S.C : Whether the TRO could have confirmed the sale on 25th March, 1998, when the demands on account of tax for the recovery of which tax recovery certificates were issued had admittedly ceased to exist;

Supreme Court Of India

Mohan Wahi vs. CIT & Ors.

Sections 156, 222, 225(3), SCH. II, Rules 56 & 63

Asst. years 1967-68, 1968-69, 1969-70

Dr. A.S. Anand, C.J.; R.C. Lahoti & Doraiswamy Raju, JJ.

Civil Appeal No. 2488 of 2001

30th March, 2001

Counsel Appeared

M.L. Verma, N.N. Goswami & A.M. Singhvi with Ranbir Chandra, Ms. Suruchi Aggarwal, Rajiv Tyagi, B.V. Balram Das, Ms. Sushma Suri, Sushil Kumar Jain, Rajesh Kumar & Ms. Neera Gupta, for the Appearing parties.



The relevant facts are jejune and beyond and pale of controversy. Late Bhagwati Prasad owned a house property described as D-53/91-D, Luxa, Varanasi (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 hisfour sons. The elder two sons-P and S, had entered into a partnership known as M/s 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 asst. yrs. 1967-68 to 1969-70. Recovery certificates were issued in 1973-74 pursuant whereto the house property was attached. On 3rd Dec., 1979, a proclamation for sale of the property was issued setting out a demand of Rs. 30,82,000 and upset price at Rs. 1,70,000. On 11th Jan., 1980, at the public auction, respondent No. 3 made a bid proposing to purchase the property for Rs. 1,70,000 (which was the upset price). The bid was accepted by the officer conducting the sale. An amount of Rs. 42,500 being 1/4th of the auction money, was deposited by the auction-purchaser on 11th Jan., 1980 simultaneously with the acceptance of the bid. The balance amount of Rs. 1,27,500 was deposited on 25th Jan., 1980 within the prescribed period of 15 days. R, the third brother had died. His widow, Padma, filed a civil suit in the Court of Civil Judge, Varanasi submitting that the undivided property of the four brothers and in any case the share of the brothers, who were not the partners in the firm, could not have been attached and advertised for sale for recovery of dues against the firm. She also sought for an ad interim restraint on sale. On 9th Jan., 1980, the Court of Civil Judge deemed it not proper to stay the auction sale but nevertheless felt a prima facie case having been made out to stay the confirmation of the auction sale.

Accordingly, the Union of India and the authorities of the IT Department were directed, through an ad-interim injunction, not to confirm the sale. In the year 1984 the auction-purchaser, respondent No. 3 herein, was also impleaded as a party to the suit. The ad-interim injunction continued to operate until the suit itself came to the dismissed in default of appearance on 12th Jan., 1998. On 13th Jan., 1998, an application for restoration of the suit was filed. On 30th July, 1999, the suit was restored to file. The assessments made against the firm UPCC were all ex parte and a substantial part of the demand raised against the firm consisted of penalty and interest. The firm agitated the matter in the hierarchy of IT Department. The challenge to the orders of assessment failed before the CIT(A) who dismissed the appeals relevant to asst. yrs. 1967-68 to 1970-71 as having been filed beyond the prescribed period of limitation. Four appeals were filed before the Appellate Tribunal, Bench Allahabad. By an order dt. 11th Dec., 1987, all the four appeals were allowed. The Tribunal formed an opinion that there was sufficient cause which had prevented the assessee from filing the appeals before the CIT(A) in time and, therefore, the appeals were liable to be restored on the file of CIT (A) to be dealt with on merits. It was ordered accordingly. During the course of its order the Tribunal upheld a finding of fact recorded by the CIT(A) that “the assessee could not be said to have been served with the demand notice”. On being so remanded, the appeals were heard on merits by the CIT(A). Most of the matters relating to demand on account of tax, penalty and interest were resolved at the stage of CIT(A) 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 26th March, 1990, the ITO, Ward II, Varanasi, wrote to CIT, Allahabad, that various demands raised against the assessee-firm had stood reduced to nil. On 22nd Nov., 1996, the assessee-firm, M/s UPCC wrote to the ITO, Ward II, Varanasi that all demands to tax and penalties having been cancelled/liquidated, refunds were due and the TRO may be advised for cancellation of all the recovery certificates. Copy of the application was endorsed to the TRO. On 16th Jan., 1997, the advocate for the assessee- firm wrote to the ITO, Ward-II, Varanasi that in view of all the demands against the firm having ceased to exist and instead refunds having become due to the firm, it may be confirmed that all the recovery certificates issued for demands against the firm had stood withdrawn/cancelled. A copy of communication dt. 26th March, 1990, from ITO, Ward II, Varanasi to the CIT was annexed with the letter.

In spite of the abovesaid communications, on 25th March, 1998, sale in favour of respondent No. 3 was confirmed by the TRO though only as regard the interest of P and S in the house property and a sale certificate was also issued to respondent No. 3. The order of the TRO confirming the sale was put in issue before CIT, Varanasi by the firm UPCC and its partners P and S, by filing a petition under s. 264 of the Act. Vide order dt. 21st May, 1999, the CIT dismissed the petition forming an opinion that whatever happened after the auction sale held on 11th Jan., 1980, was immaterial and the TRO had no other option except to confirm the sale. S, the petitioner before us then filed the present writ petition laying challenge to the order of TRO confirming the sale and issuing sale certificate to respondent No. 3 also to the order of CIT, dt. 21st May, 1999. The fact that all the demands against the firm (and the partners) had ceased to exist by 1996 and 1997 is a fact positively asserted in para 5 of the writ petition filed before the High Court and not denied in the counter-affidavit filed on behalf of the CIT. So also the fact that the demands against the firm UPCC had stood cancelled and this fact was communicated by the ITO, Ward II, Varanasi to the CIT, Allahabad through his letter dt. 26th March, 1990, is also admitted in the counter-affidavit. However, the petition has been dismissed by the High Court. The aggrieved petitioner has filed this petition for special leave under Art. 136 of the Constitution. Leave granted. Two questions arise for decision in this appeal : (i) Whether the TRO could have confirmed the sale on 25th March, 1998, when the demands on account of tax for the 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 s. 156 of the IT Act, 1961 having not been served on the assessee on the sale held for recovery of arrears of income-tax ?

4. Taking up first question the first, according to s. 222 where an assessee is in default or is deemed to be in default in making a payment of tax, the TRO may issue a certificate specifying the amount of arrears due from 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 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 TRO. Several provisions contained in the rules which follow r. 56 are in pari materia with the provisions dealing with attachment and sale of immovable property contained in O. 21 of the CPC dealing with exemption of decrees passed by civil Courts. However, in O. 21 of the CPC a provision similar to r. 56 of Second Schedule is not to be found. Rule 60 provides for an application to set aside sale of immovable property being made by defaulter or an interested person on his depositing the specified amount within 30 days from the date of sale. Rule 61 deals with application to set aside sale of immovable property on the ground of non-service of notice on the defaulter under the Schedule or on the ground of material irregularity in publishing or conducting the sale.

Under r. 62 a sale may be set aside on an application by the purchaser on the ground that the defaulter had no saleable interest in the property sold. The prescribed time limit within which the application can be made under rr. 60, 61 or 62 is 30 days from the date of sale. Where no application is made for setting aside the sale or such an application having been made is disallowed, the TRO shall make an order confirming the sale and thereupon the sale shall become absolute. On a sale of immovable property becoming absolute, a sale certificate shall be issued under r. 65.

5. Under s. 224, an assessee cannot dispute the correctness of any certificate drawn up by the TRO but it is lawful for the TRO to cancel the certificate for any reason if he thinks it necessary to do so or to correct any clerical or any arithmetical error therein. Sub-s. (3) of s. 225 provides as under : 225. Stay of proceedings in pursuance of certificate and amendment or cancellation thereof.— xxx xxx xxx (3). Where a certificate has been drawn up and subsequently the amount of the outstanding demand is reduced as a result of an appeal or other proceeding under this Act, the TRO shall, when the order which was the subject-matter of such appeal or other proceeding has become final and conclusive, amend the certificate, or cancel it, as the case may be.” The term ‘reduced’ in sub-s. (3) of s. 225 would include a case where the demand consequent upon an appeal or any proceedings under the IT Act has been reduced to nil also. The TRO is obliged to give effect to such reduction in demand and accordingly amend or cancel the certificate. The scheme of Part III of 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 TRO 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 TRO by incorporating r. 56 in the Schedule. In it true that ordinarily if there is no application filed for setting aside sale under rr. 60, 61 or 62 and 30 days from the date of the sale have expired, the TRO has to make an order confirming a sale. Nevertheless, an order shall have to be actually made. The combined effect of sub-s. (3) of s. 225 of the Act and r. 56 and r. 63 of Second Schedule is that if before an order confirming the sale is actually passed by the TRO, the demand of tax consequent upon an order made in appeal or other proceedings under the Act has been reduced to nil, the TRO is obliged to cancel the certificate and as soon as the certificate is cancelled, he shall have no power to make an order confirming the sale. The sale itself being subject to confirmation by the TRO, would fall to the ground for want of confirmation.

6. In the case at hand the sale was held on 11th Jan., 1980. No application was filed for setting aside the sale either by the assessee or by the auction-purchaser or by anyone interested in the property. On expiry of 30 days from the date of the sale the TRO could have passed an order confirming the sale. However, the TRO was injuncted by the writ of civil Court from confirming the sale. The interim order issued by the civil Court ceased to operate on 12th Jan., 1998, whereafter an order of confirmation was passed on 25th March, 1998, by the TRO ignoring, or unmindful of, the important event which had taken place in between. Before 25th March, 1998, the demand against the assessee admittedly stood reduced to nil. This fact was in the notice of ITO as well as the CIT. Attention of the ITO as also the TRO was also invited by the firm M/s UPCC through its communication dt. 22nd Nov., 1996 (Annexure P-6). On 16th Jan., 1997, the counsel for the assessee had specifically called upon the ITO who had raised the demand against the assessee to confirm if all the recovery certificates issued against the assessee-firm had stood withdrawn or cancelled. In view of the facts within the knowledge of the Department and the communications so made, the TRO could not have confirmed the sale on 25th March, 1998. Rule 56 in Second Schedule of the IT Act, 1961, is neither a redundant nor a formal provision. It casts an obligation on the TRO to pass an order confirming the sale consciously and with due application of mind to the relevant facts relating to sale by public auction which is to be confirmed. Under r. 63, confirmation of sale is not automatic. An order confirming the sale is contemplated to make the sale absolute. Ordinarily, in the absence of an application under rr. 60, 61 or 62 having been made, or having been rejected if made, on expiry of 30 days from the date of sale the TRO 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 TRO which goes to the root of the matter, the TRO may refuse to pass an order confirming the sale. The fact that 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 TRO 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 vs. Gurdial Singh & Anr. (1967) 2 SCR 77 and Sardar Govindrao Mahadik & Anr. vs. Devi Sahai & Ors. AIR 1982 SC 989 wherein it has been held that once a sale has taken place in execution of 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 (supra), sale was held in execution of an ex parte decree. The ex parte decree was set aside subsequent to the date of the sale but before an order confirming the sale was passed. This Court held that in the absence of an application for setting aside the sale having been moved on the grounds available under rr. 89 to 91 of O. 21 of CPC, the Court could not have refused to confirm the sale. However, in this case itself, this Court, has observed (at p. 80) that there may be cases in which apart from the provisions of rr. 89 to 91 the Court may refuse to confirm a sale, as, for instance, where a sale is held without giving notice to the judgment debtor, or where the Court is misled in fixing a reserved price or where there was no decree in existence at the time when the sale was held.

In Sardar Govindrao Mahadik’s case (supra), Janak Rai’s case (supra) was referred. The Court has drawn a distinction between the Court auction held in favour of a decree holder and where the auction purchaser is an outsider or a stranger. In former case on the decree ceasing to exist before the sale is confirmed, the sale may be refused to be confirmed but in the latter case, equity in favour of the stranger should be protected and the judgment debtor should be left to suffer for the default on his part for not obtaining stay of the execution of the decree from where it was under challenge. Though the learned counsel for the auction-purchaser has relled heavily on these decisions, suffice it to observe that these are the cases of auction sale held under O. 21 of the CPC and, therefore, may not apply to the case of an auction sale held under Second Schedule of the IT Act in view of r. 56 contained therein. Moreover, in these decisions also, the Supreme Court has contemplated situations where in spite of the auction sale having been held and no application for setting aside the sale having been moved, yet in exceptional situations the sale may be refused to be confirmed and may be set aside. Shri S.K. Jain also relied on Padanathil Rugmini Amma vs. P.K. Abdulla, JT (1996) 1 SC 381, wherein this Court has observed that unless the auction-purchasers were protected, the properties which are sold in Court auctions would not fetch a proper price. It is true that sanctity of 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 pronouncement holding, before the sale was confirmed, that there were no arrears. This observation applies a fortiori under the scheme of IT Act, the relevant provisions whereof have already been referred to by us.

9. We now take up the second question. Sec. 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 AO 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 s. 156 is not paid within the time limited by sub-s. (1) or extended under sub-s. (3) of s. 220, then the assessee shall be deemed to be in default under sub-s. (4) of s. 220. Tax recovery certificate can be issued under s. 222 when an assessee is in default or is deemed to be in default. Proceedings for recovery of tax under the Second Schedule can be initiated against a defaulter. Thus s. 156 provides for a vital step to be taken by the AO without which the assessee cannot be termed a defaulter. The use of the term ‘shall’ in s. 156 implies that service of demand notice is mandatory before initiating recoveryproceedings and constitutes foundation of subsequent recovery proceedings. We have already stated that the finding of fact recorded by CIT(A) and the Tribunal was that notice of demand was not served on the assessee. The very foundation for initiating the recovery proceedings, therefore, was non-existent and assessee could neither have deemed to be in default nor any proceedings for recovery of tax could have been initiated against him. The provision corresponding with s. 156 of the IT Act, 1961, contained in s. 29 of the IT Act, 1922 came up for the consideration of this Court in ITO & Anr. vs. Seghu Buchiah Setty (1964) 52 ITR 538 (SC) : TC 52R.1343

Hidayathullah, J. (as His Lordship then was) held that it is after the demand is made, the tax penalty and interest become a debt due to the Government. ‘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. His Lordship emphasised that the service of notice of demand has a few vital impacts amongst others: (i) When the notice of demand is not complied with, the assessee can be treated as a person in default; (ii) on the failure of the assessee to pay after a notice of demand is issued, the recovery proceedings can be started and the amount of tax can be treated as an arrear of land revenue. However, in this case Hidayatullah, J. went on to hold that if an assessment made by the ITO is altered, reduced or increased—by reason of any order under the Act, it is the duty of the ITO to issue a fresh notice of demand in the prescribed form and serve upon the assessee. This particular finding of Hidayathullah, J. created serious complications and resulted in nullifying several recovery proceedings, as also creating bottlenecks in the recoveries of outstanding demands. The Parliament, therefore, enacted Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 which was given a retrospective effect. Sec. 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 taxation authority intimated of reduction to the assessee and the TRO 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 (supra) was superseded.

12. In Homely Industries vs. STO (1976) 37 STC 483 (SC) 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.

13. In Ram Swarup Gupta vs. Behari Lal Baldeo Prasad & Ors. (1974) 95 ITR 339 (All) : TC 52R.567, a Division Bench of Allahabad High Court referred to the effect of Taxation Laws (CVRP) Act, 1964 on the law laid down by this Court in Seghu Buchiah Setty’s case (supra) and held : “The effect of these provisions is to dispense with the need of issuing a fresh notice of demand and the recovery certificate and to allow the original recovery proceedings to continue, but only for the amount found due after reduction in the appeal, and it is for this purpose that the taxing authority is required to send intimation of the fact of the reduction to the assessee and to the TRO. As the proceedings for recovery can be continued only for the amount that finally remains due, and not for any amount in excess thereof, the requirement of sending intimation to the TRO becomes an essential duty of the taxing authority and must be held to be a mandatory condition. Noncompliance of that condition will be an illegality in the procedure and will invalidate the proceedings. A sale held in proceedings initiated and continued for the recovery of an amount in excess of the amount payable by the assessee, after its reduction in appeal, will be invalid. Such a sale is not validated by cl. (c) of s. 3 of the Act.” The Division Bench decision of Allahabad Court in Ram Swarup Gupta’s case (supra) was cited with approval before this Court in Union of India vs. Jardine Henderson Ltd. (1979) 10 CTR (SC) 94 : (1979) 118 ITR 112 (SC) : TC 52R.560 though it was distinguished for its applicability to the facts of the case before this Court. The Division Bench of Orissa High Court has held in Sunil Kumar Singh Deo vs. TRO & Anr. (1987) 64 CTR (Ori) 210 : (1987) 166 ITR 882 (Ori) : TC 52R.191 that non-service of demand notice goes to the root of the jurisdiction of the officer initiating recovery proceedings. We find ourselves in agreement with the view so taken. Incidentally, we may refer to three Division Bench decisions of the High Court of Madhya Pradesh, viz. Ghanshyamlal vs. State of M.P. (1961) MPLJ SN 218, Manmohan Lal Shukla vs. Board of Revenue, M.P. & Ors. (1964) MPLJ 32 and Premchand Ramchand vs. Board of Revenue, M.P. & Ors. (1964) MPLJ 337. Sec. 146 of M.P. Land Revenue Code, 1959 provides that before issuing any process for recovery of arrears of land revenue the Tehsildar or Naib Tehsildar may cause a notice of demand to be served on any defaulter. Chief Justice P.V. Dixit speaking for the Division Benches, in all the 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 falling 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.

14. We are, therefore, clearly of the opinion that service of notice of demand on the assessee under s. 156 of the Act, is mandatory before taking steps for recovery under Second Schedule. Non-service of 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.

15. In Surinder Nath Kapoor vs. Union of India & Ors. (1988) 72 CTR (SC) 75 : 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 that the sale was confirmed. When a decree or order is illegal, any sale held in execution of such a decree or order and confirmed cannot be set aside on the ground that it was illegal when the sale is in favour of a third party. But when a decree or order is a nullity, it will be deemed to have no existence at all and any sale held in execution of such a decree or order must also be held to be null and void.”

16. In the present case, the plea as to non-service of demand notice having been raised before the High Court, in our opinion the High Court should not have adopted too technical a approach by refusing to deal with the plea because it was not raised in the manner in which the High Court thought it should have been raised. The plea went to the root of the matter. The plea was raised before the Departmental authorities right from the ITO to the Tribunal and was not given up before the High Court also. It would not have been difficult for the High Court to ask the IT Department to produce the record of the proceedings and to show if the demand notice was at all served on the assessee. A little more sensitive approach is required to be adopted in the process of dispensing justice when it is found that valuable property of a person was sought to be sold away for recovery of such arrears as did not exist at all.

17. Thus, on both the grounds, we hold that the sale of suit property in favour of respondent No. 3 is liable to be set aside. The appeal is allowed. The impugned judgment of the High Court is set aside. The writ petition filed by the appellant shall stand allowed. All the proceedings for the sale of the disputed property as also the order of the TRO confirming the sale are hereby quashed. The sale having fallen to the ground, the purchase money deposited by the respondent No. 3 shall, obviously, be liable to be refunded to her. She also needs to be compensated by awarding suitable interest for the period for which she has been deprived of the use of her money for no fault of her. In our opinion, it would meet the ends of justice if the amount of Rs. 1,70,000 deposited by her with the TRO is directed to be refunded and she is also awarded interest @ 12 per cent per annum. Who should bear the liability for payment of interest ? For the period for which the sale was not vitiated on account 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 that fact was brought to the notice of the TRO 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 IT Department, represented by respondent Nos. 1 and 2, which has also kept the money and made use of it. It is, therefore, directed that the amount of Rs. 1,70,000 shall be refunded to the respondent No. 3 by the respondents No. 1 and 2 within a period of two months from the date of this judgment. For the period commencing from 11th Jan., 1980, on an amount of Rs. 42,500, and from 25th Jan., 1980, on an amount of Rs. 1,27,500, calculating up to 22nd Nov., 1996, the appellant shall pay the interest @ 12 per cent per annum to the respondent No. 3 which may, in default of payment, be recovered from the house property. With effect from 23rd Nov., 1996, upto the date of refund, the respondent No. 3 shall be entitled to recover interest at the same rate from respondents No. 1 and 2. The amount of interest shall also be calculated and paid within a period of two months from today. We make it clear that the interest is being awarded purely on equitable considerations, in the facts and circumstances of this case, and in doing so we are not laying down any principle of law to be followed as a precedent. The appeal stands allowed in these terms. No order as to the costs.

[Citation : 248 ITR 799]

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