The Hindu Business Line : When attachment causes misery

INCOME-TAX law permits the income-tax officer (ITO) to enforce collection from persons who owe money to the tax defaulter. This is known as the resort to garnishee proceedings. The provision is taken from the Civil Procedure Code. Safeguard has been built-in to prevent abuse. Before invoking Section 226(3) of the I-T Act, 1961, the defaulting assessee is to be issued a notice and he should be heard. In the absence of such notice, recovery proceedings are not valid. The ITO may, at any time or from time to time, by a written notice, require any person from whom money is due or may become due to the assessee to pay the same to the I-T Department and such payment will constitute a good and sufficient discharge of the liability of such person to the assessee. Failure to make such payment will make such person accountable as an assessee in default. The essential criterion for a notice is that on the date of service of the notice, the persons served with notice should be under an existing liability to pay an amount to the assessee. Notice cannot operate in respect of a liability which is not in existence at all at the time of the service of the notice.

The Malani case

In this case (B. M. Malani vs Income Tax Department — 270 ITR 515 AP), Malani was in arrears of tax to the tune of Rs 157.77 lakh. He told the ITO that he had sold property in 1998 and invested Rs 65 lakh with the Unit Trust of India's Monthly Income Plan 1998 - III under the Capital Gains Scheme in order to get exemption under Section 54 EA. Since there was some time for maturity of the units, Malani sought time for payment of tax till the date of maturity.

The ITO could not wait. He issued attachment proceedings under Section 226(3) of the Act in February 2002 attaching the units of Malani. After the attachment, a separate notice was issued to Malani informing him about the garnishee order to the UTI. On account of mismanagement, the face value per unit had fallen to Rs 7.

The UTI, without waiting for the date of maturity of the units, resorted to unauthorised distress sale of the units of Malani, resulting in a loss of Rs 3.07 per unit. Malani went to the High Court challenging this action of the UTI and the ITO. He pointed out that the sale was wholly unwarranted and unauthorised and without notice and consent of the unit-holder.

The proceedings issued by the ITO seeking attachment under Section 226 of the Act did not warrant UTI to resort to distress sale of the units. He was receiving dividends on the units at Rs 8,12,500, being 12.5 per cent on the investment of Rs 65 lakh free of income-tax and as such, besides having a loss of Rs 21.31 lakh because of sale at a discount, he had also suffered a loss of income of Rs 8.12 lakh per annum by way of dividends. He argued before the High Court that even if the attachment was valid, the UTI was merely obliged to hold the money that would become due to Malani on the said units, and since the units were under the lock-in period under the capital gains scheme and were within the hold and control of the UTI, they could not have been sold.

Allowing the writ petition, the AP High Court pointed out that attachment of debt would mean that the 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. The prerequisite for exercise of power under Section 226(3) is that the person to whom the notice is issued should be holding the money on behalf of the assessee or it should become due to him some time in future.

The ITO had attached not money but units held by Malani with the UTI. These units were transferable and their value had not become due to the assessee on the day the notice was given. No money was due to Malani from the UTI on the day the notice was given. The money would have become due to Malani only on the maturity of the units.

The court considered the whole exercise as illegal. The UTI had purchased the units held by Malani prematurely without his permission, transferred the units to itself on a value decided by itself and submitted some money to the I-T Department. That, said the High Court, is not the purport of Section 226(3).

Even the I-T Department in its counter-affidavit stated that though the units have been attached, the UTI ought to have obtained the consent of Malani before sale and as such the loss, if any, on account of sale cannot be attributed to the I-T Department. The UTI denied any liability pointing out that under the Scheme, the unit-holder can transfer the units after three years at net asset value (NAV). It is only after completion of five years that they can be redeemed at par.

The High Court quashed the sale of the units at a discount and directed the UTI to calculate the face value of the units at Rs 10 per unit and pay the difference to Malani who had in the meantime paid off his tax arrears.

Courts have often cautioned that the powers under Section 226(3) must be exercised with great care.

(The author is a former Chief Commissioner of Income-Tax.)

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