KURUMBER BETTA ESTATE Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THIS writ appeal impugns the judgment of the learned single judge dated November 15, 1995 (see [1996] 217 ITR 631), dismissing the original petition. The question of law that arises here for our consideration is : whether the amount kept in simpliciter deposit with the Revenue authorities without being appropriated towards the tax due of an assessee would be liable to attract interest for the period it was lying in deposit ?

(2.) THE petitioner is a partnership business which was running a cardamom and tea estate known as Kurumber Betta Estate in the Nilgiris. THE partnership consisted of three partners, one of whom, S. Chenniah, was a resident of Mysore, Karnataka and the other two partners were residents of Kerala State. THE said Chenniah was a defaulter of tax and accumulated income-tax arrears. All his properties in Karnataka were subjected to recovery proceedings by the income-tax authorities. A notice dated December 28, 1968, was issued by the Tax Recovery Officer, Mysore, addressed to Kurumber Betta Estate ordering that the share of the said Section Chenniah in Kurumber Betta Estate and the profits of the said property were charged with the payment of amount of Rs. 7,41,678.10 as certified to the Tax Recovery Officer by the Income-tax Officer, Central Circle-1, Bangalore, together with interest payable under Section 220(2) of the Income-tax Act, 1961 (hereianfter referred to as "the Act"). THE notice also directed that no amount due or payable on any account should be paid without a written order from the office of the Tax Recovery Officer. By a letter dated December 26, 1977, at exhibit P-2, the managing agent of Kurumber Betta Estate sought clarification from the Income-tax Officer, Central Circle-I, Bangalore, as to whether the partnership property could be partitioned and the share of Section Chenniah who had since deceased, could be given to his legal heir, Smt. Prameela Krishnan, or in the alternative, whether the share of Section Chenniah could be sold and the sale proceeds be paid to the legal representative. On January 5, 1978, vide exhibit P-3, a garnishee notice was served on the managing agent of Kurumber Betta Estate under Section 226(3) of the Act calling upon him forthwith to pay any amount due from him or held by him for and on account of Section Chenniah to the extent of Rs. 20,18,448 which was due from the deceased Section Chenniah. THEre was no action taken by the Kurumber Betta Estate on the garnishee notice and no payments were made pursuant thereto. In the meantime, the partnership itself had run into difficulties and the partners decided to liquidate their liability by selling the assets in the partnership firm. Since the assets of partnership comprised immovable properties of large value, they were obliged to seek permission from the Income-tax Department. When the Income-tax Department was moved for permission to sell the estate, the Department agreed to grant such permission on condition that one-third of the sale price be kept in deposit or secured by way of bank guarantee for meeting the final income-tax dues of the deceased Section Chenniah. On March 14, 1987, vide exhibit P-4, the managing agent of Kurumber Betta Estate addressed a letter to the Tax Recovery Officer and offered to deposit the amount required and not to go in for bank guarantee, as it was anxious to complete the sale without further delay. THE offer was to deposit the entire one-third of the sale proceeds without prejudice to the contention that they were liable to deposit only one-third of the net sale proceeds after paying off all liabilities incurred for maintenance and running of the estate. This was confirmed by the letter dated March 24, 1987, addressed by the Tax Recovery Officer, Bangalore, to Kurumber Betta Estate, in which he conveyed that, after discussion with the Commissioner of Income-tax, he had been instructed to call for a demand draft for a sum of Rs. 11,67,000 in favour of the Tax Recovery Officer, Mysore, which would be kept in deposit "to be appropriated towards income-tax after final settlement of the liability of Section Chenniah, towards the firm of Kurumber Betta Estate". (Though this document is not on record, at our request, learned counsel for the appellant produced it and we have perused it). THE position was clarified by the Kurumber Betta Estate by a further letter dated July 5, 1987 (vide exhibit P-5) addressed to the Tax Recovery Officer, Mysore. This letter is crucial, in our view, and bears reproduction in full. THE letter reads as under :

(3.) THE crucial question on which the appeal turns is, what was the nature of the amount retained in the hands of the Income-tax Department from July 6, 1987, to February 16, 1989. THE material on record to which we have referred in extenso clearly indicates that, in proceedings other than the proceedings pertaining to the tax liability of the deceased, Section Chenniah, a partner of the appellant firm, as a condition for granting permission for sale of the firm's immovable property, the Income-tax Department required security to the extent of one-third of the gross sale proceeds. THEy gave two options to the appellant firm, either to make a cash deposit or furnish a bank guarantee in equivalent amount. It is the appellant which chose to make a cash deposit. THEreafter, the appellant's correspondence with the Department shows that they did not want appropriation of the amount towards income-tax dues immediately, but wanted the Income-tax Department to retain it as a deposit to be appropriated subsequently when the tax dues of the deceased Chenniah were finally determined. THE Revenue acceded to this request. In other words, both the Revenue and the appellant were conscious of the fact that money was retained in the hands of the Revenue only by way of deposit as security for meeting the liability. At no time was it appropriated in discharge of the tax liability of the deceased Section Chenniah, till the Central Board of Direct Taxes advised to take such action. It is on the instructions of the Central Board of Direct Taxes, at the instance of the Tax Recovery Officer, that the amount in deposit was appropriated on February 17, 1989, towards meeting the tax liability of Section Chenniah. On and from that date the amount became liable to fetch interest under the provisions of the Income-tax Act under Section 244A. Prior thereto, it was retained by the Income-tax Department as a non-interest bearing deposit. THEre is no other provision in the Income-tax Act to pay interest except under Section 244. Section 244A would spring into action only in the event of refund of excess amount of tax, penalty, tax collected at source or paid as advance tax, or treated as paid under Section 199. THE liability of the Revenue to pay interest under Section 244A is only towards the excess amount of tax or penalty, demanded and collected by it in discharge of the liability of an assessee. We do not see nor are we advised of, any provision in the Income-tax Act, which requires the Revenue to pay interest on the amount kept in such deposit. At our instance, learned counsel for the Revenue, explained to us by reference to the clarification he had sought from the Commissioner of Income-tax and the State Bank of India that, during the period from July 6, 1987, to February 16, 1989, the amount was held in a personal deposit account. We are informed that under administrative circulars, amounts which were not to be appropriated to Revenue are held in personal deposit account to be kept in the name of certain officers, including the Tax Recovery Officer. THEse amounts are actually treated as amounts of the Government over which the bank has no authority. In other words, instead of depositing the amount in the treasury, the bank holds it as an agent of the treasury for the purpose of holding the money. Such amounts which are held as security cannot be utilised by the bank, would not bear any interest, and the Revenue also would not be entitled to any interest on such amount held. All amounts which are collected otherwise than by way of tax or penalty are credited to this personal deposit account. Amounts such as seized cash are also credited to this account.