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Introduction:

Generally, after completion of the Income tax assessment, the tax department issues a notice under Section 156 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) to enforce and collect the tax demand. The assessee has to pay the tax amount within 30 days from the date of service of the notice as per Section 220(1) of the Act.

If an assessee fails to pay the demand amount as per the notice, he would be treated as an assessee deemed to be in default under Section 220(4) of the Act. Later, the tax department will initiate the recovery proceedings in terms of Section 222 and 226 of the Act.

In this article, an attempt has been made to elucidate the provisions of Sections 222 and 226 relating to recovery and other modes of tax recovery pursued by the income tax department. Further, various scenarios and issues arising in connection with tax recovery are also dealt with reference to relevant judicial pronouncements.

Certificate to Tax Recovery Officer (TRO) under Section 222 of the Act:

Section 222 of the Act provides that when an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer (TRO) may draw up under his signature a statement in the prescribed Form 57 specifying the amount of arrears due from the assessee (“certificate”) and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule—

(a) attachment and sale of the assessee’s movable property;

(b) attachment and sale of the assessee’s immovable property;

(c) arrest of the assessee and his detention in prison;

(d) appointing a receiver for the management of the assessee’s movable and immovable properties.

The explanation therein clarifies that the assessee’s movable or immovable property shall include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973, by the assessee to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property so transferred to his minor child or his son’s minor child is concerned, it shall, even after the date of attainment of majority by such minor child or son’s minor child, as the case may be, continue to be included in the assessee’s movable or immovable property for recovering any arrears due from the assessee in respect of any period prior to such date.

From the above, it is evident that the Tax Recovery Officer (TRO) has to draw a statement in the prescribed Form 57 under his signature to recover the tax amount by one or more modes mentioned above. Based on his certificate the tax department will initiate recovery proceedings.

The assessee in default may have the following recourses against the recovery proceedings initiated under Section 222:

a. By filing an application for stay of recovery proceedings with the TRO/ CIT/ ITAT under Section 220(6) of the act. As per the Section 220(6) of the act “Where an assessee has presented an appeal under section 246or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed of.”

b. Thus the assessee may file an application for stay of recovery proceedings with the TRO and request him to not proceed with the recovery proceedings until the disposal of appeal.

c. TRO may in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, may allow for stay of recovery proceedings. This facility is available on a case to case basis and subject to conditions as imposed by the tax authorities. Generally, when an assessee files a stay of demand application for recovery proceedings, the tax department may insist for payment of 20% of the disputed tax demand amount as per Office Memorandum issued by the Central Board of Direct Taxes (CBDT) dated 31 July 2017.

However, we have numerous judgments pronounced by the judiciary in favour the assessee for granting stay of recovery proceedings.  A few are cited for ready reference:

(i) The Gujarat High Court has held in D. Infra Developers vs. Deputy Commissioner of Income-tax, Central Circle-2 & 3 [2016] 70 taxmann.com 270 (Gujarat), that during the pendency of the stay application, which had been filed almost immediately after the period stipulated in the notice under section 156 had expired, there was no warrant for the respondents to resort to drastic measures of making coercive recovery without first taking the decision on the application under section 220(6). The action of the respondents in attaching the bank accounts and flats of the petitioner, therefore, cannot be sustained.

(ii) In Maheshwari Agro Industries Vs Union of India [2012] 65 DTR 129 (Raj), the High Court of Rajasthan has held that “as already held, since the CIT(A) also has inherent and implied powers to grant stay, the assessee-petitioner may also file stay application before the CIT(A), who may also consider such stay application on its own merits upon the relevant factors as enumerated above viz. prima facie case, balance of convenience, irreparable injury, nature of demand and hardship likely to be caused to the assessee, liquidity available to the assessee etc.

(iii) Harsh Dipak Shah Vs Union of India [2022] 135 taxmann.com 242 (Gujarat) wherein it was held by the Gujarat High Court that while deciding stay of demand application u/s 220(6), the AO should divorce himself from his position as the authority who made the assessment. The AO may stipulate pre-deposit of less than 20% of demand (even 5%/10%), while granting stay of demand u/s 220(6). His discretion of not treating the assessee in default, conferred under sub-section (6) should ordinarily be exercised in favour of assessee, unless the overriding and over whelming reasons are there to reject the application of the assessee under Section 220(6) of the Act. The application under Section 220(6) of the Act cannot normally be rejected merely describing it to be against the interest of Revenue if recovery is not made, if tax demanded is twice or more of the declared tax liability. Powers to grant stay can be implied as inherent power of the First Appellate Authority CIT (A).

(iv) Further, in case of Prem Prakash Tripathi Vs CIT [1994] 208 ITR 461 (All).the Allahabad High Court held that“When the Appellate Tribunal was held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction, we see no reason why the same legal position should not follow in the case of the Commissioner of Income-Tax (Appeals), who is also an appellate authority like the Appellate Tribunal. In this situation, what holds good in the case of the Appellate Tribunal equally applies to the Commissioner of Income-Tax (Appeals). Following this authority, we hold that the Commissioner of Income-Tax (Appeals) must be held to have the power to grant stay, which is incidental or ancillary to its appellate jurisdiction”.

(v) In ITO Vs M.K. Mohammed Kunhi [1969] 71 ITR 815 (SC) the Apex Court emphasized that the Tribunal will consider to stay the recovery proceedings based on the conditions the stay will be granted in most deserving and appropriate cases, where the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.

Analysis of Section226- Other modes of recovery :

Where no certificate has been drawn up under section 222, the Assessing Officer may recover the tax by any one or more of the modes provided in this section.

Where a certificate has been drawn up under section 222, the Tax Recovery Officer may, without prejudice to the modes of recovery specified in that section, recover the tax by any one or more of the modes provided in this section.

Incase no certificate of recovery has been drawn up by a TRO, the Assessing officer may recover the tax by one or other modes mentioned in the Section 226.

It is evident that when a certificate has been drawn up by a TRO under Section 222, the assessing officer has been debarred from resorting to other modes of recovery under Section 226.

If any assessee is in receipt of any income chargeable under the head “Salaries”, the Assessing Officer or Tax Recovery Officer may require any person paying the same to deduct from any payment subsequent to the date of such requisition any arrears of tax due from such assessee, and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the Central Government or as the Board directs.

As per the proviso, any part of the salary exempt from attachment in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908 shall be exempt from any requisition made under section 226(2).

The Assessing Officer (AO) or Tax Recovery Officer (TRO) may issue a notice to any person responsible for paying salary to the assessee to deduct from payment of salary to him at a date subsequent to the service of such notice, any arrears of tax due from such assessee. The person on whom such notice is served is bound to make such deduction from such salary and to make payment of the deducted amount to the credit of the Central Government or as the Board directs. Such attachment of salary is subject to the provisions of Section 60 of the Code of the Civil Procedure, 1908.

Garnishee Proceedings:

Garnishee order is issued to a debtor not to pay to his own creditor but to some third party who has obtained a final judgment against the creditor.

The Assessing Officer or TRO may initiate the garnishee proceedings against the assessee in default in connection with tax demand. The AO or TRO will issue a Garnishee order to the debtor of the assessee in default.

 The AO or TRO 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 AO or TRO 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. It is pertinent to issue the Garnishee notice in writing and it must be served to the tax defaulter’s debtors.

Modes of Recovery Under Sections 222 & 226 of Income-Tax Act, 1961

A notice may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of sub-section, the shares of the joint-holders in such account shall be presumed, until the contrary is proved, to be equal.

Notice has to be served to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person. It is elementary that issuance of garnishee notice under Section 226(3) to the garnishee is sine qua non for initiating proceedings under the section.

A copy of the notice shall be forwarded to the assessee at his last address known to the AO or TRO, and in the case of a joint account to all the joint-holders at their last addresses known to the AO or TRO.

The section states that a copy of the garnishee notice shall be forwarded to the assessee, in the case of joint account to all the joint holders at their last address known to the. It is unclear whether the garnishee notice issued to the assessee firstly and recovery proceedings initiated later. Else, recovery proceedings initiate firstly and later inform the assessee in this regard. The tax department adopts the process, which varies from case to case.

There are different views expressed by the Courts on these issues, which are discussed below:

a) The Honorable High Court of Delhi has held in the case of Gecas Services India (P.) Ltd. v. Income-tax Officer [2017] 84 taxmann.com 21 (Delhi) there was no illegality committed by the Assessing Officer in not issuing to the assessee a notice under section 226(3)(iii) simultaneously with or prior to the notice issued to its bank under section 226(3)(i) for recovery of the tax demand from its account. The Court accepted the submission of the revenue that requirement under section 226(3)(iii) is only that a copy of the notice issued under section 226(3)(i) should be forwarded to the assessee and not that a copy should be served on the assessee in advance or simultaneously. (In favour of revenue).

b) Purnima Das* v. Union of India [2010] 329 ITR 278 (Calcutta). In this case the assessee has filed an appeal against the assessment order. Further, she filed an application for stay of demand. However, the assessing Officer initiated attachment proceedings and debited certain amount from current account of assessee’s bank account which was paid to the department. The Assessee filed a writ petition before the High Court of Calcutta by contending that since no notice preceding attachment was issued, the entire action was bad in law. The Court held that the sum was debited illegally without disposing of the stay application and without serving notice as postulated under section 226(3) (iii), and that the said action of debiting the sum could not be sustained and was set aside.( In favour of assessee)

c) High Court of Karnataka has held in the case of Beena Muralidhar v. Tax Recovery Officer, Hyderabad, [2019] 109 taxmann.com 133 (Karnataka) where appellant was holding joint saving bank account with her husband, TRO could not issue notice to bank for marking said bank account for lien towards arrears of tax liability of her husband, without issuing a notice to appellant under sub-section (3)(iii) of section 226, which is a sine qua non for recovery of tax. Since the mandatory requirement was not complied with by the revenue the notice was quashed (In favour of assessee).

Every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary.

Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice.

The garnishee should not pay any claim relating to the property on which garnishee notice has been issued by the tax department. In other words, the tax dues as per the garnishee notice needs to be settled firstly.

Any person who does not hold any asset or money of the assessee, if the garnishee notice has been issued by the tax department; he may submit a statement of oath to the tax department that he does not have/hold any assets of the assessee. In such a case, the garnishee will not be required to pay any amount on behalf of the assessee. However, if it is discovered that such statement filed by the garnishee is false, he would be liable personally to the extent of his own liability to the assessee or to the extent of assessee’s labiality to the tax department.

A few case laws on the above issue have been discussed below to understand the nuances of this provision:

a) The Madras High Court has held in the case of Kavin Kumar Kandaswamy v. Chief Commissioner of Income-tax, Coimbatore [2021] 129 taxmann.com 401 (Madras) that tax dues were to be paid by defaulter and the notice was also issued to petitioner to pay dues to be paid by defaulter to department. Court held that petitioner could not be construed as an aggrieved person, and he had to comply with impugned notice by depositing income tax dues of defaulter to department.

b) In Kaneria Granito Ltd. v. Assistant Commissioner of Income-tax, the Gujarat High Court held that in case of cash credit account or term loan account, bank and assessee do not have debtor-creditor relationship and, hence the said account could not be attached for recovery of unpaid tax.

Further, the AO or TRO may, at any time or from time to time, amend or revoke any notice issued under this sub section or extend the time for making any payment in pursuance of such notice.

The AO or TRO has to issue a receipt in connection with the amount received from the Garnishee against the notice. The garnishee is also discharged from the liability to the assessee to the extent of the amount he paid as per the garnishee notice.

If a person pays to the assessee after receiving the garnishee order, he will be personally liable to the AO or TRO to the extent of amount he paid to the assessee or to the extent of assessee’s liability for any sum due under the act, whichever is less.

  If any person who fails to make payment to the AO or TRO  as per the notice issued he will be treated as deemed assessee in default and recovery proceedings will be initiated under Section 222 to 225 of the Act , but not under Section 226.

The AO or TRO may apply to the court in whose custody there is money belonging to the assessee for payment to him or the entire amount of such money, or, if it is more than the tax due, an amount sufficient to discharge the tax.

The AO or TRO may, if authorised by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner by general or special order, may proceed to recover the tax by distraint and sale of the movable property of the assessee in the manner laid down in the Third Schedule.

Conclusion:

Thus it is evident that the Department can exercise various modes of recovery of taxes in terms of Section 222 and 226 of the IT Act, which at times have lead to excesses and harassment and the assessees have to approach the Courts for remedies.

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