Case: Third Income-Tax Officer, Mangalore Vs. M. Damodar Bhat

1. This appeal is brought by certificate on behalf of the III Income-tax Officer, Mangalore from the judgment of the Mysore High Court dated February 1, 1967 in Writ Petition No. 846 of 1965 holding that the notice under S. 226 (3) ofthe Income-tax Act, 1961, hereinafter called the new Act, bearing Nos. 770-d/60-61, 61-62, 62-68 and 63-64 issued by the III Income-tax Officer to M/s. Rajarajeswari Motor Service, Mangalore, produced as Ex. VIII with the writ petition was invalid and inoperative in respect of the following items of tax and penalty includedfor the assessment year 1960-61Rs. 7,056.502.Tax for the assessment year1961-62Rs. 485.553. Penalty for 1962-63Rs. 1,890.004.Tax for the assessment year 1963-64Rs.quashing the notice to that extent.2. The impugned notice was issued under S. 226 (3) of the new Act. The respondent Sri M. Damodar Bhat was in arrears in respect of income-tax and penalty levied on him in respect of three or four assessment years. The total amount shown as due in the notice was Rs. 74,086.02 and was made up asfor the assessment year 1960-61Rs. 7,056.152. Tax for the assessment year1961-62Rs. 485.553.Balance of tax for the assessment year 1962-63Rs. 346.424.Penalty for assessment year1962-63Rs. 1,890.005.Tax for the assessment year1963-64Rs. 64,307.90Rs.

Reasoning:
In our opinion, the argument on behalf, of the appellant is well founded and must be accepted as correct. In the first place, it is necessary to notice that S. 220 (4) of the new Act mentions in what circumstances the assessee shall be deemed to be in default and S. 222 provides that when an assessee is in default or is deemed to be in default in making payment of tax, the Income-tax Officer may forward to the Tax Recovery Officer a certificate under his signature specifying the amount of arrears due from the assessee, and the Tax Recovery Officer on receipt of such certificate, shall proceed to recover from the assessee the amount specified therein by one or more of the modes mentioned in the section. Section 226, however, provides for other methods of recovery and there is no reference in S. 226 (3) to any default on the part of the assessee. Section 226 (3) merely states that the Income-tax Officer may, at any time or from time to time", by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may, subsequently hold money for or on account of the assessee, to pay to the Income-tax Officer either forthwith so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.In a proceeding under S. 226 (3) of the new Act therefore it is not necessary that the assessee should be in default or should be deemed to be in default and no such condition or limitation is imposed by the language of that sub-section. We are accordingly of the opinion that the Income-tax Officer had authority to issue the notice dated December 11, 1963 under S. 156 of the new Act with respect to the tax liability of Rs. 485.55 incurred by the respondent under the old Act. The High Court has expressed the view that "in the case of an assessment under the old Act no notice under Section 156 of the new Act was possible", and "there was no way of taking advantage of the provisions for recovery and collection of tax contained in Sections 220 to 234 of the new Act". The High Court has based its opinion on the premise that all recoveries are possible only when the stage mentioned in Section 220 (4) was reached, namely that the assessee had become or deemed to have been an assessee in default" and the action under Section 226 could be taken only when an assessee was in default In our opinion, the reasoning adopted by the High Court and the conclusion reached by it are not correct in law. The effect of the judgment of the High Court on this point is that the provisions of Section197 (2) (j) of the new Act are nullified an declared to be of no consequence. An interpretation of Section 226 (3) of the new Act which leads to such a startling result should be avoided as it is opposed to all sound canons of interpretation. As we have already stated, there is nothing in the language of Section 226 (3) of the new Act to warrant the conclusion that the assessee should be in default or should be deemed to be in default before the issue of the notice under that sub-section. It is true that the group of sections from Section 220 to Sec.232 of the new Act are placed under the heading "Collection and recovery".But in a case falling within Section 297 (2) (j) of the new Act, for example in a proceeding for recovery of tax and penalty imposed under the old Act, it is not required that all the sections of the new Act relating to recovery and collection should be literally applied but only such of the sections will apply as are appro priate in the particular case and subject if necessary, to suitable modifications. In other words, the procedure of the new Act will apply to the cases contemplated by Section 297 (2) (j) of the new Act mutatis mutandis.As regards items 4 and 5 for the assessment years 1962-63 and 1963-64 the argument of the respondent is that the impugned notice issued on April 23, 1965 was not legally valid as notices of demand were served on the respondent for payment of these sums and time given in this notice was due to expire on May 21, 1965. The impugned notice was issued on April 23, 1965, nearly a month before that date. As the tax and penalty covered by the notice were not due till May 21, 1965 it was said that notice of attachment under Sec. 226 (3) of the new Act could not legally be issued on April 23, 1965. In our opinion, there is no warrant for this argument. As we have already observed, there is nothing in the language of Sec. 226 (3) of the new Act to suggest that the assessee must be in default before a notice under that sub-section could be issued. It is true that Section 220 of the new Act deals with the question as to when the tax is payable and when the assessee is deemed to be in default but so far as Section 226 (3) of the new Act is concerned, the question of any default of the assessee is irrelevant. It was argued by Mr. Srinivasan on behalf of the respondent that the amount of tax must be "due to be paid" by the assessee before a notice can be issued under Sec. 226 (3) of the new Act. It is not disputed in this case that the notices of demand under Section 156 of the new Act were served on the respondent before the issue of the notice under Section 226 (3) of the newthe High Court was right in taking the view that the Income-tax Officer did not properly exercise the statutory discretion in issuing the impugned notice with regard to the first item, viz., tax for the assessment year 1960-61 amounting to Rs.