C.V. Ramana vs Commissioner of Income Tax

M.N. Rao, J.—This judgment will dispose of the two writ petitions as they are inter-connected.

The petitioner in Writ Petition No. 12292 of 1987, is the husband of the petitioner in Writ Petition No. 12297 of 1987. Both the petitioners, residents of Rajam, Srikakulam District, are carrying on the business of money-lending. On April 7, 1971, their business and residential premises were searched by the officials of the Income Tax Department, when certain pronotes and account books were seized. Challenging that seizure, the petitioners filed Writ Petition No. 1699 of 1971, on the file of this court questioning the constitutionality of section 132(5) of the Income Tax Act. That writ petition was dismissed by this court upholding the validity of section 132(5) of the Act and also the search conducted by the Income Tax Departmental officials and the consequent seizure of the account books and the promissory notes. Thereafter, two suits were filed by the petitioners, O.S. No. 30 of 1974, by the wife and O.S. No. 32 of 1974, by the husband seeking a decree for damages and loss said to have been sustained by them as a result of the wrongful retention of the promissory notes; the decree sought in O.S. No. 30 of 1974, was for Rs. 62,918.32 and in O.S. No. 32 of 1974, was for Rs. 13,783,10. The civil court decreed both the suits. The Income Tax Department carried the matter in appeal. Both the appeals, A.S. No. 208 of 1978, and Transfer A.S. No. 519 of 1980, were allowed by this court by a common judgment dated March 31, 1986, and, consequently, both the suits were dismissed. The common judgment in the aforesaid two appeals thus became final. In the meantime, the Income Tax officials finalised the assessments of both the wife and husband. The petitioners preferred appeals against both the assessment orders to the appellate authority and also to the Income Tax Appellate Tribunal unsuccessfully. A demand notice dated July 1, 1987, for Rs. 24,848, was issued to the husband in respect of the assessment years 1971-72, 1972-73 and 1973-74. Likewise, on the same date, another demand notice was issued to the wife for Rs. 33,520 in respect of the assessment years 1966-67 to 1973-74. In these two writ petitions, the said demand notices have been challenged.

Mr. K. V. Subrahmanya Narusu, learned counsel for the petitioners, contends that when the Income Tax officials, subsequent to the search they conducted on April 7, 1971, issued notices to the debtors of the promissory notes seized from the business and residential premises of the petitioners, it was incumbent upon them (departmental officials) to collect the amounts covered by the promissory notes and adjust the same towards the arrears of tax due from both the petitioners. As a result of the inaction, deliberate or accidental, on the part of the departmental officials, several promissory notes became time-barred. If only the departmental officials had taken steps to collect the amounts from the debtors, the promissory notes would not have become time-barred since the attachment of the promissory notes would automatically result in the limitation being extended. Countering these contentions, Mr. M. Suryanarayana Murthy, learned counsel for the Revenue, argues that the mode of recovery contemplated u/s 226 of the Income Tax Act is not the only mode to recover the tax; it is only one of the several modes contemplated by the Act. So far as the factual situation is concerned, learned counsel says that the petitioners had taken back 86 promissory notes and when the departmental officials offered to return the rest, the petitioners have not taken them back deliberately. Almost all the promissory notes which the petitioners declined to take return of were time-barred even by the date of search and seizure. Only in respect of two promissory notes aggregating Rs. 2,600, the limitation had expired after the seizure was effected and before the offer to return was made and in respect of those two promissory notes, the Department had adjusted the amount towards the tax due from the petitioners.

Before considering the submissions made by counsel for both sides, the relevant statutory provisions may be read.

Section 132 of the Income Tax Act deals with search and seizure. IF the Director-General or the Chief Commissioner or the Deputy Commissioner, as empowered by the Board of Direct Taxes, has reason to believe in consequence of information in his possession, that any person to whom a summons have been issued to produce, or cause to be produced, any books of account or documents has omitted or failed to produce, or caused to be produced, the same or any person in possession of any money, bullion, jewellery or other valuable article or thing representing either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Income Tax Act, is authorised to enter and search any building or place where he has reason to believe the books of account or documents, money, bullion, jewellery or other valuable article are kept. He may break open the locks of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred for using the power of search if the keys are not available. He may search any person or seize any books. Sub-section (5) in so far as it is material for the purpose of these two cases reads thus :

"Where any money, bullion, jewellery or other valuable article or thing is seized under sub-section (1) or sub-section (1A), the Income Tax Officer, after affording a reasonable opportunity to the person concerned of being heard and making such enquiry as may be prescribed, shall within one hundred and twenty days of the seizure, make an order, with the previous approval of the Deputy Commissioner, -

(i) estimating the undisclosed income (including the income from the undisclosed property) in a summary manner to the best of his judgment on the basis of such materials as are available with him;.....

(iii) specifying the amount that will be required to satisfy any existing liability under this Act and any one or more of the Acts specified in clause (a) of sub-section (1) of section 230A in respect of which such person is in default or is deemed to be in default,

and retain in his custody such assets or part thereof as are in his opinion, sufficient to satisfy the aggregate of the amounts referred to in clauses (ii), (iia) and (iii) and forthwith release the remaining portion, if any, of the assets to the person from whose custody they were seized;....."

The other relevant material sub-sections are (9), (10), (11) and (11A), which read as under :

"(9) The person from whose custody any books of account or other documents are seized under sub-section (1) or sub-section (1A) may make copies thereof, or take extracts therefrom, in the presence of the authorised officer or any other person empowered by him in this behalf, at such place and time as the authorised officer may appoint in this behalf.

(10) If a person legally entitled to the books of account or other documents seized under sub-section (1) or sub-section (1A) objects for any reason to the approval given by the Chief Commissioner or Commissioner under sub-section (8), he may make an application to the Board stating therein the reasons for such objection and requesting for the return of the books of account or other documents.

(11) If any person objects for any reason to an order made under sub-section (5), he may, within thirty days of the date of such order, make an application to the Chief Commissioner or Commissioner stating therein the reasons for such objection and requesting for appropriate relief in the matter.

(11A) Every application referred to in sub-section (11) which is pending immediately before the 1st day of October, 1984, before an authority notified under that sub-section as it stood immediately before that day shall stand transferred on that day to the Chief Commissioner or Commissioner, and the Chief Commissioner or Commissioner may proceed with such application from the stage at which it was on that day."

Section 220 of the Act deals with a situation where tax was payable and when the assessee is deemed to be in default.

Section 221 speaks of penalty payable when tax was in default. Section 222 confers power on the Income Tax Officer to forward to the Tax Recovery Officer a certificate specifying the amounts of arrears due from the assessee and the Tax Recovery Officer on receipt of such certificate is required to recover from the assessee the amounts specified in the certificate in one or more of the modes mentioned in the section in accordance with the rules laid down in the Second Schedule.

Section 226 of the Act deals with the "other modes of recovery" and omitting immaterial parts, it reads as follows :

"226. (1) Notwithstanding the issue of a certificate to the Tax Recovery Officer u/s 222, the Income Tax Officer may recover the tax by any one or more of the modes provided in this section....

(3) (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.

(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 Income Tax Officer, and in the case of a joint account to all the joint holders at their last addresses known to the Income Tax 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.....

(vi) Where a person to whom a notice under this sub-section is sent object 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 materials 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 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 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 - 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 u/s 222."

From a reading of section 132(5) of the Act, it is clear that where valuables are seized by the Income Tax Officer, he is required to complete the assessment within 120 days of the seizure (at the relevant time the limitation was 90 days) after obtaining the previous approval of the Deputy Commissioner. He is also empowered to retain in his custody the assets which, according to him, are sufficient to satisfy the amounts due by way of tax liable from the person from whom the seizure was effected. u/s 226(3), the Income Tax Officer is empowered to issue notice in writing 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 assessee, to pay to the Income Tax Officer, within the time specified, or forthwith that much of the money which is sufficient to pay the amount due by the assessee in respect of the arrears due from the assessee. The person to whom such notice was issued is bound by clause (iv) of sub-section (3) of section 226 to comply with the notice. If such a person states on oath before the Income Tax Officer 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 no obligation is cast upon him to part with the money, but if it is discovered that such statement is false in any material particulars, the person is liable to the extent of his own liability to the assessee on the date of notice (vide clause (vi) of sub-section (3)).

Clause (x) of sub-section (3) of section 226 of the Act says that if the person to whom a notice is sent fails to make payment, he shall be deemed to be the assessee in respect of the amounts specified in the notice.

The contention of Mr. Subrahmanya Narusu, learned counsel for the petitioner, is that the Income Tax Officer had issued notices to the executants of the promissory notes and, therefore, he ought to have treated them as assessees under clause (x) of sub-section (3) of section 226, lacks factual basis. No details are mentioned in the affidavits filed in support of the writ petitions as to the persons to whom notices were issued by the Income Tax Officer pursuant to the raid conducted, what are the statements recorded and how many failed to make payments. On the other hand, from the judgment of this court in A. S. No. 226 of 1978 and Transfer A.S. No. 519 of 1980 dated January 13, 1986, it is clear that when the Income Tax Officers have expressed their readiness to return the promissory notes, the petitioners had actually taken return of 86 promissory notes and the rest they refused to take back. Assuming that notices were issued by the Income Tax Officers to the executants of the promissory notes seized, that by itself will not operate as an attachment u/s 226(3)(x); such a situation will come into being only if the debtor fails to make payment and thereafter it is incumbent upon the Income Tax Officer to initiate proceedings for realisation of the amount in accordance with the prescribed procedure. No facts have been brought to our notice warranting the conclusion that the mode of recovery contemplated u/s 226 of the Act has been resorted to by the Income Tax Officer and, therefore, we cannot accept the contention that it was obligatory on the part of the Income Tax Officer to realise the amounts in the manner contemplated u/s 226(3)(x) from the debtors of the assessee who executed the promissory notes which had been seized by the departmental officials in the raid conducted on April 7, 1971. The provisional assessment could not be completed within 90 days in respect of the two petitioners and it appears that the petitioners were themselves responsible for the delay; they filed writ petitions and civil suits only to drag on the proceedings. The departmental officials acted fairly in offering to return the promissory notes and, in fact, 86 promissory notes were taken back by the petitioners. From this it is evident that such of those promissory notes which were found to be useful by the petitioners for recovering the amounts were taken back by them and the others which obviously are time-barred were rejected by the petitioners. In such a situation, it is not open to them to contend that section 226(3)(x) was attracted and an obligation cast on the departmental officials to collect the amounts from the debtors and adjust the same towards the arrears to tax.

Exhibit B-18 in the civil suits filed by the petitioners was the statement prepared by the Income Tax Officers the correctness of which was admitted by the petitioners themselves. As per that statement, except the amount of Rs. 2,600 which had already been adverted to, in respect of the other promissory notes, the petitioners had either collected the entire amounts in respect of the promissory notes left with the Department or the promissory notes became time-barred even by the date of the seizure.

These writ petitions must fail on another ground also. When the civil suits were filed by the petitioners in the civil court seeking damages against the departmental officials for alleged wrongful retention of the promissory notes, the plea not put forth by them, viz., that by applying the provisions of section 226(3)(x) of the Act, the Income Tax Officer ought to have treated the executants of the promissory notes as assessees, although available, had not been taken by them. On the principle of constructive res judicata, it is not open to the petitioners now to raise that plea. The petitioners are trying to approbate and reprobate having taken the plea in the earlier litigation that the retention itself was illegal, now they are contending that the departmental officials ought to have taken steps for recovery of the amounts from the debtors u/s 226(3)(x) of the Act Such a plea is not plainly available to them.

There are no merits in these writ petitions and accordingly for the foregoing reasons they are dismissed. No costs.