High Court Of Andhra Pradesh
B.M. Malani vs. Income Tax Department & Ors.
Section 226(3)
Asst. Year 1988, 1990-91 to 1995-96
Bilal Nazki & P.S. Narayana, JJ.
Writ Petn. No. 23025 of 2002
27th August, 2004
Counsel Appeared :
Vilas V. Afzulpurkar, for the Petitioner : J.V. Prasad & Ch. Ramesh Babu, for the Respondents
JUDGMENT
BIlLAL NAZKI, J. :
A short question is involved in this writ petition. The petitioner is an assessee of the IT Department. For the asst. yrs. 1988-89 and 1990-91 to 1995-96 pursuant to the orders dt. 2nd Dec., 1999, the second respondent determined the tax at Rs. 1,76,80,735 payable by the petitioner to the Department. A demand notice was issued on 11th Feb., 2000, to the petitioner asking him to pay the tax by 12th April, 2000. The demand notice contained certain mistakes and on an application filed by the petitioner, the notice was rectified by the second respondent on 8th March, 2002, and the tax was revised to Rs. 157.77 lakhs. The petitioner contended that he had disposed of some properties in 1998 and invested sale proceeds in a sum of Rs. 65 lakhs with the third respondent in the units of Monthly Income Plan 1998-III under the capital gains scheme, and had sought exemption under s. 54EA of the IT Act, 1961 (for short “the IT Act”). The said units were transferable after three years of deposit, i.e., in September,2001, on face value of Rs. 10 per unit. The said units could also be redeemed by the third respondent at Rs. 10 per unit after five years, i.e., in September, 2003. The said amount of Rs. 65 lakhs was, therefore, fully secured under the said units with the third respondent. Since there was some time for maturity of the units, the petitioner had sought time for payment of tax till September, 2001, from the ITSC, Chennai. Once again, he moved an application on 4th Feb., 2002, before the Settlement Commission seeking extension of time till 31st May, 2002. Along with the application he deposited an amount of Rs. 25 lakhs on 31st Jan., 2002, to prove his bona fides. As such, the total deposits made by the petitioner was Rs. 92.04 lakhs upto October, 2000. On 31st Jan., 2002, he made a further deposit of Rs. 25 lakhs. The total amount deposited by him was Rs. 117.04 lakhs. Only a balance of Rs. 40.73 lakhs was due and the petitioner had units of the face value of over Rs. 65 lakhs. He was waiting for the orders of the Settlement Commission on the application made by him on 4th Feb., 2002. In the meantime, it appears, the second respondent issued attachment proceedings under s. 226(3) of the IT Act on 8th Feb., 2002, and the units of the petitioner with the third respondent were attached. The petitioner was neither aware of the same nor was given any notice. It was only on 15th Feb., 2002, that the second respondent addressed a separate notice to the petitioner informing him of the attachment of the units. The said notice and the attachment of the petitioner’s units was in the nature of a garnishee order to the third respondent. It is further contended that even if it is assumed that the attachment made by the second respondent was valid, the third respondent was merely obliged to hold the money that would become due to the petitioner on the said units and since the said units were under the lock-in period under the capital gains scheme, and were within the hold and control of the third respondent, he could not have sold them. It is further contended that it was a matter of record that on account of mismanagement and change in policy of the Unit Trust of India, the face value per unit had fallen to Rs. 7 per unit in September, 2001, as against Rs. 10 and the said market value of the units was not improved thereafter. The petitioner was, therefore, hoping to redeem the said units at the face value of Rs. 10 and he requested the Settlement Commission to extend the time for payment of the balance amount till 31st May, 2002. It is contended that the petitioner’s units in the hands of the third respondent were only attached by the second respondent under s. 226(3) of the IT Act. The third respondent on his own resorted to unauthorised distress sale of the units of the petitioner and thereby the petitioner incurred loss of Rs. 3.07 per unit. The action of the third respondent in resorting to sale of the units was wholly unwarranted, unauthorised and without notice and consent of the petitioner. The original records pertaining to the units remained with the petitioner. The proceedings issued by the second respondent seeking attachment under s. 226(3) of the IT Act did not warrant the third respondent to resort to distress sale of the petitioner’s units in such a hasty manner. The petitioner had invested Rs. 65 lakhs with the third respondent. The petitioner was also receiving the dividends on the units annually at Rs. 8,12,500, being 12.5 per cent, free from income-tax and as such besides having a loss of Rs. 21.31 lakhs because of the sale of his units, the petitioner has also suffered loss of income at Rs. 8.12 lakhs per annum by way of dividends. The petitioner also challenged the order by which some interest was levied on him.
2. Sec. 226(3)(i) of the IT Act lays down, “(i) the AO or TRO 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 AO or TRO either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) 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.”
3. A perusal of s. 226(3)(i) of the IT Act shows that the proceedings under this provision are in the nature of garnishee proceedings. Attachment of a debt would mean that a creditor would reach money due from a third party to the debtor. The money should be either due or it should become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee. So the prerequisite for exercise of power under s. 226(3) of the IT Act is that the person to whom the notice under this section is issued should be holding money on behalf of the assessee or it should become due to him some time in future. What was attached under the impugned notice by the ITO was not money, but were the units held by the assessee with the third respondent. These units were transferable units and their value had not become due to the assessee on the day the notice was given. Thus, in our opinion, no money was due to the assessee from the third respondent at the time of the impugned notice; it would have become due on maturity of the units. Therefore, the whole exercise was illegal. The third respondent purchased the units held by the assessee prematurely without his permission, transferred the units to himself on a value decided by him and submitted some money to the IT Department. That is not the purport of s. 226(3) of the Act. Even the IT Department in its counter-affidavit stated that though the units have been attached, the UTI ought to have obtained the consent of the petitioner before sale and as such the loss, if any, on account of sale cannot be attributed to the second respondent.
4. In the counter-affidavit filed by the third respondent-UTI it has been stated in para 5(ii) : “In reply to para 4, I submit that the investment made by the petitioner in the Monthly Income Scheme 1998-III under the capital gain exemption, the unit-holder can transfer the units purchased after three years and the repurchase price will be based on the net asset value (NAV) of the scheme on the units. Hence, the contention of the petitioner that the units held by him will be transferable after three years of deposit at par on face value of Rs. 10 per unit is not correct and is hereby denied. As a matter of fact the units held by the petitioner under the scheme can be redeemed at par at Rs.10 per unit after completion of five years but not otherwise. Hence, all the adverse allegations made in para 4 are hereby denied.”
5. In any case the redemption value of the units was Rs. 10 per unit after five years, therefore, the petitioner is entitled to face value of Rs. 10 per unit as admittedly five years have passed from the date of investment.
6. In the result, the transfer of units of the petitioner to the UTI by the third respondent is quashed. Since the tax has already been paid, therefore, in the interest of justice, we direct the third respondent to calculate the face value of the units of the petitioner at Rs. 10 per unit and pay the difference to the petitioner. The writ petition is accordingly disposed of. No costs.
[Citation : 270 ITR 515]
