H.N. Devani, J.@mdashRule. Mrs. M.M. Bhatt, learned senior standing counsel for the Respondents waives service of rule.
2. Having regard to the controversy involved in the present petition which lies in a very narrow compass, the petition is taken up for final hearing today.
3. This petition under Articles 226 and 227 of the Constitution of India has been filed with the following substantive prayer:
(A) Issue a writ of certiorari and/or a writ of mandamus and/or any other writ direction or order to quash and set aside the impugned notice dated 26-2-2010 at Annex. W and the recovery proceedings initiated by Respondent No. (2) against the Petitioner for assessment year 1985-86 in the interest of justice.
4. The facts as appearing in the petition are that on 7-8-1985, the Petitioner had filed declaration u/s 184(7) of the Income Tax Act, 1961 (the Act) for continuation of registration of the partnership firm in Form No. 12 for the assessment year 1985-86. The Petitioner received a notice dated 11-11-1987 from the Income Tax Officer, Circle 1/F, Ahmedabad, calling upon it to furnish the reasons for late filing of Form No. 12 as per the provisions of Section 184(7) of the Act. The Petitioner furnished the reasons vide letter dt.3-12-1987. According to the Petitioner, subsequently the Petitioner did not hear anything as regards passing of any assessment order and/or granting of registration to the Petitioner firm. However, vide notice dt.15-1-1991 issued u/s 221(1) of the Act, recovery of Rs. 10,023 being income tax and interest of Rs. 8,443 was sought to be made. Vide letter dated 21-2-1991 addressed to the Income Tax Officer, the Petitioner informed that the recovery proceedings were bad in law as the same had been commenced without issuance of assessment order or demand notice. The Petitioner also requested for a copy of the assessment order and notice of demand, if any, with a further request to drop the recovery proceedings. It appears that there was no response to the said communication and another notice came to be issued on 15-6-1994 u/s 221(1) of the Act followed by a summons dated 28-11-1994 under Rule 83 of the Second Schedule to the Act for recovery of the outstanding dues of Rs. 27,466 for the assessment year 1985-86. The Petitioner thereupon addressed a letter dated 12-12-1994 to the TRO stating that the Petitioner had not received a copy of the assessment order and demand notice and renewed the request for issuance of assessment order and demand notice and to drop recovery proceedings. Thereafter, along with a communication dated 10-2-1995, the Petitioner received a xerox copy of the assessment order dated 30-3-1988 passed u/s 143(1) of the Act for assessment year 1985-86 along with a challan of Rs. 27,466. The Petitioner again by a letter dated 16-2-1995 informed the Income Tax Officer that the Petitioner had not received a statutory demand notice u/s 156 of the Act for assessment year 1985-86 and requested him to issue demand notice u/s 156 of the Act as well as furnish the original copy of the assessment order for assessment year 1985-86. Vide letter dated 20-7-1995, the TRO, Ahmedabad directed the Petitioner to pay Rs. 54,181 plus TR Os interest within three days from receipt of the letter failing which the Petitioner would be liable for the consequences mentioned in Section 32 of the Code of Civil Procedure, 1908. The Petitioner again addressed a letter dated 29-7-1995 to the TRO renewing the earlier request. Thereafter, there was no communication till June, 1996. On 1-7-1996, the Petitioner received a summons dated 24-6-1996 under Rule 83 of the Second Schedule to the Income Tax Act, 1961 to appear before the TRO along with books of accounts etc. Vide letter dated 4-7-1996, the Petitioner referred to the earlier letters addressed by it to the authorities and requested to drop the proceedings. The Petitioner thereafter received copies of letters dated 19-7-1996 and 27-11-1996 addressed by the TRO to the Income Tax Officer, Ward 1(4), Ahmedabad stating that it was not possible to make recovery of demand against the Petitioner as the representative of the Petitioner had stated that the Petitioner had not received copy of the assessment order and the demand notice. Thereafter, for a period of almost four years nothing was done. On 31-1-2000, the Petitioner received a notice from the TRO, Ahmedabad in connection with arrears of taxes amounting to Rs. 54,181 for assessment year 1985-86. The Petitioner again addressed a letter dated 7-2-2000 reiterating what was stated in the earlier letters. The Petitioner thereafter received notices u/s 221(1) of the Act dated 10-3-2000 and 4-8-2000 demanding arrears of Rs. 58,231 for assessment year 1985-86 with interest and other arrears for assessment year 1986-87. Thereafter, in the year 2005, on 10-10-2005, the Petitioner again received a letter from the Income Tax Officer, Ward No. 6(3), Ahmedabad for recovery of arrears for assessment years 1985-86 and 1986-87. The Petitioner addressed a letter dated 21-10-2005 referring to the earlier communications with a request to drop the proceedings. The Petitioner received a letter dated 16-1-2007 from the Respondent No. 3-assessing officer in connection with payment of outstanding arrears of Rs. 54,000 for assessment year 1985-86. The Petitioner again addressed a letter dated 27-1-2007 referring to the earlier communications and requesting to drop the proceedings. Vide letter dated 15-2-2010 of the TRO, the Petitioner was called upon to pay outstanding arrears of Rs. 54,181 for assessment year 1985-86. The Petitioner, in reply, addressed a letter dated 22-2-2010 referring to the earlier communications and submitted that in the light of the fact that the Petitioner had not received statutory demand notice u/s 156 of the Act at any point of time, no recovery of tax could be made from the Petitioner. Vide notice dated 26-2-2010 made u/s 226(3) of the Act which was served upon the Respondent No. 4--The Ahmedabad Mercantile Co-operative bank Ltd., issued by the TRO, the said bank was directed to attach the account of the Petitioner being current account No. ODFD 329. The Petitioner upon receipt of intimation from the bank, vide letter dated 8-3-2010, requested the TRO to withdraw the proceedings in as much as the notice u/s 226(3) of the Act was bad as no valid demand notice has ever been issued u/s 156 of the Act. The Petitioner also addressed a letter dated 26-3-2010 to the income tax Ombudsman, Ahmedabad requesting him to direct the TRO to lift the attachment upon the bank account of the Petitioner. Vide letter dated 5-4-2010, the Petitioner was informed by the office of the income tax Ombudsman that it was not possible for the said office to take action in this regard. The Petitioner thereafter addressed a letter dated 21-4-2010 to the Respondent No. 1-CIT reiterating what was stated in the earlier communication. Since no action was taken by Respondent Nos. 1 to 3 in the matter of vacating the attachment of the account of the Petitioner since March, 2010, the Petitioner has filed the present petition under Article 226 of the Constitution of India.
5. In response to the petition the Respondent No. 2 has filed an affidavit-in-reply stating that the Petitioner had been served with a notice of demand dated 12-9-1994 under Rule 2 of the Second Schedule to the Act by the office of the TRO which had not been challenged by the Petitioner at the relevant time. That the demand is now sought to be challenged by the Petitioner after a lapse of 16 years. That no records are available with the office of the assessing officer, as the matter is very old. However, there is no factual averment regarding demand notice u/s 156 of the Act ever having been served upon the Petitioner.
6. Mr. B.D. Karia, learned advocate for the Petitioner invited the attention of the court to the various communications addressed by the Petitioner to the tax authorities as well as the communication addressed by the TRO to the assessing officer requesting him to issue copies of the assessment order and demand notice to the Petitioner. Attention was invited to the provisions of Section 156 of the Act, as was in force at the relevant time, to submit that it was incumbent upon the assessing officer to serve upon the Petitioner a notice of demand in the prescribed format specifying the sum so payable. It was submitted that in absence of any demand having been made u/s 156, it was not permissible for the Respondents to initiate recovery proceedings against the Petitioner. It was submitted that till date, neither the assessment order nor a demand notice u/s 156 of the Act has been served upon the Petitioner and as such, the entire recovery proceedings stand vitiated and cannot be sustained. In the absence of a demand notice being served upon the Petitioner, there was no legally enforceable demand and as such, it was not permissible for the Respondents to initiate recovery proceedings as a demand u/s 156 is a condition precedent for taking action for recovery u/s 222 of the Act. It was, accordingly, submitted that the entire proceedings stand vitiated in the absence of the basic condition precedent namely, service of demand notice u/s 156 being satisfied. It was accordingly submitted that the recovery proceedings are not sustainable and as such, are required to be quashed and set aside and the Respondents are required to be directed to lift the attachment of the Petitioners bank account.
7. On the other hand, Mrs. M.M. Bhatt, learned senior standing counsel opposed the petition. The learned Counsel placed reliance upon the averments made in the affidavit-in-reply to submit that despite the fact that demand had been raised under Rule 2 of the Second Schedule of the Income Tax Act way back in the year 1994, the Petitioner had never challenged the same and as such, the Petitioner cannot be permitted to challenge the said demand by way of the present writ petition after a lapse of 16 years. It was submitted that this being a very old case, no records are available with the office of the assessing officer and as such, the petition should be rejected on the ground of inordinate delay and laches. Referring to the averments made in the petition and more particularly, to paras 6 and 7 thereof, it was pointed out that recovery certificate was drawn as per the provisions of Sections 222 to 226 under the Second Schedule to the Act and the Assessee was also served with Form No. 57 dated 12-9-1994 by the TRO on 5-12-1994 wherein a demand of Rs. 54,181 had been raised which includes tax and interest u/s 220(2) of the Act for assessment year 1985-86. That the said demand was never disputed by the Petitioner till date and that the certificate of recovery having not been challenged, the Petitioner ought not to be permitted to challenge the same belatedly by way of this writ petition.
8. Thus the controversy that arises for determination is (i) whether any legally valid demand notice had been served upon the Petitioner? and (ii) in case the first issue is answered in the negative, whether in the absence of a legally valid demand notice, the recovery proceedings initiated by the Respondents are legal and valid.
9. From the facts emerging on record, no demand notice, as contemplated u/s 156 of the Act, appears to have ever been served upon the Petitioner. On behalf of the Respondents, it has been contended that since the petition has been filed after a considerable delay, the record of the case is not available with the assessing officer so as to enable the Respondents to ascertain as to whether or not any demand notice u/s 156 had been served upon the Petitioner. However, the said contention appears to be misconceived in as much as the Petitioner, at the earliest point of time, upon receipt of the recovery notice dated 15-1-1991, had, vide reply dated 21-2-1991 objected to the initiation of the recovery proceedings as it had not received copies of the assessment order and demand notice. Thereafter, over the years, from time to time, recovery notices have been issued to the Petitioner and on each occasion, the Petitioner has responded to the same by filing replies calling upon the Respondents to serve the assessment order as well as demand notice u/s 156 on the Petitioner. In fact, at one point of time, even the TRO vide communications dated 19-7-1996 and 27-11-1996, had informed the assessing officer as regards the objection raised by the Assessee against the recovery of demand in absence of service of assessment order and demand notice and had requested him to take necessary action and intimate the correct demand to be recovered to the TRO. Thus, it is apparent that till date, no demand notice as envisaged u/s 156 of the Act has been served upon the Petitioner-Assessee.
10. On behalf of the Respondents, the learned Counsel has submitted that as the Petitioner has not challenged the certificate u/s 222 of the Act, it is not permissible for the Petitioner to challenge the recovery proceedings at this stage. In this regard, it may be germane to refer to the provisions of Section 220 of the Act which provides "when tax payable and when Assessee deemed in default". Sub-section (1) of Section 220 provides that any amount, otherwise than by way of advance tax, specified as payable in a notice of demand u/s 156 shall be paid within 35 days of the service of notice at the place and to the person mentioned in the notice. Sub-section (2) thereof provides that if the amount specified in any notice of demand u/s 156 is not paid within the period limited under Sub-section (1), the Assessee shall be liable to pay simple interest of 12 per cent per annum from the day commencing after the end of the period mentioned in Sub-section (1). Sub-section (3) provides that without prejudice to the provisions contained in Sub-section (2), on an application made by the Assessee before the expiry of the due date under Sub-section (1), the Income Tax Officer may extend the time for payment or allow payment by instalments, subject to such conditions, as he may think fit in the circumstances of the case. Sub-section (4) thereof provides that if the amount is not paid within the time limited under Sub-section (1) or extended under Sub-section (3), as the case may be, at the place and to the person mentioned in the said notice, the Assessee shall be deemed to be in default. On a plain reading of Sub-section (4) of Section 220 of the Act, it is apparent that a person can be said to be an Assessee in default, (i) if he does not pay the amount specified in a notice u/s 156 within the time limited under Sub-section (1), viz., 35 days of the service of notice or (ii) if he does not pay the amount specified in a notice u/s 156 within the time extended under Sub-section (3), at the place and to the person mentioned in the said notice. Thus, before invoking the provisions of Section 220 of the Act, a notice is required to be served upon the Assessee, specifying the amount as well as the place and the person to whom such amount is to be paid. Unless a demand notice u/s 156 of the Act is served upon the Assessee, he would not be in a position to know (i) the amount that he is required to pay; (ii) the place where he is required to make payment; and (iii) the person to whom such payment is required to be made. Moreover, the period of 35 days for making payment under Sub-section (1) would commence only from the date of service of notice u/s 156 of the Act. In the circumstances, in the absence of any demand notice u/s 156 of the Act being served upon the Assessee, the time to make payment under Sub-section (1) would not start running, hence, it would not be possible to compute the period of 35 days therefrom, nor would it be possible to fix the liability to pay interest under Sub-section (2) of Section 220 as the interest is required to be computed from the day commencing after the end of the period mentioned in Sub-section (1); consequently the question of extending the period under Sub-section (3) would also not arise. Thus, when it is not possible to satisfy any of the conditions precedent for treating a person to be an Assessee in default, the question of invoking the provisions of Section 220 of the Act would not arise. As a necessary corollary, the question of the Income Tax Officer issuing a certificate under Sub-section (1) of Section 222 of the Act specifying the amount of arrears due from the Assessee and forwarding the same to the recovery officer would not arise.
11. Examining the facts of the present case in the background of the aforesaid statutory provisions, the record of the case makes it apparent that no demand notice u/s 156 of the Act has been served upon the Petitioner. In the circumstances in the absence of a demand notice u/s 156 of the Act being served on the Petitioner, the condition precedent for invoking Section 220 of the Act, viz. default in payment of the amount demanded by the revenue under a notice u/s 156 within the time stipulated therein and non-satisfaction of such demand, does not stand satisfied. Thus, in the absence of service of a demand notice u/s 156 of the Act on the Petitioner, which is a basic requirement for invoking the provisions of Section 220 of the Act, the Petitioner could not have been treated to be an Assessee in default. In para 6 of the affidavit-in-reply filed on behalf of the Respondents it has been stated that demand raised u/s 143(1) was reflected as outstanding in the arrear demand and collection register, therefore, the recovery certificate was drawn as per the provisions of Sections 222 to 226 under the Second Schedule to the Income Tax Act. However, in the absence of any demand notice having been served on the Petitioner, one fails to understand as to how interest u/s 220(2) of the Act came to be computed and as to how the Petitioner came to be treated as an Assessee deemed to be in default. Thus, in the absence of service of notice of demand u/s 156 of the Act, the subsequent proceedings under Sections 220 to 226 of the Act are evidently without jurisdiction.
12. The apex court in the case of
14. If the amount specified in the notice of demand u/s 156 is not paid within the time limited by Sub-section (1) or extended under Sub-section (3) of Section 220, then the Assessee shall be deemed to be in default under Sub-section (4) of Section 220. Tax recovery certificate can be issued u/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 Section 156 provides for a vital step to be taken by the assessing officer without which the Assessee cannot be termed a defaulter. The use of the term shall in Section 156 implies that service of demand notice is mandatory before initiating recovery proceedings and constitutes foundation of subsequent recovery proceedings.
13. As already noted in the preceding paras, in the facts of the present case no notice of demand has been served upon the Petitioner. In the circumstances, in the absence of service of a demand notice u/s 156 of the Act on the Petitioner, prior to initiating recovery proceedings, which is mandatory, the very foundation of the recovery proceedings stands vitiated and as such, the same cannot be sustained.
14. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 26-2-2010 (Annex. W to the petition) as well as the recovery proceedings initiated by the Respondent No. 2 against the Petitioner for assessment year 1985-86 are hereby quashed and set aside. Consequentially, the attachment effected by the Respondent No. 2 of the bank account No. ODFD 329 with The Ahmedabad Mercantile Co-operative bank Ltd., Mehadi Kuva Branch, Ahmedabad also cannot be sustained and shall be forthwith vacated. Rule is made absolute accordingly with no order as to costs.
