9911796707
TMI Blog1971 (11) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... On March 8, 1967, the Income-tax Officer, Kothagudem, the second respondent herein, forwarded certificate to the Tax Recovery Officer under section 222 of the Income-tax Act, 1961 (which for the sake of brevity will be referred to as " the Act " hereafter). The amounts recoverable as per the certificate are Rs. 4,162.20 and Rs. 22,793.13. These amounts are inclusive of the interest that accrued due up to the issue of the certificate. The person named in the certificate is the firm of Kethmal Parekh & Co. It is submitted by the petitioner that there was no notice of demand served on him by the second respondent. It is further averred that the certificate issued under section 222 of the Act mentions the name of the firm alone as the defaulter. On 21st August, 1971, a notice under rule 73 of the Second Schedule of the Act has been served on the petitioner calling upon him to show cause why he should not be arrested and detained in civil prison. The notice recites that a sum of Rs. 37,978.10 for the assessment years 1962-63 and 1963-64 remains unpaid. On receipt of the notice the petitioner appeared before the Tax Recovery Officer, the first respondent herein, and sought adjournme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, " shall serve upon the assessee a notice of demand in the prescribed form specifying the sum " payable as per an order passed under the Act. Where the demand is not met or satisfied and the assessee is in default or is deemed to be in default in the payment of tax, the Income-tax Officer may, under section 222, forward to the Tax Recovery Officer a certificate under his signature specifying the amount of arrears due from the assessee. The Tax Recovery Officer, on receipt of such certificate, shall proceed to recover from such assessee the amount specified therein by one or more of the modes mentioned in clauses (a) to (d) of sub-section (1) of section 222. The process of recovery must conform to the rules laid down in the Second Schedule of the Act. The four alternatives (and concurrent enforcement under more than one mode is permissible) are, attachment and sale of the assessee's movable property, like action in regard to immovable property, arrest of the assessee and his detention in prison, and, lastly, the realisation of dues by the appointment of receiver for the management of the property of the assessee. It is enacted under sub-section (2) of section 222 that the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed and neglected to satisfy the demand before the expiry of 15 days from the date of service of notice. The significance of the notice under rule 2 can be appreciated in the true perspective if one turns to rule 16 which, inter alia, declares that after the service of such notice, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him, except with the permission of the Tax Recovery Officer. The rule also renders a civil court powerless to issue any process against such property in execution of a decree for payment of money. There is thus a total embargo on the exercise of the powers of disposal incidental to ownership. Even third parties suffer from the constraint because they are under a disability to invoke the civil court's aid to enforce their decrees. Under rule 73 of the Second Schedule no order for the arrest and detention in civil prison of a defaulter shall be made unless the Tax Recovery Officer has issued and served a notice upon the defaulter calling upon him to appear before him on the date specified in the notice. The appearance before the officer is to enable the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus a mandatory obligation of the Tax Recovery Officer to determine on the facts of the case whether certain acts of commission or omission have taken place so as to justify the arrest and detention in prison. Mr. Dasaratharama Reddy has relied upon the decision of a Full Bench of the Mysore High Court in Raja Pid Naik v. Agricultural Income-tax Officer-cum-Commercial Tax Officer. That was a case under the Hyderabad Agricultural Income-tax Act. The provisions of that statute which were construed and applied by the Full Bench of the Mysore High court are in pari materia with the provisions of the Income-tax Act, which are pertinent in the present context. Section 34 of the statute considered by the Mysore High Court enabled the Agricultural Income-tax Officer to forward to the Taluqdar a certificate in cases in which the assessee was in default. The wording of section 34 is identical in all material respects with the language of section 222. On receipt of the certificate it was competent for the Taluqdar to recover the amounts specified therein as a public demand. The assessee died during the pendency of the recovery proceedings. But, before his death a notice of demand was serve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re without jurisdiction. It was observed : " Some indication of what a recovery certificate should be is provided by section 222. It is a certificate under the signature of the Income-tax Officer specifying the amount of arrears due from an assessee and forwarded by the Income-tax Officer to the Tax Recovery Officer .... The two notices are in the statutory form .... and in the blank space where the number and date of the recovery certificate should be filled in the entry is ' number nil and dated nil '. In the instant case, as no recovery certificate was issued, the recovery proceedings taken by the Tax Recovery Officer are without jurisdiction. " M. Rama Rao, counsel for revenue, submits that the decisions relied upon by the counsel for the petitioner are distinguishable and that the action proposed to be taken by the Tax Recovery Officer is sustainable under law. The main basis of his argument is that all the partners are jointly and severally liable for the tax and that when the firm is named in the certificate as the assessee, it is tantamount to the naming of all the partners. According to him all of them are defaulters within the meaning of the Second Schedule. Consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arrears of tax. But the submission is that for the coercive process of recovery specified in Schedule 2 to be applied, the condition precedent is the issue of a certificate, naming the person sought to be proceeded against, as the assessee. This question was not specifically dealt with by the Supreme Court in the case cited. Further, the provisions of the repealed Act, on the basis of which the decision was rendered, are materially different from the provisions of the Second Schedule. The argument that was advanced in that case was that it was not open to the Collector in a proceeding under section 46(2) of the Act to recover from the appellant the income-tax dues from the partnership. It was this argument that their Lordships of the Supreme Court found themselves unable to accede to. The controversy before us does not relate to the substantive liability of the partner to pay the arrears of tax. The sole question is whether the petitioner can be subjected to arrest and detention in civil prison on the strength of a certificate which does not name him eo nomine as the assessee. Another decision of the Supreme Court to which our attention was drawn is at page 623 of the same vol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " assessee " under section 2(7) means a person by whom any tax or any other sum of money is payable under the Act. But the mode of recovery prescribed by Schedule 2 becomes applicable only on the proved default or the omission of the person against whom a coercive process is sought. The reasoning adopted by his Lordship in regard to penal proceedings is equally applicable in regard to the coercive procedure prescribed by Schedule 2. If the expression " person " cannot be understood with reference to penal proceedings in the manner defined under section 2(31), by the same token the expression " assessee " cannot be understood in the sense in which it is defined by the Act, in respect of the proceedings under Schedule 2. The mandatory requirement is that there should be notice to the defaulter under rule 2 before further action can be taken. We are of opinion that the provisions of rule 2 cannot be said to have been complied with, and the doctrine of constructive notice cannot be resorted to. What the rule makes a condition precedent is actual notice to the assessee and not constructive notice, which may be imputed to him in his capacity as partner. Our attention was next drawn to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvisage several situations especially in regard to unregistered firms where the very existence of the jural relationship as partner might be in dispute. We are not persuaded that the constructive liability of a partner for tax liability is to be understood in such a manner as to enable the Tax Recovery Officer to proceed against persons whom he deems to be partners although they may question the fact of the jural relationship. Can it be said that without such persons being named in the certificate, and without their having an opportunity to raise the question at any earlier stage, they can be called upon under rule 73 to show cause against their detention in prison ? It is very doubtful whether under an inquiry whether he is a partner is permissible. An intention cannot be attributed to the legislature to provide only for a summary inquiry of such an issue. It involves a hardship and renders possible the use of a coercive machinery in an oppressive manner which could not have been intended by the legislature. We cannot overlook the distinction between the constructive liability of a partner for the tax and disability which arises by reason of the certificate making a partner const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead in, nothing is to be implied. One can only look fairly at the language used. On this principle it must be held that the certificate issued in the name of the firm cannot be said to be effective against the individual partners also so as to make them liable on the strength of a certificate naming the firm alone. We are of opinion that there is no warrant for the view that on the strength of a certificate naming the firm as the defaulter it will be permissible to arrest an individual partner. We are of opinion that the construction of the relevant provisions of law advocated by the counsel for revenue cannot be accepted. It is, however, open to the Income-tax Officer to amend the certificate already issued by him naming the individual partner also as a defaulter. We are of opinion that the ruling in Union of India v. Sathyanarayan Khan is applicable to a situation like the present one. The Income-tax Officer may amend the certificate previously issued by him enabling the Tax Recovery Officer to take steps now against the petitioner under Schedule 2. For the reasons mentioned above, we hold that the notice issued under rule 73 on August 21, 1971, is ultra vires and has to be qua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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