Holding

The LIC is liable to pay interest to the assignee for the period of delay caused by its failure to make the statutory statement on oath under Section 226(3)(vi), and the rate of 15 % per annum is reasonable.

Summary

The case concerned four life‑insurance policies taken by G.V. Ranade and assigned in 1969 to his wife, Kamalabai Ranade. The Income‑Tax Officer issued a notice under Section 226(3) of the Income Tax Act directing the LIC to pay the policy proceeds to satisfy Ranade’s tax arrears. The LIC delayed making the statutory statement on oath under clause (vi) of that section until December 5 1975, after which the notice was withdrawn and the proceeds were paid, but the LIC refused to pay interest for the period of delay. The assignee filed writ petitions and obtained a decree directing the LIC to pay interest at 15 % per annum on the amounts of the first two policies. On appeal, the Supreme Court held that the assignment was valid, the LIC’s delay in complying with Section 226(3)(vi) was inordinate, and consequently the LIC was liable to pay interest to the assignee. The Court dismissed the appeal with costs.

Issues considered

Whether the assignment of the policies to the assignee is valid and binding on the LIC notwithstanding the ITO’s notice under Section 226(3).
Whether the LIC’s failure to make a statement on oath under Section 226(3)(vi) within a reasonable time makes it liable to pay interest on the policy proceeds.
Whether the interest awarded at 15 % per annum is excessive or contrary to Section 244 of the Income Tax Act.
Whether earlier writ petitions and orders bar the claim for interest under the doctrine of res judicata or constructive res judicata.
Whether the Income‑Tax Officer needed to be impleaded as a party to determine the liability for interest.

Legislation cited

Income Tax Act, 1961s. 226(3)(vi), s. 226(3)(vii), s. 244, s. 281

Subjects

assignment of life insurance policiesincome tax recoverySection 226(3) of Income Tax Actinterest on delayed paymentres judicatastatutory obligationlife insurancetax arrears

Judgment

LIFE INSURANCE CORPORATION OF INDIA & ANR.
A
v.
GANGADHAR VISHWANATH RANADE (DEAD) BY LRS.

SEPTEMBER 8, 1989

[N.D. OJHA AND J.S. VERMA, JJ.] B

Income Tax Act, 1961-Sections 226(3)(vi) and 281-Assignment
of policies by insurer-Assignment accepted by LIC-ITO of opinion
that transfer of policy with intent to defraud Revenue-/nordi-,,ate delay
by L/C in making statement on oath before ITO-Liability of LIC to
pay interest to assignee of policies for delay in fulfilling statutory
obligation. c
One Sh. G. V. Ranade took four policies on his own life from the
L_IC during the period 1958 to 1960. In April 1969 G.V. Ranade as-
signed absolutely all these four policies in favour of his wife Smt.
Kamalabai G. Ranade and the assignment was duly registered by the c
LIC. These policies were paid up and the date of maturity of these were
14.9. 72, 28.12. 73, 9. ll. 75 and 21.12. 75.

There were some income tax dues against the said G.V. Ranade
for recovery of which income tax officer ·commenced recovery proceed-
ings. The Income Tax Officer on 27. l. 71 issued a notice under Section E
226(3) of the Income Tax Act,_ 1961 to the. Manager of the LIC at
Nagpur directing the LIC to pay to I.T.O. forthwith any amount due
from the LJC to or, held by the LIC for or on account of the said
Ranade to meet the amount due from Ranade as arrears of income tax.
The Divisional Manager of the LIC at Nagpur intimated this fact of
receipt of the notice under section 226(3) of the Income Tax Act 1961 to F
the assignee of these policies Smt. Kamalabai G. Ranade, suggesting
that she take steps to get the notice vacated in order to safeguard her
interest in the policies. By further correspondence the ITO required
the LIC to deposit the amount of Rs.3415. 70 payable against the first
policy which was to mature on 14.9. 72 and the LIC informed the
assignee that the moneys due under the policies will be paid to her only G
after her getting the notice served on LIC by the ITO vacated.

On 5.9.72 Smt. kamalabai G. Ranade filed a Writ Petition in the
High Court of Bombay impleading LIC and the ITO claiming several
reliefs including a direction to the LIC for payment of Rs.3415.70 and
also to make a statement that no part of the said amount is due to G. V. H
97
98 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.
,_
Ranade nor df!,eS the LIC hold any part of the sum for or on account of
A Ranade. This Writ Petition was dismissed in limine, Smt. Kamalabai
G. Ranade filed an appeal by special leave in this court and this court
disposed of the appeal on the counsel for the LIC stating that he would
file the necessary statement on oath in accordance with S. 226(3)(vi) of
the Income Tax Act, 1961 stating that no sum of money is due to the
B Assessee, insured person, before the ITO except one policy in respect of
which the LIC having already paid the money to ITO no statement need
be made and consequently no order can be made u/s 226(3)(vi) and the
appeal was disposed of accordingly.

It appears ihat the ITO did got revoke the order of attachment
inspite of the LIC making the requisite statement on oath under section
c 226(3)(vi) of the Income Tax Act on 5.12.75. This led to the filing of
another Writ Petition in the Bombay High Court by Smt. Kamalabai
praying for a direction to the ITO to revoke all notices issued under
section 226(3) to the LIC and to the LIC to pay her the amount due
against the policies which had matured. On 4.4.1977 counsel for the
D ITO produced before the High Court a copy of the order dated 1.4. 77
passed by the ITO withdrawing the notice u/s 226(3) of the Income Tax
Act and the Writ Petition was dismissed as withdrawn.

Smt. Kamalabai then sent notice to the LIC demanding payment
of the total amount due against the four policies together with interest·@
E 15% since the delay in payment had been occasioned by the default of
the LIC. LIC made the payment of these amounts to her but disputed its
liability to pay interest thereon for the period subsequent to the date of
maturity on the ground that the delay was occasioned by the ITOs
notice u/s 226(3). This dispute regarding the LIC's liability to pay
interest led to the filing of Writ Petition No. 1248 of 1977 decided on
p January 7, 1981 which gives rise to this appeal.

The impugned judgment holds that the last two policies having
matured on 9.11. 75 and 21.12. 75 a few days.before or after 5.12.75\when
the statement on oath u/s 2.26(3) of the Income Tax Act was made by .the
LIC did not qualify for award of such interest which was payable in
d respect of the first 1fwo which had matured earlier on 14.9. 72 and
28.12. 73. This view of the High Court on which the award of interest is
based is assailed on behalf of the appellant.

The dispute in this appeal is only about the LIC's liability for
payment of interest on the principal amount from the date of maturity
~ of the first two policies to 31.12.75 and the rate of 15% p.a. which is
alleged to be excessive.
..
L.I.C. v. G.V. RANADE 99

Dismissing the appeal with costs this Court,
A
HELD: In the instant case, admittedly assignment of the policies
was made by the insured G. V. Ranade and the same was dnly accep-
ted and registered by the LIC in April 1969. It is, therefore, obvious
that the LIC was bound to act on that assignment in favour of Smt.
Kamalabai G. Ranade unless the assignment was held to be invalid B
by a competent authority on a proper proceeding taken for this
purpose. [IllBJ_

Mere issuance of notice under section 226(3) of the Income Tax
Act, 1961 did not have the effect of invalidating the assignment nor did
the casual mention of section 281 of the Income Tax Act, 1961 by the
ITO in his letter dated 28.8. 72 result in this consequence. Any further c
step towards formation of the final opinion by the ITO could be taken
only after the LIC had made the requisite statement on oath under
section 226(3)(vi) of the Income Tax Act, 1961 on the basis of the
registered assignment of policies. llllC-D)
D
The question of revocation of the notice under clause (vii) of sub-
section (3) of Section 226 of the Income .Tax Act, 1961 arose .in the
present case only after the LIC made the requisite statement on oath
under section 226(3)(vi) of the Act in view of its consistent stand
throughout that the moneys due under the poiicies were held by it for
and on behalf of the assignee and not the defaulter. Mere information of E
the assignment to the ITO and keeping the assignee informed of the
ITO's action did not amount to discharge of the statutory obligation
under section 2i1i(3)(vi) of the Act by the LIC. Sub-section (3) of Section
226 of the Income Tax Act, 1961 clearly shows that on a notice there-
under being issued by the ITO to the LIC in the present case, it was
incumb~t on the LIC to make the requisite statement on oath under F
clallse-.(vi) thereof raising an objection on the basis of the registered
assignment. It was 'then for the ITO to proceed further and form his
final opinion and revoke the notice under clause (vii). [1120-E; 113G-H]

The inordinate delay in making the.statement on oath by the LIC
under section 226(3)(vi) of the Income Ta" Act, 1961 was the result of G
misconstruction of the provisions and misappreciation of its liability
thereunder. [114B] ·;,:,

Obviously the assignee of the policies who had become entitled to
.-• receive the amount due thereunder on the dates of their maturity must
be compensated by the LI C for its failure to perform its statutory H IQ.,
100 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.,
'·
A obligation under section 226(3)(vi) of the Income Tax Act, 1961 within a
reasonable time. Performance of this statutory obligation by the LIC in
the present case being after inordinate delay award of interest to
the assignee of the policies to whom the payment thereunder had to
be made even according to the stand of the LIC is, therefore, clearly
justified. l114C-D]
B
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1979 "
of 1981.

From the Judgment and Order dated 7.1.81 of the Bombay High ,.
Court in Civil Writ Petition No. 1248 of 1977.
c P.P. Rao, Kailash Vasdev and S. Murlidhar for the Appellants.

A.K. Sanghi for the Respondent.

The Judgment of the Court was delivered by
D
VERMA, J. This appeal by special leave is against the judgment
dated January 7, 1981 in Writ Petition No. 1248 of 1977 of the Nagpur
Bench of the Bombay High Court. The special leave has been confined
only to the question of liability of the appellant, Life Insurance Cor-
poration, to pay interest for the period after date of maturity of insu-
E ranee policy, in case of delay in payment. Accordingly, this is the only
question arising for decision in this appeal.

The writ petition in the High Court was filed by Smt. Kamalabai
G. Ranade, the wife of Gangadhar Vishwanath Ranade of Nagpur.
The said G. V. Ranade took four policies on his own life from the Life
F Insurance Corporation of India (hereinafter referred to as "the LIC")
during the period 1958 to 1960. These policies were paid up and the
particulars thereof including their paid up value payable on the date of
maturity are as under:

Policy Sum Paid up Date of
G Number Assured Value Maturity.
19620636 10,000.00 3415.70 14.9.72
13932229 3,500.00 1118.65 28.12.73
13969144 5,000.00 892.20 9.11.75
13972300 2,000.00 557.70 21.12.75

H In April 1969 G.V. Ranade assigned absolutely all these four
•..
L.l.C. v. G.V. RANADE [VERMA, J.] 101

insurance policies in favour of his wife Smt. Kamalabai G. Ranade and
A
the assignment so made was duly registered by the LIC as under:

"In registering this Assignment the Corporation makes no
admission as to its validity.

Nagpur sd/- B
Dt. 8.4.69 P. Divisional Manager"

It appears that there were some income tax dues against the said
G. V. Ranade for recovery of which Income-tax Officer had com-
menced recovery proceedings. Prior to the date of maturity of these
policies the Income-tax Officer on 27 .1. 1971 issued a notice under
section :226(3) of the Income tax Act, f961 to the Manager of the LIC c
at Nagpur directing the LIC to pay to the ITO forthwith any amount
due from the LIC to or, held by the LIC for or on account of the said
G. V. Ranade to meet the amount due from G. V. Ranade as arrears of
income tax. This notice further mentioned the consequences envisaged
by section 226(3) of the Income Tax Act, 1961. The Divisional D
Manager of the LIC at Nagpur intimated the fact of receipt of the
notice under section 226(3) of the Income Tax Act, 1961 to the
assignee of these policies, Smt. Kamalabai G. Ranade, suggesting that
she take steps to get the notice vacated in order to safeguard her
interest in the policies. The further correspondence in this behalf bet-_
ween Income-tax Officer, the LIC and the assignee shows that the E
Income-tax Officer required the LIC to deposit the amount of
Rs.3415.70 payable against the first policy which was to mature on
14.9.72 and the LIC kept the assignee informed of this demand by the
ITO adding in its letter <l;ated 27. 7 .1972 to the assignee that the
moneys due under the policies will be paid to her "only after your
getting the notice served on us by the ITO vacated". This was F
reiterated by the LIC in its letter dated 11.8.72 to the assignee.

The assignee sent a notice dated 21.8.72 to the LIC reiterating
that the policies had been absolutely assigned to her as admitted by the
LIC as a result of which the amount payable against the same had to be
paid only to her since the amount was not held by the LIC for or on G
account of G.V. Ranade. The LIC was also required by this notice to.
take the necessary steps for revocation of the ITO's notice and to make
the payment due in respect of all these policies to the assignee. The .
assignee sent a similar notice to the ITO asserting her claim as the
assignee to get the moneys payable under the policies. The ITO in a
letter dated 28.7.72 addressed to the LIC had added that the alleged H
102 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

A transfer of policies by G. V. Ranade to his wife are void with an inten'
tion to defraud the revenue and the case falls within the mischief of
section 281 of the Income Tax Act, 1961; and the LIC was requested to
withhold any payment to Smt. Kamalabai G. Ranade till further com-
munication from the ITO.

B On 5.9.1972 Smt. Kamalabai G. Ranade filed .a writ petition,
(S.C.A. No. 861 of 1972), in the High Court of Bombay impleading
the LIC and the ITO as respondents therein claiming several reliefs
which are mentioned at pages 33 to 35 of the paper-book. The reliefs
included a direction to the LIC for payment of Rs.3415.70 due on
14.9.72 on maturity of the first policy to Smt. Kamalabai G. Ranade
and also to make a statement on oath as contemplated by section
C 226(3} of the Income Tax Act, 1961 that no part of the said amount is
due to G.V. Ranade nor does the LIC hold any part of the sum for or
on account of G.V. Ranade. This writ petition was dismi.ssed in limine
by the High Court on 14.9.72. The amount of Rs.3415.70 payable
against the first policv which matured on 14. 9. 72 was paid by the LIC
O to the ITO. Smt. Kamalabai G. Ranade filed an apeal IC.A. No. 3731of
1973) by special leave in this Court against dismissal of her writ peti-
tion by the Bombay High Court. That appeal was disposed of by this
Court on October 6, 1975 as under:

"On behalf of the Life Insurance Corporation of
India Mr. Rathi stated that he would file the necessary
statement on oath in accordance with sub-cl. (vi) of Cl. (3)
of S. 226 of the Income Tax Act, 1961 and file it in Court
within two months from today stating that no sum of money
is due to the Assessee, insured person, before the Income-
taX Officer. It will thereafter be open to the Income-tax
p Officer to take such other proceedings as he might consider
necessary in order to realise the amounts due from the
assessee. It is, however, stated that in respect of one policy,
the Life Insurance Corporation has already paid the money
to the Income-tax Officer. In respect of it no statement
nee.ct be made and consequently no order can be made
0 under S.,226(3)(vi). The appeal is disposed of accordingly.
There will be no order as to costs".

In pursuance of the above order of this Court, the LIC filed on
December 5, 1975 the requisite statement on oath under section
226(3)(vi) of the Income Tax Act,.1961 in respect of the remaining
H three policies.
L.I.C. v. G.V. RANADE [VERMA, J.) 103

It appears that the ITO did not revoke the order of attachment in A
spite of the UC making the requisite statement on oath under section
226(3)(vi) of Income Tax Act, 1961 on 5.12.75. This led to another
writ petition (S.C.A. 302 of 1977) filed in the Bombay High Court by
Smt. Kamalabai G. Ranade praying for a dir.ection to the ITO to
revoke all notices issued under section 226(3) to the UC and to the
UC to pay to her the amount due against the policies which had B
matured. On 4.4.71 counsel for the ITO produced before the High
Court a copy of the order dated 1.4.77 passed by the Income-tax
Officer withdrawing the notice under section 226(3) of the Income Tax
Act, 1961 and the writ petition was dismissed as withdrawn.

Smt. Kamalabai G. Ranade then promptly sent a notice to the
UC demanding payment of the total amount due against these four C
policies together with interest @-15% since the delay .in payment had
been occasioned by the default of the UC. Admittedly the UC had
made·tlle payment of these amounts to Smt. Kamalabai G. Ranade in
these circumstances.
D
The L.I.C. has not disputed at any stage its liability to pay to
Smt. Kamalabai G. Ranade the amounts due under these. policies.
Jlowever, it has disputed its liability to pay.interest thereon for any
perio-!\. after the date of maturity on the ground that the delay was
occasioned by the I.T.O.'s notice under section 226(3). On the other
hand,\Smt. Kamalabai G. Ranade claimed that the L.1.c: nadwrong- E
fully tefused to make the statement as contemplated under 'section
226(3)(vi) of the Income Tax Act, 1961 resulting in delay in payment
of the moneys after maturity of the policies. This dispute regarding the
L.I.C. 's liability to pay interest led to the filing of the Writ Petition
No. 1248 of 1977 decided on January 7, 1981 which gives rise to this
appeal. F

The impugned judgment of the Bombay High Court in Writ
Petition No. 1248 of 1977 holds that the last two policies having
matured on 9.11.1975 and 21.12.1975, i.e., a few days before or after
5.12. 75 wlien the statement on oath under section 226(3) of the
Income Tax Act, 1961 was made by the L.l.C. did not qualify for G
award of such interest which was payable in respect of the first two
which had matured much earlier on 14.9.72 and 28.12.73. For the
'period commencing from the date of maturity of the policy ending with
-performance of the L.l.C.'s obligation to make the statement under
section 226(3)(vi) of the Income Tax Act, 1961 on 5.12.75 the L.l.C.
has been held liable to.pay interest on the basis of its failure to perform H
104 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

A its statutory obligation. This view of the High Court ou which the
award of interest is based, is assailed on behalf of the appellant.

The surviving dispute in this appeal is now only about the
L.I.C.'s liability for payment of interest on the principal amount from
the date of maturity of the first two policies to 31.12. 75, and the rate of
B 15% per annum which is alleged to be excessive.

Broadly stated, the contention of the appellant is that the appel-
lant was not liable to pay any interest for the period during which it
was restrained from making the payment on account of the J.'.r.O.'s
notice under section 226(3) of the Income tax Act, 1961 and the I.T.O.
also adding that the matter fell within the ambit of S. 281 of the Act.
G On this basis it was urged on behalf of the appellant that the award of
interest on the first two policies from the date of their maturity till
31.12.1975 (statement on oath by the L.i.C. being made only on
5.12.1975) is contrary to law.
·'
D To support the main contention of the appellant, that it is not
liable for payment of any interest for any period after maturity of the
policies, Shri P .P. Rao, learned counsel for the appellant advanced
several arguments. His first argument is that the Income-tax Officer
was a necessary party in the writ petition giving rise to this appeal and
in his absence no effective adjudication of this dispute can be made.
E The second argument is that the High Court has misconstrued section
226(3) of thelncome Tax Act, 1961 and thereby wrongly fastened the
liability for payment of interest upto 31.12. 75 on the appellant. The
third argument is that the principle of res judicata or atleast construc-
tive res judicata, as a result of the earlier writ petitions, bars the claim
for payment of interest in this writ petition. The fourth argument is
F that the writ petition (S.C.A. No. 302 of 1977) being withdrawn
unconditionally without liberty to file a fresh petition, this writ peti-
tion (W.P. No. 1248 of 1977) is not maintainable. The fifth argument is
that the rate of 15% p.a. at which interest has been awarded is exces-
sive. The sixth and the last argument is that the appellant has been
required to make double payment of Rs.3415.70 due against the policy
G which matured on 14.9.1972 inasmuch as the L.l.C. had already
deposited that amount earlier in September 1972 with the I.T.O. in
pursuance to the LT. 0 .'s demand.

In reply, Shri A.K. Sanghi, learned counsel for the respondent
contended that the liability for payment of interest has been correctly
H fastened on the ap_pellant because of its failure to discharge the statu-
L.l.C. v. G.V. RANADE [VERMA, J.] 105

tory obligation of making the requisite statement on oath under sec-
A
tion 226(3)(vi) of the Income Tax Act, 1961 till 5, 12.1975.• He argued
that the L.I.C. having accepted and registered the absolute assignment
made by the insured G. V. Ranade in favour of his wife Smt.
Kamalabai G. Ranade, it was the duty of the L.I.C. to promptly make
the requisite statement on oath under section 226(3)(vi) of the Income
Tax ACt, 1961 which it made much later on 5.12.75 in pursuance to the B
Court's order to enable the I.T.O. to revoke the notice issued by him
under section 226(3) of the Income Tax Act, 1961. Shri Sanghi stated
that even though the special leave granted by this Court is confined
only to the question of interest and therefore, does not extend to the
question of alleged double payment of'Rs.3415.70 by the L.I.C. yet
the respondent concedes that the amount of Rs.3415.70 deposited by
the L.I.C. with the I.T.O. may be refunded by the I.T.O. to the L.I.C. c
together with interest, ·if any, payable on refund of that amount; and
that the respondent does not lay any claim to that amount from the
I.T.O. having obtained that amount from the L.I.C.

We shall first dispose of the last point relating to double payment D
by the L.l.C. of the amount of Rs.3415.70 in view of the express
concession made by Shri Sanghi, learned counsel for the respondent
that the respondent does not lay any claim to it and that the L.I.C. may
obtain its refund from the I.T.O. In view of this statement of learned
counsel for the respondent, Shri Sanghi, it is sufficient to observe that
it would be open to the L.I.C. to obtain refund of the amount of E
Rs.3415.70 deposited by it with the I.T.0. together with interest, if
any, payable on the refund by the Income Tax Department, since it
has. been conceded that the respodent does not claim that amount from
the I. T. 0. We shall now deal with the remaining arguments of Shri
Rao, learned counsel for the appellant.
F
The first argument of the learned counsel for the appellant is that
the I. T. 0. was a necessary party' in the writ petition giving rise to this
appeal. We are unable to accept this contention. The only claim made
in Writ Petition No. 1248 of 1977 decided on 7.1.1981 giving rise to this
appeal is for payment of interest by the appellant, and no relief has
been sought against the I.T.O. This being so, for effective adjudica- G
tion of the L.I.C.'s liability towards the respondent, the presence of
the I.T.O. is not necessary. The respondent's claim is only against the
L.I.C. without any claim being made in the alternative or otherwise
against the I.T.O. The respondent's claim has, therefore, to: succeed
; or fail only on the basis of the L.I.C.'s liability vis-a-vis the respondent
without involving the I.T.O. or anyone else in that process. Merely H
106 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R

A because the defence of the L.I.C. was based on an act of the I.T.O., it
was not incumbent for the respondent to' implead the I.T.O. in this
proceeding when neither any relief was claimed against the I.T.O. nor
was any suggestion of I. T. 0 .'s liability for payment of interest made in
the writ petition. This argument is, therefore, rejected.
B
The second argument relating to construction of section 226(3)
of the Income Tax Act, 1961 is in fact the main argument of Shri Rao
and, therefore, we shall consider the same after disposing of the
remaining arguments which are shorter points.

The third argument is based on the principle of res judicata and
C constructive res judicata on the basis of two earlier writ petitions filed
by Smt. K~malabai G, Ranade. The first writ petition was S.C.A. No.
861of1972 filed in the'Bombay High Court on 5.9.72 prior to the date
of maturity of the fi~t policy claim againsLwhich was required to be
paid by the L.I.C. to the assignee, Sm!. Kamalabai q: Ranade. This
was after issuance of the notice under section 226(3) of the Income Tax
D Act, 1961 by the I.T.0. to the L.I.C. One of the reliefs claimed therein
was a direction to the L.l.C. to.make a statement on oath as required
by section 226(3)(vi) of the Income Tax Act, 1961 that no part of the
amoul)t due against the policy maturing on 14. 9. 72 was due to the
insured G.V. Ranade nor did the L.I.C. hold any part of that sum for
or on account of the alleged defaulter. No doubt some other reliefs
Et ,inc_luding revocati_on of the notice under section 226(3) of the Income
1)\x__Act, 1961 were. also claimed including payment of the amount
together with the accretions thereto. This writ petition being dismis-
sed, -Smt. Kamalabai G. Ranade came to this Court by special leave
and Civil Appeal No. 373 of 1973 was disposed of by this Court's order
dated 6.10.1975 requiring the L.I.C. to make the necessary statement
F on oath in accordance with section 226(3)(vi) of the Income Tax Act,
196lwithin two months. It is obvious that with this direction requiring
the L.I.C. to make the requisite statement on oath under section
226(3)(vi) of the Income Tax Act, 1961._no further question suivived
in that writ petition and the oonsequent civil appeal in this Court since
Cii the further questions including payment of interest on the principal·
amount were to arise only at a subsequent stage. Asking for any other
relief was obviously premature at that stage. It is apparently for this
reason that this Court did not at that stage go into the other questions
relating to the further reliefs specified in that writ petition. That deci-
sion cannot, therefore, preclude agitation of the question of intere!I:
!lI subsequently.
L.l.C. v. G.V. RANADE [VERMA, l.] 107

The next writ petition filed by Smt. Kamalabai G. Ranade was
A
S.C.A. No. 302 of 1977 in the Bombay High Court. The prayer made
therein was for a direction to the L.l.C. to pay the principal amount
together with interest thereon. In this writ petition also the l.T.O. was
impleaded as a party. This writ petition had to be filed because in spite
of the L.l.C. having made the requisite statement under section
226(3)(vi) of the Income Tax Act, 1961 on 5.12.75, the Income-tax 3
Officer had not withdrawn the notice under section 226(3) of the
Income Tax Act, 1961 issued to the L.l.C. and, therefore, the L.l.C.
was not making the payment to the respondent. On 4.4.77 that writ
petition was dismissed as. withdrawn as a result of the I.T.0.'s counsel
filing a copy of the order dated 1.4.1977 withdrawing the l.T.O.'s
notice under section 226(3) of the Income Tax Act, 1961 enabling the
L.I.C. to make the payment due against the policies to the respondent. c
The operation of the notice under section 226(3) of the Income Tax
Act, 1961 by the I.T.O. being the only reason given by the L.l.C. to
support its action of non-payment to the respondent, it was unneces-
sary to persue that writ petition when the I. T. 0. had made the order
withdrawing the notice under sectiqn 226(3) of the Act. Admittedly, it D
was in consequence of the withdrawal of the I.T.O.'s notice by order
datec\ .. L4.77 that payment was actually made by the L.l.C. to the
respondent. It is, therefore, difficult to appreciate how the withdrawal
of that writ petition can, in any manner, preclude the respondent from
raising the question of the L.I.C.'s liability to pay interest when the
principal amount alone was paid later. E
The L.l.C. having refused to pay the interest on the principal
amount in spite of the inordinate delay in payment, the Writ Petition
No. 1248 of 1977 had to be filed giving rise to this appeal raising only
the question of L.l.C. 's liability to pay interest on the principal
amount due against the policies. The same is, therefore, clearly main- ·F
tainable and. the earlier writ petitions cannot, in any manner, bar the
adjudication of this point herein for the reasons already given. This
contention of learned counsel for the appellant is also, therefore,
rejected.

The fourth contention based on withdrawal of writ petition G
(S.C.A. No. 302 of 1977) being covered by the discussion relating to
the third contention, the same is rejected.

The fifth argument relates to the rate of interest. Shri Rao con-
tended tha~ the ·award of interest @15% p.a. is excessive even if the
- L.l.C. is held liable for payment ohnterest. Reference was made by H
108 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

A Shri Rao to Section 244 of the Income Tax Act, 1961 providing for
payment of interest on refund which prescribed the rate of 12% p.a.
from I. 7.1972 to L I0.1984, the increase to 15% p.a. being made therein
only from 1.10.84 by amendment of that section. It was urged that the
period in question in the present case being prior to 1.10.84 the rate of
15% p.a. in excess of the statutory provision of 12% p.a. in Section 244
B
of the Income Tax Act, 1961 is unjustified. Admittedly, the award of
interest, in the present case, for payment by the L.I.C. is not governed
by Section 244 of the Income Tax Act, 1961. Apparently, for this
reason, learned counsel for the appellant relied on Section 244 of the
Income Tax Act, 1961 as of persuasive value. We are not impressed by
this argument. The High Court has relied on the fact that interest.@
c 15% p.a. is reasonable, in the present case, particularly in view of the
fact that the L.I.C. itself charges interest at that rate. It is sufficient for
us to state that there is no material produced, in the present case, to
suggest that award of interest @ 15% p.a. is excessive to permit
interference with the rate in this appeal particularly when the High
Court has come to the conclusion that this is the reasonable rate. This
argument also is, therefore, rejected.

The only point remaining for consideration now is the construc-
tion of Section 226(3) of the Income Tax Act, 1961 the relevant por-
tion of which, reads as under:
E "Other modes of recovery: 226.( 1) Notwithstanding the
issue of a certificate to the Tax Recovery Officer under
section 222, the Income-tax Officer may recover the tax by
any one or more of the modes provided in this section.

(3)(i) The Income-tax Officer 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 Income-tax
Officer 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
H
when it is equal to or less th.an that amount.
..
L.l.C. v. G.V. RANADE [VERMA, J.] 109

(ii) A notice under this sub-section may be issued to
A
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 this sub-section, the shares
of the joint-holders in such account shall be presumed,
until the contrary is proved to be equal.
B
(iii) A copy of the notice shall be forwarded to the
assessee at his last address known to the Income-tax
Officer, and in the case of a joint account to all the joint-
holders at their last addresses known to the Income-tax
Officer.

(iv) Save as otherwise provided in this sub-section,
c
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 docu- D
ment to be produced for the purpose of any entry, endorse-
ment or the like being made before payment is made,
notwithstanding any rule, practice or requirement to the
contrary.

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

(vi) Where a person to whom a notice under this sub-
section is sent objects to it by a statement on oath that the F
sum demanded or any part thereof is not due to the asses-
see or that he does not hold any money for or on account of
the assessee, then, nothing contained in this sub-section
shall be deemed to require such person to pay any such sum
or part thereof, ·as the case may be, but if it is discovered
that such statement was false in any material particular, G
Such person shall be personally liable to the Income-tax
Officer ·to the extent of his own liability to the assessee on
the date of the notice, or to the extent of the assessee's
liability for any sum due under this Act, whichever is Jess.

_(vii) The Income-tax Officer may, at any time or H
110 SUPREME CO.URT REPORTS [1989) Supp. 1 S.C.R.

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.

(viii) The Income-tax Officer shall grant a receipt for
any amount paid in compliance with a notice issued under
B this sub-section, and the person so paying shall be fully
discharged from his liability to the assessee to the extent of
the amount so paid.

(ix) Any person discharging any liability to the asses-
see after receipt of a notice under this sub-section shall be
personally liable to the Income-tax Officer to the extent of
d his own liability to the assessee so discharged or to the
extent of the assessee's liability for any sum due under this
Act, whichever is less.

(x) If the person to whom a notice under tliis sub-
0 section is sent fails to make payment in pursuance thereof
to the Income-tax Officer, he shall be deemed to be an
assessee in default in respect of the amount specified in the-
notice and further proceedings may be taken against him
for the realisation of the amount as if i\ were an arrear of
tax due from him, in the manner provided in sections 222 to
E 225 and the notice shall have the same effect as an attach-
ment of a debt by the Tax Recovery Officer in exercise of
his powers under section 222."

F The argument of the learned counsel for the appellant is that on
receipt of the I.T.O.'s notice under section 226(3) of the Income Tax
Act, 1961, the L.I.C. was not left with the option to make the payment
to assignee of the policies since the L.I.C. or its officer making the
statement on oath under section 226(3)(vi) would thereby have been
exposed to personal liability as the defaulter of the income tax dues. It
G was argued that in these circumstances the L.I.C. could make the
payment only aftter revocation of the notice by the I.T.O.'s Order
dated 1.4.77 and, therefore, the L.I.C. cannot be held liable for pay-
ment of interest for any period prior to revocation of the notice. The
period for which the L.I.C. has been held liable to pay interest being
prior to revocation of the notice by the I.T.O., it was urged that the
H same was unjustified.
L.l.C. v. G.V. RANADE [VERMA, J.} 111

Having given our anxious consideration to the argument we can-
A
not persuade ourselves to accept the same. On a close scrutiny of the
provision we find that the benefit claimed by the L.l.C. is not available
to it, in the facts of the present case.

Admittedly assignment of the policies was made by the insured
G.V. Ranade and the same was duly accepted and registered by the B
L.l.C. in April 1969. It is, therefore, obvious that the L.I.C. was
bound to act on that assignment in favour of Smt. Kamalabai
G. Ranade unless the assignment was held to be invalid by a compe-
tent authority in a proper proceeding taken for this purpose. It is
significant that the L.I.C. never disputed the validity of the assignment
and was throughout prepared to act on it. It is undisputed that the
assignment was not declared invalid by any competent authority. Mere
c
issuance of notice under section 226(3) of the Income Tax Act, 1961
did not have the effect of invalidating the assignment nor did the
casual mention of Section 281 of the Income Tax Act, 1961 by the
I.T.O. in his letter dated 28.8.72 result in this consequence. Any
further step towards formation of the final opinion by the I. T. 0. could D
be taken only after the L.I.C. had made the requisite statement on
oath under section 226(3)(vi) of the Income Tax Act, 1961 on the basis
of the registered assignment of policies. This act was performed by the
L.l.C. only on 5.12.75 which led to revocation of the notice under
section 226(3) of the Act, by the I.T.0. The question is of the liability
of the L.I.C. in these circumstances. E

Section 226 consists of several Sub-sections of which sub-sections
( 1) and (3) alone are relevant for our purpose. Sub-section (1) enables
the I.T.O. to recover the tax by anyone or more of the further modes
provided in this section. Sub-section (3) deals with one such mode
where. the defaulter's money is held by another person. Clause (i) of F
sub-section (3) enables the I.T.O. by notice in writing to 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 the Income-tax Officer that money or so
much of it as is sufficient to pay the dues of the assessee in respect of
the arrears of tax. It is in exercise of this power that the I. T. 0. had G
issued the notice to the L.I.C. in the present case. Obviously, the
I. T. 0. had assumed that the money payable on maturity of these
policies belonged to the insured/assessee/defaulter G. V. Ranade over-
looking the duly registered assignment made much earlier in favour of
the assessee's wife in April 1969. The further clauses (ii) to (v) of
sub-section (3) deal with. ancillary matters and also provide that any H
112 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

claim in respect of property covered by the notice shall be void after
A
the date of the notice as against the demand contained in the notice.

Clause (vi) is relevant for the present purpose and speaks of the
obligation of a person to whom such a notice has been sent. Clause (vi)
relieves the person receiving such a notice from the liability to pay any
B sum to the l.T.O. in obedience to the notice if he "objects to it by a
statement on oath that the sum demanded or any part thereof is not
due to the assessee or that he does not hold any money for or on
account of the assessee". This clause further provides that "if it is
discovered that such statement was false in any material particular"
such person shall be personally liable to the I.T.O. to the extent of the
C assessee's liability on the date of notice. Clause (vii) then provides,
inter alia, for amendment or revocation of the notice issued under this
sub-section by the l.T.O. This stage of amendment or revocation of
the notice under clause (vii) is reached only after the stage provided in
clause (vi), in a case where the notice objects that he does not hold the
money for or on behalf of the defaulter of tax dues.
D
It is, therefore, obvious that the question of revocation of the
notice under clause (vii) of sub-section (3) of section 226 of the Income
Tax Act, 1961 arose in the present case only after the L.I.C. made the
requisite statement on oath under section 226(3)(vi) of the Act in view
of its consistent stand throughout that the moneys due under the
E policies were held by it for and on behalf of the assignee and not the
defaulter. Mere information of the assignment to the I.T.O. and keep-
ing the assignee informed of the I.T.O.'s action did not amount to
discharge of the statutory obligation under section 226(3)(vi) of the
Act, by the L.I.C. The statute having expressly provided the mode of
raising such an objection in the form of a statement on oath specified
F in clause (vi), performance of that obligation by the notice had to be
made only in that manner. This statutory obligation was perfom1ed by
the L.l.C. only on 5.12.1975 as stated earlier. The personal liability
arising after making the requisite statement on oath as envisaged by
clause (vi) is only "if it is discovered that such statement was false in
any material particular and not otherwise.
G
Learned counsel for the appellant argued that the requisite state-
ment under section 226(3)(vi) of the Income Tax Act, 1961 could not
be made by the L.I.C. since it involved the risk of exposing the L.I.C.
or its officer making the statement on oath to personal liability for the
income tax du.es of the assessee/defaulter G.V. Ranade. In the first
H . place_, such a statement w~s in fact made without hesitation by the
L.I.C. v. G.V. RANADE [VERMA, J.) 113

L.l.C. on 5.12. 75 after the assignee was compelled to obtain such a
direction in a writ petition filed by her. That apart the risk visualised A
on behalf of the L.l.C., in ultimate analysis, is entirely imaginary and
not real. The risk of personal liability envisaged in clause (vi) arises
only "if it is discovered that such statement was false in any material
particular". Thus, there is no risk of personal liability of the person
making .the statement on oath unless any material particular men- B
tioned in the statement is false. The statement on oath required to be
made by clause (vi) is only "that the sum demanded or any part thereof
is not due to the assessee or that he does not hold any money for or on
account of the assessee". The L.l.C. itself has taken the stand
throughout that the sum demanded by the notice issued under section
226(3) of the Income Tax Act, 1961 by the l.T.O. did not belong to the
assessee inasmuch as it was payable only to the assignee, Smt. c
Kamalabai G. Ranade by virtue of the assignment made, accepted and
registered in April 1969 much earlier to the date of the notice. This
being so the making of this statement on oath of the L.I. C. 's own stand
which in fact was so made on 5.12.75 did not involve even remotely the
possibility of any risk of personal liability. D

On the contrary, real risk of the L.l.C. being treated deemed
defaulter assessee under clause (x) of sub-section (3) of section 226 of
the Act lay in its failure to pay to the l.T.O. after receipt of notice
under section 226(3), the amounts of the matured policies within the
time given by the l.T.O. or a reasonable time, without objecting to the E
demand by denying its liability to the assessee in the manner pres-
cribed in clause (vi) thereof, instead of in doing so. Prudence also
required the L.l.C. in its own interest, to object to the demand accord-
ing to clause (vi) instead of refusing or delaying the objection. The
argument that such a statement was not made since it involved the
likelihood of exposing the L.l.C. or any of its officers to personal F
liability has, therefore, no merit. This being the only reason given by
.the L.l.C. to justify the inordinate delay in making the requisite state-
ment under section 226(3)(vi) of the Income Tax Act, 1961, it is ob-
vious that this defence is untenable.

Sub"section (3) of section 226 of the Income Tax Act, 1961 G
clearly shows that on a notice thereunder being issued by the l.T.O. to
the L.1.C., in the present case, it was incumbent on the L.l.C. to make
the requisite statement on oath under clause (vi) thereof raising an
objection on the basis of the registered assignment. It was then for the
l.T.O. to proceed further and form his fnal opinion and revoke the
notice under clause _(vii). It was not possible for the assi~ee of the H
114 SUPREME COURT REPORTS l1989] Supp. 1 S.C.R.

A policies to obtain revocation of the notice by the I.T.O. without the
requisite statement on oath being made by the L.I.C. as envisaged in
clause (vi) of sub-section (3) of section 226 of the Income Tax Act. It is
obvious that the inordinate delay in making the statement on oath by
the L.I.C. under section 226(3)(vi) of the Income Tax Act, 1961 was
the result of misconstruction of the provision and misappreciation of
B its liability thereunder.

Obviously the assignee of the policies who had become entitled
to receive the amounts due thereunder on the dates of their maturity
must be compensated by the L.I.C. for its failure to perform its statu-
tory obligation under section 226(3)(vi) of the Income Tax Act, 1961
C within a reasonable time. We have nu doubt that this is the proper
construction of section 226(3) of the Income Tax Act, 1961 and the
consequential liability resulting from the failure of the notice to raise
the objection in the prescribed manner under clause (vi) thereof within
a reasonable time. Performance of this statutory obligation by the
L.I.C., in the present case, being after inordinate delay, award of
D interest to the assignee of the policies to whom the payment there-
under had to be made even according to the stand of the L.I.C. is,
therefore, clearly justified. This contention which is really the main
contention urged on behalf of the appellant, therefore, fails and is
rejected.
E Consequently, the appeal is dismissed with costs. The costs are
quantified at Rs.2,000.

R.N.J. Appeal dismissed.

.