PETITIONER:
LIFE INSURANCE CORPORATION OF INDIA & ANR.
Vs.
RESPONDENT:
GANGADHAR VISHWANATH RANADE (DEAD) BY LRS.
DATE OF JUDGMENT08/09/1989
BENCH:
VERMA, JAGDISH SARAN (J)
BENCH:
VERMA, JAGDISH SARAN (J)
OJHA, N.D. (J)
CITATION:
1990 AIR 185 1989 SCR Supl. (1) 97
1989 SCC (4) 297 JT 1989 (3) 637
1989 SCALE (2)499
ACT:
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--Inordinate delay by LIC in making statement
on oath before ITO--Liability of LIC to pay interest to
assignee of policies for delay in fulfilling statutory
obligation.
HEADNOTE:
One Sh. G.V. Ranade took four policies on his own life
from the LIC during the period. 1958 to 1960. In April 1969
G.V. Ranade assigned absolutely all these four policies in
favour of his wife Smt. Kamalabai G. Ranade and the assign-
ment was duly registered by the LIC. These policies were
paid up and the date of maturity of these were 14.9.72,
28.12.73, 9.11.75 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 proceedings. The Income Tax Officer on 27.1.71
issued a notice under Section 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 LIC 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 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 after her getting the notice served
on LIC by the ITO vacated.
On 5.9.72 Smt. kamalabai G. Ranade flied 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.
98
Ranade nor does the LIC hold any part of the sum for or on
account of 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 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 that the ITO did not revoke the order of
attachment inspite of the LIC making the requisite statement
on oath under section 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 direc-
tion 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 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 @ 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 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 226(3) of the
Income Tax Act was made by the LIC did not qualify for award
of such interest which was payable in respect of the first
two 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.
99
Dismissing the appeal with costs this Court,
HELD: In the instant case, admittedly assignment of the
policies was made by the insured G.V. Ranade and the same
was duly accepted 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 by a competent author-
ity on a proper proceeding taken for this purpose [111B]
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 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. [111C-D]
The question of revocation of the notice under clause
(vii) of subsection (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 policies were held by it for and on
behalf of the assignee and not the defaulter. Mere informa-
tion of 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 226(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 thereunder being
issued by the ITO to the LIC in the present case, it was
incumbent on the LIC 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 ITO to
proceed further and form his final opinion and revoke the
notice under clause (vii). [112D-E; 113G-H]
The inordinate delay in making the statement on oath by
the LIC under section 226(3)(vi) of the Income Tax Act, 1961
was the result of 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 LIC for its
failure to perform its statutory
100
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 inor-
dinate delay award of interest to the assignee of the poli-
cies to whom the payment thereunder had to be made even
according to the stand of the LIC is, therefore, clearly
justified. [114C-D]
JUDGMENT:
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.
P.P. Rao, Kailash Vasdev and S. Murlidhar for the Appel-
lants.
A.K. Sanghi for the Respondent.
The Judgment of the Court was delivered by
VERMA, J. This appeal by special leave is against the
judgment dated January 7, 1981 in Writ Petition No. 1248 of
1977 of the Nagput Bench of the Bombay High Court. The
special leave has been confined only to the question of
liability of the appellant, Life Insurance Corporation, to
pay interest for the period after date of maturity of insur-
ance 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 Nagput. The said G.V. Ranade took four policies on his
own life from the Life Insurance Corporation of India
(hereinafter referred to as “the LIC”) during the period
1958 to 1960. These policies were paid up and the particu-
lars thereof including their paid up value payable on the
date of maturity are as under:
Policy Sum Paid up Date of Number Assured Value Maturity. 19620636 10,000.00 3415.70 14.9.72 13932229 3,500.00 1118.65 28.12.73 13969 144 5,000.00 892.20 9.11.75 13972300 2,000.00 557.70 21.12.75
In April 1969 G.V. Ranade assigned absolutely all these four
101
insurance policies in favour of his wife Smt. Kamalabai G.
Ranade and the assignment so madewas duly registered by the
LIC as under:
“In registering this Assignment the Corpora-
tion makes no admission as to its validity.
Nagpur sd/-
Dt. 8.4.69 P. Divisional Manag- er"
It appears that there were some income tax dues against
the said G.V. Ranade for recovery of which Income-tax Offi-
cer had commenced 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, 1961 to the Manager of the LIC 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. Ranadeto meet the amount due from G.V. Ranade as ar-
rears of income tax. This notice further mentioned the
consequences envisaged by section 226(3) of the Income Tax
Act, 1961. The Divisional Manager of the LIC at Nagput
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 between Income-tax Officer, the LIC and the assignee
shows that the Income-tax Officer required the LIC to depos-
it 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
dated 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 reit-
erated by the LIC in its letter dated 11.8.72 to the assign-
ee.
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 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
102
transfer of policies by G.V. Ranade to his wife are void
with an intention 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 communication from the
ITO.
On 5.9.1972 Smt. Kamalubai G. Ranade filed a writ peti-
tion, (S.C.A. No. 861 of 1972), in the High Court of Bombay
impleading the LIC and the ITO as respondents therein claim-
ing 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 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 dis-
missed in limine by the High Court on 14.9.72. The amount of
Rs.3415.70 payable against the first policy which matured on
14.9.72 was paid by the LIC to the ITO. Smt. Kamalabai G.
Ranade filed an appeal (C.A. No. 373.of 1973) by special
leave in this Court against dismissal of her writ petition
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 CI. (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 Incometax Officer.
It will thereafter be open to the Income-tax
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 need be made and
consequently no order can be made under S.
226(3)(vi). The appeal is disposed of accord-
ingly. 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, L961 in
respect of the remaining three policies.
103
It appears that the ITO did not revoke the order of
attachment in spite of the LIC making the requisite state-
ment 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. Kamala-
bai G. Ranade 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 to her the amount due against the policies
which had 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, 196 1 and the
writ petition was dismissed as withdrawn.
Smt. Kamalabai G. Ranade then promptly sent a notice to
the LIC demanding payment of the total amount due against
these four policies together with interest @ 15% since the
delay in payment had been occasioned by the default of the
LIC. Admittedly the LIC had made the payment of these
amounts to Smt. Kamalabai G. Ranade in these circumstances.
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. However, it has disputed its liability to pay
interest thereon for any period 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. Kamala-
bai G. Ranade claimed that the L.I.C. nad wrongfully refused
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.
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 when the statement on oath
under section 226(3) of the Income Tax Act, 1961 was made by
the L.I.C. did not qualify for 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 com-
mencing from the date of maturity of the policy ending with
performance of the L.I.C.’s obligation to make the statement
under section 226(3)(vi) of the Income Tax Act, 1961 on
5.12.75 the L.I.C. has been held liable to pay interest on
the basis of its failure to perform
104
its statutory obligation. This view of the High Court on
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 prin-
cipal amount from the date of maturity of the first two
policies to 31.12.75, and the rate of 15 % per annum which
is alleged to be excessive.
Broadly stated, the contention of the appellant is that
the appellant was not liable to pay any interest for the
period during which it was restrained from making the pay-
ment on account of the I.T.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. 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.
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 neces-
sary party in the writ petition giving rise to this appeal
and in his absence no effective adjudication of this dispute
can be made. The second argument is that the High Court has
misconstrued section 226(3) of the Income Tax Act, 1961 and
thereby wrongly fastened the liability for payment of inter-
est upto 31.12.75 on the appellant. The third argument is
that the principle of res judicata or atleast constructive
res judicata, as a result of the earlier writ petitions,
bars the claim for payment of interest in this writ peti-
tion. The fourth argument is that the writ petition (S.C.A.
No. 302 of 1977) being withdrawn unconditionally without
liberty to file a fresh petition, this writ petition (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 excessive. 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 which matured on 14.9.1972
inasmuch as the L.I.C. had already deposited that amount
earlier in September 1972 with the I.T.O. in pursuance to
the I.T.O. ‘s demand.
In reply, Shri A.K. Sanghi, learned counsel for the
respondent contended that the liability for payment of
interest has been correctly fastened on the appellant be-
cause of its failure to discharge the statu-
105
tory obligation of making the requisite statement on oath
under section 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 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 depos-
ited by the L.I.C. with the I.T.O. may be refunded by the
I.T.O. to the L.I.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 by the L.I.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 Rs.3415.70 deposited by it with the I.T.O. togeth-
er with interest, if any, payable on the refund by the
Income Tax Department, since it has been conceded that the
respondent does not claim that amount from the I.T.O. We
shall now deal with the remaining arguments of Shri Rao,
learned counsel for the appellant.
The first argument of the learned counsel for the appel-
lant is that the I.T.O. 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 adjudication 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
106
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.O.
‘s liability for payment of interest made in the writ peti-
tion. This argument is, therefore, rejected.
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 constructive res judicata on the basis of two
earlier writ petitions filed by Smt. Kamalabai G. Ranade.
The first writ petition was S.C.A. No. 861 of 1972 filed in
the Bombay High Court on 5.9.72 prior to the date of maturi-
ty of the first policy claim against,which was required to
be paid by the L.I.C. to the assignee, Smt. Kamalaba G
Ranade. This was after issuance of the notice under section
226(3) of the Income Tax Act, 1961 by the I.T.O. to the
L.I.C. One of the reliefs claimed therein was a direction to
the L.I.C. to make a statement on oath as required by sec-
tion 226(3)(vi) of the Income Tax Act, 1961 that no part of
the amount 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 including revocation of the
notice under section 226(3) of the Income Tax Act, 1961
were. also claimed including payment 01′ the amount together
with the accretions thereto. This writ petition being dis-
missed, 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 requiting the
L.I.C. to make the necessary statement on oath in accordance
with section 226(3)(vi) of the Income Tax Act, 1961 within
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 survived in that writ petition and the consequent
civil appeal in this Court since 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 appar-
ently 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 decision cannot,
therefore, preclude agitation of the question of interest
subsequently.
107
The next writ petition filed by Smt. Kamalabai G. Ranade
was S.C.A. No. 302 of 1977 in the Bombay High Court. The
prayer made therein was for a direction to the L.I.C. to pay
the principal amount together with interest thereon. In this
writ petition also the I.T.O. was impleaded as a party. This
writ petition had to be filed because in spite of the L.I.C.
having made the requisite statement under section 226(3)(vi)
of the Income Tax Act, 1961 on 5.12.75, the Income-tax
Officer had not withdrawn the notice under section 226(3) of
the Income Tax Act, 1961 issued to the L.I.C. and, there-
fore, the L.I.C. was not making the payment to the respond-
ent. On 4.4.77 that writ petition was dismissed as withdrawn
as a result of the I.T.O .’s counsel filing a copy of the
order dated 1.4.1977 withdrawing the I.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. 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.I.C. to support its action of non-
payment to the respondent, it was unnecessary to persue that
writ petition when the I.T.O. had made the order withdrawing
the notice under section 226(3) of the Act. Admittedly, it
was in consequence of the withdrawal of the I.T.O.’s notice
by order dated 1.4.77 that payment was actually made by the
L.I.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 ques-
tion of the L.I.C.’s liability to pay interest when the
principal amount alone was paid later.
The L.I.C. having refused to pay the interest on the
principal amount in spite of the inordinate delay in pay-
ment, the Writ Petition No. 1248 of 1977 had to be filed
giving rise to this appeal raising only the question of
L.I.C.’s liability to pay interest on the principal amount
due against the policies. The same is therefore, clearly
maintainable and the earlier writ petitions cannot, in any
manner, bar the adjudication of this point her,’in 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 peti-
tion (S.C.A. No. 302 of 1977) being covered by the discus-
sion relating to the third contention, the same is rejected.
The fifth argument relates to the rate of interest. Shri
Rao contended that the award of interest @15% p.a. is exces-
sive even if the L.I.C. is held liable for payment of inter-
est. Reference was made by
108
Shri Rao to Section 244 of the Income Tax Act, 1961 provid-
ing for payment of interest on refund which prescribed the
rate of 12% p.a. from 1.7.1972 to 1.10.1984, 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 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 inter-
est @ 15% p.a. is reasonable, in the present case, particu-
larly 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 particular-
ly 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
construction of Section 226(3) of the Income Tax Act, 1961
the relevant portion of which, reads as under:
“Other modes of recovery: 226.(1) Notwith-
standing the issue of a certificate to the Tax
Recovery Officer under section 222, the In-
come-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 when it is
equal to or less than that amount.
109
(ii) A notice under this sub-section
may be issued to 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.
(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, every person to whom a
notice is issued under this subsection. 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 document
to be produced for the purpose of any entry,
endorsement or the like being made before
payment is made, notwithstanding any rule,
practice or requirement to the contrary.
(v) Any claim respecting any proper-
ty in relation to which a notice under this
sub-section has been issued arising 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 subsection is sent 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, 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, 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 less.
(vii) The Income-tax Officer may, at any time
or
110
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 compli-
ance with a notice issued under 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 assessee after receipt of a
notice under this sub-section shall be person-
ally liable to the Income-tax Officer to the
extent of 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 this subsection 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 it were an arrear of tax due from
him, in the manner provided in sections 222 to
225 and the notice shall have the same effect
as an attachment of a debt by the Tax Recovery
Officer in exercise of his powers under sec-
tion 222.”
………….”
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 state-
ment on oath under section 226(3)(vi) would thereby have
been exposed to personal liability as the defaulter of the
income tax dues. It 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, there-
fore, the L.I.C. cannot be held liable for payment of inter-
est 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 same was unjustified.
111
Having given our anxious consideration to the argument
we cannot persuade ourselves to accept the same. On a close
scrutiny of the provision we find that the benefit claimed
by the L.I.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 L.I.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 competent 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 issuance of notice under section 226(3) of
the Income Tax Act, 1961 did not have the effect of invali-
dating 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.O. could
be taken only after the L.I.C. had made the requisite state-
ment 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.I.C. only on 5.12.75 which
led to revocation of the notice under section 226(3) of the
Act, by the I.T.O. The question is of the liability of the
L.I.C. in these circumstances.
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 sec-
tion. Sub-section (3) deals with one such mode where the
defaulter’s money is held by another person. Clause (i) of
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 suffi-
cient t6 pay the dues of the assessee in respect of the
arrears of tax. It is in exercise of this power that the
I.T.O. had issued the notice to the L.I.C. in the present
case. Obviously, the I.T.O. had assumed that the money
payable on maturity of these policies belonged to the in-
sured/assessee/defaulter G.V. Ranade overlooking 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
112
claim in respect of property covered by the notice shall be
void after 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 sum to the
I.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 fur-
ther 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 asses-
see’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 I.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.
It is, therefore, obvious that the question of revoca-
tion 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
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 keeping the assignee informed of the I.T.O.’s
action did not amount to discharge of the statutory obliga-
tion 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 in
clause (vi), performance of that obligation by the notice
had to be made only in that manner. This statutory obliga-
tion was performed by the L.I.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.
Learned counsel for the appellant argued that the
requisite statement 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 dues of the assessee/defaulter G.V. Ranade. In
the first place, such a statement was in fact made without
hesitation by the
113
L.I.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 on behalf of the L.I.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 mate-
rial particular”. Thus, there is no risk of personal liabil-
ity of the person making the statement on oath unless any
material particular mentioned 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 ac-
count of the assessee”. The L.I.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
I.T.O. did not belong to the assessee inasmuch as it was
payable only to the assignee, Smt. 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.
On the contrary, real risk of the L.I.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 I.T.O. after receipt of notice under section 226(3), the
amounts of the matured policies within the time given by the
I.T.O. or a reasonable time, without objecting to the demand
by denying its liability to the assessee in the manner
prescribed in clause (vi) thereof, instead of in doing so.
Prudence also required the L.I.C. in its own interest, to
object to the demand according 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.I.C. or any of its officers to personal
liability has, therefore, no merit. This being the only
reason given by the L.I.C. to justify the inordinate delay
in making the requisite statement under section 226(3)(vi)
of the Income Tax Act, 1961, it is obvious that this defence
is untenable.
Sub-section (3) of section 226 of the Income Tax Act,
1961 clearly shows that on a notice thereunder being issued
by the I.T.O. to the L.I.C., in the present case, it was
incumbent on the L.I.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
I.T.O. to proceed further and form his final opinion and
revoke the notice under clause (vii). It was not possible
for the assignee of the
114
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 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 statutory obligation under section
226(3)(vi) of the Income Tax Act, 1961 within a reasonable
time. We have no doubt that this is the proper construction
of section 226(3) of the Income Tax Act, 1961 and the conse-
quential 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 interest to the
assignee of the policies to whom the payment thereunder had
to be made even according to the stand of the L.1.C. is,
therefore, clearly justified. This contention which is
really the main contention urged on behalf of the appellant,
therefore, fails and is rejected.
Consequently, the appeal is dismissed with costs. The
costs are quantified at Rs.2,000.
R.N.J. Appeal dis-
missed.
115