Recovery under Section 226(3) cannot defeat contractual redemption rights before money becomes payable to the assessee.

Section 226(3) of the Income-tax Act permits attachment only where money is due or may become due to the assessee from the person served with notice, and that recovery power cannot be used to unilaterally exercise a contractual option belonging to the assessee. Where repurchase or redemption under the investment scheme depended on the holder's own option, the department could not treat the units as payable before that option was exercised. The attachment and sale of the units was therefore unjustified. The assessee was also entitled to restoration of the contractual benefits attached to the units, including redemption value at par and dividend declared during the relevant period.

---

---

Issues: (i) Whether sub-section (3) of Section 226 of the Income-tax Act, 1961 permitted attachment and sale of the assessee's units before the assessee exercised the contractual option to repurchase or redeem them; and (ii) whether the assessee was entitled to the redemption value and dividend on the units.

Issue (i): Whether sub-section (3) of Section 226 of the Income-tax Act, 1961 permitted attachment and sale of the assessee's units before the assessee exercised the contractual option to repurchase or redeem them.

Analysis: The notice under Section 226(3) could operate only where money was due or may become due to the assessee from the person served with notice. The scheme made repurchase dependent on the holder's option and did not authorise the department or the trustee to exercise that option on the assessee's behalf. On the date of notice, the amount had not become payable to the assessee, and the statutory fiction in clause (vi) could not be stretched to authorise unilateral disposal of the units without notice to, or consent of, the holder.

Conclusion: The attachment and sale of the units under Section 226(3) was not justified and was against the assessee.

Issue (ii): Whether the assessee was entitled to the redemption value and dividend on the units.

Analysis: The assessee had invested the funds in the scheme and remained entitled to the contractual return attached to the units. Since the sale at the lower market value was held to be illegal, the assessee was entitled to be restored to the position that would have obtained under the scheme. The declared dividend during the relevant period also formed part of the benefit attached to the units from the date of allotment.

Conclusion: The assessee was entitled to the redemption value at par and to the dividend declared during the relevant period.

Final Conclusion: The statutory recovery action could not override the contractual incidents of the investment scheme, and the assessee was restored to the benefits flowing from the units, including their full redemption value and declared dividend.

Ratio Decidendi: Section 226(3) authorises recovery only of money that is due or may become due to the assessee, and where entitlement under a contract depends on the assessee's own option, the recovery authority cannot unilaterally exercise that option or dispose of the asset before the amount becomes payable.

---