Surinder
Nath Kapoor Vs. Union of India & Ors [1988] INSC 201
(3 August 1988)
Misra
Rangnath Misra Rangnath Dutt, M.M. (J)
CITATION:
1988 AIR 1777 1988 SCR Supl. (2) 211 1988 SCC Supl. 626 JT 1988 (3) 285 1988
SCALE (2)318
ACT:
Income
Tax Act, 1961-Whether a garnishee order passed by Income-tax Officer under
section 226(3) (x)-Of-For payment of a fictitious sum without notice under
section 226(3) of and whether consequent sale of property pursuant to such an
order are null and void.
HEAD NOTE:
This
Civil Micellaneous Petition was filed by a firm, Raja Properties for directions
consequent upon the disposal of a special leave petition (civil) filed by one Surinder
Nath Kapoor.
Surinder
Nath Kapoor was one of the partners of M/s. Krishna Kapoor & Co. M/s.
Indo-Kashmir Carpets and Handicrafts was a sister concern of M/s. Krishna Kapoor
& Co. The IAC (Asstt.) passed a garnishee order under section 226 (3) (x)
of the Income Tax Act ('the Act') holding M/s. Krishna Kapoor & Co. a
defaulter to the extent of Rs. 8.56.377 found due by that firm to the assessee
M/s. Indo- Kashmir Carpets & Handicrafts, and as a result to the garnishee
order, the property of M/s. Krishna Kapoor & Co. was put up for sale by the
Tax Recovery Officer, and purchased by the petitioner, Raja Properties, and the
sale was confirmed.
Surinder
Nath Kapoor made an application under rule 61 of the Second Schedule to the Act
before the Tax Recovery Office, for setting aside the sale obovesaid. The
application was dismissed. Surinder Nath Kapoor filed an appeal before the Tax
Recovery Commissioner, he also filed an application for stay of confirmation of
the sale in question till the disposal of that appeal. As no stay was granted,
he filed a writ petition in the High Court, which dismissed the same. Being
aggrieved by the dismissal of the writ petition, he filed a petition for
special leave in this Court. This Court, upon being informed by petitioner's
counsel that the amount of tax involved had already been paid to the
Department, passed an order dated October 12, 1987, setting aside the sale
aforesaid, the confirmation of which had been stayed by this court, and
disposing of the special leave petition accordingly.
The
Tax Recovery Officer did not dispose of the appeal afore mentioned of Surinder
,Nath Kapoor, in view of the PG NO 212 order of this Court setting aside the
sale. Surinder Nath filed an application for clarification of this Court's said
order. During the pendency of the application for clarification. the petitioner
Raja Properties, the auction- purchaser, filed the present petition for
directions; for recalling the order above-said passed in the special Leave
petition and for dismissing the Special Leave Petition. As regards the
clarification of its order, the Court reiterated that by virtue of that order
the sale stood set aside.
It was
contended by the petitioner/auction-purchaser, Raja Properties, that the
auction sale having been confirmed, the same could not be set aside.
Disposing
the petition of Raja Properties, the Court.
HELD:
Sec. 226 (3) (x) of the Act provides for the issue of a notice on a garnishee.
Under clause (x), if a person to whom a notice 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 in this
case was Rs. 2,86,450. The firm, M/s. Krishna Kapoor & Co., did not deny on
oath that the said sum demanded was due by them to Indo-Kashmir Carpets &
Handicrafts. In view of clause (x), M/s. Krishna Kapoor & Co. would be
deemed to be an assessee in default in respect of the said sum of Rs. 2,86,450
as specified in the notice and not for any other amount. The Income-tax Officer
put up the property to sale for Rs. 8,56,377.55, which was not the amount specified
in the garnishee notice. The garnishee order was for a fictitious sum of Rs.
8,56,377.55, as this amount was not mentioned in the notice under section 226
(3) of the Act. When an order is made for payment of a fictitious sum without
giving an opportunity to the person against whom the order is made, to show
cause against the passing of such an order, the order is a nullity. It will be
deemed that there was no existence of such an order and any step taken pursuant
to that order will also be a nullity. The garnishee order passed by the IAC
(Asst.) in this case for Rs. 8,56,377.55 was null and void, and the sale had
been confirmed. In the language of the Privy Council in Baijnath Sahai v. Ramgut
Singh, Vol. 23 I.A. 45, there was no judgment, there was nothing corresponding
to a judgment, there was nothing corresponding to a judgment or decree for
payment of the amount, and there was no foundation for sale. [219A, G-H;220A-D;221A-B]
For
all this, the Revenue was responsible and liable to compensate the
auction-purchaser, a stranger to the PG NO 213 litigation. Counsel for the
Revenue pointed out that a representation on behalf of Surinder Nath Kapoor had
been made before the Court when it passed its order dated October 12, 1987,
aforementioned that the income tax dues of the firm, Krishna Kapoor & Co.,
to the extent of Rs.3,38.146 had already been paid to the department when, on
the date of the said order, the amount had not been paid, but was paid on the
next day and the said order setting aside the sale had been obtained by making
a false representation to this Court. Even though there was some
misrepresentation on the part of the firm, the Court could not recall the
order, setting aside the sale which was null and void. But in view of the
conduct of the firm or its partner, they should share along with the Revenue a
part of the compensation to be allowed to the auction-purchaser. The
auction-purchaser would he entitled to withdraw unconditionally the sum of
RS.37,81,000 deposited by it and would be entitled to get interest at specified
rate on the said amount for the period the amount remained blocked, by way of
compensation, out of which a sum quantified would be paid by the firm M/s.
Krishna Kapoor & Co. and/or its partner Surinder Nath Kapoor, and the rest,
by the Revenue. [221B-G] Baijnath Sahai v. Ramgut Singh Vol. 23 I.A. 45,
referred to.
CIVlL
APPELLATE JURlSDICTION: Civil Miscellaneous Petition No. 2340 of 1988.
Special
Leave Petition (Civil) No. 9946 of 1987.
From
the Judgment and Order dated 29.9.1986 of the Rajasthan High Court W.P. No. 853
of 1986.
Dr. Gauri
Shankar and P.N. Misra for the Appellant.
Kuldip
Singh, Additional Solicitior General, S.C. Manchanda, Shanti Bhushan, Ms. A. Subhashini
and S.K. Jain for the Respondents.
The
following Order of the Court was delivered:
O R D
E R
This
Civil Miscellaneous Petition has been filed by a firm, Raja Properties, praying
for certain directions, consequent upon the disposal of the Special Leave
Petition (Civil) No. 9946 of 1987 filed by one Surinder Nath Kapoor against the
Union of India and others.
PG NO
214 Before considering the Civil Miscellaneous Petition, it is necessary to
state a few facts leading to the filing of the petition.
Surinder
Nath Kapoor is one of the partners of M/s. Krishna Kapoor & Co. consisting
of the following four partners:
(1) Shri
Shiv Dayal Kapoor (since deceased).
(2) Shri
Surinder Nath Kapoor.
(3) Shri
Ram Nath Kapoor.
(4) Shri
Narender Nath Kapoor.
Partners
Nos. 2, 3 and 4 are the sons of Shiv Dayal Kapoor, since deceased. There is
another firm M/s. Indo- Kashmir Carpets & Handicrafts. It is the sister
concern of M/s. Krishna Kapoor & Co. and constituted with the said Shiv Dayal
Kapoor, since deceased, and his daughters-in-law. Both the firms are assessees under
the Income Tax Act, 1961, hereinafter referred to as 'the Act'.
On
December 12, 1954, the IAC (Astt.), Range-lI, Amritsar, passed a garnishee
order under section ,226(3)(x) of the Act holding M/s. Krishna Kapoor & Co.
a defaulter to the extent of Rs . 8,56, 377 on the allegation that the said sum
was due by M/s. Krishna Kapoor & Co. to the assessee M/s. Indo-Kashmir
Carpets & Handicrafts. The garnishee order was thereafter put into
execution and the property of M/s. Krishna Kapoor & Co. was put up for sale
by the Tax Recovery Officer-I, Jaipur, on January 21, 1986 and was purchased by
the petitioner, Raja Properties, for the sum of Rs. 37,13 1,000. The sale was
confirmed on March 14,
1986.
The
said Surinder Nath Kapoor made an application dated February 15, 1986 under
rule 61 of the Second Schedule to the Act before the Tax Recovery Officer, Jaipur,
praying for setting aside of the sale of the property of M/s. Krishna Kapoor
&r Co. The said application was dismissed by the Tax Recovery Officer, Jaipur,
by his order dated March
14, 1986.
He
filed an appeal in Form No. 29-A under rule 86(1)(c) of the Second Schedule to
the Act before the Tax Recovery Commissioner, Jaipur. He also filed an
application praying for stay of the confirmation of the sale by the Tax
Recovery Officer, Jaipur, till the disposal of the appeal. The said appeal was,
however, transferred by the Tax Recovery PG NO 215 Commissioner, Jaipur, to the
Tax Recovery Commissioner, Amritsar. The
said Surinder Nath Kapoor also filed an application for stay before the Tax
Recovery Commissioner, Amritsar. As no stay was granted, he filed a
writ petition in the Rajasthan High Court. The writ petition was, however,
dismissed by the High Court by its order dated September 29, 1986. Being aggrieved by the dismissal of his writ petition, the
said Surinder Nath Kapoor filed the above Special1 Leave Petition No. 9946 of
1986.
The
Special Leave Petition was disposed of by this Court b1y its order dated October 12, 1987 as follows:
"Heard
learned counsel for the parties. Mr. Manchanda for the Department agrees that
the tax liability of the petitioner has been reduced to Rs.3,38,l46. Mr. P.N. Misra,
counsel for the petitioner states in Court that this amount has already been
paid to the Department. In that view of the matter, the petitioner no more owes
any tax to the Income Tax Department. The sale already held confirmation of
which we had granted stay shall stand vacated. Special Leave petition is
disposed of with aforesaid directions. " It is clear from the above order
of this Court that the sale was set aside. As the Tax Recovery Officer, Amritsar,
before whom the said Surinder Nath Kapoor had filed an appeal, did not dispose
of the appeal, in view of the said order of this Court setting aside the sale, Surinder
Nath Kapoor filed an application for clarification of the said order of this
Court dated October 12,1987. During the pendency of the said application for
clarification, the petitioner, Raja Properties, the auction-purchaser, filed
the said petition for direction praying for recalling the order dated October 12, 1987 of this Court and the dismissal of
the Special Leave Petition.
It may
be stated at this stage that this Court took the view that its order dated October 12, 1987 was quite clear and did not require
any clarification whatsoever. The Court reiterated that by virtue of that
order, the sale stood set aside. Upon receipt by the Commissioner of Income
Tax, Jaipur, of a contempt notice issued by this Court, the appeals which had
been filed by Surinder Nath Kapoor, were all disposed of by him on February 4, 1988 in the light of the order of this
Court setting aside the sale.
It was
contended by the petitioner auction-purchaser in support of its application for
direction that the auction- PG NO 216 sale having been confirmed on March 14, 1986, the same could not be set aside.
During the hearing of the petition of the auction-purchaser, there was a
dispute a to the amount for which the auction sale was held. It was urged on
behalf of the firm, M/s. Krishna Kapoor & Co. that it did not owe an amount
to Indo-Kashmir Carpets & Handicrafts and, therefore, the garnishee order
in execution of which its property was sold was illegal. Further, it was urged
that M/s. Krishna Kapoor & Co. was only liable to the extent of Rs.3,38,
146 to the Income Tax Department on account of its own Income Tax dues which
amount it had already deposited.
The
Revenue could not produce before this Court any document showing the exact
amount in respect of which M/s. Krishna Kapoor & Co. was really indebted to
the Indo-Kashmir Carpets & Handicrafts. It was only contended on behalf of
the Revenue that the firm, M/s. Krishna Kapoor & Co., was liable to the
tune of Rs. 10,00,000 and odd arising out of the garnishee order, which was emphatically
denied by the said firm. In that state of records, an April 26, 1988, this
Court made the following order:
"The
matter is adjourned to 9 th May-1988. In the meantime, as represented by the
learned Additional Solicitor General, the Central Board of Direct Taxes will
hold an enquiry to find out whether on the date of sale the assessee was liable
to the tune of Rs. 10 lakhs and odd arising out of the garnishee order and
therefore in the auction sale held this amount was available to be included as
debt to the Department. The report of the Enquiry Officer shall be made:
available to us on that day. Parties are free to place further materials before
us." Pursuant to the above order, the Central Board of Direct Taxes
appointed Shri K.K. Veer, Director of Income Tax Recovery ), New Delhi, the
Enquiry Officer. After holding an enquiry into the matter, the Enquiry Officer
has since submitted his report. The report reveals a startling fact which wi]l
be stated presently. The lAC CAsst.) Range-Il Amritsar, issued a show cause
notice dated October
13, 1984 under section
226(3) of the Act to M/s. Krishna Kapoor & Co.
In the
show cause notice, a demand of Rs .2, 86, 450, alleged lo be due: from the firm
Krishna Kapoor & Co. to the finn Indo-Kashmir Carpets & Handicrafts,
was made. No reply was received by the Income Tax Officer from M/s. Krishna Kapoor
& Co. in respect of the show cause notice. Curiously without passing a
garnishee order for the sum of PG NO 217 Rs.2,86,450, a garnishee order for the
sum of Rs.8,56,377 was passed by the IAC (Asst.), Range-II, Amritsar, under
section 226(3)(x) of the Act. This fact,. which has been clearly stated in the
report of the Enquiry Officer, has not been Denied before us by the Revenue.
The basis of passing the garnishee order dated December 10, 19134 was, as
pointed out by the Enquiry Officer in his report, a copy of a statement of
accounts filed by M/s. Indo-Kashmir Carpets & Handicrafts and a letter
dated September 27, 1884 written by two of its partners to the Assessing
Officer, inter alia, stating that M/S. Krishna Kapoor & Co. was indebted to
M/s Indo-Kashmir Carpets & Handicrafts to the tune of Rs.8 lacs.
In
this connection, it is significant to notice that the IAC (Asst.), Range-II, Amritsar, then holding the post of Dy.
Commissioner
of Income-tax (Central), Range-II, Ludhiana, in his letter addressed to the
Enquiry Officer stated, inter alia, that on the basis of the balance-sheet
available on the assessment records filed after the garnishee order was passed,
no amount was payable to M/s. Indo-Kashmir Carpets & Handicrafts by M/s.
Krishna Kapoor & Co. as on 31.3.1982. A copy of the letter is Annexure-VII
to the report of the Enquiry Officer. The Enquiry Officer observed in his
report as follows:
"There
is nothing on record to show that the Assessing Officer made any attempt to
call for the balance-sheet and accounts of the firm. There is also nothing on
record show that the assessing officer tried to record the statements of any or
of all the partners specially when the filing of balance-sheets and statement
of accounts was being delayed intentionally or otherwise on the ground that
there were disputes among the partners. The assessing officer was assessing
both the firms and all the partners of the firm, yet no attempt was made by him
to include the arrears of the partners also in the show cause notice issued
under s. 226(3) on 15. 10.84. . . . . . . . . . . . . . . . . . . . .
In
view of the facts mentioned above. I express my regrets that I am unable to
give a finding in respect of the amount of Rs.8,56,377.55 mentioned in the
garnishee order since without co-operation of assessee and books of account of
both the firms and partners, I am unable to establish whether M/s. Krishna Kapoor
& Co. owed this amount to M/s. Indo-Kashmir Carpets..& Handicrafts. I
still hold that the Assessing Officer at the time of issue of garnishee order
PG NO 218 should have verified the amount being mentioned by him both in the
show cause notice as well as in the garnishee order passed by him u/s 226(3)(x)
of the I.T. Act, 1961, which he failed to do, with all the powers of production
of books as well as summoning the partners of the firm u/s 131 of the I.T. Act,
1961 being at his command. " It is manifestly clear from the observations
of the Enquiry Officer extracted above that he could not come to a finding that
a sum of Rs. 8,56,377.55 in respect of which the garnishee order was, passed
was actually due by M/s. Krishna Kapoor & Co. to M/s. Indo-Kashmir Carpets
& Handicrafts. It is true that the Enquiry Officer has observed that both
the firms did not co-operate in the matter, but it is equally true that the
Revenue had failed to substantiate that the said sum was due by Krishna Kapoor
& Co. to the other firm. The most glaring fact that has been found by the
Enquiry Officer is that although the IAC (Astt.), Range-II, Amritsar, issued a show cause notice to
Krishna Kapoor & Co. under section 226(3) in respect of Rs.3,86,450, yet he
issued a garnishee order for Rs.l3,5d,377.55. It has been observed by the
Enquiry Officer that it was due to the carelessness of the officer concerned
that he did not issue the show cause notice for the sum of Rs.8,56,377.55 for
which a garnishee order was issued. but such carelessness, in our opinion, is
unpardonable.
Moreover,
as stated already, there is no satisfactory evidence before the IAC (Asstt.),
Range-Il, Amritsar, that a sum of Rs.8,56,377.55 was due by the firm, Krishna Kapoor
& Co., to M/s. Indo-Kashmir Carpets & Handicrafts, inasmuch as the
Enquiry Officer himself has been unable to come to a finding in respect of that
amount. Thus, without giving the firm, Krishna Kapoor & Co., an opportunity
of showing cause in respect of the sum of Rs.8,56,377.55 under section 226(3)
of the: Act, a garnishee order in respect of that amount was passed under
section 226(3)(x) and a very valuable property of the firm was put up to
auction and sold to the petitioner.
The
contention of the petitioner auction-purchaser as well as of the Revenue is
that the petitioner being a third party auction-purchaser. the sale could not
be set aside after it was confirmed on March 14, 1986. On the other hand, it has been
strenuously urged on behalf of the firm, Krishna Kapoor & Co., that as no
show cause notice was issued to it under section 226(3) of the Act in respect
of the sum of Rs.8,56,377.55,, the garnishee order passed under section
226(3)(x) for the amount and the sale held in execution of such an order are
null and void.
PG NO
219 Section 226(3)(x) provides for the issue of a notice on a garnishee.
Section 226(3)(vi) provides as follows:
"S.
226(3) (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 the assessee's liability for any sum due under this Act.
whichever
is less." The object of serving a notice under clause (3)(vi) of section
226 is to give the garnishee an opportunity to admit or deny his liability for
the amount mentioned in the notice. Under clause (i) of section 226(3), if the
garnishee objects to the notice by a statement on oath that the sum demanded or
any part thereof is not due to to the assessee, then the garnishee will not be
required to pay any such sum or part thereof, as the case may be. Thereafter. clause
(x) of section 226 (3) provides as follows :
"S.
226(3)(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. In the manner provided in
sections 223 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."
Under clause (x), if the person to whom a notice 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. The
amount that was specified in the notice was Rs.2,86,450. The firm, M/s. Krishna
Kapoor & Co., did not deny on any part thereof was due by them to
Indo-Kashmir Carpets & Handicrafts. So, PG NO 220 in view oof clause (x),
M/s.Krishna Kapoor & Co. shall be deemed to be an assessee in default in
respect of the said sum of Rs.2,86,450 as specified in the notice and not for
any other amount. The Income Tax Officer, however, put up the property to sale
for Rs.8,56,377.55, which was not at all specified in the garnishee notice. In
other Words the garnishee order was for a fictitious sum of Rs. 8,56,377.55
inasmuch as it was not mentioned in the notice under section 226(3) of the Act.
There
can be no doubt that when an order is made for the Payment of a fictitious sum
without giving any opportunity to a person, against whom the order is made, to
show cause against the passing of such an order for the said sum, the order is
a nullity. In other words, in the eye of law it will be deemed that there was
no existence of such an order and any step taken pursuant to or in enforcement
of such an order will also be a nullity. It will be tantamount to selling a
property in execution of a decree when the decree has no factual existence. In such
a case also, the sale will be null and void. The garnishee order that was
passed by the IAC (Asst.), Range-ll., Amritsar, for the sum of Rs. 8,56,377. 55 is, therefore, null and void.
In
this connection, we may refer to a decision of the Privy Council in Baijnath Sahai
v. Ramgut Singh, Vol. 23 I.A. 45. In that case, a property was sold in
execution of a certificate issued under the Bengal Public Demands Recovery Act.
1880, when, as a matter of fact, there was no, existence of any certificate.
The Privy Council observed as follows:
"If
no such certificate is given then the whole basis of the proceeding is gone.
There is no judgment, there is nothing corresponding to a judgment or decree
for payment of the amount, and there is no foundation for the sale. The
authority to proceed to the sale is based on the certificate which has the
effect, as has been already pointed out, of a judgment or decree, and if no
judgment or decree is given, and no certificate is filed having the force or
effect of a judgment or decree, there can be no valid sale at all." In the
instant case, the garnishee order that was passed was a nullity and any sale
held pursuant to such an order is also a nullity. If is quite immaterial that
the sale was confirmed. When a decree or order is illegal, any sale held in
execution of such a decree or order and confirmed cannot be set aside on the
ground that it was illegal when the sale PG NO 221 is in favour of a third
party. But, when a decree or order is a nullity, it will be deemed to have no existence
at all and any sale held in execution of such a decree or order must also be
held to be null and void. In the language of the Privy Council in the above
case, there is no judgment, there is nothing corresponding to a judgment or
decree for payment of the amount, and there is no foundation for the sale.
For
all this, the Revenue is responsible and is liable to compensate the
auction-purchaser who is a stranger to the litigation. Our attention has been
drawn by the learned Additional Solicitor General to the order dated October
12, 1987, which has already been extracted above, showing that a representation
on behalf of the said Surinder Nath Kapoor, had been made to this Court that
the Income Tax dues of the firm, Krishna Kapoor & Co., to the extent of
Rs.3,38, 146 had already been paid to the Department, when, admittedly, on the
date the said order was passed it was not paid, but on the next day. It is
pointed out by the learned Additional Solicitor General that by making a false
representation to this Court the firm and/or its partner, Surinder Nath Kapoor,
got an order setting aside the sale. In the circumstances, it is submitted that
the order setting aside the sale should be recalled.
We are
unable to accept the contention. It has already been held by us that the sale
is a nullity and even though there was some misrepresentation on the part of
the firm, it is difficult for us to recall the order setting aside the sale
which is null and void. We are, however, of the view that in view of the conduct
of the firm and/or its said partner, they should share along with the Revenue a
part of the compensation that may be allowed to the auction- purchaser.
It has
already been noticed that a sum of Rs.37,81,000 was deposited by the
auction-purchaser. The auction- purchaser will be entitled to withdraw the said
amount unconditionally. The Revenue shall see that the said amount is refunded
back to the auction-purchaser. Further, the auction purchaser will be entitled
to get interest on the said amount at the rate of fifteen per cent per annum
for a period of two years and a half, during which the amount remained blocked,
by way of compensation. The amount of interest calculated at the said rate for
the said period comes to Rs.l4,l7,875. Out of the said amount, the Revenue
shall pay to the auction-purchaser a sum of Rs. 11, 17, 875 and the remaining
sum of Rs.3,00,000 shall be paid to the purchaser by the firm M/s. Krishna Kapoor
& Co. and/or the Surinder Nath Kapoor, who was the petitioner in the
Special PG NO 222 Leave Petition. The said finn and/or Surinder Nath Kapoor
shall pay the said amount of Rs.3 lacs to the auction- purchaser within three
months from date, in default the auction-purchaser will be entitled to execute
this order and realise the same by the sale of the self-same property or such
portion thereof as will be sufficient for the realisation of the said amount.
The Revenue is also directed to pay the said sum of Rs. 11,17,875 to the
auction- purchaser within a period of two months from date.
The C.M.P.
is disposed of as above. There will, however, be no order as to costs.
S.L.
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