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CASE NO.: Appeal (civil) 2488  of  2001

PETITIONER: SRI MOHAN WAHI

       Vs.

RESPONDENT: COMMISSIONER, INCOME-TAX, VARANASI & ORS.

DATE OF JUDGMENT:       30/03/2001

BENCH: CJI, R.C. Lahoti & Doraiswamy Raju.

JUDGMENT:

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R.C. Lahoti, J.

   The  relevant  facts are jejune and beyond any  pale  of controversy.   Late  Bhagwati Prasad owned a house  property described as D-53/91-D, Luxa, Varanasi (hereinafter referred to as the house property).  He had four sons - namely, P, S, R  and K.  Under his will of the year 1962, probated in  the year  1965, the house property devolved upon his four  sons. The elder two sons - P and S, had entered into a partnership known  as M/s United Provinces Commercial Corporation, Luxa, Varanasi  (UPCC,  for short) dealing in import and  sale  of heavy  machinery  and  road rollers.   The  labour  troubles resulted in the firms business collapsing in the year 1967. The  partners left Varanasi and migrated elsewhere.  In  the year  1972,  Income-tax  assessments of the firm  UPCC  were finalised  for the assessment years 1967-1968 to  1969-1970. Recovery  certificates  were issued in 1973-  1974  pursuant whereto  the  house property was attached.  On  3.12.1979  a proclamation for sale of the property was issued setting out a demand of Rs.30,82,000/- and upset price at Rs.1,70,000/-. On  11.1.1980, at the public auction, respondent no.3 made a bid  proposing  to purchase the property  for  Rs.1,70,000/- (which  was  the upset price).  The bid was accepted by  the officer conducting the sale.  An amount of Rs.42,500/- being 1/4th   of  the  auction  money,   was  deposited   by   the auction-purchaser  on  11.1.1980   simultaneously  with  the acceptance  of the bid.  The balance amount of Rs.1,27,500/- was  deposited on 25.1.1980 within the prescribed period  of 15 days.

   R,  the third brother had died.  His widow, Padma, filed a  civil  suit  in  the   Court  of  Civil  Judge,  Varanasi submitting  that the undivided property of the four brothers and  in any case the share of the brothers, who were not the partners  in  the  firm, could not have  been  attached  and advertised  for sale for recovery of dues against the  firm. She  also  sought for an ad interim restraint on  sale.   On 9.1.1980,  the Court of Civil Judge deemed it not proper  to

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stay  the  auction sale but nevertheless felt a prima  facie case  having  been made out to stay the confirmation of  the auction  sale.   Accordingly,  the Union of  India  and  the authorities  of  the  Income-tax department  were  directed, through  an ad-interim injunction, not to confirm the  sale. In  the  year  1984 the auction-purchaser,  respondent  no.3 herein,  was  also  impleaded as a party to the  suit.   The ad-interim  injunction  continued to operate until the  suit itself  came  to  be dismissed in default of  appearance  on 12.1.1998.   On 13.1.1998 an application for restoration  of the  suit was filed.  On 30.7.1999 the suit was restored  to file.

   The  assessments  made  against the firm UPCC  were  all ex-parte and a substantial part of the demand raised against the  firm  consisted  of  penalty and  interest.   The  firm agitated   the  matter  in   the  hierarchy  of   Income-tax Department.   The  challenge  to the  orders  of  assessment failed  before the Commissioner of Income Tax (Appeals)  who dismissed the appeals relevant to assessment years 1967-1968 to  1970-1971  as  having been filed beyond  the  prescribed period  of  limitation.  Four appeals were filed before  the Income-tax Appellate Tribunal, Bench Allahabad.  By an order dated  11.12.1987  all the four appeals were  allowed.   The Tribunal  formed an opinion that there was sufficient  cause which  had  prevented the assessee from filing  the  appeals before  the  CIT (A) in time and therefore the appeals  were liable  to  be restored on the file of CIT (A) to  be  dealt with  on  merits.  It was ordered accordingly.   During  the course  of  its order the Tribunal upheld a finding of  fact recorded by the CIT (A) that the assessee could not be said to  have  been served with the demand notice.  On being  so remanded,  the appeals were heard on merits by the CIT  (A). Most  of  the matters relating to demand on account of  tax, penalty  and  interest  were resolved at the  stage  of  CIT (Appeals)  while  the tax demand referable to 1967-1968  was resolved  before  the  Tribunal.  The fact remains  that  on different dates in the year 1989 the several demands against the  assessee  firm  had all stood wiped out  and  therefore reduced  to nil.  On 26.3.1990 the Income-tax Officer,  Ward II,  Varanasi wrote to Commissioner of Income-tax, Allahabad that  various  demands raised against the assessee firm  had stood  reduced to nil.  On 22.11.1996 the assessee firm, M/s UPCC wrote to the Income-tax Officer, Ward II, Varanasi that all   demands   of   tax     and   penalties   having   been cancelled/liquidated,  refunds were due and the Tax Recovery Officer  may be advised for cancellation of all the recovery certificates.   Copy of the application was endorsed to  the Tax  Recovery  Officer.  On 16.1.1997 the advocate  for  the assessee  firm  wrote to the ITO, Ward-II, Varanasi that  in view  of  all the demands against the firm having ceased  to exist  and instead refunds having become due to the firm, it may  be confirmed that all the recovery certificates  issued for  demands against the firm had stood withdrawn/cancelled. A  copy of communication dated 26.3.1990 from ITO, Ward  II, Varanasi  to the Commissioner of Income-tax was annexed with the letter.

   In  spite of the abovesaid communications, on  25.3.1998 sale  in favour of respondent no.3 was confirmed by the  Tax Recovery Officer though only as regard the interest of P and S  in  the  house property and a sale certificate  was  also issued  to  respondent No.3.  The order of the Tax  Recovery Officer  confirming  the sale was put in issue  before  CIT, Varanasi  by  the  firm UPCC and its partners P  and  S,  by

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filing  a petition under section 264 of the Act.  Vide order dated  21.5.1999, the CIT dismissed the petition forming  an opinion  that whatever happened after the auction sale  held on 11.1.1980 was immaterial and the Tax Recovery Officer had no  other  option  except  to  confirm  the  sale.   S,  the petitioner  before  us then filed the present writ  petition laying  challenge  to  the  order of  Tax  Recovery  Officer confirming   the  sale  and   issuing  sale  certificate  to respondent  No.3  also  to  the   order  of  C.I.T.    dated 21.5.1999.   The fact that all the demands against the  firm (and the partners) had ceased to exist by 1996 and 1997 is a fact  positively  asserted  in para 5 of the  writ  petition filed   before  the  High  Court   and  not  denied  in  the counter-affidavit  filed  on behalf of the  Commissioner  of Income-tax.   So also the fact that the demands against  the firm UPCC had stood cancelled and this fact was communicated by  the  ITO,  Ward  II, Varanasi  to  the  Commissioner  of Income-tax,  Allahabad through his letter dated 26.3.1990 is also  admitted  in  the counter-  affidavit.   However,  the petition  has  been  dismissed  by   the  High  Court.   The aggrieved  petitioner  has filed this petition  for  special leave under Article 136 of the Constitution.

       Leave granted.

   Two  questions  arise for decision in this appeal :

   i) Whether the Tax Recovery Officer could have confirmed the sale on 25.3.1998 when the demands on account of tax for the  recovery of which tax recovery certificates were issued had admittedly ceased to exist;  and

   ii)  What  is  the effect of a notice  of  demand  under Section  156  of  the Income-tax Act, 1961 having  not  been served  on  the  assessee on the sale held for  recovery  of arrears of income-tax?

   Taking up first question the first, according to Section 222  where  an assessee is in default or is deemed to be  in default in making a payment of tax, the Tax Recovery Officer may issue a certificate specifying the amount of arrears due from  assessee  and  shall  proceed  to  recover  from  such assessee the amount so specified by one or more of the modes which   include  attachment  and   sale  of  the  assessees immovable  properties.   The  Second Schedule sets  out  the procedure for recovery of tax.  We will refer to some of the rules  contained in the Second Schedule and relevant for our purpose.   Rules regarding attachment and sale of  immovable property are contained in Part III of Second Schedule.  Rule 56  provides that the sale shall be by public auction to the highest  bidder and shall be subject to confirmation by  the Tax  Recovery Officer.  Several provisions contained in  the rules  which  follow  Rule 56 are in pari materia  with  the provisions  dealing  with attachment and sale  of  immovable property  contained in Order 21 of the C.P.C.  dealing  with execution  of  decrees passed by civil courts.  However,  in Order  21  of the C.P.C., a provision similar to Rule 56  of Second Schedule is not to be found.  Rule 60 provides for an application  to  set aside sale of immovable property  being made  by defaulter or an interested person on his depositing the  specified amount within 30 days from the date of  sale. Rule  61  deals  with  application  to  set  aside  sale  of immovable property on the ground of non-service of notice on the  defaulter  under  the  Schedule or  on  the  ground  of material  irregularity in publishing or conducting the sale.

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Under  Rule 62 a sale may be set aside on an application  by the  purchaser  on  the  ground that the  defaulter  had  no saleable interest in the property sold.  The prescribed time limit  within  which the application can be made under  Rule 60,  61  or 62 is 30 days from the date of sale.   Where  no application  is  made for setting aside the sale or such  an application having been made is disallowed, the Tax Recovery Officer  shall  make  an  order   confirming  the  sale  and thereupon  the  sale  shall become absolute.  On a  sale  or immovable  property  becoming absolute, a  sale  certificate shall be issued under Rule 65.

   Under  Section  224,  an  assessee  cannot  dispute  the correctness  of any certificate drawn up by the Tax Recovery Officer  but  it is lawful for the Tax Recovery  Officer  to cancel  the  certificate  for  any reason if  he  thinks  it necessary  to  do  so  or to correct  any  clerical  or  any arithmetical  error therein.  Sub-section(3) of Section  225 provides as under:-

   225.   Stay  of proceedings in pursuance of  certificate and amendment or cancellation thereof.

       xxx             xxx                  xxx

   (3).   Where  a  certificate  has   been  drawn  up  and subsequently the amount of the outstanding demand is reduced as a result of an appeal or other proceeding under this Act, the Tax Recovery Officer shall, when the order which was the subject-matter of such appeal or other proceeding has become final  and conclusive, amend the certificate, or cancel  it, as the case may be.

   The  term  reduced  in Sub-section(3) of  Section  225 would  include  a case where the demand consequent  upon  an appeal  or any proceedings under the Income-tax Act has been reduced to nil also.  The Tax Recovery Officer is obliged to give  effect  to  such reduction in demand  and  accordingly amend  or cancel the certificate.  The scheme of Part III of Second   Schedule  indicates  that   the  sale   proceedings terminate  on  their becoming absolute whereafter  all  that remains  to  be  done is the issuance of  sale  certificate. However,  an  order confirming the sale by the Tax  Recovery Officer  is  a  must.  The efficacy of the  sale  by  public auction  in  favour of the highest bidder has been  made  to depend  on  the  order of confirmation by the  Tax  Recovery Officer  by  incorporating Rule 56 in the Schedule.   It  is true  that  ordinarily if there is no application filed  for setting aside sale under Rules 60, 61 or 62 and 30 days from the  date of the sale have expired, the Tax Recovery Officer has  to  make an order confirming a sale.  Nevertheless,  an order  shall have to be actually made.  The combined  effect of  Sub-section(3) of Section 225 of the Act and Rule 56 and Rule  63  of  Second  Schedule is that if  before  an  order confirming  the sale is actually passed by the Tax  Recovery Officer,  the demand of tax consequent upon an order made in appeal  or other proceedings under the Act has been  reduced to  nil,  the Tax Recovery Officer is obliged to cancel  the certificate  and as soon as the certificate is cancelled, he shall  have  no power to make an order confirming the  sale. The  sale  itself being subject to confirmation by  the  Tax Recovery  Officer,  would  fall to the ground  for  want  of confirmation.

   In  the case at hand the sale was held on 11.1.1980.  No

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application  was filed for setting aside the sale either  by the  assessee  or  by  the auction purchaser  or  by  anyone interested  in the property.  On expiry of 30 days from  the date  of the sale the Tax Recovery Officer could have passed an  order  confirming the sale.  However, the  Tax  Recovery Officer  was  injuncted  by  the writ of  civil  court  from confirming  the sale.  The interim order issued by the civil court  ceased to operate on 12.1.1998 whereafter an order of confirmation  was  passed on 25.3.1998 by the  Tax  Recovery Officer ignoring, or unmindful of, the important event which had  taken  place in between.  Before 25.3.1998, the  demand against  the assessee admittedly stood reduced to nil.  This fact  was in the notice of Income-tax Officer as well as the Commissioner  of  Income Tax.  Attention of  the  Income-tax Officer as also the Tax Recovery Officer was also invited by the   firm  M/s.   UPCC   through  its  communication  dated 22.11.1996  (Annexure P- 6).  On 16.1.1997, the counsel  for the  assessee  had specifically called upon the  income  tax officer  who  had raised the demand against the assessee  to confirm  if all the recovery certificates issued against the assessee  firm had stood withdrawn or cancelled.  In view of the  facts  within the knowledge of the department  and  the communications  so made, the Tax Recovery Officer could  not have  confirmed  the sale on 25.3.1998.  Rule 56  in  Second Schedule  of the Income-tax Act, 1961 is neither a redundant nor  a formal provision.  It casts an obligation on the  Tax Recovery  Officer  to  pass  an order  confirming  the  sale consciously and with due application of mind to the relevant facts  relating  to  sale by public auction which is  to  be confirmed.   Under  Rule  63, confirmation of  sale  is  not automatic.   An order confirming the sale is contemplated to make  the  sale absolute.  Ordinarily, in the absence of  an application  under  Rule 60, 61 or 62 having been  made,  or having  been rejected if made, on expiry of 30 days from the date  of  sale the Tax Recovery Officer shall pass an  order confirming  the sale.  However, between the date of sale and the  actual  passing of the order confirming the sale if  an event  happens  or  a fact comes to the notice  of  the  Tax Recovery  Officer which goes to the root of the matter,  the Tax  Recovery Officer may refuse to pass an order confirming the  sale.  The fact that sale was being held for an assumed demand  which is found to be fictitious or held to have  not existed  at  all, in fact or in the eye of law, is one  such event  which  would oblige the Tax Recovery Officer  not  to pass an order confirming the sale and rather annul the same. The  High Court in our opinion, clearly fell in error in not allowing relief to the petitioner-appellant by setting aside the sale.

   Shri    S.K.    Jain,    learned    counsel   for    the auction-purchaser,  respondent  No.3, referred to Janak  Raj Vs.   Gurdial  Singh  and Anr., (1967) 2 SCR 77  and  Sardar Govindrao  Mahadik  and Anr.  Vs.  Devi Sahai and Ors.,  AIR 1982  SC  989 wherein it has been held that once a sale  has taken  place  in execution of a decree, the sale has  to  be confirmed notwithstanding the fact that after the holding of the  sale,  the decree was set aside.  In Janak Rajs  case, sale  was  held  in execution of an  ex-parte  decree.   The ex-parte  decree was set aside subsequent to the date of the sale  but  before an order confirming the sale  was  passed. This  court  held that in the absence of an application  for setting  aside  the  sale having been moved on  the  grounds available  under  Rules 89 to 91 of Order 21 of C.P.C.,  the court  could not have refused to confirm the sale.  However, in  this  case itself, this court has observed (at page  80)

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that  there may be cases in which apart from the  provisions of  Rules  89 to 91 the court may refuse to confirm a  sale, as, for instance, where a sale is held without giving notice to  the  judgment  debtor, or where the court is  misled  in fixing  a  reserved  price or where there was no  decree  in existence  at  the time when the sale was held.   In  Sardar Govindrao  Mahadiks  case, Janak Rajs case  was  referred. The  court  has drawn a distinction between a court  auction held  in  favour  of a decree holder and where  the  auction purchaser  is an outsider or a stranger.  In former case  on the  decree  ceasing to exist before the sale is  confirmed, the  sale  may be refused to be confirmed but in the  latter case,  equity in favour of the stranger should be  protected and  the  judgment debtor should be left to suffer  for  the default  on his part for not obtaining stay of the execution of the decree from where it was under challenge.  Though the learned counsel for the auction purchaser has relied heavily on these decisions, suffice it to observe that these are the cases  of  auction  sale held under Order 21 of  the  C.P.C. and, therefore, may not apply to the case of an auction sale held  under Second Schedule of the Income-tax Act in view of Rule  56  contained therein.  Moreover, in  these  decisions also, the Supreme Court has contemplated situations where in spite   of  the  auction  sale   having  been  held  and  no application  for  setting aside the sale having been  moved, yet  in exceptional situations the sale may be refused to be confirmed and may be set aside.  Shri S.K.  Jain also relied on  Padanathil Ruqmini Amma Vs.  P.K.  Abdulla, JT (1996)  1 SC  381,  wherein  this court has observed that  unless  the auction  purchasers were protected, the properties which are sold  in court auctions would not fetch a proper price.   It is  true that sanctity of sale of property by public auction has  to  be protected but at the same time a  citizen  faced with  proceedings for recovery of assumed arrears should not be  deprived of his property in spite of judicial or  quasi- judicial   pronouncement  holding,  before   the  sale   was confirmed,  that  there were no arrears.   This  observation applies  a fortiori under the scheme of Income-tax Act,  the relevant provisions whereof have already been referred to by us.

       We now take up the second question.

       Section 156 of the Act provides as under:-

156.    Notice of demand.

   When  any tax, interest, penalty, fine or any other  sum is  payable  in consequence of any order passed  under  this Act,  the Assessing Officer shall serve upon the assessee  a notice  of demand in the prescribed form specifying the  sum so payable.

   If  the  amount specified in the notice of demand  under Section  156  is  not  paid   within  the  time  limited  by sub-section  (1) or extended under sub-section(3) of Section 220,  then  the  assessee shall be deemed to be  in  default under   sub-section  (4)  of   Section  220.   Tax  recovery certificate can be issued under Section 222 when an assessee is  in  default or is deemed to be in default.   Proceedings for  recovery  of  tax  under the  Second  Schedule  can  be initiated  against  a defaulter.  Thus Section 156  provides for  a  vital  step  to be taken by  the  assessing  officer without  which  the assessee cannot be termed  a  defaulter.

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The  use  of  the term shall in Section 156  implies  that service  of  demand  notice is mandatory  before  initiating recovery   proceedings   and   constitutes   foundation   of subsequent recovery proceedings.

   We have already stated that the finding of fact recorded by  C.I.T.(Appeals)  and  the Tribunal was  that  notice  of demand  was not served on the assessee.  The very foundation for  initiating  the  recovery proceedings,  therefore,  was non-existent and the assessee could neither have been deemed to  be  in default nor any proceedings for recovery  of  tax could have been initiated against him.

   The  provision  corresponding  with Section 156  of  the Income-tax  Act,  1961  contained  in   Section  29  of  the Income-tax  Act, 1922 came up for the consideration of  this Court  in  Income-Tax  Officer, Kolar Circle and  Anr.   Vs. Seghu  Buchiah Setty - (1964) 52 ITR 538.  Hidayatullah,  J. (as  His Lordship then was) held that it is after the demand is  made, the tax penalty and interest become a debt due  to the  Government The notice of demand is a vital document in many  respects.   Disobedience to it makes the  assessee  a defaulter.   It is a condition precedent to the treatment of the  tax  as  an  arrear  of  land  revenue.   His  Lordship emphasised  that  the service of notice of demand has a  few vital  impacts  amongst  others :  (i) when  the  notice  of demand  is not complied with, the assessee can be treated as a person in default;  (ii) on the failure of the assessee to pay  after  a  notice  of demand  is  issued,  the  recovery proceedings  can  be  started and the amount of tax  can  be treated as an arrear of land revenue.  However, in this case Hidayatullah, J.  went on to hold that if an assessment made by  the Income-tax Officer is altered - reduced or increased -  by  reason of any order under the Act, it is the duty  of the  Income-tax Officer to issue a fresh notice of demand in the  prescribed  form  and serve upon  the  assessee.   This particular  finding  of  Hidayatullah, J.   created  serious complications  and  resulted in nullifying several  recovery proceedings,  as also creating bottlenecks in the recoveries of  outstanding demands.  The Parliament, therefore, enacted Taxation  Laws  (Continuation  and  Validation  of  Recovery Proceedings)  Act,  1964  which was  given  a  retrospective effect.  Section 3 of this Act provides that in the event of government  demand  being reduced by an order in  appeal  or other  proceedings it shall not be necessary for the  taxing authority  to  serve  upon the assessee a  fresh  notice  of demand,  it would suffice if taxation authority intimated of reduction  to  the assessee and the Tax Recovery Officer  to scale  down  the  amount  of recovery  and  the  proceedings initiated  on  the  basis of the previous notice  of  demand shall  continue to be valid.  To this extent the decision of this Court in Seghu Buchiah Setty was superseded.

   In  Homely Industries Vs.  Sales Tax Officer, Sector  V, Kanpur  - (1976) 37 STC 483 also the significance of service of demand notice came up for the consideration of this Court and  it  was  held  that there can be  no  recovery  without service  of a demand notice;  if such notice was not served, the recovery proceedings are not maintainable in law and are invalid  and  the same along with the recovery  certificates are liable to be quashed.

   In Ram Swarup Gupta Vs.  Behari Lal Baldeo Prasad & Ors. -  (1974)  95  ITR 339, a Division Bench of  Allahabad  High Court  referred  to the effect of Taxation Laws (CVRP)  Act,

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1964  on  the law laid down by this court in  Seghu  Buchiah Settys case and held :-

   The  effect of these provisions is to dispense with the need  of  issuing a fresh notice of demand and the  recovery certificate  and to allow the original recovery  proceedings to  continue,  but  only  for the  amount  found  due  after reduction in the appeal, and it is for this purpose that the taxing  authority is required to send intimation of the fact of  the  reduction to the assessee and to the  Tax  Recovery Officer.   As the proceedings for recovery can be  continued only  for  the amount that finally remains due, and not  for any  amount  in excess thereof, the requirement  of  sending intimation  to the Tax Recovery Officer becomes an essential duty  of  the  taxing  authority and must be held  to  be  a mandatory  condition.  Non-compliance of that condition will be  an  illegality in the procedure and will invalidate  the proceedings.   A  sale  held in  proceedings  initiated  and continued  for  the recovery of an amount in excess  of  the amount  payable  by  the assessee, after  its  reduction  in appeal,  will  be invalid.  Such a sale is not validated  by clause (c) of section 3 of the Act.

   The  Division Bench decision of Allahabad Court Court in Ram  Swarup Guptas case was cited with approval before this Court  in  Union  of India Vs.  Jardine  Henderson  Ltd.   - (1979)  118  ITR  112 though it was  distinguished  for  its applicability  to  the facts of the case before this  Court. The  Division  Bench of Orissa High Court has held in  Sunil Kumar  Singh Deo Vs.  Tax Recovery Officer & Anr.  -  (1987) 166  ITR  882 that non-service of demand notice goes to  the root  of the jurisdiction of the officer initiating recovery proceedings.   We find ourselves in agreement with the  view so  taken.   Incidentally,  we may refer to  three  Division Bench  decisions of the High Court of Madhya Pradesh,  viz., Ghanshyamlal  Vs.   State  of M.P.  - (1961)  MPLJ  SN  218, Manmohan  Lal Shukla Vs.  Board of Revenue, M.P.  & Ors.   - (1964) MPLJ 32 and Premchand Ramchand Vs.  Board of Revenue, M.P.   & Ors.  - (1964) MPLJ 337.  Section 146 of M.P.  Land Revenue  Code, 1959 provides that before issuing any process for  recovery  of arrears of land revenue the  Tehsildar  or Naib  Tehsildar may cause a notice of demand to be served on any  defaulter.  Chief Justice P.V.  Dixit speaking for  the Division  Benches, in all the three cases, has held that the word  may  has  the imperative meaning of shall  and  no proceedings for recovery can be initiated without service of notice  of demand failing which the proceedings would suffer from  jurisdictional defect.  For a long period of time  the High  Court  of  Madhya Pradesh has been  taking  this  view consistently.

   We  are, therefore, clearly of the opinion that  service of notice of demand on the assessee under Section 156 of the Act,  is  mandatory before taking steps for  recovery  under Second  Schedule.   Non-service of notice of demand goes  to the  root  of  the validity of  subsequent  proceedings  for recovery.   A  sale held in recovery  proceedings  initiated without  serving  the notice of demand shall be invalid  and hence  shall  be  liable to be annulled on being  called  in question.

   In  Surinder  Nath Kapoor Vs.  Union of India & Ors.   - AIR  1988 SC 1777 property was attached and sold pursuant to a  garnishee  order  which was found to be  non-existent  on

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account  of  a nullity attaching thereto.  The sale was  set aside.  This Court held :

   the  garnishee order that was passed was a nullity  and any  sale held pursuant to such an order is also a  nullity. It  is quite immaterial that the sale was confirmed.  When a decree  or  order is illegal, any sale held in execution  of such  a decree or order and confirmed cannot be set aside on the ground that it was illegal when the sale is in favour of a third party.  But, when a decree or order is a nullity, it will be deemed to have no existence at all and any sale held in  execution of such a decree or order must also be held to be null and void.

   In  the  present  case, the plea as  to  non-service  of demand  notice having been raised before the High Court,  in our  opinion  the  High Court should not  have  adopted  too technical  a  approach  by refusing to deal  with  the  plea because  it  was not raised in the manner in which the  High Court  thought it should have been raised.  The plea went to the  root  of  the matter.  The plea was raised  before  the departmental  authorities right from the ITO to the Tribunal and  was not given up before the High Court also.  It  would not  have  been  difficult  for the High Court  to  ask  the Income-tax   Department  to  produce   the  record  of   the proceedings  and  to  show if the demand notice was  at  all served on the assessee.  A little more sensitive approach is required  to be adopted in the process of dispensing justice when  it  is  found that valuable property of a  person  was sought  to be sold away for recovery of such arrears as  did not exist at all.

   Thus, on both the grounds, we hold that the sale of suit property  in  favour of respondent No.3 is liable to be  set aside.  The appeal is allowed.  The impugned judgment of the High  Court  is set aside.  The writ petition filed  by  the appellant  shall stand allowed.  All the proceedings for the sale  of the disputed property as also the order of the  Tax Recovery Officer confirming the sale are hereby quashed.

   The sale having fallen to the ground, the purchase money deposited by the respondent No.3 shall, obviously, be liable to  be refunded to her.  She also needs to be compensated by awarding  suitable interest for the period for which she has been  deprived of the use of her money for no fault of  her. In  our  opinion, it would meet the ends of justice  if  the amount  of  Rs.1,70,000/-  deposited  by her  with  the  Tax Recovery  Officer is directed to be refunded and she is also awarded  interest  @  12% per annum.  Who  should  bear  the liability for payment of interest?  For the period for which the  sale  was not vitiated on account of the demand  having not  been adjudged to be non- existent, in our opinion,  the assessee should pay the interest.  Once the demand ceased to exist  and  that fact was brought to the notice of  the  Tax Recovery  Officer  by the assessee, the former  should  have cancelled  the  recovery  certificate and,  therefore,  with effect  from that date till the date of refund, the interest should  be paid by the Union of India, i.e., the  Income-tax department,  represented by respondent nos.  1 and 2,  which has  also  kept  the  money  and made use  of  it.   It  is, therefore,  directed that the amount of Rs.1,70,000/-  shall be  refunded to the respondent No.3 by the respondents  No.1 and  2  within a period of two months from the date of  this judgment.   For  the period commencing from 11.1.1980 on  an amount  of Rs.42,500/-, and from 25.1.1980, on an amount  of

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Rs.1,27,500/-,  calculating  upto 22.11.1996  the  appellant shall  pay  the interest @ 12% per annum to  the  respondent No.3 which may, in default of payment, be recovered from the house  property.  With effect from 23.11.1996 upto the  date of  refund, the respondent No.3 shall be entitled to recover interest  at the same rate from respondents No.1 and 2.  The amount  of interest shall also be calculated and paid within a  period  of two months from today.  We make it clear  that the   interest   is  being   awarded  purely  on   equitable considerations, in the facts and circumstances of this case, and  in doing so we are not laying down any principle of law to be followed as a precedent.  The appeal stands allowed in these terms.  No order as to the costs.

       CJI.

   J.  ( R.C.  Lahoti )

   J.  ( Doraiswamy Raju )

   March 30,  2001.

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