TMI Blog2001 (3) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 four sons. The elder two sons-P and S, had entered into a partnership known as 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 firm's business collapsing in the year 1967. The partners left Varanasi, and migrated elsewhere. In the year 1972, income-tax assessments of the firm UPCC were finalised for the assessment years 1967-68 to 1969-70. Recovery certificates were issued in 1973-74 pursuant whereto the house property was attached. On December 3, 1979, a proclamation for sale of the property was issued setting out a demand of ₹ 30,82,000 and upset price at ₹ 1,70,000. On January 11, 1980, at the public auction, respondent No. 3 made a bid proposing to purchase the property for ₹ 1,70,000 (which was the upset price). The bid was accepted by the officer conducting the sale. An amount of ₹ 42,500 being 1/4th of the auction money, was deposited by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax (Appeals) that the assessee could not be said to have been served with the demand notice. On being so remanded, the appeals were heard on the merits by the Commissioner of Income-tax (Appeals), Most of the matters relating to demand on account of tax, penalty and interest were resolved at the stage of the Commissioner of Income-tax (Appeals) while the tax demand referable to 1967-68 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 March 26, 1990, the Income-tax Officer, Ward-II, Varanasi, wrote to the Commissioner of Income-tax, Allahabad, that various demands raised against the assessee-firm had stood reduced to nil. On November 22, 1996, the assessee-firm, 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 January 16, 1997, the advocate for the assessee firm wrote to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recovery of which tax recovery certificates were issued had admittedly ceased to exist ; and (ii) 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 ? Taking up the first question 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 the 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 assessee's 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 the 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. However, 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 the sale under rule 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 the 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecovery 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 the 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. The High Court in our opinion, clearly fell in error in not allowing relief to the petitioner-appellant by setting aside the sale. Shri S. K. Jain, learned counsel for the auction-purchaser, respondent No. 3, referred to Janak Raj v. Gurdial Singh [1967] AIR 1967 SC 608 ; 2 SCR 77 and Sardar Govindrao Mahadik v. Devi Sahai, AIR 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 Raj's case [1967 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r price. It is true that the sanctity of a 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 pronouncements 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. We now take up the second question. Section 156 of the Act provides as under : 156. Notice of demand.---When 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. If the amount specified in the notice of demand under section 156 is not paid within the time limited by sub-section (1) or extended under subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, which was given 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 the taxation authority intimated the 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's case [1964] 52 ITR 538 was superseded. In Homely Industries v. STO [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. In Ram Swarup Gupta v. Behari Lal Baldeo Prasad [19741 95 ITR 339, a Division Bench of the Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. We 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 the Second Schedule. Non-service of a 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. In Surinder Nath Kapoor v. Union of India, AIR 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 : The garnishee order that was passed was a nullity and any sale held pursuant to such an order is also a nullity. It is quite immaterial tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 respondents Nos. 1 and 2, which has also kept the money and made use of it. It is, therefore, directed that the amount of ₹ 1,70,000 shall be refunded to respondent No. 3 by respondents Nos. 1 and 2 within a period of two months from the date of this judgment. For the period commencing from January 11, 1980, on an amount of ₹ 42,500, and from January 25, 1980, on an amount of ₹ 1,27,500, calculating up to November 22, 1996, the appellant shall pay the interest at 12 per cent. per annum to respondent No. 3 which may, in default of payment, be recovered from the house property. With effect from November 23, 1996, upto the date of refund, respondent No. 3 shall be entitled to recover interest at the same rate from respon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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