TMI Blog1964 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, it does not automatically stand reduced to the reduced amount of the tax. It would again be absurd if the penalty could be recovered for the full original amount. The only sensible view to take in such a case would be that the order of penalty falls to the ground and the only logical way to support that conclusion would be to say that the original default has disappeared. Appeal dismissed. - C.A. 221 OF 1963 - - - Dated:- 11-3-1964 - Judge(s) : A. K. SARKAR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT SARKAR J. ---The question in these two appeals is whether certain proceedings for the recovery of tax from the assessee under the Income-tax Act, 1922, were invalid and should be quashed as the assessment orders on which they were based had been revised in appeal. The High Court of Mysore held them to be invalid and quashed them. The revenue authorities have now appealed to this court against that decision. I think it will be helpful to set out the facts chronologically. The tax sought to be realised became due under two assessment orders passed by an Income-tax Officer on March 23, 1955, in respect of the years 1953-54 and 1954-55 finding that the assessee's in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary further steps thereon for realisation of the tax which then was due only under the appellate orders. These contentions were accepted by the High Court. The revenue authorities, on the other hand, contend in short that the Act does not provide for any such supersession. Now, the scheme of the Income-tax Act for realisation of moneys becoming due under it appears to be this. The tax becomes due on the making of an assessment order or an order imposing penalty or requiring interest to be paid. Thereafter a notice of demand in respect of that amount has to be served. This is provided by section 29 which is set out below. 29. When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable. The form mentioned contains directions as to the time within which the person to whom and the place at which the payment is to be made. The consequences that follow a non-compliance with a notice of demand served under section 29 are set out in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as to the effect of the appellate orders. It is contended on behalf of the revenue authorities that the Act does not provide that the consequences of a default incurred under the Act cease to be available to the revenue authorities for realisation of the amount due in case the order which was the basis of the default was later revised in appeal. It is, therefore, said that those consequences are not affected by the revision of the order except where it is annulled and hence all notices and attachments remain in force and can be acted upon for recovering the tax due. I am unable to agree with this proposition. It may be that the Act contains no express provision stating what would happen to the default already incurred when the order under which it was incurred was later revised in appeal. But I think there is enough in the Act to indicate that in some of these cases at least the default comes to an end. If it does, it seems to me to follow inevitably that the consequences of the default also disappear. I would first refer to section 45 which says that when an order under section 31 specifies an amount as payable and the amount is not paid within the time, at the place and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his order specify the amount payable and state the other particulars about time of payment, etc. If he can do so, that would be enough for my present purpose and it is not necessary for it that the Act must in every case require him to do so. In case where the appellate order specifies an amount as payable, the Income-tax Officer's order must be deemed to have been superseded. One other argument to which I have to refer at this stage is that if the assessee's contention be correct, then the discretion given to the Income-tax Officer by section 45 not to treat an assessee in default becomes infructuous for then in every case on the making of the appellate order the default earlier incurred must disappear. This does not seem to me to put the position accurately. It is not in dispute that the filing of an appeal does not stay the operation of the original order. So if before the appellate order is made, the amount due is realised by the coercive process following the default, then those steps do not become invalid. There may be a liability to refund but none the less what was done was legal when done. Again it would, in my view, depend on the terms of the appellate order w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the default disappears. It is said that that is because the debt ceases to exist. I do not quite follow this. It has never been questioned that the debt becomes due when demand is made under section 29 and section 45 of the Act : see Doorga Prosad Chamaria v. Secretary of State. Therefore if a debt is to cease to exist it must be because the source from which it sprang, namely, the original order, has been annihilated by the appellate order annulling it. In fact section 31(3)(a) contemplates an annulment of the original assessment order itself; the demand under section 29 or section 45 is not annulled directly by it. Therefore, in the case of an order of annulment under section 31 the original order of assessment is itself destroyed. If it disappears, I cannot conceive the default based on it continuing in force. Likewise, where under clause (b) of section 31(3) the appellate order sets aside the assessment, the same result must clearly follow. There is not much difference between annulling an order and setting it aside; both wipe out the original order. I now come to an appellate order enhancing the assessment. With regard to it, it has not been disputed that a fresh notice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order confirming may be different for it confirms and, therefore, does not destroy. It has, however, been said that If subsequently the demand is modified on appeal and the amount of the tax payable is reduced, all that happens is, the liability sought to be imposed by the notice of demand, in respect of the amount by which the assessment is reduced, is found to have never been a liability at all, but the liability in respect of the remainder which stands unaffected by the appellate order remains and also that . . . where a notice of demand has, in fact, been issued in respect of a larger amount, as determined by the assessment order, it has been issued even in respect of the smaller amount which is ultimately found to be the tax properly payable. That being so, the assessee was under an obligation to pay it by the date fixed and if he did not pay it by that date, he became a defaulter, : see Ladhuram Tapatia v. D. K. Ghosh . With great respect I am unable to accede to this proposition and the conclusion based thereon that the default and its consequences continue even after the appellate order reducing the original assessment. How does the assessee know before the appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween these two dates ? If the revenue authorities are right, then the assessee continued to be in default even after the appellate order. But what was the amount in respect of which he was so in default ? Clearly he could not have continued to be in default in respect of the amount found due by the Income-tax Officer in his original order for that amount was no longer due. He could not have been in default in respect of the amount which was found due on recomputation by the Income-tax Officer according to the direction of the Appellate Commissioner because he did not know that amount. It would be absurd if the Act contemplated a default without the assessee knowing the amount in respect of which the default occurred and without his having a chance to pay it. It would be impossible to construe the Act in a way to produce that result. It has, therefore, to be held that between the date of the appellate order and the communication of the recomputed amount of the tax to the assessee by the Income-tax Officer there could be no default. Since the Act does not provide for a default being in suspension for a period it must be held that the original default ceased to exist after the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncellation of these assessments, but his applications were rejected. It was stated before us that other proceedings were pending in this behalf; but I am not concerned with them except in so far as a preliminary objection based on those and some other proceedings was made before us to which I shall refer presently. After the assessment was made, the Income-tax Officer sent notices of demand asking the assessee to pay ₹ 86,409-4-0 as tax, and on default, issued a certificate under section 46(2) of the Act to the Collector of Kolar District to recover the amount as arrears of land revenue. On December 17, 1955, the Appellate Assistant Commissioner, A Range, Bangalore, before whom the assessments were challenged by appeal, passed his order and assessed the income for the two years to be ₹ 28,000 and ₹ 46,000 respectively. The Income-tax Officer did not issue any fresh notices of demand under section 29 of the Act but wrote a letter demanding the reduced tax for the two years which now stood reduced to ₹ 4,215-9-0 and ₹ 13,346-8-0 respectively. It is significant that the reduction in the tax was from eighty-six thousand rupees to seventeen thousand ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a decision of the Calcutta High Court in Metropolitan Structural Works Ltd. v. Union of India. The appellants contend that the true view of the law is contained in a later decision of the Calcutta High Court reported in Ladhuram Taparia v. D. K. Ghosh, where the earlier case was explained. The appellants rely further on Municipal Board, Agra v. Commissioner of Income-tax, Auto Transport Union (Private) Ltd. v. Income-tax Officer, Alwaye and Hiralal v. Income-tax Officer for support. In Metropolitan Structural Works Ltd. v. Union of India, there were successive demand notices after the Appellate Assistant Commissioner and the Tribunal reduced the assessment and the Income-tax Officer finally sent a certificate under section 46(2) of the Act. The assessee in that case, relying upon the seventh sub-section of section 46, claimed that the proceedings were barred as according to it, the period of one year could only be calculated from the last day of the financial year in which demand was made and this could only be the first demand. It was contended by the assessee that the Act did not provide that a fresh notice should issue after revision of assessment, though it was admitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case also. In either case, speaking arithmetically, a portion of the demand is saved, but speaking legally, the demand notice, to quote the words of the earlier judgment, becomes inappropriate . Whether the learned Chief Justice was right on the first occasion or on the second can only be said after discussing the relative sections of the Income-tax Act, but this much I must say (and I say it with considerable hesitation and diffidence since I have always held the learned Chief Justice in high esteem) that he has not been able to get clear of the words used by him on the earlier occasion. It seems anomalous that if the tax is increased from ₹ 10,000 to ₹ 10,010 a fresh notice of demand must go, that is to say the earlier default is wiped off; but if it is reduced from ₹ 10,010 to ₹ 10 a fresh notice is not required and the assessee must be deemed to be in default for ₹ 10 with all the evil consequences of default because he did not pay an extra ten thousand rupees with the ten rupees. But it may be said, there is no room for logic and mathematics if the Act so requires and the true answer can only be furnished by what the law requires. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It follows, therefore, that 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. It is the starting point of limitation in two ways and the breach of obedience to the notice of demand draws a heavy penalty. The notice of demand which is issued must be in a form prescribed by rule 20 and the form includes the following particulars: it shows the amount which has to be paid and indicates the person to whom, the place where and the time within which it has to be so paid. Compare with it section 45 of the Income-tax Act which provides : Any amount specified as payable in a notice of demand ... under section 29 or an order under section 31 or section 33, shall be paid within the time, at the place and to the person mentioned in the notice or order, or if a time is not so mentioned then on or before the first day of the second month following the date of the service of the notice or order, and any assessee failing so to pay shall be deemed to be in default, provided that, when an assessee has presented an appeal under section 30, the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is reduced worse than that of a person whose tax is increased. At least the contumacy of the latter is the same if not greater than that of the former. It is said that all that is necessary is that the Income-tax Officer should write a letter informing the assessee that the tax is reduced from ₹ 10,010 to ₹ 10. The question is, why not send him a fresh notice of demand ? If there is no provision in the Income-tax Act to send a fresh notice there is none authorising the sending of letters. No doubt, the old proceedings for recovery of the tax might become out of date and inappropriate, but it is one thing to use coercion to recover an amount which the assessee did not but probably could not pay, and another to recover an amount which the assessee could and would pay readily. However, if the law requires that a notice of demand need not go, that would be the end of the matter; but, in my opinion, section 29 in its terms is extremely clear and indicate; that a notice of demand must always issue. It reads: When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistant Commissioner and the Tribunal may in some cases also serve as notices of demand. Further it is not clear from the later decision whether on the enhancement of the tax, a fresh notice of demand is required for the excess only or the whole of the sum. That answer is not furnished in any of the other cases to which reference was made at the bar. If default is saved in respect of the reduced amount, a default would also be saved in respect of the original amount when the demand is increased. If a notice of demand were to issue in respect of the excess only, there will be two notices of demand and two starting points of limitation, both for the purpose of coercive action under section 46(7) as well as for purposes of any appeal that might lie. If, however, a fresh notice of demand is to go in respect of the composite sum, the question to ask would be, what happens to the default which was incurred already? How does it disappear ? In my opinion, there is only one possible answer and it was given by the learned Chief Justice in the earlier case. I would therefore dismiss these appeals and all the more readily because a fresh notice of demand has issued in this case. If it is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eat the respondent as a defaulter and that the proceedings of the Collector based on the certificates issued pursuant to the order of assessment by the Income-tax Officer were illegal. Against the orders passed by the High Court, the Income-tax Officer has appealed to this court, with special leave. The question which falls to be determined in this appeal is about the legal effect of the reduction of the assessable income by the order of the Appellate Assistant Commissioner on the notices of demand previously issued by the Income-tax Officer. The respondent contends that by the modifications made in the orders of assessment the notices of demand issued by the Income-tax Officer must be deemed cancelled or superseded and he cannot be regarded as in default unless fresh notices of demand are issued by Income-tax Officer specifying the amount payable pursuant to the appellate order. The respondent says that there was at the material time no outstanding demand notice or order specifying the amount payable, failure to comply with which may be regarded as constituting a default. The respondent strongly relies upon the observations made by Chakravartti, C.J., in his judgment in Metropo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des : When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable. The notice of demand has to be in the form prescribed under rule 20 which requires that the amount demanded and the person to whom together with the place where it is to be paid, must be stated in the notice. Section 45 of the Act provides that the amount specified as payable in the notice of demand or an order under section 31 or section 33 shall be paid within the time, at the place and to the person mentioned therein, or if no time be so mentioned, then on or before the first day of the second month following the date of the service of the notice or order and if the assessee fails to pay the tax he shall be deemed to be in default unless the assessee has presented an appeal under section 30 of the Income-tax Act and the Income-tax Officer in his discretion treats the assessee as not being in default as long as such appeal is undisposed of. Section 45 therefore prescribes t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 in terms provides that when an assessee is served with the notice of demand and has failed to comply with the notice, he shall, unless otherwise ordered, be deemed to be a defaulter. The Act provides a right of appeal against the order of assessment, but on the presentation of the appeal the power of the Income-tax Officer to take steps for recovery of tax is not suspended. The Income-tax Officer is obliged by the statute to issue a notice of demand for payment of tax, penalty or interest due in consequence of any order passed under or in pursuance of the Act. Lodging of an appeal does not operate as a stay and would not entitle the assessee to withhold payment of tax till the appeal is decided. The Income-tax Officer may in his discretion treat the assessee as not in default as long as such appeal is not disposed of, but unless such an order is passed the assessee would, on failure to comply with the order, be a defaulter and proceedings for recovery of tax may be initiated and continued during the pendency of the appeal. It is clear therefore that when tax, penalty or interest is determined and demanded, proceedings shall be commenced for recovery and these proceedings may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the process for recovery will be adjusted according to the modified demand including the imposition of penalty under section 46(1). It is true that the Act contains no express provisions which enables the Income-tax Officer to modify the certificate which is issued to the Collector, but the absence of such a provision does not detract from the duty of the Income-tax Officer to give information to the recovering authority about the reduction in the liability for tax, penalty or interest made by the appellate authority and to request such authority to adjust his proceeding to the modified demand. Such a duty must necessarily be implied. An error in the certificate can always be clarified by an amendment and if that power be granted, there is no reason to suppose that a demand which is reduced because of subsequent events, such as modification of the assessment by the appellate authority, or payment made by the taxpayer as directed by the notice of demand may not be enforced in a manner consistent with the outstanding demand. If in an appeal the Appellate Assistant Commissioner enhances the tax, the Income- tax Officer may give intimation to the recovering authority about the enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Assistant Commissioner and the Income-tax Tribunal shall comply with certain requirements. In certain exceptional cases such as those in which an appeal is filed only against the amount of tax determined under section 23 or against imposition of penalty under section 28 or against orders specifying the amount of interest payable under section 18-A, the Appellate Assistant Commissioner or the Tribunal may, in their final orders, specify the amount to be paid and also the time within which and the place at which and the person to whom the amount is to be paid. Such a direction is intended only to effectuate in appropriate cases the order of the Appellate Assistant Cornmissioner or the Tribunal. It does not take the place of a notice of demand, but if made, may operate, if not complied with, to make the person liable to pay the amount specified a defaulter. An Appellate Assistant Commissioner may, in an appeal against the order of the Income-tax Officer, either confirm the assessment or modify it by reducing or increasing it. Similarly, the Tribunal may confirm the assessment of the Appellate Assistant Commissioner or may reduce the assessment. But the Appellate Assistant Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport to the argument that the issue of a fresh notice on modification by the appellate authority was a matter of reason and based on the actual necessities of realisation and that, it is obligatory upon the Income-tax Officer to issue such a notice on every occasion when the assessment was modified. But the learned Chief justice himself explained the observations in his judgment in Ladhuram Taparia v. D. K. Ghosh and pointed out that in Metropolitan Structural Works Ltd.'s case the sole question which fell to be determined was as to the commencement of the period of limitation under section 46(7) for enforcement of a notice of demand when successive notices of demand were in fact issued by the Income-tax Officer, and that the earlier judgment was not intended to lay down and did not lay down that the Income-tax Officer was under an obligation to issue a fresh notice of demand merely because the Appellate Assistant Commissioner had modified the assessment. Chakravartti C. J., after referring to the contention which was advanced and his observations regarding the necessity of issuing a fresh notice of demand where the earlier notice had become inappropriate by reason of redu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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