Mohan Wahi Vs. Commissioner, Income-Tax, Varanasi & Ors  Insc 186 (30 March 2001)
R.C. Lahoti & Doraiswamy Raju. R.C. Lahoti, J.
relevant facts are jejune and beyond any pale of controversy. Late Bhagwati
Prasad owned a house property described as D-53/91-D, Luxa, Varanasi (hereinafter referred to as the
house property). He had four sons - namely, P, S, R and K. Under his will of
the year 1962, probated in the year 1965, the house property devolved upon his
elder two sons - P and S, had entered into a partnership known as M/s United
Provinces Commercial Corporation, Luxa, Varanasi (UPCC, for short) dealing in import and sale of heavy machinery and
road rollers. The labour troubles resulted in the firms business collapsing in
the year 1967.
partners left Varanasi and migrated elsewhere. In the year
1972, Income-tax assessments of the firm UPCC were finalised for the assessment
years 1967-1968 to 1969-1970.
certificates were issued in 1973- 1974 pursuant whereto the house property was
attached. On 3.12.1979 a proclamation for sale of the property was issued
setting out a demand of Rs.30,82,000/- and upset price at Rs.1,70,000/-.
11.1.1980, at the public auction, respondent no.3 made a bid proposing to
purchase the property for Rs.1,70,000/- (which was the upset price). The bid
was accepted by the officer conducting the sale. An amount of Rs.42,500/- being
1/4th of the auction money, was deposited by the auction-purchaser on 11.1.1980
simultaneously with the acceptance of the bid. The balance amount of Rs.1,27,500/-
was deposited on 25.1.1980 within the prescribed period of 15 days.
third brother had died. His widow, Padma, filed a civil suit in the Court of
Civil Judge, Varanasi submitting that the undivided property of the four
brothers and in any case the share of the brothers, who were not the partners
in the firm, could not have been attached and advertised for sale for recovery
of dues against the firm.
also sought for an ad interim restraint on sale. On 9.1.1980, the Court of
Civil Judge deemed it not proper to stay the auction sale but nevertheless felt
a prima facie case having been made out to stay the confirmation of the auction
sale. Accordingly, the Union of India and the authorities of the Income-tax
department were directed, through an ad-interim injunction, not to confirm the
year 1984 the auction-purchaser, respondent no.3 herein, was also impleaded as
a party to the suit. The ad-interim injunction continued to operate until the
suit itself came to be dismissed in default of appearance on 12.1.1998. On
13.1.1998 an application for restoration of the suit was filed. On 30.7.1999
the suit was restored to file.
assessments made against the firm UPCC were all ex-parte and a substantial part
of the demand raised against the firm consisted of penalty and interest. The
firm agitated the matter in the hierarchy of Income-tax Department. The
challenge to the orders of assessment failed before the Commissioner of Income
Tax (Appeals) who dismissed the appeals relevant to assessment years 1967-1968
to 1970-1971 as having been filed beyond the prescribed period of limitation.
Four appeals were filed before the Income-tax Appellate Tribunal, Bench Allahabad.
By an order dated 11.12.1987 all the four appeals were allowed. The Tribunal
formed an opinion that there was sufficient cause which had prevented the assessee
from filing the appeals before the CIT (A) in time and therefore the appeals
were liable to be restored on the file of CIT (A) to be dealt with on merits.
It was ordered accordingly. During the course of its order the Tribunal upheld
a finding of fact recorded by the CIT (A) that the assessee could not be said
to have been served with the demand notice. On being so remanded, the appeals
were heard on merits by the CIT (A).
of the matters relating to demand on account of tax, penalty and interest were
resolved at the stage of CIT (Appeals) while the tax demand referable to
1967-1968 was resolved before the Tribunal. The fact remains that on different
dates in the year 1989 the several demands against the assessee firm had all
stood wiped out and therefore reduced to nil. On 26.3.1990 the Income-tax
Officer, Ward II, Varanasi wrote to Commissioner of
Income-tax, Allahabad that various demands raised against
the assessee firm had stood reduced to nil. On 22.11.1996 the assessee firm,
M/s UPCC wrote to the Income-tax Officer, Ward II, Varanasi that all demands of
tax and penalties having been cancelled/liquidated, refunds were due and the
Tax Recovery Officer may be advised for cancellation of all the recovery
certificates. Copy of the application was endorsed to the Tax Recovery Officer.
On 16.1.1997 the advocate for the assessee firm wrote to the ITO, Ward-II, Varanasi
that in view of all the demands against the firm having ceased to exist and
instead refunds having become due to the firm, it may be confirmed that all the
recovery certificates issued for demands against the firm had stood
of communication dated 26.3.1990 from ITO, Ward II, Varanasi to the
Commissioner of Income-tax was annexed with the letter.
spite of the abovesaid communications, on 25.3.1998 sale in favour of
respondent no.3 was confirmed by the Tax Recovery Officer though only as regard
the interest of P and S in the house property and a sale certificate was also
issued to respondent No.3. The order of the Tax Recovery Officer confirming the
sale was put in issue before CIT, Varanasi by the firm UPCC and its partners P
and S, by filing a petition under section 264 of the Act. Vide order dated
21.5.1999, the CIT dismissed the petition forming an opinion that whatever
happened after the auction sale held on 11.1.1980 was immaterial and the Tax
Recovery Officer had no other option except to confirm the sale. S, the
petitioner before us then filed the present writ petition laying challenge to
the order of Tax Recovery Officer confirming the sale and issuing sale
certificate to respondent No.3 also to the order of C.I.T. dated 21.5.1999. The
fact that all the demands against the firm (and the partners) had ceased to
exist by 1996 and 1997 is a fact positively asserted in para 5 of the writ
petition filed before the High Court and not denied in the counter-affidavit
filed on behalf of the Commissioner of Income-tax. So also the fact that the
demands against the firm UPCC had stood cancelled and this fact was
communicated by the ITO, Ward II, Varanasi to the Commissioner of Income-tax, Allahabad
through his letter dated 26.3.1990 is also admitted in the counter- affidavit.
However, the petition has been dismissed by the High Court. The aggrieved
petitioner has filed this petition for special leave under Article 136 of the
questions arise for decision in this appeal :
Whether the Tax Recovery Officer could have confirmed the sale on 25.3.1998
when the demands on account of tax for the recovery of which tax recovery
certificates were issued had admittedly ceased to exist; and
What is the effect of a notice of demand under Section 156 of the Income-tax
Act, 1961 having not been served on the assessee on the sale held for recovery
of arrears of income-tax?
up first question the first, according to Section 222 where an assessee is in
default or is deemed to be in default in making a payment of tax, the Tax
Recovery Officer may issue a certificate specifying the amount of arrears due
from assessee and shall proceed to recover from such assessee the amount so
specified by one or more of the modes which include attachment and sale of the assessees
immovable properties. The Second Schedule sets out the procedure for recovery
of tax. We will refer to some of the rules contained in the Second Schedule and
relevant for our purpose. Rules regarding attachment and sale of immovable
property are contained in Part III of Second Schedule. Rule 56 provides that
the sale shall be by public auction to the highest bidder and shall be subject
to confirmation by the Tax Recovery Officer. Several provisions contained in
the rules which follow Rule 56 are in pari materia with the provisions dealing
with attachment and sale of immovable property contained in Order 21 of the
C.P.C. dealing with execution of decrees passed by civil courts. However, in
Order 21 of the C.P.C., a provision similar to Rule 56 of Second Schedule is
not to be found. Rule 60 provides for an application to set aside sale of
immovable property being made by defaulter or an interested person on his
depositing the specified amount within 30 days from the date of sale.
61 deals with application to set aside sale of immovable property on the ground
of non-service of notice on the defaulter under the Schedule or on the ground
of material irregularity in publishing or conducting the sale.
Rule 62 a sale may be set aside on an application by the purchaser on the
ground that the defaulter had no saleable interest in the property sold. The
prescribed time limit within which the application can be made under Rule 60,
61 or 62 is 30 days from the date of sale. Where no application is made for
setting aside the sale or such an application having been made is disallowed,
the Tax Recovery Officer shall make an order confirming the sale and thereupon
the sale shall become absolute. On a sale or immovable property becoming
absolute, a sale certificate shall be issued under Rule 65.
Section 224, an assessee cannot dispute the correctness of any certificate
drawn up by the Tax Recovery Officer but it is lawful for the Tax Recovery
Officer to cancel the certificate for any reason if he thinks it necessary to
do so or to correct any clerical or any arithmetical error therein. Sub-section(3)
of Section 225 provides as under:- 225. Stay of proceedings in pursuance of
certificate and amendment or cancellation thereof.
xxx (3). Where a certificate has been drawn up and subsequently the amount of
the outstanding demand is reduced as a result of an appeal or other proceeding
under this Act, the Tax Recovery Officer shall, when the order which was the
subject-matter of such appeal or other proceeding has become final and
conclusive, amend the certificate, or cancel it, as the case may be.
term reduced in Sub-section(3) of Section 225 would include a case where the
demand consequent upon an appeal or any proceedings under the Income-tax Act
has been reduced to nil also. The Tax Recovery Officer is obliged to give
effect to such reduction in demand and accordingly amend or cancel the
certificate. The scheme of Part III of Second Schedule indicates that the sale
proceedings terminate on their becoming absolute whereafter all that remains to
be done is the issuance of sale certificate.
an order confirming the sale by the Tax Recovery Officer is a must. The
efficacy of the sale by public auction in favour of the highest bidder has been
made to depend on the order of confirmation by the Tax Recovery Officer by
incorporating Rule 56 in the Schedule. It is true that ordinarily if there is
no application filed for setting aside sale under Rules 60, 61 or 62 and 30 days
from the date of the sale have expired, the Tax Recovery Officer has to make an
order confirming a sale. Nevertheless, an order shall have to be actually made.
The combined effect of Sub-section(3) of Section 225 of the Act and Rule 56 and
Rule 63 of Second Schedule is that if before an order confirming the sale is
actually passed by the Tax Recovery Officer, the demand of tax consequent upon
an order made in appeal or other proceedings under the Act has been reduced to
nil, the Tax Recovery Officer is obliged to cancel the certificate and as soon
as the certificate is cancelled, he shall have no power to make an order
confirming the sale.
sale itself being subject to confirmation by the Tax Recovery Officer, would
fall to the ground for want of confirmation.
case at hand the sale was held on 11.1.1980. No application was filed for
setting aside the sale either by the assessee or by the auction purchaser or by
anyone interested in the property. On expiry of 30 days from the date of the
sale the Tax Recovery Officer could have passed an order confirming the sale.
However, the Tax Recovery Officer was injuncted by the writ of civil court from
confirming the sale. The interim order issued by the civil court ceased to
operate on 12.1.1998 whereafter an order of confirmation was passed on
25.3.1998 by the Tax Recovery Officer ignoring, or unmindful of, the important
event which had taken place in between. Before 25.3.1998, the demand against
the assessee admittedly stood reduced to nil. This fact was in the notice of
Income-tax Officer as well as the Commissioner of Income Tax. Attention of the
Income-tax Officer as also the Tax Recovery Officer was also invited by the
firm M/s. UPCC through its communication dated 22.11.1996 (Annexure P- 6). On
16.1.1997, the counsel for the assessee had specifically called upon the income
tax officer who had raised the demand against the assessee to confirm if all
the recovery certificates issued against the assessee firm had stood withdrawn
or cancelled. In view of the facts within the knowledge of the department and
the communications so made, the Tax Recovery Officer could not have confirmed
the sale on 25.3.1998. Rule 56 in Second Schedule of the Income-tax Act, 1961
is neither a redundant nor a formal provision. It casts an obligation on the
Tax Recovery Officer to pass an order confirming the sale consciously and with
due application of mind to the relevant facts relating to sale by public
auction which is to be confirmed. Under Rule 63, confirmation of sale is not
automatic. An order confirming the sale is contemplated to make the sale
absolute. Ordinarily, in the absence of an application under Rule 60, 61 or 62
having been made, or having been rejected if made, on expiry of 30 days from
the date of sale the Tax Recovery Officer shall pass an order confirming the
sale. However, between the date of sale and the actual passing of the order
confirming the sale if an event happens or a fact comes to the notice of the
Tax Recovery Officer which goes to the root of the matter, the Tax Recovery
Officer may refuse to pass an order confirming the sale. The fact that sale was
being held for an assumed demand which is found to be fictitious or held to
have not existed at all, in fact or in the eye of law, is one such event which
would oblige the Tax Recovery Officer not to pass an order confirming the sale
and rather annul the same.
High Court in our opinion, clearly fell in error in not allowing relief to the
petitioner-appellant by setting aside the sale.
S.K. Jain, learned counsel for the auction-purchaser, respondent No.3, referred
to Janak Raj 1982 SC 989 wherein it has been held that once a sale has taken
place in execution of a decree, the sale has to be confirmed notwithstanding
the fact that after the holding of the sale, the decree was set aside. In Janak
Rajs case, sale was held in execution of an ex-parte decree. The ex-parte
decree was set aside subsequent to the date of the sale but before an order
confirming the sale was passed.
court held that in the absence of an application for setting aside the sale
having been moved on the grounds available under Rules 89 to 91 of Order 21 of
C.P.C., the court could not have refused to confirm the sale. However, in this
case itself, this court has observed (at page 80) that there may be cases in
which apart from the provisions of Rules 89 to 91 the court may refuse to
confirm a sale, as, for instance, where a sale is held without giving notice to
the judgment debtor, or where the court is misled in fixing a reserved price or
where there was no decree in existence at the time when the sale was held. In Sardar
Govindrao Mahadiks case, Janak Rajs case was referred.
court has drawn a distinction between a court auction held in favour of a
decree holder and where the auction purchaser is an outsider or a stranger. In
former case on the decree ceasing to exist before the sale is confirmed, the
sale may be refused to be confirmed but in the latter case, equity in favour of
the stranger should be protected and the judgment debtor should be left to
suffer for the default on his part for not obtaining stay of the execution of
the decree from where it was under challenge. Though the learned counsel for
the auction purchaser has relied heavily on these decisions, suffice it to
observe that these are the cases of auction sale held under Order 21 of the
C.P.C. and, therefore, may not apply to the case of an auction sale held under
Second Schedule of the Income-tax Act in view of Rule 56 contained therein.
Moreover, in these decisions also, the Supreme Court has contemplated
situations where in spite of the auction sale having been held and no
application for setting aside the sale having been moved, yet in exceptional
situations the sale may be refused to be confirmed and may be set aside. Shri
S.K. Jain also relied SC 381, wherein this court has observed that unless the
auction purchasers were protected, the properties which are sold in court
auctions would not fetch a proper price. It is true that sanctity of sale of
property by public auction has to be protected but at the same time a citizen
faced with proceedings for recovery of assumed arrears should not be deprived
of his property in spite of judicial or quasi- judicial pronouncement holding,
before the sale was confirmed, that there were no arrears. This observation
applies a fortiori under the scheme of Income-tax Act, the relevant provisions
whereof have already been referred to by us.
take up the second question.
156 of the Act provides as under:- 156. Notice of demand.
any tax, interest, penalty, fine or any other sum is payable in consequence of
any order passed under this Act, the Assessing Officer shall serve upon the assessee
a notice of demand in the prescribed form specifying the sum so payable.
amount specified in the notice of demand under Section 156 is not paid within
the time limited by sub-section (1) or extended under sub-section(3) of Section
220, then the assessee shall be deemed to be in default under sub-section (4)
of Section 220. Tax recovery certificate can be issued under Section 222 when
an assessee is in default or is deemed to be in default. Proceedings for
recovery of tax under the Second Schedule can be initiated against a defaulter.
Thus Section 156 provides for a vital step to be taken by the assessing officer
without which the assessee cannot be termed a defaulter.
use of the term shall in Section 156 implies that service of demand notice is
mandatory before initiating recovery proceedings and constitutes foundation of
subsequent recovery proceedings.
have already stated that the finding of fact recorded by C.I.T.(Appeals) and
the Tribunal was that notice of demand was not served on the assessee. The very
foundation for initiating the recovery proceedings, therefore, was non-existent
and the assessee could neither have been deemed to be in default nor any
proceedings for recovery of tax could have been initiated against him.
provision corresponding with Section 156 of the Income-tax Act, 1961 contained
in Section 29 of the Income-tax Act, 1922 came up for the consideration of this
Seghu Buchiah Setty - (1964) 52 ITR 538. Hidayatullah, J.
His Lordship then was) held that it is after the demand is made, the tax
penalty and interest become a debt due to the Government The notice of demand
is a vital document in many respects. Disobedience to it makes the assessee a
defaulter. It is a condition precedent to the treatment of the tax as an arrear
of land revenue. His Lordship emphasised that the service of notice of demand
has a few vital impacts amongst others :
the notice of demand is not complied with, the assessee can be treated as a
person in default;
the failure of the assessee to pay after a notice of demand is issued, the
recovery proceedings can be started and the amount of tax can be treated as an
arrear of land revenue.
in this case Hidayatullah, J. went on to hold that if an assessment made by the
Income-tax Officer is altered - reduced or increased - by reason of any order under
the Act, it is the duty of the Income-tax Officer to issue a fresh notice of
demand in the prescribed form and serve upon the assessee. This particular
finding of Hidayatullah, J. created serious complications and resulted in
nullifying several recovery proceedings, as also creating bottlenecks in the
recoveries of outstanding demands. The Parliament, therefore, enacted Taxation
Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 which was
given a retrospective effect. Section 3 of this Act provides that in the event
of government demand being reduced by an order in appeal or other proceedings
it shall not be necessary for the taxing authority to serve upon the assessee a
fresh notice of demand, it would suffice if taxation authority intimated of
reduction to the assessee and the Tax Recovery Officer to scale down the amount
of recovery and the proceedings initiated on the basis of the previous notice
of demand shall continue to be valid. To this extent the decision of this Court
in Seghu Buchiah Setty was superseded.
- (1976) 37 STC 483 also the significance of service of demand notice came up
for the consideration of this Court and it was held that there can be no
recovery without service of a demand notice; if such notice was not served, the
recovery proceedings are not maintainable in law and are invalid and the same
along with the recovery certificates are liable to be quashed.
(1974) 95 ITR 339, a Division Bench of Allahabad High Court referred to the
effect of Taxation Laws (CVRP) Act, 1964 on the law laid down by this court in Seghu
Buchiah Settys case and held :- The effect of these provisions is to dispense
with the need of issuing a fresh notice of demand and the recovery certificate
and to allow the original recovery proceedings to continue, but only for the
amount found due after reduction in the appeal, and it is for this purpose that
the taxing authority is required to send intimation of the fact of the
reduction to the assessee and to the Tax Recovery Officer. As the proceedings
for recovery can be continued only for the amount that finally remains due, and
not for any amount in excess thereof, the requirement of sending intimation to
the Tax Recovery Officer becomes an essential duty of the taxing authority and
must be held to be a mandatory condition. Non-compliance of that condition will
be an illegality in the procedure and will invalidate the proceedings. A sale
held in proceedings initiated and continued for the recovery of an amount in
excess of the amount payable by the assessee, after its reduction in appeal,
will be invalid. Such a sale is not validated by clause (c) of section 3 of the
Division Bench decision of Allahabad Court Court in Ram Swarup Guptas case was
cited with approval before this (1979) 118 ITR 112 though it was distinguished
for its applicability to the facts of the case before this Court.
Division Bench of Orissa High Court has held in Sunil 166 ITR 882 that
non-service of demand notice goes to the root of the jurisdiction of the
officer initiating recovery proceedings. We find ourselves in agreement with
the view so taken. Incidentally, we may refer to three Division Bench decisions
of the High Court of Madhya Pradesh, viz., M.P. & Ors. - (1964) MPLJ 337.
Section 146 of M.P. Land Revenue Code, 1959 provides that before issuing any
process for recovery of arrears of land revenue the Tehsildar or Naib Tehsildar
may cause a notice of demand to be served on any defaulter. Chief Justice P.V. Dixit
speaking for the Division Benches, in all the three cases, has held that the
word may has the imperative meaning of shall and no proceedings for recovery
can be initiated without service of notice of demand failing which the
proceedings would suffer from jurisdictional defect. For a long period of time
the High Court of Madhya Pradesh has been taking this view consistently.
are, therefore, clearly of the opinion that service of notice of demand on the assessee
under Section 156 of the Act, is mandatory before taking steps for recovery
under Second Schedule. Non-service of notice of demand goes to the root of the
validity of subsequent proceedings for recovery. A sale held in recovery
proceedings initiated without serving the notice of demand shall be invalid and
hence shall be liable to be annulled on being called in question.
1988 SC 1777 property was attached and sold pursuant to a garnishee order which
was found to be non-existent on account of a nullity attaching thereto. The
sale was set aside. This Court held :
garnishee order that was passed was a nullity and any sale held pursuant to
such an order is also a nullity.
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 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.
present case, the plea as to non-service of demand notice having been raised
before the High Court, in our opinion the High Court should not have adopted
too technical a approach by refusing to deal with the plea because it was not raised
in the manner in which the High Court thought it should have been raised. The
plea went to the root of the matter. The plea was raised before the
departmental authorities right from the ITO to the Tribunal and was not given
up before the High Court also. It would not have been difficult for the High
Court to ask the Income-tax Department to produce the record of the proceedings
and to show if the demand notice was at all served on the assessee. A little
more sensitive approach is required to be adopted in the process of dispensing
justice when it is found that valuable property of a person was sought to be
sold away for recovery of such arrears as did not exist at all.
on both the grounds, we hold that the sale of suit property in favour of respondent
No.3 is liable to be set aside. The appeal is allowed. The impugned judgment of
the High Court is set aside. The writ petition filed by the appellant shall
stand allowed. All the proceedings for the sale of the disputed property as
also the order of the Tax Recovery Officer confirming the sale are hereby
sale having fallen to the ground, the purchase money deposited by the
respondent No.3 shall, obviously, be liable to be refunded to her. She also
needs to be compensated by awarding suitable interest for the period for which
she has been deprived of the use of her money for no fault of her.
opinion, it would meet the ends of justice if the amount of Rs.1,70,000/-
deposited by her with the Tax Recovery Officer is directed to be refunded and
she is also awarded interest @ 12% per annum. Who should bear the liability for
payment of interest? For the period for which the sale was not vitiated on
account of the demand having not been adjudged to be non- existent, in our
opinion, the assessee should pay the interest. Once the demand ceased to exist
and that fact was brought to the notice of the Tax Recovery Officer by the assessee,
the former should have cancelled the recovery certificate and, therefore, with
effect from that date till the date of refund, the interest should be paid by
the Union of India, i.e., the Income-tax department, represented by respondent
nos. 1 and 2, which has also kept the money and made use of it. It is,
therefore, directed that the amount of Rs.1,70,000/- shall be refunded to the
respondent No.3 by the respondents No.1 and 2 within a period of two months
from the date of this judgment. For the period commencing from 11.1.1980 on an
amount of Rs.42,500/-, and from 25.1.1980, on an amount of Rs.1,27,500/-,
calculating upto 22.11.1996 the appellant shall pay the interest @ 12% per
annum to the respondent No.3 which may, in default of payment, be recovered
from the house property. With effect from 23.11.1996 upto the date of refund,
the respondent No.3 shall be entitled to recover interest at the same rate from
respondents No.1 and 2. The amount of interest shall also be calculated and
paid within a period of two months from today. We make it clear that the
interest is being awarded purely on equitable considerations, in the facts and
circumstances of this case, and in doing so we are not laying down any
principle of law to be followed as a precedent. The appeal stands allowed in
these terms. No order as to the costs.
R.C. Lahoti ) J. ( Doraiswamy Raju ) March 30, 2001.