TAX RECOVERY OFFICER Vs. DILIP CONSTRUCTION CO

JUDGEMENT

(1.) THIS order shall also govern the disposal of Civil Revision No. 40 of 1983 (Ramkrishna Shenoy v. Dilip Construction Company and Anr.).

(2.) ONE Dilip Construction Company, Baroda (non-applicant No. 1), had to recover certain dues from Bhilai Steel Plant (non-applicant No. 2). It ultimately secured two awards in its favour and against the Bhilai Steel Plant for Rs. 7,71,512 and Rs. 5,15,722 for two different claims. The awards were put into execution by Dilip Construction Company in the Court of District Judge, Durg. Dilip Construction Company which was a partnership firm was, however, dissolved on September 28, 1980. The firm and its partners individually were in all to pay a huge amount of Rs. 12,00,000 odd as income-tax. On September 28, 1980, the Tax Recovery Officer, Baroda, issued a prohibitory order to the Bhilai Steel Plant as also to the District Judge, Durg, in exercise of its powers under Rule 31 of the Second Schedule to the I.T. Act, 1961. The amount sought to be recovered was stated to be Rs. 11,16,927. The Bhilai Steel Plant all the same deposited a sum of Rs. 12,20,017 on May 6, 1982, in the court. Meanwhile, the non-applicants Nos. 3 to 7 filed suits at Baroda for recovery of certain amounts against Dilip Construction Company. The claims were not opposed and consent decrees were obtained. At the same time, the decrees so obtained also created a charge upon the amount payable by the Bhilai Steel Plant to the Dilip Construction Company. These decree-holders (non-applicants Nos. 3 to 7) got those decrees transferred to Durg for execution. They filed executions to enforce the charge against the amount deposited by the Bhilai Steel Plant for payment to the Dilip Construction Company. Applications for rateable distributions were also filed by those decree-holders.

(3.) THE I.T. Department claims that the entire amount for which the TRO issued a prohibitory order must be made available to it and should be allowed to be appropriated towards the dues against the firm and against the partners individually. It was argued that after the issuance of the prohibitory order, the court has no jurisdiction to issue any process against that amount at the instance of other claimants against the assessee, namely, the Dilip Construction Company, to whom the amount belonged. It was also argued that the charge created under various decrees in favour of non-applicants Nos. 3 to 7 is void and that the tax dues against the firm should be recovered from the partners and vice versa. Section 222(1) of the I.T. Act permits the ITO to forward to the TRO a certificate under his signature specifying the amount of arrears due from the assessee when the assessee is in default or is deemed to be in default in making payment of tax. This section further provides that on receipt of such certificate from ITO, the TRO shall proceed to recover from the assessee the amount so specified in the certificate by attachment of movable or immovable property of the assessee or by his arrest and detention in prison or by appointing a receiver for the management of assessee's movable and immovable properties. THE procedure to be adopted by the TRO is regulated by rules laid down in the Second Schedule. Rule 2 of these rules requires the TRO to issue a notice requiring the defaulter to pay the amount specified in the certificate within 15 days from the date of service of the notice. Under Rule 4, the TRO is entitled upon failure of the assessee to pay the amount as demanded by notice under Rule 2, to attach the defaulter's movable or immovable properties or to arrest and detain him in prison or to appoint a receiver for management of his movable or immovable properties. Rule 11 permits the TRO to investigate claims made to the property attached in execution of the certificate by any other person. According to Rule 16, after the notice under Rule 2 is served upon a defaulter, he or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the TRO. Another noticeable provision is contained in Rule 31, according to which, where the property to be attached is in the custody of any court or public officer, the attachment shall be made by a notice to such court or officer, requesting that such property, and any interest or dividend becoming payable thereon, may be held subject to the further orders of the TRO by whom the notice is issued. This rule further provides that where the property attached is in custody of a court, any question of title or priority arising between the ITO and any other person, not being the defaulter, claiming to be interested in such property by virtue of any assignment, attachment or otherwise, shall be determined by such court. From these provisions, it will appear that after the assessee-defaulter is served with a notice under Rule 2 of the Second Schedule, a civil court is not entitled to issue any process against any property of the defaulter in execution of a decree for payment of money. This is so by force of Rule 16(1). [See TRO v. V. A. Ramaswami [1978] 114 ITR 408 (Mad) and Union of India v. Ganesh Lal Bajaj [1978] 115 ITR 791 (Mad)]. This, however, relates only to the property of the defaulter-assessee and to no other property because the notice under Rule 2 contemplates notice only to the defaulter and the property to be attached under Rule 4 is the property of the defaulter. In the case in hand, the prohibitory order issued under Rule 31 attached the entire amount which was due and payable only to the firm, Dilip Construction Company. This entire amount payable to the firm undoubtedly is the asset of the firm itself. THE prohibitory order issued under Rule 31, however, clearly stated that it was for realisation of the arrears of income-tax dues against the firm as also dues against the individual partners. All the same, the property in the custody of court or the public officer which is permitted to be attached under Rule 31 is the property of the defaulter-assessee and not of any other person. THErefore, the prohibitory order issued under Rule 31 shall be effective only to the extent of the amount of tax to be recovered from the firm. It will have no effect and shall bear no consequence relating to the dues against the individuals because no part of that amount belonged to the individual partners. THE findings of the executing court in this behalf are well founded.