1983 (5) TMI 6 - HC - Income Tax

Court ruling prioritizes Income Tax Department's claim over firm's tax dues, not individual partners. Payment directed to individual after settling dues.

The court dismissed Civil Revision No. 39 of 1983 filed by the Tax Recovery Officer, upholding the priority of the Income Tax Department's claim only ... Garnishee Proceedings Issues Involved:1. Validity of prohibitory orders issued by the Tax Recovery Officer (TRO).2. Priority of income-tax dues over other claims.3. Validity of charges created under decrees in favor of decree-holders.4. Bar of limitation on execution applications.Issue-wise Detailed Analysis:1. Validity of Prohibitory Orders Issued by the Tax Recovery Officer (TRO):The court examined the prohibitory orders issued by the TRO under Rule 31 of the Second Schedule to the Income Tax Act, 1961. It was held that the prohibitory orders were valid only against the dues of the firm, Dilip Construction Company, and not against the individual partners. The court emphasized that the property in the custody of the court or 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 and not against the individual partners.2. Priority of Income-Tax Dues Over Other Claims:The court held that the Income Tax Department has priority over the claims of the decree-holders only to the extent of tax dues from M/s. Dilip Construction Company. The court referred to Section 222(1) of the Income Tax Act, which permits the Income Tax Officer (ITO) to forward a certificate to the TRO specifying the amount of arrears due from the assessee. The TRO is then entitled to recover the amount by attachment of the defaulter's movable or immovable properties. The court concluded that the prohibitory order issued under Rule 31 would have no effect on the dues against the individual partners, as no part of the amount belonged to them.3. Validity of Charges Created Under Decrees in Favor of Decree-Holders:The court addressed the argument that the charges created under the decrees in favor of non-applicants Nos. 3 to 7 were in violation of Section 281 of the Income Tax Act and thus void. Section 281(1) declares a charge or transfer void against any claim in respect of any tax or other sum payable by the assessee if certain conditions are met. The court held that the charge created under those decrees is void only to the extent of the legitimate claim of the Income Tax Department, which extends only to the arrears of tax due from the firm. The court did not find the charge to be void altogether.4. Bar of Limitation on Execution Applications:The court examined the execution application filed by Ramkrishna Shenoy, which had been dismissed as barred by time. The court found that after Shenoy got the amount attached, he took no further steps towards realization of that amount. The subsequent execution application filed by him was deemed to be an application only for directing payment of the amount in the hands of the garnishee (Bhilai Steel Plant). The court concluded that the subsequent application was in continuance of the initial execution application and should not be treated as a fresh application. Therefore, the execution court erred in holding it to be barred by limitation.Conclusion:1. Civil Revision No. 39 of 1983 filed by the TRO, Baroda, was dismissed. The court upheld the priority of the Income Tax Department's claim only to the extent of the tax dues from the firm, not against individual partners.2. Civil Revision No. 40 of 1983 filed by Ramkrishna Shenoy was allowed. The court directed that out of the amount deposited by Bhilai Steel Plant, after payment of dues to the Income Tax Department against the judgment-debtor (Dilip Construction Company), the decree-holder (Ramkrishna Shenoy) shall be entitled to the payment of the amount earlier attached by him in execution of his decree.The ultimate result is that Civil Revision No. 39 of 1983 is dismissed without any order as to costs, while Civil Revision No. 40 of 1983 succeeds and is allowed with costs. The costs shall be paid by non-applicant No. 1, i.e., M/s. Dilip Construction Company.