Unit Trust of India Vs. B.M. Malani & Ors  Insc
1037 (11 October 2007)
Sinha & Harjit Singh Bedi
out of SLP (C) No. 209 of 2005) [With Civil Appeal Nos. 4793-4799/07 @ SLP (C)
Nos.18855-18861 of 2005] S.B. Sinha, J.
Interpretation of sub-section (3) of Section 226 of the Income Tax Act, 1961
(Act) is involved in these appeals which arises out of a judgment and order
dated 27.8.2004 passed by the High Court of Judicature of Andhra Pradesh at
Hyderabad in Writ Petition No.2305 of 2002 whereby and whereunder the writ
petition filed by B.M. Malani (hereafter referred to as the respondent) was
allowed in part.
Respondent is an assessee of income tax. He was admittedly a defaulter in
payment of income-tax. He had invested an amount of 65 lacs in the Monthly
Income Plan (III) offered by the Unit Trust of India under Capital Gains
Scheme, the predecessor in interest of the petitioner in the year 1998 with an
object to seek exemption under Section 84-E of the Act.
Highlights projected for such an offer were as under :
A five year close ended income plan
plan offers three options
Monthly Income Option,
Annual Income Option &
face value of a unit is Rs.10/- and units will be sold at par.
Trust shall pay an assured income @ 12.50% p.a. payable monthly under monthly
income option and @ 13.25% p.a. payable annually under annual income option,
for all the five years of the plan.
Under the Monthly Income Option, income distribution warrants for the period upto
March 1999 will be sent along with the membership advice/unit certificate.
income warrants payable monthly will be sent in advance for every April- March
Repurchase allowed from 1st
September, 2001 at NAV
based repurchase price under all the three options.
Scheme shall be listed on the whole sale debt segment of the NSE within six
months from the closure of subscription.
is guaranteed that the capital invested in the scheme will be protected on
maturity i.e. units will not be redeemed below par. The Development Reserve
Fund (DRF) of the Trust will guarantee this capital protection. There is no
such guarantee for premature repurchases and the repurchase price in such cases
will be as per prevailing NAV. There is scope for capital appreciation as a
part of investment will be in equities.
benefits under Section 80L and Sections 48 and 112 of Income Tax Act, 1961 on
income distributed and capital gains from capital appreciation. Capital gains
tax exemption under Section 54EA of the Income Tax Act, 1961 subject to lock-in
for three years from the date of acceptance.
Appellant received a notice from the Income Tax Department purported to be
under sub-section (3) of Section 226 of the Income Tax Act.
compliance of the demand made therein, a sum of Rs.43,69,083.30 p. was paid to
the Department by the appellant wherefor, the value of the unit at the relevant
time was calculated at the rate of Rs.6.93 p. per unit.
Respondent herein filed a writ petition questioning the said action of the
appellant in resorting to sale of the said units without his consent.
Admittedly, although the units were transferred, their value had not become due
to the assessee on the date on which such notice was given. It was held by the
High Court that the respondent was entitled to the redemption value of the
units at the rate of Rs.10/- per unit after five years.
Appellant is, thus, before us. An appeal has also been filed by the respondent
contending that the dividend declared on the said amount also should have been
directed to be paid by the High Court.
M.L. Verma, learned senior counsel appearing on behalf of the appellant, would
submit that the respondent being a defaulter and the appellant having been
holding the units on its behalf, the High Court committed a serious error in
passing the impugned judgment. The learned counsel urged that admittedly the
units were transferable on the day on which the payments were made and keeping
in view the purported tenor of the notice in terms whereof the appellant was to
be treated as an assessee-in- default, it had no other option but to make
Deshpande, learned counsel appearing on behalf of the respondent, on the other
hand, would support the impugned judgment.
Sub-section (3) of Section 226 of the Act reads as under :
The Assessing Officer or Tax Recovery 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 Assessing Officer or Tax
Recovery 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.
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 Assessing Officer or Tax Recovery
Officer to the extent of his own liability to the assessee on the date of the
notice, or to the extent of the assessees liability for any sum due under
this Act, whichever is less.
Indisputably, a notice was issued by the Income Tax officer upon the Branch
Manager of the Unit Trust of India wherein, inter alia, it was stated :
sum of Rs.48,08,000/- is due from B.M. Malani of Hyderabad on account of Income- tax penalty. You are required hereby
under Section 226(3) of the Income-tax Act, 1961 to pay to me forthwith any
amount due from you to or, held by you, for or on account of the said assessee upto
the amount of arrears shown above.
also request you to pay any money which may subsequently become due from you to
him/them or which you may subsequently hold for or on account of him/them upto
the amount of arrears still remaining unpaid, forthwith on the money becoming
due or being held by you as aforesaid.
payment made by you in compliance with this notice is in law deemed to have
been made under the authority of the said assessee and my receipt will
constitute a good and sufficient discharge of your liability to the person to
the extent of the amount referred in the receipt.
Please note that if you discharge any liability to the assessee after receipt
of this notice you will be personally liable to me as Assessing Officer/Tax
Recovery Officer to the extent of the liability discharged, or to the extent of
the liability of the assessee for tax/penalty interest/fine referred to in the
preceding para, whichever is less.
Further, if you fail to make payment in pursuance of this notice, you shall be
deemed to be an assessee in default in respect of the amount specified on this
notice and further proceeding may be taken against you for the realisation of
the amount as if it were an arrear of tax due from you in the manner provided
in Section 222 to 225 of the Income Tax Act, 1961 and this notice shall have
the same effect as an attachment of a debt under Section 222 of the said Act.
necessary challan(s) for depositing the money to the credit of the Central
Government is/are enclosed.
copy of this notice is being sent to the afore-mentioned assessee.
Whether the action on the part of the appellant to act thereupon was valid, is
the question. The scheme, the relevant provision whereof had been noticed by us
hereinbefore, goes to show that the lock-in period was for a period of five
years. Purchase of the units, however, was allowed from 1st September, 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 respondent. Appellant, on the basis of the said
purported notice dated 8.2.2002, could not have placed itself in the shoes of
the respondent. It is not in dispute that the respondent 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 of the Act. The amount of 65 lacs
was secured under the said units with the appellants. It is not in dispute that
an application for settlement was filed before the Settlement Commissioner by
the respondent. 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. He, therefore, in
his letter dated 4.2.2002 stated as under :
of Bonds at present would result in a loss of Rs.3 per unit which will be about
30% loss and it would be difficult to bear such loss while the taxes are
pending payment. In the event the Bonds are sought to be acquired by the
Department, I shall transfer them at its face value at Rs.10/- per unit against
taxes although I am voluntarily making the tax payments as per commitments.
above facts and circumstances, with a great constrains I had paid tax Rs.25.00 lakhs
on 31.1.2002 as committed by me in my petition dated 26.10.2001 although I had
sought time for above payment till the end of February 2002. It may also be
submitted that I had sold my property for the purpose of payment of taxes and
opted an additional tax burden of Rs.35.00 lakhs under the Settlement
Commission Orders and Co-operated with the Department. In the circumstances, I
request you sir to grant time for payment of balance tax till the end of May
2002 as I am given to understand after the budget is presented, the capital
gains Bonds issued by Unit Trust of India are likely to be purchased by the
Government at par @ Rs.10/- per Unit in which case I will not suffer loss on
sale and the market rate for sale of such units will also go up. The department
was good enough to grant time earlier for payment of tax and I have kept my
commitments at all the times and accordingly paid the tax.
Sub-section (3) of Section 226 of the Income Tax Act would be applicable only
when a money is due to the assessee from any person. Was the amount due to the assessee
when the notice dated 8.2.2002 was issued is the question?
Appellant is 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, relevant provisions whereof have been noticed by us hereinbefore, it is
evident that repurchase was allowed only from 1st September, 2001.
the respondent did not opt therefor. In absence of any right of option having
been exercised by the respondent, the appellant, in our opinion, could not have
transferred the amount in question. It is wholly incorrect to contend that the
scheme itself provided that repurchase was allowed from 1.9.2001 even without
the consent of the respondent. It was for the respondent to give his option.
The Income Tax Officer could not have exercised the said option on behalf of
the assessee. Curiously, the Income Tax Department itself, in its counter
affidavit filed before the High Court, categorically stated :
reply to the averments made in para 10 of the affidavit, it is submitted that
the letter addressed to the petitioner on 7.12.2001 which was served on the
same date clearly speaks about the actual demand outstanding for payment. From
out of that, the petitioner paid an amount of Rs.25,00,000/- on 31.1.2002.
Hence the net figure reported in the attachment proceedings is quite correct
i.e. (Rs.73.08 lakhs Rs.25.00 Lakhs). It is pertinent to mention here that
though the petitioner once again approached Settlement Commission on the levy
of interest as wholly unjustified and untenable on 4.2.2002, nothing is heard
from the Settlement Commission before initiating the proceedings for
attachment, i.e., by way of any letter from the Settlement Commission for stay
of demand till the outcome of the Settlement Commissions Report. Secondly,
though the units have been attached the UTI which when the units are there for
sale ought to have obtained the consent of the petitioner before sale and as
such the loss, if any on account of sale, i.e., Rs.21.31 lakhs cannot be
attributed to the 2nd respondent. The petition for waiver of interest filed
before the Commissioner of Income Tax, V, Hyderabad has been rejected for Asst.
year 1990- 91, 91-92, 92-93 & 95-96 vide Commissioner of Income Tax Proc.
No.CIT.V/220(2A)/1/2002-03 dated 26.11.2002.
Thus, the stand of the Income Tax Department also was that it sought to attach
the units and did not opt for the repurchase value at that point of time.
have noticed that the respondent made all sincere efforts to pay the tax. It
made an offer to the Income Tax Officer 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.
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 a reasonable
manner. Clause (vi) of sub- section (3) of Section 226 of the Act 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.
to act reasonably and fairly.
Respondent No.1 never authorised the Unit Trust of India to sell the same in
the market at the lower price as respondent No.1 has stated in the letter dated
4th February, 2002 that due to the fall in the prices
in the market, he was not able to dispose of the units. Respondent No.1 further
prayed time till May 2002 to clear the dues and was awaiting information from
Respondent Nos.2 and 3 but in the meantime the petitioner sold the same in the
market without any intimation to respondent No.1
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.
Reliance has been placed on Life Insurance Corporation of India & Anr. v. Gangadhar Vishwanath Ranade
(dead) by Lrs. [(1989) 4 SCC 297] is misplaced. In a situation of this nature,
having regard to sub-section (3) of Section 226 of the Act, it cannot be said
that the appellant was holding the money of the respondent. The amount in
question could have been held by the appellant only whether the respondent had
exercised his option therefore.
fact situation obtaining therein was absolutely different. In that case, the
paid up policies taken by the respondent. He assigned the same in favour of his
wife. Assignment made was registered although notice under sub- section (3) of Section
226 was issued before the policy was matured. No statement on oath was made
under clause (vi) thereof raising an objection on the basis of the registered
assignment. It was in that situation opined :
is, therefore, obvious that the question of revocation of the notice under
Clause (vii) of Sub- section (3) of Section 226 of the Income Tax Act, 1961
arose in the present case only after the L.I.C. made the requisite statement on
oath under Section 226(3)(vi) of the Act in view of its consistent stand
throughout that the moneys due under the policies were held by it for and on
behalf of the assignee and not the defaulter. Mere information of the
assignment to the I.T.O. and keeping the assignee informed of the I.T.O.'s
action did not amount to discharge of the statutory obligation under Section
226(3)(vi) of the Act, by the L.I.C. The statute having expressly provided the
mode of raising such an objection in the form of a statement on oath specified
in Clause (vi), performance of that obligation by the notice had to be made
only in that manner. This statutory obligation was performed by the L.I.C. only
on 5.12.1975 as stated earlier. The personal liability arising after making the
requisite statement on oath as envisaged by Clause (vi) is only "if it is
discovered that such statement was false in any material particular and not
The said decision has no application in the facts and circumstances of the
Reliance has also been placed upon a decision of a learned Single Judge of
Karnataka High Court in Vysya Bank Ltd. v. Joint Commissioner of Income Tax
[241 ITR 178]. In that case, the Bank was holding the money on behalf of the
judgment-debtor. The money was lying with the bank on fixed deposit. The said
fixed deposit was made on interest. It was in that situation opined :
banker becomes a debtor of the assessee in default the moment the fixed deposit
receipt is obtained. Normally the payment of the fixed deposit receipt on the
due dates. But on forgoing interest or paying lesser rate of interest the
bankers generally permit customers to withdraw the amount of the fixed deposits
before the maturity date. The fixed deposit receipt is not a negotiable
instrument but could be assigned with the concurrence of the bank in favour of
other persons attachment of the amount in the fixed deposit could be made by
the income-tax authorities under the proviso to section 226(3) of the
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
We, therefore, do not find any error in the judgment of the High Court as the
respondent is entitled to be restituted. We are of the opinion, that the respondent
was also entitled to dividend declared during the said period viz. from the
date of allotment. The High Court was not correct in not considering that
aspect of the matter.
For the reasons aforementioned, the appeal filed by the Administrator, Unit
Trust of India is dismissed and the appeal filed by B.M. Malani is allowed with
costs. Counsels fee assessed at Rs.25,000/- (Rupees twenty five thousand