1. By this petition filed under article 226 of the Constitution of India, the petitioner-company is challenging the legality of the action of the ITO in issuing notice dated July 1, 1974, under s. 226(3) of the I.T. Act, 1961, and the notice dated July 20,1974, issuing prohibitory orders and, thereafter, threatening to recover the amount from the petitioner-company. The facts giving rise to the petition are required to be stated briefly to appreciate the contention urged on behalf of the petitioners.
2. The petitioner-company was formed in the year 1971, with the object to take over Wireless Manufacturers (India), a partnership concern having ] four partners, who were all family members, at the relevant time. On July 12, 1971, the partnership concern entered into an agreement to sell its assets to the petitioner-company, and of the terms of the agreement indicates that the machinery of the partnership firm was already handed over to the petitioner-company long prior to the execution of the agreement. It is required to be stated that the petitioner-company and the partnership firm are really sister concerns.
3. On July 1, 1974, the Tax Recovery Officer, Bombay, issued a notice to the petitioner-company under s. 226(3) of the I.T. Act demanding an amount of Rs. 1,61,000 which was due as arrears of income-tax from the partnership firm and its partners. Prior to this date, on June 24, 1974, the prohibitory orders were issued restraining the petitioner-company from disposing of their property. The petitioner-company claims that the Tax Recovery Officer was approached on July 18, 1974, and thereafter, on July 22, 1974, a letter was sent forwarding a certificate issued by the chartered accountant that no amount is due from the petitioner-company to the partnership concern. The petitioners claim that a notice dated July 20, 1974, issued by the Tax Recovery Officer was served upon the petitioner-company on July 22, 1974, threatening that in case the amount of arrears was not paid, then the same would be realised in accordance with the Second Schedule to the I.T. Act, 1961. The petitioner-company claims that on July 25, 1974, the Tax Recovery Officer came to recover the amount and the petitioner-company immediately approached this court and filed this petition and secured interim orders.
4. Shri Taleyarkhan, learned counsel appearing in support of the petition, submitted that it is open for the ITO to recover the Tax by various modes, including the one provided under s. 226 of the I.T. Act, 1961. Section 226(3), inter alia, provides that the ITO may by notice in writing require any person from whom money is due to pay to the ITO so much of the money which are sufficient to pay the amount due by the assessee. In other words, this section enables the ITO to recover the amount from the garnishee of the assessee. Clause (vi) of s. 226(3) reads as under :
'Whether a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that the does not hold any money for or on account of the assessee, then, nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Income-tax Officer to the extent of his own liability to the assessee on the date of notice, or to the extent of the assessee's liability for any sum due under this act, whichever is less.'
5. This sub-section provides that if the person to whom notice is issued makes a statement on oath that the arrears demanded are not due or he does not hold any money on account of the assessee, then nothing contained in s. 226 shall apply. It further provides that if any statement made on oath is found to be false, then such person shall be liable. Clause (x) of s. 226(3) enables the ITO to recover the amount by taking proceedings in the manner provided under ss. 222 to 225 and the notice shall have the effect as an attachment of a debt by the Tax Recovery Officer in exercise of the powers under s. 222 of the I.T. Act.
6. Shri Taleyarkhan submits that the petitioners have filed two affidavits as contemplated by cl. (vi) of s. 226(3) of the I.T. Act, 1961, and unless the ITO comes to the conclusion that the statements made therein are false, it is not permissible to adopt proceedings for recovery of the tax from the petitioners under the provisions of s. 226 of the Act. There is considerable merit in the submission of the learned counsel. Shri Joshi, learned counsel appearing on behalf of the Department, stated that it was not possible for the ITO to ascertain the correctness of the statements in the affidavits in view of the interim orders passed by this court restraining him to take any action. Shri Joshi states that the ITO will now consider whether the statements made in the affidavits should be accepted or otherwise, and, in case the statements made in the affidavits are found to be correct, then the ITO will not proceed to recover the arrears from the petitioners. The ITO is at liberty to proceed in accordance with the notice dated July 1, 1974, to recover the arrears in case it is found that the statements made in the affidavits are false in any material ] particular. It is made clear that the notice dated July 1, 1974, is not set aside as also the prohibitory orders issued by the ITO. The ITO is entitled to proceed to recover the arrears in accordance with the provisions of s. 226 of the Act provided it is discovered that the statements made in the affidavits are false in any material particular.
7. Accordingly, the rules is discharged, but it is directed that the ITO and the Tax Recovery Officer will not proceed to enforce the recovery till the ITO ascertains whether the statements made in the affidavits by the petitioners are correct or otherwise, in accordance with the provisions of cl. (vi) of s. 226(3) of the I.T. Act, 1961. In the circumstances of the case, there will be no order as to costs.
8. Chamber Summons No. 472 of 1983, taking out by the former partners of Wireless Manufacturers (India) for being impleaded as party to the proceedings, in view of the dismissal of the petition, does not survive and is dismissed without any order as to costs.
9. It is unfortunate that the petition remained pending right from the year 1974, and I have directed the Prothonotary and Senior Master to make an inquiry as to how the petition remained pending for so many years.