B M MALANI Vs. INCOME TAX DEPT

JUDGEMENT

(1.) A short question is involved in this writ petition. The petitioner is an assessee of the Income Tax Department. For the assessment years 1988-89 and 1990-91 to 1995-96 pursuant to the orders dated 2.12.1999 the 2nd respondent determined the tax at Rs.1,76,80,735/- payable by the petitioner to the department. A demand notice was issued on 11.2.2000 to the petitioner asking him to pay the tax by 12.4.2000. The demand notice contained certain mistakes and on an application filed by the petitioner, the notice was rectified by the 2nd respondent on 8.3.2002 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.65.00 lakhs with the 3rd respondent in the units of Monthly Income Plan 1998-III under Capital Gains Scheme and had sought exemption under Section 54 EA of the Income Tax Act (for short "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 3rd respondent at Rs.10/- per unit after five years i.e., in September, 2003. The said amount of Rs.65,00 lakhs was, therefore, fully secured under the said units with the 3rd respondent. Since there was some time for maturity of the units, the petitioner had sought time for payment of tax till September, 2001 from Income Tax Settlement Commissioner, Chennai. Once again he moved an application on 4.2.2002 before the Settlement Commissioner seeking extension of time till 31.5.2002. Along with the application he deposited an amount of Rs.25.00 lakhs on 31.1.2002 to prove his bona fides. As such the total deposits made by the petitioner was Rs.92.04 lakhs up to October, 2000. On 31.1.2002 he made further deposit of Rs.25.00 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 the units in the face value of over Rs.65.00 lakhs. He was waiting for the orders of the Settlement Commissioner on the application made by him on 4.2.2002. In the meantime, it appears, the 2nd respondent issued attachment proceedings under Section 226 (3) of the Income Tax Act on 8.2.2002 and the units of the petitioner with the 3rd respondent were attached. The petitioner was neither aware of the same nor was given any notice. It was only on 15.2.2002 that the 2nd 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 garnishee order to the 3rd respondent. It is further contended that even if it is assumed that the attachment made by the 2nd respondent was valid, the 3rd 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 3rd 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 Unit Trust of India, the face value per unit had fallen to Rs.7.00 per unit in September, 2001 as against Rs.10.00 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.10.00 and he requested the Settlement Commissioner to extend the time for payment of balance amount till 31.5.2002. It is contended that the petitioner's units in the hands of 3rd respondent were only attached by the 2nd respondent under Section 226 (3) of the Income Tax Act. The 3rd respondent on his own resorted to unauthorized distress sale of the units of the petitioner and thereby the petitioner incurred loss of Rs.3.07 ps. per unit. The action of the 3rd respondent in resorting to sale of the units was wholly unwarranted, unauthorized and without notice and consent of the petitioner. The original records pertaining to the units remained with the petitioner. The proceedings issued by the 2nd respondent seeking attachment under Section 226(3) of the Income Tax Act did not warrant the 3rd respondent to resort to distress sale of the petitioner's units in such a hasty manner. The petitioner had invested Rs.65.00 lakhs with the 3rd respondent. The petitioner was also receiving the dividends on the units annually at Rs.8,12,500/-being 12.5% free from income tax and as such besides having 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. Section 226(3)(i) of the Income Tax Act lays down:

(2.) A perusal of Section 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 Section 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 assessee or it should become due to him some time in future. What was attached under the impugned notice by the Income Tax Officer was not money, but were the units held by the assessee with the 3rd 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 3rd 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 3rd 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 Income Tax Department. That is not the purport of Section 226(3) of the Act. Even the Income Tax 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 2nd respondent.

(3.) In the counter-affidavit filed by the 3rd respondent-UTI it has been stated in Para 5 (ii),