Holding

The sale is void; a Tax Recovery Officer cannot confirm a sale when the tax demand is reduced to nil, and non‑service of a notice of demand invalidates the recovery proceedings.

Summary

The appellant, a partnership firm, owned a house property that was attached and proclaimed for sale under tax recovery proceedings. The property was auctioned in 1980 and a bid was accepted, but the tax demands against the firm were later reduced to nil after successful appeals before the Income Tax Appellate Tribunal. Despite the nil demand and the fact that a notice of demand under Section 156 had never been served, the Tax Recovery Officer confirmed the sale in 1998 and issued a sale certificate. The Supreme Court held that under Section 225(3) and Rule 56 of the Income Tax Rules, the officer could not confirm a sale when the demand was reduced to nil, and that non‑service of a notice of demand invalidates the recovery proceedings. Consequently, the sale was set aside, the confirmation order quashed, and the auction purchaser was ordered to be refunded with interest.

Issues considered

Whether the Tax Recovery Officer could confirm the sale when the tax demand underlying the recovery certificate had been reduced to nil.
Whether the failure to serve a notice of demand under Section 156 of the Income Tax Act renders the sale under the Second Schedule invalid.

Legislation cited

Code of Civil Procedure, 1908s. Order 21
Income Tax Act, 1961s. 156, s. 222, s. 224, s. 225, s. 225(3)

Subjects

Income TaxTax Recovery OfficerSection 225(3)Rule 56Public auctionNotice of demandSection 156Reduction of tax demandConfirmation of saleTax recovery certificateProperty attachment

Judgment

A SRI MOHAN WAH!
~ ·~
COMMISSIONER, INCOME TAX, VARANASI AND ORS. ~

MARCH 30, 2001

B [DR. A.S. ANAND, C.J., R.C. LAHOTI AND DORAISWAMY RAJU, JJ.]

Income Tax Act, 1961 :

Section 225(3)-lncome Tax-AYs 1967-68 to 1969-70-Tax recovery
ce11ificate issued against assesseejirm-House property belonging to assessee
c attached and proclamationforsale issued-Auction-purchaser's bid accepted-
In appeal, demand of income tax against assessee-firm stood wiped out and
reduced to nil-But Tax Recove1y Officer confirmed the sale and issued sale
certificate infavourof auction-purchaser-Validity of-Held: If the demand of
tax is reduced to nil, Tax Recovery Officer is obliged not to confirm the sale-
D R. 56 is neither a redundant nor afonnal provision-It casts an obligation on
the Tax Recove1y Officer to confirm the sale consciously-If a subsequent event
goes to the root of the matter, Tax Recovery Officer must refuse to confirm the
sale-Hence, auction sale set aside-Income Tax Rules-Second Schedule,
Rule 56.

E Rule 56 in Second Schedule--AYs 1967-68 to 1969-70-Notice of De-
mand--Se111ice o,f-Tax recove1y ce11ificate issued against assessee-finn-House
proppry belonging to assessee attached and proclamation for sale issued-
Auction-pwdwser's bid accepted-In appeal, demand of income tax against-
assessee Jinn stood wiped out and reduced to nil-It was also held that the
assessee ivas not served 1vith a d.emand notice-But Tax Recovery Officer
F confinned the sale and issued sale certificate infavourof auction-purchaser-
Validity of-Held: Sen>ice of notice of demand on assessee is mandat01y-
Non-sen,ice of notice of demand goes to the root of recovery proceedings-Sale .':.
of prope11y without service of notice of demand is invalid and liable to "w
mmulled.
G
Words and phrases :

"Reduced"-Meaning of-In the context of S. 225( 3) of the Income Tax
Act, 1961.

Appellant and his brother entered into a partnership and income tax
H assessments of the partnership firm were finalised for the assessment years
912
'y

SRI MOHAN WAH! v. C.I.T. 913
1967-68 to 1969-70. Recovery certificates were issued pursuant to which A
the house property belonging to the appellant and his brother was attached
and a proclamation for the sale of the property was issued. Respondent
No.J's bid was accepted. However, in appeal, the several demands of in-
come tax against the assessee·firm stood wiped out and, therefore, reduced
to nil. In the appeal it was also held that the assessee•firm was not served
B
with the demand notice. But the Tax Recovery Officer confirmed the sale
and issued a sale certificate in favour of respondent No. 3. The High Court
dismissed the writ petition filed by respondent No. 3. Hence this appeal.

The following question arose before this Court :

(i) Whether the Tax Recovery Officer could have confirmed the sale
c
when the demands on account of tax for the recovery of which tax recovery
certificates were issued had admittedly ceased to exist?

(ii) What is the effect of a notice of demand under Section 156 of the
Income Tax Act, 1961 having not been served on the assessce on the sale D
held for recovery of arrears of income tax'?

Allowing the appeal, the Court

HELD : 1. The term "reduced" occurring in Section 225(3) of the
Income Tax Act, 1961 would also include a case where the demand conse- E
quent upon an appeal or any proceedings under the Income Tax Act has
been reduced to nil. The Tax Recovery Officer is obliged to give effect to
such reduction in demand and accordingly amend or cancel the certificate.
The scheme of Part III of Second Schedule indicates that the sale proceed-
ings terminate on their becoming absolute where after all that remains to
F
be done is the issuance of sale certificate. However, an order confirming the
sale by the Tax Recovery Officer is a must. The efficacy of the sale by
public auction in favour of the highest bidder has been made to depend on
the order of confirmation by the Tax Recovery Officer by incorporating
Rule 56 in the Schedule. It is true that ordinarily if there is no application
filed for setting aside the sale under Rules 60, 61 or 62 of the Income Tax G
Rules and 30 days from the date of the sale have expired, the Tax Recovery
Officer has to make an order confirming a sale. Nevertheless, an order
shall have to be actually made. The combined effect of Section 225(3) of the
Act and Rules 56 and 63 of the Second Schedule is that if before an order
confirming the sale is actually passed by the Tax Recovery Officer, the H
914 SUPREME COURT REPORTS [2001] 2 S.C.R.
A demand of tax consequent upon an order made in appeal or other pro·
ceedings under the Act has been reduced to nil, the Tax Recovery Officer is
obliged to cancel the certificate and as soon as the certificate is cancelled,
he shall have no power to make an order confirming the sale. The sale
itself, being subject to confirmation by the Tax Recovery Officer, would
fall to the ground for want of confirmation. [919-E-H]
B
2. The demand against the assessee admittedly stood reduced to nil.
This fact was in the notice of the Income Tax Officer as well as the
Commissioner of Income Tax. In view of the facts within the knowledge of
the department, the Tax Recovery Officer could not have confirmed the
c sale. Rule 56 in the Second Schedule of the Income Tax Act, 1961 is neither
a redundant nor a formal provision. It casts an obligation on the Tax
Recovery Officer to pass an order confirming the sale consciously and
with due application of mind to the relevant facts relating to sale by public
auction which is to be confirmed. Under Rule 63, confirmation of sale is
not automatic. An order confirming the sale is contemplated to make the
D
sale absolute. Ordinarily, in the absence of an application under Rules 60,
61 or 62 having heen made, or having been rejected if made, on expiry of
30 days from the date of sale, the Tax Recovery Officer shall pass an order
confirming the sale. However, between the date of sale and the actual
passing of the order confirming the sale if an event happens or a fact
E comes to the notice of the Tax Recovery Officer which goes to the root of
the matter, the Tax Recovery Officer may refuse to pass an order confirm·
ing the sale. The fact that the sale was being held for an assumed demand
which is found to be fictitious or held to have not existed at all, in fact or in
the eye of law, is one such event which would oblige the Tax Recovery
F Officer not to pa.s an order confirming the sale and rather annul the
same. [920-D-H]

Janak Raj v. Guniial Singh, [1967] 2 SCR 77; SaniarGovindraoMahadik
v. Devi Sahai, Affi (1982) SC 989 and Padanathi/ Ruqmini Amma v. P.K.
Abdulla, JT (1996) 1 SC 381, referred to.
G
3. Service of notice of demand on the assessee under Section 156 of
the Act is mandatory hefore taking steps for recovery under the Second
Schedule. Non-service of notice of demand goes to the root of the validity
of subsequent proceedings for recovery. A sale held in recovery proceed-
H in!}• initiated without serving the notice of demand shall be invalid and
SRI MOHAN WAHi v. C.i.T. [R.C. LAHOTI, J.] 915
hence shall he liable to be annulled on being called in question. (925-B] A

Income Tax Officer, Kolar Circle v. Seglm Buchiah Setty, (1964) 52 ITR
538; Homely Industries v. Sales Tax Officer, (1976) 37 STC 483; Union of
India v. Jardine Henderson Ltd., (1979) 118 ITR 112 and Surinder Nath
Kapoor v. Union of India, AIR (1988) SC 1777, referred to.
B
Ram Swarup Gupta v. Behari Lal Baldeo Prasad, (1974) 95 ITR 339
(All.); Sunil Kumar Singh Dea v. Tax Recovery Officer, (1987) 166 ITR 882
(Ori.); Ghanshyamlal v. State of M.P, (1961) MPLJ SN 218 (MP);Manmohan
Lal Shukla v. Board of Revenue, M.P., (1964) l'vlPLJ 32 (MP) and Premchand
Ramchand v. Bomd of Revenue, (1964) MPLJ 337 (MP), approved.
c
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2488 of2001.

From the Judgment and Order dated ll.1.2000 of the Allahabad High
Court in C.M.W.P. No. 640 of 1999.

M.L. Ve1ma, N.N. Goswami, Dr. A.M. Singhvi, Ranbir Chandra, Ms. D
Smuchi Aggarwal, Rajiv Tyagi, B.V. Balram Das, Ms. Sushma Suri, Sushi!
Kumar Jain, Rajesh Kumar and Ms. Neera Gupta for the appearing parties.

The Judgment of the Court was delivered by

R.C. LAHOTI, J. The relevant facts are jejune and beyond any pale E
of controversy. Late Bhagwati Prasad owned a house property described as
D-53/91-D, Luxa, Varanasi (hereinafter referred to as the house property). He
• had four sons - namely, P, S, R and K. Under his will of the year 1962,
probated in the year 1965, the house property devolved upon his four sons.
The elder two sons - P and S, had entered into a partnership known as
F
M/s United Provinces Commercial Cmporation, Luxa, Varanasi (UPCC, for
short) dealing in import and sale of heavy machinery and road rollers. The
labour troubles resulted in the firm's business collapsing in the year 1967.
'The partners left Varanasi and migrated elsewhere. In the year 1972, Income-
tax assessments of the firm UPCC were finalised for the assessment years
1967-1968 to 1969-1970. Recovery certificates were issued in 1973-1974 G
pursuant whereto the house property was attached. On 3.12.1979 a procla-
mation for sale of the property was issued setting out a demand of Rs.30,82,000
and upset p1ice at Rs.1,70,000. On 11.\.1980, at the public auction, respond-
ent no. 3 made a bid proposing to purchase the property for Rs.1,70,000
(which was the upset price). The bid was accepted by the o!Iicer conducting H
916 SUPREME COURT REPORTS [2001) 2 S.C.R.
A the sale. An amount of Rs. 42,500 being I/4th of the aGction money, was
deposited by the auction-purchaser on l l.1.1980 simultaneously with the
acceptance of the bid. The balance amount of Rs. 1,27,500 was deposited on
25.1.1980 within the prescribed period of 15 days.

R, the third brother had died. His widow, Padma, filed a civil suit in
B
the Court of Civil Judge, Varanasi submitting that the undivided property of
the four brothers and in any case the share of the brothers, who were not the
partners in the fom, could not have been attached and advertised for sale for
recovery of dues against the finn. She also sought for an ad interim restraint
on sale. On 9.1.1980, the Court of Civil Judge deemed it not proper to stay
c the auction sale but nevertheless felt a prima facie case having been made
out to stay the confinnation of the auction sale. Accordingly, the Union of
India and the authorities of the Income-tax depaitment were directed, through
an ad-interim injunction, not to confinn the sale. Jn tl1e year 1984 the auction-
purchaser, respondent no.3 herein, was also impleaded as a party to the suit.
The ad-interim injunction continued to operate until tl1e suit itself came to
D
he dismissed in default of appearance on 12.1.1998. On 13.1.1998 an
application for restoration of the suit was filed. On 30. 7 .1999 the suit was
restored to file.

The assessments made against the finn UPCC were all ex-pal1e and a
E substantial pait of the demand raised against tl1e !inn consisted of penalty and
interest. The film agitated the matter in tl1e hierarchy of Income-tax Depart-
ment. The challenge to the orders of assessment failed before the Commis-
sioner of Income Tax (Appeals) who dismissed tl1e appeals relevant to
assessment years 1967-1968 to 1970-1971 as having been filed beyond the
F prescribed period of limitation. Four appeals were filed before the Income-
tax Appellate Tribunal, Bench Allahabad. By an order dated 11.12.1987 all
the four appeals were allowed. The Tribunal fanned an opinion that there was
sufficient cause which had prevented the assessee from filing the appeals
before the CIT (A) in time and therefore the appeals were liable to be restored
on the file of CIT (A) to be dealt with on merits. It was ordered accordingly.
G During the course of its order the Tribunal upheld a finding of fact recorded
by the CIT (A) that "the assessee could not be said to have been served with
the demand notice". On being so remanded, the appeals were heard on merits
by the CIT (A). Most of the matters relating to demand on account of tax,
penalty and interest were resolved at the stage of CIT (Appeals) while the
H tax demand referable to 1967-1968 was resolved before the Tribunal. The fact
SRI MOHAN WhHI v. C.LT [R.C. LAHOTI, l.] 917
remains that on different dates in the year 1989 the several demands against A
the assessee finn had all stood wiped ont and therefore reduced to nil. On
r 26.3.1990 the Income-tax Officer, Ward II, Varanasi wrote to Commissioner
of Income-tax, Allahabad that various demands raised against the assessee
firm had stood reduced to nil. On 22.11.1996 the assessee firm, Mis UPCC
wrote to the Income-tax Officer, Ward II, Varanasi that all demands of tax
B
and penalties having been cancelled/liquidated, refunds were due and the Tax
Recovery Officer may be advised for cancellation of all the recovery certifi-
..... cates. Copy of the application was endorsed to the Tax Recovery Officer. On
16.1.1997 the advocate for the assessee firm wrote to the ITO, Ward-II,
Varanasi that in view of all the demands against the firm having ceased to
exist and instead refunds having become due to the firm, it may be confirmed c
that all the recove1y certificates issued for demands against the firm had stood
withdrawn/cancelled. A copy of communication dated 26.3.1990 from ITO,
Ward II, Varanasi to the Commissioner of Income-tax was annexed with the
letter.
f
D
In spite of the abovesaid communications, 011 25.3.1998 sale in favour
of respondent no. 3 was confirmed by the Tax Recovery Officer though only
as regard the interest of P and S in the honse property and a sale certificate
was also issued to respondent No. 3. The order of L1e Tax Recovery Officer

. confirming the sale was put in issue before CIT, Varanasi by the firm UPCC
and its pai1ners P and S, by filing a petition under Section 264 of the Act.
Vide order dated 21.5.1999, the CIT dismissed the petition forming an
opinion that whatever happened after the auction sale held on 11.1.1980 was
E

immaterial and the Tax Recovery Officer had no other option except to
con.fitm the sale. S, the petitioner before us then filed the present writ petition
laying challenge to the order of Tax Recovery Officer confinning the sale and
F
issuing sale certificate to respondent No.3 also to the order of C.l.T. dated
21.5.1999. The fact that all the demands against the firm (and the partners)
had ceased to exist by 1996 and 1997 is a fact positively asserted in para
5 of the writ petition filed before the High Com1 and not denied in the
counter-affidavit filed on behalf of the Commissioner of Income-tax. So also
the fact that the demands against the firm UPCC had stood cancelled and this G

-
fact was communicated by the ITO, Ward II, Varanasi to the Conunissioner
of Income-tax, Allahabad through his letter dated 26.3.1990 is also admitted
in the counter-affidavit. However, the petition has been dismissed by the High
·~
Comt. The aggrieved petitioner has filed this petition for special leave under
Article 136 of the Constitution. H
918 SUPREME COURT REPORTS [2001] 2 S.C.R.
A Leave granted.

Two questions arise for decision in this appeal : -'\"
·• .
(i) Whether the Tax Recovery Officer could have con.tinned the sale
on 25.3.1998 when the demands on account of tax for the recovery of which
B tax recovery certificates were issued had admittedly ceased to exist; and

(ii) What is the effect of• notice of demand under Section 156 of the
Income-tax Act, 1961 having not been served on the assessee on the sale held .....
for recove1y of arrears of income-tax?

c Taking up first question the first, according to Section 222 where an
assessee is in default or is deemed to be in default in making a payment of
tax, the Tax Recovery Officer may issue a certificate specifying the amount
of arrears due from assessee and shall proceed to recover from such assessee
the amount so specified by one or more of the modes which include
attachment and sale of the assessee's inunovable properties. The Second
D
Schedule sets out the procedure for recovery of tax. We will refer to some
of the rules contained in the Second Schedule and relevant for our purpose.
Rules regarding attachment and sale of immovable property are contained in
Part Ill of Second Schedule. Rule 56 provides that the sale shall be by public
auction to the highest bidder aud shall be subject to confirmation by the Tax
E Recovery Officer. Several provisions contained in the rules which follow Rule
56 are in pari materia with the provisions dealing with attachment and sale
of immovable property contained in Order 21 of the C.P.C. dealing with
execution of decrees passed 1iy civil courts. However, in Order 21 of the
·"
C.P.C., a provision similar to Rule 56 of Second Schedule is not to be found.
F Rule 60 provides for an application to set aside sale of immovable property
being made by defaulter or an interested person on his depositing the
specified amount within 30 days from the date of sale. Rule 61 deals with
application to set aside sale of immovable property on the ground of non-
service of notice on the defaulter under the Schedule or on the ground of
material irregularity in publishing or conducting the sale. Under Rule 62 a
G sale may be set aside on an application by the purchaser on the ground that
the defaulter had no saleable interest in the property sold. The prescribed time
limit within which the application can be made under Rules 60, 61 or 62 is
30 days from the date of sale. Where no application is made for setting aside
the sale or such an application having been made is disallowed, the Tax
..... -
H Recovery Officer shall make an order confinning the sale and thereupon the
SRI MOHAN WAHi v. C.i.T. [R.C. LAHOTI, J.] 919
sale shall become absolute. On a sale or immovable property becoming A
absolute, a sale certificate shall be issued under Rule 65.

Under Section 224, an assessee cannot dispute the co1Tectness of any
certificate drawn up by the Tax Recovery Officer but it is lawful for the Tax
Recovery Officer to cancel the certificate for any reason if he thinks it
necessary to do so or to correct any clerical or any arithmetical e!Tor therein.
B
Sub-section(3) of Section 225 provides as nnder:-

225. Stay of proceedings in pursuance ofcertificate and amend-
ment or cancellation thereof.
c
xxx xxx xxx

(3). Where a certificate has been drawn up and subse-
quently the amount of the outstanding demand is reduced
as a result of an appeal or other proceeding under this Act,
the Tax Recovery Officer shall, when the order which was D
the subject-matter of such appeal or other proceeding has
become final and conclusive, amend the certificate, or
cancel it, as the case may be.

The term 'reduced' in Sub-section(3) of Section 225 would include a
E
case where the demand consequent upon an appeal or any proceedings under
tl1e Income-tax Act has been reduced to nil also. The Tax Recovery Officer
is obliged to give effect to such reduction in demand and accordingly amend
or cancel the certificate. The scheme of Part Ill of Second Schedule indicates
that the sale proceedings terminate on their becoming absolute whereafter all
that remains to be done is the issuance of sale certificate. However, an order F
confirming the sale by the Tax Recovery O!licer is a must. The ellicacy of
the sale by public auction in favour of the highest bidder has been made to
depend on the order of confirmation by the Tax Recovery Officer by
incorporating Rule 56 in the Schedule. It is true that ordinarily if tl1ere is no
application filed for setting aside sale nnder Rules 60, 61 or 62 and 30 days

-
G
from the date of the sale have expired, the Tax Recovery Officer has to make
an order confirming a sale. Nevertheless, an order shall have to be actually
-.I made. The combined effect of Sub-section(3) of Section 225 of the Act and
Rule 56 and Rule 63 of Second Schedule is that if before an order confirming
the sale is actually passed by the Tax Recovery Officer, the demand of tax
consequent upon an order made in appeal or other proceedings nnder the Act H
920 SUPREME COURT REPORTS [2001) 2 S.C.R.
A has been reduced to nil, the Tax Recovery Officer is obliged to cancel the
certificate and as soon as the certificate is cancelled, he shall have no power
to make an order confirming the sale. The sale itself being subject to
confrnnation by the Tax Recovery Officer, would fall to the ground for want
of confirmation.

B In the case at hand the sale was held on 11.1.1980. No application was
filed for setting aside the sale either by the assessee or by the auction
purchaser or by anyone interested in the property. On expiry of 30 days from
the date of the sale the Tax Recovery Officer could have passed an order
confirming the sale. However, the Tax Recovery Officer was injuncted by the
c writ of civil court from confi1ming the sale. The interim order issued by the
civil court ceased to operate on 12.1.1998 whereatier an order of confrnnation
was passed on 25.3.1998 by the Tax Recovery Officer ignoring, or unmindful
of, the important event which had taken place in between. Before 25.3.1998,
the demand against the assessee admittedly stood reduced to nil. This fact was
in the notice of Income-tax Officer as well as the Commissioner of Income
D Tax. Attention of the Income-tax Officer as also the Tax Recovery Officer
was also invited hy the fi1m Mis. UPCC tlu-ough its conununication dated
22.11.1996 (Annexure P- 6). On 16.1.1997, the counsel for the assessee had
specifically called upon the income tax officer who had raised the demand
against the assessee to confom ii" all the recovery certificates issued against
E the assessee frnn had stood withdrawn or cancelled. In view of the facts
within the knowledge of the department aad the communications so made,
the Tax Recovery Otlicer could not have confirmed the sale on 25.3.1998.
Rule 56 in Second Schedule of the Income-tax Act, 1961 is neither a
redundant nor a formal provision. It casts an obligation on the Tax Recovery
F Otlicer to pass an order confi1ming the sale consciously and with due
application of mind to the relevant facts relating to sale by public auction
which is to be confi1med. Under Rule 63, confi1mation of sale is not
automatic. An order confirming the sale is contemplated to make the sale
absolute. Ordinarily, in the absence of an application under Rules 60, 61 or
62 having been made, or having been rejected if made, on expiry of 30 days

--
G from the date of sale the Tax Recovery Officer shall pass an order confrnning
the sale. However, between the date of sale and the actual passing of the order
confirming the sale if an event happens or a fact comes to the notice of the
Tax Recovery Officer which goes to the root of the matter, the Tax Recovery
Officer may refuse to pass an order confinning the sale. The fact that sale
was being held for an assumed demand which is found to be fictitious or held
H
SRI MOHAN WAH! v. C.I.T. [R.C. LAHOTI, J.] 921
to have not existed at all, in fact or in the eye of law, is one such event which A
would oblige the Tax Recovery Officer not to pass an order confinning the
sale and rather annul the same. The High Court in our opinion, clearly fell
in enor in not allowing relief to the petitioner-appellant by setting aside the
sale.

Shri S.K. Jain, learned counsel for the auction-purchaser, respondent
B
No. 3, referred to Janak Raj v. Gurdial Singh and Anr., (1967) 2 SCR 77
and Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors., AIR 1982
SC 989 wherein it has been held that once a sale has taken place in execution
of a decree, the sale has to be confirmed notwithstanding the fact that after
the holding of the sale, the decree was set aside. In Janak Raj's case, sale c
was held in execntion of an ex-pane decree. Tue ex-pane decree was set
aside subsequent to the date of the sale but before an order confirming the
sale was passed. 11iis comt held that in the absence of an application for
setting aside the sale having been moved on the grounds available under
Rules 89 to 91 of Order 21 of C.P.C., the court could not have refused to
D
confom the sale. However, in this case itself, this comt has observed (at page
80) that there may be cases in which apan from the provisions of Rules 89
to 91 the comt may refuse to confirm a sale, as, for instance, where a sale
is held without giving notice to the judgment debtor, or where the comt is
misled in fixing a reserved price or where there was no decree in existence
at the time when the sale was held. In Sardar Govindrao Mahadik's case, E
Janak Raj's case was refened. The court has drawn a distinction between a
court a1'ction held in favour of a decree holder and where the auction
purchaser is an outsider or a stranger. In fonner case on the decree ceasing
to exist before the sale is confomed, the sale may be refused to be confinned
but in tlie latter case, equity in favour of the stranger should be protected and
F
the judgment debtor should be left to snffer for the default on his part for
not obtaining stay of the execution of the decree from where it was under
challenge. Though the learned counsel for the auction purchaser has relied
heavily on these decisions, sutTice it to observe that these are the cases of
auction sale held under Order 21 of the C.P.C. and, therefore, may not apply
to the case of an auction sale held under Second Schedule of the Income- G
tax Act in view of Rule 56 contained therein. Moreover, in these decisions
also, the Supreme Court has contemplated situations where in spite of the
auction sale having been held and no application for setting aside the sale
having been moved, yet in exceptional situations the sale may be refused to
be confirmed and may be set aside. Shri S.K. Jain also relied on Padanathil H
922 SUPREME COURT REPORTS [2001] 2 S.C.R.
A Ruqmini Amma v. P.K. Abdulla, IT (1996) 1 SC 381, wherein this coun
has observed that unless the auction purchasers were protected, the properties
which are sold in court auctions would not fetch a proper p1ice. It is true
that sanctity of sale of property by public auction has to be protected but at
the same time a citizen faced with proceedings for recovery of assnmed
B arrears should not be deprived of his property in spite of judicial or quasi-
judicial pronouncement holding, before the sale was confomed, that there
were no atTears. This observation applies a fortiori under the scheme of _,.._
Income-tax Act, the relevant provisions, whereof have already been refetT~d
to by us. ·

C We now take up the second question.

Section 156 of the Act provides as under:-

"56. Notice 4 demand. When any tax, interest, penally, fine or
any other sum is payable in consequence of any order passed
D
under this Act, the Assessing Ollicer shall serve upon the
assessee a notice of demand in the presc1ibed fonn specifying
the snm so payable."

If the amount specified in the notice of demand under Section 156 is
E not paid within the time limited by sub-section (1) or extended under sub-
section(3) of Section 220, then the assessee shall be deemed to be in default
under sub-section (4) of Section 220. Tax recovery certificate can be issued
under Section 222 when an assessee is in default or is deemed to be in default.
Proceedings for recovery of tax under the Second Schedule can be initiated
against a defaulter. Thus Section 156 provides for a vital step to be taken by
F
the assessing officer without which the assessee cannot be te1med a def<hllter.
The use of the tenn 'shall' in Section 156 implies that ser\iice bf ·ilemand
notice is mandatory before initiating recovery proceedings"and tonsiitutes •·
foundation of subsequent recovery proceedings. " ' I- · · ·
. ,.
G We have already stated that the .finding ·of fact ·recorded by 0.1.T
(Appeals) and the Tribunal was that notice of demand was not served 6n the., ·
assessee. The very foundation for.initiating the recovery proceedings, thereJ '' ·
fore, was non-existent and the assessee could neiihfrhave been deemed 'to'"'
be in default nor any proceedings for recovery of tax could have been ·
H , initiated against, him.
SRI MOHAN WAHi v. C.I.T. [R.C. LAHOTI, J.] 923
;

The provision corresponding with Section 156 of the Income-tax Ac~ A
1961 contained in Section 29 of the Income-tax Act, 1922 came up for the
consideration of this Court in Income-Tax Officer, Kolar Circle and An1: v.
Seghu Buchiah Setty, (1964) 52 I1R 538. Hidayatullah, J. (as His Lordship
then was) held that it is after the demand is made, the tax penalty and interest
become a debt due to the Government 'The notice of demand is a vital
B
document in many respects'. Disobedience to it makes the assessee a de·
faulter. It is a condition pre~edent to the treatment of the tax as an arrear of
-> land revenue. His Lordship emphasised that the service of notice of demand
has a few vital impacts amongst others : (i) when the notice of demand is
not complied with, the assessee can be treated as a person in default; (ii) on
the failure of the assessee to pay after a notice of demand is issued, the c
recovery proceedings can be started and the amowll of tax can be treated as
an arrear of land revenue ..However, in this case Hidayatullah, J. went on to
hold that if an assessment made by the Income-lax O!Jicer is alle:ed ·reduced
or increased - by reason of any order urrder the Act, it is the duty of the
Income-tax Ollicer to issue a fresh notice of demand in the prescribed fom1 D
and serve upon the assessee. TI1is particular finding of Hidayatullah, J. created
serious complications and resulted in nullifying several recovery proceedings,
as also creating bottlenecks in the recoveries of outstanding demands. The
Parliament, therefore, enacted Taxation Laws (Continuation and Validation of
Recovery Proceedings) Act, 1964 which was given a retrospective effect.
Section 3 of this Act provides that in the event of govcnuncnt demand being E
reduced by an order in appeal or other proceedings it shall n'1t be necessary
for the taxing authority to serve upon the assessec a fresh notice of demand,
it would suffice if taxation authority intimated of reduction to the assessee
and the Tax Recovery Ofiicer to scale down the amount of recovery and the
proceedings initiated on tl1e hasis of the previous notice of demand shall F
continue to be valid. To this extent tl1e decision of this Court in Segbu
....ir. Buchiah Setty was superseded.

In Homely Industries v. Sales Tax Office1; Sector V, Kanpur, (1976) 37
STC 483 also the significance of service of demand notice came up for the
consideration of tl1is Court and it was held that there can be no recovery G
without service of a demand notice; if such notice was not served, the
recovery proceedings are not maintainable in law and are invalid and the same
along with the recovery certificates are liable to be quashed.

In Ram Swarup Gupta v. Behari Lal Baldeo Prasad & Ors., (1974) 95
11R 339, a Division Bench of Allahabad High Conrt refctTed to the effect H
924 SUPREME COURT REPORTS [2001] 2 S.C.R.
A of Taxation Laws (CVRP) Act, 1964 on the law laid down by this court in
Seghu Buchiah Setty's case and held :-

"The effect of these provisions is to dispense with the need of
issuing a fresh uotice of demand and the recovery certific_ate and to
aflow the original recovery proceedings to continue, but only for the
B amount found due after reduction in the appeal, and it is for this
purpose that the taxing authority is required to send intimation of the
fact of the reduction to the assessee and to the Tax Recovery Officer. "'- -
As the proceedings for recovery can be continued only for the amount
that finally remains due, and not for any amount in excess thereof,
c the requirement of sending intimation to the Tax Recovery Officer
becomes an essential duty of the taxing authority and must be held
to be a mandatory condition. Non-compliance of that condition will
be an illegality in the procedure and will invalidate the proceedings.
A sale held in proceedings initiated and continued for the recovery
of an amount in excess of the amount payable by the assessee, after
D
its reduction in appeal, will be invalid. Such a sale is not validated
by clause (c) of Section 3 of the Act."

The Division Bench decision of Allahabad High Court in Ram Swarup
Gupta's case was cited with approval before this Court in Union of India v.
E Janiine Henderson fol., (1979) 118 !TR 112 though it was distinguished for
its applicability to the facts of the case before this Court. 1l1e Division Bench
of Orissa High Court has held in Sunil Kumar Singh Deo v. Tax Recovery
Officer & Anr., (1987) 166 !TR 882 that non-service of demand notice goes
to the root of the jurisdiction of the officer initiating recove1y proceedings.
F We find ourselves in agreement with the view so taken. Incidentally, we may
refer to three Division Bench decisions of the High Comt of Madhya Pradesh,
viz., Ghanshyamlal v. State of M.P., (1961) MPLJ SN 218; Manmohan Lal
Shukla v. Board of Revenue, M.P. & Ors., (1964) MPLJ 32 and Premchand
Ramchandv. Buurd uf Revenue, M.P. & Ors., (1964) MPLJ 337. Section 146
of M.P. Land Revenue Code, 1959 provides that before issuing any process
G· for recovery of arrears of land revenue the Tehsildar or Naib Tehsildar may
cause a notice of demand to be served on any defaulter. Chief Justice P. V.
Dixit speaking for the Division Benches, in all the three cases, has held that
the word 'may' has the imperative meaning of 'shall' and no proceedings for
recovery can be initiated without service of notice of demand failing which
H the proceedings would suffer from jurisdictional defect. For a long period of
SRI MOHAN WAHI v. C.l.T. [R.C. LAHOTI, J.] 925
time the High Court of Madhya Pradesh has been taking this view consist- A
ently.

We are, therefore, clearly of the opinion that service of notice of
demand on the assessee nnder Section 156 of the Act, is mandatory before
taking steps for recovery under Second Schedule. Non-service of noti~e of
demand goes to the root of the validity of subsequent proceedings for B
recovery. A sale held in recovery proceedings initiated without serving the
->- notice of demand shall be invalid and hence shall be liable to be annulled
on being called in question.

In Surinder Nath Kapoor v. Union of India & Or!,, AIR (1988) SC C
1777, property was attached and sold pursuant to a garnishee order which was
fow1d to be non-existent on account of a nullity attaching thereto. The sale
was set aside. This Court held :

"the garnishee order that was passed was a nullity and any sale held
pursuant to such an order is also a nullity. It is quite immaterial that D
the sale was conti1med. When a decree or order is iUegal, any sale
held in execution of such a decree or order and conii1med cannot be
set aside on the ground that it was illegal when the sale is in favour
of a third party. But, when a decree or order is a nullity, it will be
deemed to have no existence at all and any sale held in execution of E
such a decree or order must also be held to be null and void."

In the present case, the plea as to non-service of demand notice having
been raised before the High Court, in onr opinion the High Court should not
have adopted too technical a approach by refusing to deal with the plea
because it was not rnised in the manner in which the High Court thought it F
_... should have been raised. The plea went to the root of the matter. The plea .
was raised before the departmental autho1ities right from the ITO to the
Tribunal and was not given up before the High Court also. It would not have
been difficult for die High Court to ask the Income-tax Department to produce
the record of the proceedings and to show if the demand notice was at all G
served on the assessee. A little more sensitive approach is required to be
adopted in the process of dispensing justice when it is found that valuable
.._... property of a person was sought to be sold away for recovery of such arrears
as did not exist at all.

Thus, on both the grounds, we hold tl1at the sale of suit property in H
926 SUPREME COURT REPORTS [2001] 2 S.C.R.
A favour of respondent No. 3 is liable to be set aside. The appeal is allowed.
The impugned judgment of the High Comt is set aside. The writ petition filed
by the appellant shall stand allowed. All the proceedings for the sale of the
disputed property as also the order of the Tax Recovery Officer confirming
the sale are hereby quashed.

B The sale having fallen to the ground, the purchase money deposited by
the respondent No. 3 shall, obviously, be liable to be refunded to her. She
also needs to be compensated by awarding suitable interest for the period for
which she has been deprived of the use of her money for no fault of her.
In our opinion, it would meet the ends of justice if the amount of Rs. 1,70,000
c deposited by her with the Tax Recovery Officer is directed to be refunded
and she is also awarded interest @ 12% per annum. Who should bear the
liability for payment of interest'! For the period for which the sale was not
vitiated on account of the demand having not been adjudged to be non-
existent, in our opinion, the assessee should pay the interest. Once the demand
ceased to exist and that fact was brought to the notice of the Tax Recovery
D Officer by the assessee, the former should have cancelled the recovery
certificate and, therefore, with effect from that date till the date of refond,
the interest should be paid by the Union of India, i.e., tl1e Income-tax
department, represented by respondent nos. I and 2, which has also kept the
money and made use of it. It is, therefore, directed that the amount of
E Rs. 1,70,000 shall be refonded to the respondent No.3 by the respondents
No. 1 and 2 within a period of two months from the date of this judgment.
For the period commencing from 1).I .1980 on an amount of Rs. 42,500, and
from 25.1.1980, on an amount of Rs. 1,27,500, calculating upto 22.11.1996
the appellant shall pay the interest @ 12% per annmn to the respondent No.3
which may, in default of payment, be recovered from the house property. With
F
effect from 23.11.1996 upto the date of refund, the respondent No. 3 shall
be entitled to recover interest at the same rate from respondents No. I and 2. ~
The amount of interest shall also be calculated and paid within a period of
two months from today. We make it clear that the interest is being awarded
purely on equitable considerations, in the facts and circumstanc~s of this case,
G and in doing so we are not laying down any principle of law to be followed
as a precedent. The appeal stands allowed in these te1ms. No order as to the
costs.

v.s.s. Appeal allowed.