VIP Road Chartered Accountants Association

Introduction and Overview

The most important thing in the career of a Professional after attending to his client’s case is to recover his fees. In the same breath, the most important thing for the Income Tax Department after making the assessment is to recover the taxes. There is no charm in framing any type of assessment, unless it results in recovery of taxes.

Over the years, we have seen so many high-pitched assessments made by trigger happy Assessing Officers, which ultimately results in Parliament questions and final write off of the demand. Realising this fact, the Finance Ministry had evolved formation of the Settlement Commission, which as originally envisaged, used to take into consideration, an assessee’s capacity to pay. Unfortunately, the Settlement Commission is now embroiled in a lot of rigmarole and technicalities and has not served its intended purpose. Therefore, we again have to go back to the recovery proceedings under the Income Tax Act. Ironically, before the introduction of Second Schedule to the Income-tax Act, taxes used to be collected as under the Land Revenue Code. There are elaborate provisions made in Second Schedule for the recovery of taxes and the same is read along with Sections 222 & 276 of the Act.

Second Schedule is divided in several parts. While Part-I deals with general provisions, Part –II deals with attachment and sale of movable properties. Part –III deals with attachment and sale of immovable properties and Part IV deals with the appointment of Receivers. Part-V deals with extreme provisions for the arrest and detention of the defaulter. Second Schedule is a perfect code by itself and it is very necessary to look at the complicated provisions of the Second Schedule, which provides ample technical loopholes for an assessee, who is in default. Before getting into panic, one should carefully look at the Certificate and the provisions of Second Schedule, as also the relevant sections to find out where the Department has gone wrong, so that the harassed assessee can find a solace.

Several questions crop up when you are dealing with the subject of recovery proceedings and Stay. The provisions of Section 179 of the Income-tax Act, which make the Directors of a private company liable for the tax dues, unless he proves that the non-recovery cannot be attributed to him because of any default on his part are very often misused. In the same way, the provisions of Section 249 of the Act, which make it mandatory that the admitted tax must be paid before an Appeal is entertained and the Appellate Authority is deprived of its discretion to condone the default is also very arbitrary in nature in those cases where the resultant income is on paper and not in the form of cash receipts.

There can be no discussion on the recovery of taxes, unless one takes into consideration, the very important provisions of the Income-tax Act for grant of Stay. There is an inherent inertia in the Department’s administration for the grant of Stay. Assurances were given from time to time that when the assessed income exceeds far more than the returned income, Stay should be granted as a matter of course. These directions and assurances given to the various Chambers of Commerce and the Tax Practitioners' Associations are flouted in practice depending upon the exigency of the recovery schedule. It is unfortunate that even in spite of flat denials, there are quotas fixed for every Officer for collection of taxes. This practice has to be strongly condemned, as it puts so much strain on the Officers while discharging their duties and puts the assessees to the vagaries of unsustainable additions. If one were to analyse the Supreme Court’s judgements in the cases of (i) Income Tax Officer vs. M. K. Mohammed Kunhi 71 ITR 815 and (ii) CIT vs. Bansi Dhar & Sons, 157 ITR 665, one would come to an inevitable conclusion that the power to grant Stay also vests with the CIT(A) though he seldom uses it. In the same way, the power to grant Stay is also exercised by the Income Tax Appellate Tribunal in a very sparing manner. There is a wrong reliance placed on the judgement of the Supreme Court in the case of Assistant Collector of Central Excise vs. Dunlop India Limited 154 ITR 172(SC).

It is true that the Government cannot run on Bank guarantees, but at the same time, an assessee who is bled to financial death because of harsh recovery proceedings cannot be resurrected if he eventually succeeds in his case. The Tribunal’s rules, which mechanically provide for obtaining rejection from the Commissioner as a precondition before the Stay Application can be entertained is against the provisions of the Income-tax Act. Under the Income-tax Act, it is only the Assessing Officer who grants Stay under Section 220 of the Act. Afterwards as per the judgements of the Supreme Court in Income Tax Officer vs. M. K. Mohammed Kunhi and CIT vs. Bansi Dhar & Sons (supra), the Appellate Authorities, either CIT(A) or the Tribunal, have the power to grant Stay. The statute does not envisage the powers of the Commissioner to grant Stay.

In this connection, we should also not forget the Bombay High Court judgement in the case of KEC International Limited vs. B. R. Balakrishnan and Others (251 ITR 158), which has given proper guidelines for dealing with the Application for Stay and has also laid down the parameters to be complied with by authorities when Stay Applications are preferred before them. In the same volume in the ITAT Section at page 20, the Tribunal has even gone to the extent of holding that –

"The Assessing Officer is precluded from taking coercive action for the recovery of the disputed demand until the expiry of the period of limitation allowed for filing of the appeal against the decision of the first appellate authority and also during the pendency of stay application before any revenue authority or the Tribunal."

The Supreme Court had also taken a view that the Tribunal’s power to grant Stay extends till the matter is finally disposed of under Section 260 of the Act. This was the position when there were provisions for filing reference to the High Court. This law will now no longer be the good law in view of the fact that there are regular Appeal proceedings provided in the Act after the passing of the Income-tax Tribunal’s Order. Consequently, once an Appeal is preferred to the High Court, the Tribunal will no longer be seized of the matter and will not have the power to grant Stay. However, the Tribunal would still be seized of the matter if a Miscellaneous Application for rectification is filed before it, because there is always a possibility that on filing the Miscellaneous Application, the original Order may be reversed and if no Stay is granted, then the Tribunal will be denying substantial justice. It is needless to state that in turn, the High Court will now have the power to grant Stay while the Appeal is pending before it. At the same time, the assessee should also realise that in the event of final defeat, huge interest liability (which is not deductible) could be invited.

The Income Tax Department should also take a practical view and should not insist on Bank guarantees before granting Stay in every case, because Bank guarantees can become a costly exercise. Other securities in the form of immovable properties or Guilt Edged Securities should also be given equal respect. In the ultimate analysis, the Income Tax Department should bear in mind the wise saying of Chanakya whence he had said that – "The King should collect the revenue like the bee collecting honey without harming the flower". Nearer to modern times, we should remember the parable that one should not kill the goose, which lays the golden egg.

I have perused the questions and answers and even though, they are fairly exhaustive and cover a large area, the canvass itself is so wide that many questions can crop up in future, which would require continuous monitoring. I, however, commend this effort, because it touches a subject, which is most vital in the tax system and is of utmost importance both to the taxpayers and the tax gatherers.

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