant, Shiv Kumar Arora, stating that on 24th May, 1966,
when they received the notice dated 21st May, 1966, there was nothing due from
the petitioners to B. R. Sons Ltd. but on the contrary B. R. Sons Ltd owed a sum
of Rs. 76,436.23 to the petitioners. The view taken by the High Court could also
be sustained additionally on the ground that, in any event, by his letter dated
31st December, 1966, the ITO pointed out to the petitioners that, according to
him, B. R. Sons Ltd. had a credit balance of over Rs. 8 lakh as on 24th May,
1966, and the petitioners had, therefore, clear notice of what was the amount
alleged to be due from the petitioners to B. R. Sons Ltd. So far as the
affidavit of the accountant filed on behalf of the petitioners was concerned, it
was disputed before us on behalf of the revenue whether this affidavit could be
regarded as a " statement on oath " within the meaning of cl. (vi) so
as to attract the applicability of that clause. The argument of the revenue was,
and this argument was accepted by the High Court, that though this affidavit was
undoubtedly made on oath, it was not a " statement on oath " within
the contemplation of cl. (vi), because it was not a statement of any of the
partners of the petitioners but was merely a statement of an accountant of the
petitioners. Now, it is true that this affidavit filed on behalf of the
petitioners was sworn to by an accountant of the petitioners and not by one of
their partners but we do not think that on that account it could be disregarded
by the ITO. The accountant of the petitioners would obviously have knowledge of
the state of the account between the petitioners and B. R. Sons Ltd. and he
would be competent to make a statement on oath in regard to the position of such
account. In fact, the accountant of the petitioners stated in para. 1 of the
affidavit that he was acquainted with the facts deposed to in the affidavit and
he also mentioned in the verification clause that so far as the averments in
paras. 2 and 3 of the affidavit were concerned, which related to the position of
the account between the petitioners and B. R. Sons Ltd., they were " true
to his knowledge and based on the account books " of the petitioners. The
state of the account between the petitioners and B. R. Sons Ltd., detailed by
the accountant in the affidavit was thus based both on the account books of the
petitioners as also on his personal knowledge and he was, therefore, competent
to state on oath what was the position of that account. Moreover, the affidavit
containing the statement of the accountant on oath was filed by the petitioners
in support of their objection that far from there being any money due from them
to B. R. Sons Ltd. a sum of Rs. 76,436.23 was, in fact, due from B. R. Sons Ltd.
to them. There was, therefore, sufficient compliance with the requirement of cl.
(vi). It is not necessary under cl. (vi) that the statement on oath contemplated
in that provision should be made only by the person to whom the notice under cl.
(i) is sent by the ITO. It is in our opinion sufficient if the objection to the
requisition contained in the notice is made by the person to whom the notice is
sent and such objection is supported by a statement on oath made by a person
competent to make such statement. Here, as we have pointed out above, the
accountant of the petitioners was competent to state on oath as to what was the
true state of the account between the petitioners and B. R. Sons Ltd. and, since
an affidavit containing this statement on oath made by the accountant was filed
on behalf of the petitioners in support of their objection, the requirement of
cl. (vi) was satisfied and its provisions were attracted.
Now under cl. (vi), where a garnishee, to whom a notice
under cl. (i) 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, he is not required to pay such sum
or any part thereof to the ITO in compliance with the requisition contained in
the notice. But if it is discovered by the ITO that such statement on oath was
false in any material particular, the garnishee is made personally liable to the
ITO 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 arrears of tax, whichever is
less. The petitioners having objected to the requisition contained in the notice
dated 21st May, 1966, by filing an affidavit of their accountant that nothing
was due from the petitioners to B. R. Sons Ltd., were not bound to comply with
the requisition contained in such notice, but if the ITO discovered that such
statement on oath was false in material particular and that some amount was due
from the petitioners to B. R. Sons Ltd., the petitioners would be personally
liable to pay such amount to the ITO. The question is whether the ITO could be
said to have discovered that the statement on oath made in the affidavit of the
accountant of the petitioners that nothing was due from the petitioners to B. R.
Sons Ltd. was false in any material particular, as claimed by the revenue in the
notices dated 31st December, 1966, and 11th January, 1967. Now, it is obvious
that under cl. (vi) the discovery by the ITO that the statement on oath made on
behalf of the garnishee is false in any material particular has the consequence
of imposing a personal liability for payment on the garnishee and it must,
therefore, be a quasi-judicial decision preceded by a quasi-judicial inquiry
involving observance of the principles of natural justice. The ITO cannot
subjectively reach the conclusion that in his opinion the statement on oath made
on behalf of the garnishee is false in any material particular. He would have to
give notice and hold an inquiry for the purpose of determining whether the
statement on oath made on behalf of the garnishee is false and in which material
particular and what amount is in fact due from the garnishee to the assessee and
in this inquiry he would have to follow the principles of natural justice and
reach an objective decision. Once a statement on oath is made on behalf of the
garnishee that the sum demanded or any part thereof is not due from the
garnishee to the assessee, the burden of showing that the statement on oath is
false in any material particular would be on the revenue and the revenue would
be bound to disclose to the garnishee all such evidence or material on which it
proposes to rely and it would have to be shown by the revenue on the basis of
relevant evidence or material that the statement on oath is false in any
material particular and that a certain definite amount is due from the garnishee
to the assessee. Then only can personal liability for payment be imposed on the
garnishee under cl. (vi). Here, what happened was that an affidavit of the
accountant containing a statement on oath that on 24th May, 1966, nothing was
due from the petitioners to B. R. Sons Ltd. but on the contrary a sum of Rs.
76,436.23 was due from B. R. Sons Ltd. to the petitioners was filed on behalf of
the petitioners some time after 22nd December, 1956, and on receipt of this
affidavit, the ITO pointed out to the petitioners by his notice dated 31st
December, 1966, that this statement on oath contained in the affidavit was false
in material particulars, because on 24th May, 1966, B. R. Sons Ltd. had a credit
balance of over Rs. 8 lakhs in the books of the petitioners and concluded that
the petitioners were, therefore, personally liable to the ITO to the extent of
their liability to B. R. Sons Ltd. This notice clearly embodied the decision of
the ITO that the statement on oath made by the accountant in the affidavit filed
on behalf of the petitioners was false in material particulars and that the
petitioners were personally liable to make payment under cl. (vi). The
petitioners by their letter dated 10th January, 1967, disputed the conclusion
reached by the ITO in his notice dated 31st December, 1966 , and reiterated that
nothing was due from the petitioners to B. R. Sons Ltd. as on 24th May, 1966.
The ITO, however, adhered to the decision reached by him and his notice dated
11th January, 1967, intimated to the petitioners that he was treating them as
assessee in default within the meaning of cl. (x) and proceeding to take
appropriate coercive steps for realising the amount of tax due from them. It
will thus be seen that after receipt of the affidavit of the accountant, the ITO
did not give any notice or hold any inquiry for the purpose of determining
whether or not the statement on oath made by the accountant in the affidavit was
false in any material particular and whether any and, if so, what amount was due
from the petitioners to B. R. Sons Ltd. but straightaway reached the conclusion
that the statement on oath that nothing was due from the petitioners to B. R.
Sons Ltd. was false in material particulars and, without even determining what
precise amount was due from the petitioners to B. R. Sons Ltd., held that the
petitioners were personally liable to the ITO under cl. (vi). The ITO did set
out in his notice dated 31st December, 1966, the reasons which prevailed with
him in reaching this decision but he did not offer any opportunity to the
petitioners to show that the reasons which weighed with him were not correct.
The decision reached by the ITO that the statement on oath made in the affidavit
of the accountant was false in material particulars as set out in the notices
dated 31st December, 1966, and 11th January, 1967, was, therefore, clearly
invalid and the notices dated 31st December, 1966, and 11th January, 1967, must
consequently be set aside.
We, accordingly, dismiss the appeal in so far as it is
directed against the validity of the notice dated 21st May, 1966, but so far as
the notices dated 31st December, 1966, and 11th January, 1967, are concerned, we
allow the appeal and issue a writ quashing and setting aside the said two
notices. We may make it clear that it will be open to the ITO to proceed to hold
an inquiry for the purpose of determining whether the statement on oath
contained in the affidavit of the accountant of the petitioners that nothing was
due from the petitioners to B. R. Sons Ltd. as on 24th May, 1966, was false in
material particulars, and if as a result of such inquiry, carried out in
accordance with the principles of natural justice, the revenue is able to show,
the burden being upon it, that the statement on oath made by the accountant was
false in material particulars and that certain definite amount was due from the
petitioners to B. R. Sons Ltd. on 24th May, 1966, the petitioners would be
personally liable to pay such amount to the ITO and in case of default, the ITO
would be entitled to treat. the petitioners as " assessee in default "
under cl. (x) of s. 226, sub-s. (3).
Since the petitioners have partly succeeded and partly
failed, the fair order of costs would be that each party should bear and pay its
own costs throughout.
Appeal allowed in Part
