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CASE NO.: Appeal (civil)  4792 of 2007

PETITIONER: Administrator, Unit Trust of India

RESPONDENT: B.M. Malani & Ors

DATE OF JUDGMENT: 11/10/2007

BENCH: S.B. Sinha & Harjit Singh Bedi

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No. 209 of 2005) [With Civil Appeal Nos. 4793-4799/07 @ SLP (C) Nos.18855-18861 of  2005]

S.B. Sinha, J.

1.      Leave granted.

2.      Interpretation of sub-section (3) of Section 226 of the Income Tax  Act, 1961 (Act) is involved in these appeals which arises out of a judgment  and order dated 27.8.2004 passed by the High Court of Judicature of Andhra  Pradesh at Hyderabad in Writ Petition No.2305 of 2002 whereby and  whereunder the writ petition filed by B.M. Malani (hereafter referred to as  the respondent) was allowed in part.   3.      Respondent is an assessee of income tax.  He was admittedly a  defaulter in payment of income-tax.  He had invested an amount of 65 lacs  in the Monthly Income Plan (III) offered by the Unit Trust of India under  Capital Gains Scheme, the predecessor in interest of the petitioner in the  year 1998 with an object to seek exemption under Section 84-E of the Act.   The \021Highlights\022 projected for such an offer were as under : ?       \023A five year close ended income plan ?       The plan offers three options 1) Monthly  Income Option, 2) Annual Income Option &  3) Cumulative Option ?       The face value of a unit is Rs.10/- and units  will be sold at par. ?       The Trust shall pay an assured income @  12.50% p.a. payable monthly under monthly  income option and @ 13.25% p.a. payable  annually under annual income option, for all  the five years of the plan. ?       Under the Monthly Income Option, income  distribution warrants for the period upto  March 1999 will be sent along with the  membership advice/unit certificate.   Thereafter income warrants payable monthly  will be sent in advance for every April- March period. ?       Repurchase allowed from 1st September,  2001 at NAV based repurchase price under  all the three options. ?       Scheme shall be listed on the whole sale  debt segment of the NSE within six months  from the closure of subscription. ?       It is guaranteed that the capital invested  in the scheme will be protected on

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maturity i.e. units will not be redeemed  below par.  The Development Reserve  Fund (DRF) of the Trust will guarantee  this capital protection.  There is no such  guarantee for premature repurchases and  the repurchase price in such cases will be  as per prevailing NAV.  There is scope for  capital appreciation as a part of  investment will be in equities. ?       Tax benefits under Section 80L and Sections  48 and 112 of Income Tax Act, 1961 on  income distributed and capital gains from  capital appreciation. Capital gains tax  exemption under Section 54EA of the  Income Tax Act, 1961 subject to lock-in for  three years from the date of acceptance.\024

4.      Appellant received a notice from the Income Tax Department  purported to be under sub-section (3) of Section 226 of the Income Tax Act.   In compliance of the demand made therein, a sum of Rs.43,69,083.30 p. was  paid to the Department by the appellant wherefor, the value of the unit at the  relevant time was calculated at the rate of Rs.6.93 p. per unit.   5.      Respondent herein filed a writ petition questioning the said action of  the appellant in resorting to sale of the said units without his consent. 6.      Admittedly, although the units were transferred, their value had not  become due to the assessee on the date on which such notice was given.  It  was held by the High Court that the respondent was entitled to the  redemption value of the units at the rate of Rs.10/- per unit after five years.   7.      Appellant is, thus, before us.  An appeal has also been filed by the  respondent contending that the dividend declared on the said amount also  should have been directed to be paid by the High Court.   8.      Mr. M.L. Verma, learned senior counsel appearing on behalf of the  appellant, would submit that the respondent being a defaulter and the  appellant having been holding the units on its behalf, the High Court  committed a serious error in passing the impugned judgment.  The learned  counsel urged that admittedly the units were transferable on the day on  which the payments were made and keeping in view the purported tenor of  the notice in terms whereof the appellant was to be treated as an assessee-in- default, it had no other option but to make payment.   9.      Mr. Deshpande, learned counsel appearing on behalf of the  respondent, on the other hand, would support the impugned judgment.   10.     Sub-section (3) of Section 226 of the Act reads as under : \023(3)(i)       The Assessing Officer or Tax Recovery  Officer may, at any time or from time to time, by  notice in writing require any person from whom  money is due or may become due to the assessee  or any person who holds or may subsequently hold  money for or on account of the assessee to pay to  the Assessing Officer or Tax Recovery Officer  either forthwith upon the money becoming due or  being held or at or within the time specified in the  notice (not being before the money becomes due or  is held) so much of the money as is sufficient to  pay the amount due by the assessee in respect of  arrears or the whole of the money when it is equal  to or less than that amount. (ii) to (v)     \005. (vi)    where 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 he 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

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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 Assessing Officer or Tax Recovery  Officer to the extent of his own liability to the  assessee on the date of the notice, or to the extent  of the assessee\022s liability for any sum due under  this Act, whichever is less.\024

11.     Indisputably, a notice was issued by the Income Tax officer upon the  Branch Manager of the Unit Trust of India wherein, inter alia, it was stated : \023A sum of Rs.48,08,000/- is due from B.M.  Malani of Hyderabad on account of Income- tax penalty.  You are required hereby under  Section 226(3) of the Income-tax Act, 1961  to pay to me forthwith any amount due from  you to or, held by you, for or on account of  the said assessee upto the amount of arrears  shown above. 2.      I also request you to pay any money  which may subsequently become due from  you to him/them or which you may  subsequently hold for or on account of  him/them upto the amount of arrears still  remaining unpaid, forthwith on the money  becoming due or being held by you as  aforesaid. 3.      Any payment made by you in  compliance with this notice is in law  deemed to have been made under the  authority of the said assessee and my receipt  will constitute a good and sufficient  discharge of your liability to the person to  the extent of the amount referred in the  receipt. 4.      Please note that if you discharge any  liability to the assessee after receipt of this  notice you will be personally liable to me as  Assessing Officer/Tax Recovery Officer to  the extent of the liability discharged, or to  the extent of the liability of the assessee for  tax/penalty interest/fine referred to in the  preceding para, whichever is less. 5.      Further, if you fail to make payment  in pursuance of this notice, you shall be  deemed to be an assessee in default in  respect of the amount specified on this  notice and further proceeding may be taken  against you for the realisation of the amount  as if it were an arrear of tax due from you in  the manner provided in Section 222 to 225  of the Income Tax Act, 1961 and this notice  shall have the same effect as an attachment  of a debt under Section 222 of the said Act. 6.      The necessary challan(s) for  depositing the money to the credit of the  Central Government is/are enclosed. 7.      A copy of this notice is being sent to  the afore-mentioned assessee.\024

12.     Whether the action on the part of the appellant to act thereupon was  valid, is the question.  The scheme, the relevant provision whereof had been  noticed by us hereinbefore, goes to show that the lock-in period was for a  period of five years.  Purchase of the units, however, was allowed from 1st  September, 2001 at NAV based repurchase price.  The scheme constituted a

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contract between the parties.  The option of the purchase was to be exercised  by the respondent.  Appellant, on the basis of the said purported notice dated  8.2.2002, could not have placed itself in the shoes of the respondent.  It is  not in dispute that the respondent was a defaulter to the extent of Rs.157.77  lacs.  He had sold some of his properties in 1998.  A portion of the sale  proceeds, namely, 65 lacs had been invested with the appellant.  He had  sought for exemption under Section 54AE of the Act.  The amount of 65 lacs  was secured under the said units with the appellants.  It is not in dispute that  an application for settlement was filed before the Settlement Commissioner  by the respondent.  He had deposited a sum of Rs.25 lacs when moving an  application for deposit of the amount.  Upto October 2000, he had already  paid a sum of Rs.92.04 lacs.  Only a sum of Rs.48,08,000/- were due from  him.  He, therefore, in his letter dated 4.2.2002 stated as under : \023Sale of Bonds at present would result in a loss of  Rs.3 per unit which will be about 30% loss and it  would be difficult to bear such loss while the taxes  are pending payment.  In the event the Bonds are  sought to be acquired by the Department, I shall  transfer them at its face value at Rs.10/- per unit  against taxes although I am voluntarily making the  tax payments as per commitments.         In the above facts and circumstances, with a  great constrains I had paid tax Rs.25.00 lakhs on  31.1.2002 as committed by me in my petition  dated 26.10.2001 although I had sought time for  above payment till the end of February 2002.  It  may also be submitted that I had sold my property  for the purpose of payment of taxes and opted an  additional tax burden of Rs.35.00 lakhs under the  Settlement Commission Orders and Co-operated  with the Department.  In the circumstances, I  request you sir to grant time for payment of  balance tax till the end of May 2002 as I am given  to understand after the budget is presented, the  capital gains Bonds issued by Unit Trust of India  are likely to be purchased by the Government at  par @ Rs.10/- per Unit in which case I will not  suffer loss on sale and the market rate for sale of  such units will also go up.  The department was  good enough to grant time earlier for payment of  tax and I have kept my commitments at all the  times and accordingly paid the tax.\024

13.     Sub-section (3) of Section 226 of the Income Tax Act would be  applicable only when a money is due to the assessee from any person.  Was  the amount due to the assessee when the notice dated 8.2.2002 was issued is  the question?   14.     Appellant is a statutory authority.  It had floated the scheme.  It knew  the terms and conditions thereof.  On a plain reading of the highlights of the  scheme, relevant provisions whereof have been noticed by us hereinbefore,  it is evident that repurchase was allowed only from 1st September, 2001.   Indisputably, the respondent did not opt therefor.  In absence of any right of  option having been exercised by the respondent, the appellant, in our  opinion, could not have transferred the amount in question.  It is wholly  incorrect to contend that the scheme itself provided that repurchase was  allowed from 1.9.2001 even without the consent of the respondent.  It was  for the respondent to give his option.  The Income Tax Officer could not  have exercised the said option on behalf of the assessee.  Curiously, the  Income Tax Department itself, in its counter affidavit filed before the High  Court, categorically stated : \023In reply to the averments made in para 10 of the  affidavit, it is submitted that the letter addressed to  the petitioner on 7.12.2001 which was served on  the same date clearly speaks about the actual  demand outstanding for payment.  From out of

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that, the petitioner paid an amount of  Rs.25,00,000/- on 31.1.2002.  Hence the net figure  reported in the attachment proceedings is quite  correct i.e. (Rs.73.08 lakhs \026 Rs.25.00 Lakhs).  It  is pertinent to mention here that though the  petitioner once again approached Settlement  Commission on the levy of interest as wholly  unjustified and untenable on 4.2.2002, nothing is  heard from the Settlement Commission before  initiating the proceedings for attachment, i.e., by  way of any letter from the Settlement Commission  for stay of demand till the outcome of the  Settlement Commission\022s Report.  Secondly,  though the units have been attached the UTI which  when the units are there for sale ought to have  obtained the consent of the petitioner before sale  and as such the loss, if any on account of sale, i.e.,  Rs.21.31 lakhs cannot be attributed to the 2nd  respondent.  The petition for waiver of interest  filed before the Commissioner of Income Tax, V,  Hyderabad has been rejected for Asst. year 1990- 91, 91-92, 92-93 & 95-96 vide Commissioner of  Income Tax Proc. No.CIT.V/220(2A)/1/2002-03  dated 26.11.2002.

15.     Thus, the stand of the Income Tax Department also was that it sought  to attach the units and did not opt for the repurchase value at that point  of  time.   16.     We have noticed that the respondent made all sincere efforts to pay  the tax.  It made an offer to the Income Tax Officer to transfer the bonds at  their face value at Rs.10/- per unit.  Unfortunately, the Income Tax  Department neither replied to the said letter nor paid and heed to his request.   Respondent had invested a sum of Rs.65 lacs.  He, therefore, was entitled to,  at least, that amount.  Government of India had already been considering the  matter of reimbursement to the holders of the units at least at the purchase  rate.  In that view of the matter, it must be held that it not only acted hastily  but also illegally.  As a State, within the meaning of Article 12 of the  Constitution of India, it was required to exercise restraint and give effect to  the provisions of the contract in a reasonable manner.  Clause (vi) of sub- section (3) of Section 226 of the Act in categorical terms created a legal  fiction to the effect that when an amount is not payable, the assessee is not  required to pay any such amount or part thereof.  Appellant being a statutory  authority should have acted strictly in terms of the conditions of the contract.   It was to act reasonably and fairly. 17.     Respondent No.1 never authorised the Unit Trust of India to sell the  same in the market at the lower price as respondent No.1 has stated in the  letter dated 4th February, 2002 that due to the fall in the prices in the market,  he was not able to dispose of the units.  Respondent No.1 further prayed  time till May 2002 to clear the dues and was awaiting information from  Respondent Nos.2 and 3 but in the meantime the petitioner sold the same in  the market without any intimation to respondent No.1 18.     Section 226(3)(vi) cannot be interpreted to mean that the Unit Trust of  India was fully authorised to dispose of the units on its own without any  notice to the holder of the units. 19.     Reliance has been placed on Life Insurance Corporation of India &  Anr. v. Gangadhar Vishwanath Ranade (dead) by Lrs. [(1989) 4 SCC 297] is  misplaced.  In a situation of this nature, having regard to sub-section (3) of  Section 226 of the Act, it cannot be said that the appellant was holding the  money of the respondent.  The amount in question could have been held by  the appellant only whether the respondent had exercised his option therefore.   The fact situation obtaining therein was absolutely different.  In that case,  the paid up policies taken by the respondent.  He assigned the same in favour  of his wife.  Assignment made was registered although notice under sub- section (3) of Section 226 was issued before the policy was matured.  No  statement on oath was made under clause (vi) thereof raising an objection on

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the basis of the registered assignment.  It was in that situation opined : \023It is, therefore, obvious that the question of  revocation of the notice under Clause (vii) of Sub- section (3) of Section 226 of the Income Tax Act,  1961 arose in the present case only after the L.I.C.  made the requisite statement on oath under Section  226(3)(vi) of the Act in view of its consistent stand  throughout that the moneys due under the policies  were held by it for and on behalf of the assignee  and not the defaulter. Mere information of the  assignment to the I.T.O. and keeping the assignee  informed of the I.T.O.’s action did not amount to  discharge of the statutory obligation under Section  226(3)(vi) of the Act, by the L.I.C. The statute  having expressly provided the mode of raising  such an objection in the form of a statement on  oath specified in Clause (vi), performance of that  obligation by the notice had to be made only in  that manner. This statutory obligation was  performed by the L.I.C. only on 5.12.1975 as  stated earlier. The personal liability arising after  making the requisite statement on oath as  envisaged by Clause (vi) is only "if it is discovered  that such statement was false in any material  particular and not otherwise.\024

20.     The said decision has no application in the facts and circumstances of  the present case.  21.     Reliance has also been placed upon a decision of a learned Single  Judge of Karnataka High Court in Vysya Bank Ltd. v. Joint Commissioner  of Income Tax [241 ITR 178].  In that case, the Bank was holding the money  on behalf of the judgment-debtor.  The money was lying with the bank on  fixed deposit.  The said fixed deposit was made on interest.  It was in that  situation opined : \023The banker becomes a debtor of the assessee in  default the moment the fixed deposit receipt is  obtained.  Normally the payment of the fixed  deposit receipt on the due dates.  But on forgoing  interest or paying lesser rate of interest the bankers  generally permit customers to withdraw the  amount of the fixed deposits before the maturity  date.  The fixed deposit receipt is not a negotiable  instrument but could be assigned with the  concurrence of the bank in favour of other persons  attachment of the amount in the fixed deposit  could be made by the income-tax authorities under  the proviso to section 226(3) of the Income-tax  Act.\024

22.     The banker becomes a debtor of the assessee-in-default on maturity of  the fixed deposit scheme.  The fixed deposit itself could have been a subject  matter of the judgment. 23.     We, therefore, do not find any error in the judgment of the High Court  as the respondent is entitled to be restituted.  We are of the opinion, that the  respondent was also entitled to dividend declared during the said period viz.  from the date of allotment.  The High Court was not correct in not  considering that aspect of the matter.   24.     For the reasons aforementioned, the appeal filed by the Administrator,  Unit Trust of India is dismissed and the appeal filed by B.M. Malani is  allowed with costs.  Counsel\022s fee assessed at Rs.25,000/- (Rupees twenty  five thousand only).