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Issues: (i) Whether proceedings under section 226(3) of the Income-tax Act, 1961 could be used to recover tax liability arising under the repealed Act, and whether prior default was a prerequisite; (ii) Whether the notice under section 226(3) was invalid as premature in relation to tax and penalty for the assessment years 1962-63 and 1963-64; (iii) Whether the Income-tax Officer failed to exercise discretion properly under section 220(6) in relation to tax for the assessment year 1960-61.
Issue (i): Whether proceedings under section 226(3) of the Income-tax Act, 1961 could be used to recover tax liability arising under the repealed Act, and whether prior default was a prerequisite.
Analysis: Section 226(3) authorises recovery from a person who owes money to the assessee or holds money for the assessee, and the language of the provision does not require that the assessee must first be in default. The saving provision in section 297(2)(j) preserves recovery of sums payable under the repealed Act by recourse to the new Act, and the recovery machinery may apply mutatis mutandis where appropriate. The notice under section 156 of the new Act was therefore competent even for liability assessed under the old Act.
Conclusion: The issue was decided in favour of the Revenue.
Issue (ii): Whether the notice under section 226(3) was invalid as premature in relation to tax and penalty for the assessment years 1962-63 and 1963-64.
Analysis: The amounts had already been assessed and notices of demand under section 156 had been served. The liability was not contingent merely because the time for payment had not yet expired. Section 226(3) contains no requirement that the assessee must already be in default before a notice can be issued, and the existence of quantified, demanded tax and penalty made the amounts due for the purpose of that provision.
Conclusion: The issue was decided in favour of the Revenue.
Issue (iii): Whether the Income-tax Officer failed to exercise discretion properly under section 220(6) in relation to tax for the assessment year 1960-61.
Analysis: The challenge to the exercise of discretion was not supported by specific pleadings showing arbitrariness or caprice. In the absence of particulars, it was not open to the High Court to hold that the discretion had been improperly exercised. The assessee failed to establish any defect in the notice on this ground.
Conclusion: The issue was decided in favour of the Revenue.
Final Conclusion: The impugned notice was upheld in full and the writ petition stood dismissed.
Ratio Decidendi: Section 226(3) of the Income-tax Act, 1961 is an independent recovery provision that does not require the assessee to be in default, and it may be applied, with necessary adaptation, to recover liabilities preserved by section 297(2)(j) of the Act.
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