STAY & RECOVERY OF INCOME-TAX

1. STAY & RECOVERY OF INCOME-TAX Sanjay Jhanwar, Advocate CHIR AMRIT LAW CHAMBERS JAIPUR

2. Assessee in Default (Section 220) • Amount demanded u/s 156 to be paid in 30 days. • Such 30 days period can be reduced with the previous approval of JC, if allowing 30 days is believed to be detrimental to revenue. • AO has power of extension of time or allowing payment in installments on application of assessee. • If amount due not paid within due date, assessee to be treated in default. June 2010

3. Interest & Penalty on Default in Payment (Sec. 220(2) & 221) • Interest at 1% p.m. which can be reduced/waived by CCIT/CIT in certain circumstances. • Penalty subject to maximum of amount in default. • Interest & Penalty also recoverable as tax. June 2010

4. Consequences of default: Modes of Recovery & Exercise of Powers by TRO • Jurisdiction of TRO (Section 222 to 225). • Other Modes of Recovery (Section 226): • Requisition of salary due. • Requisition of money due/may become due from any person. • Requisition of amount in custody of Court. • By distraint & sale of movable property. • Recovery through State Govt. (Section 227) if entrusted to the State Govt. • Cross country recoveries through Tax Treaties (Section 228A). June 2010

5. TRO’s Jurisdiction Upon drawing the certificate of Arrears, TRO gets jurisdiction. Competent TRO: Where assessee carries on business or has principal place of business. Where assessee’s properties are situated. AO cannot exercise jurisdiction for recovery, when TRO has drawn up certificate. June 2010 Page 5

6. TRO’s Powers • attachment and sale of the movable property; • attachment and sale of the immovable property; • arrest and detention in prison; • appointment of a receiver for the management of the movable & immovable properties. However, these powers can be exercised in terms of rules provided in Rules of Schedule II. June 2010

7. Procedure of Attachment of Movable Property Warrant Service of Warrant • ATTACHMENT OF VARIOUS PROPERTIES BY VARIOUS MODES: • By Actual Seizure (Movable property, Negotiable Instrument) • By Affixing Copy of Warrant (Agriculture Produce) • By Written Prohibition Order (Debt & Shares) • By Notice (Decree, Share in movable property, In Custody of • Court/Public Officer) • As per Code of Civil Procedures Rules (Salary of Govt. Servants) Preparing an Inventory Attachment not to be Excessive June 2010

8. Procedure of Sale of Movable Property Sale of Attached Property Issue of Proclamation specifying Time & Place of Sale Sale after 15 days except in case of speedy and natural decay or where expense of holding it is higher Sale to be by Public Auction (One or more lots) Sale of negotiable instrument and share in a corporation through Broker Irregularity not to vitiate sale, but any person injured may sue Order payment of Coin or Currency Notes June 2010

9. Procedure of Attachment ofImmovable Property Attachment by a Prohibiting Order Service of Notice of Attachment Proclamation of Attachment Attachment to relate back from the date of Service of Notice June 2010

10. Procedure of Sale of Immovable Property Sale of Attached Property • Issue of Proclamation specifying: • -Time & place of sale • -Property to be sold • Revenue (if any) assessed upon the property or any part • Amount of recovery for which sale is ordered • Reserve price (if any) • Any other material thing for purchaser No sale without consent of defaulter, before 30 days from date of affixing proclamation on the property Sale by public auction and not below reserve price. Where sale postponed for want of bid, AO (if authorised) can bid on behalf of Govt. June 2010

11. Application (within 30 days) to set aside sale on depositing the amount Application (within 30 days) to set aside sale on ground of non-service of notice or material irregularity Confirmation of sale and granting sale certificate TRO may, on application of defaulter, postpone the sale to enable him to raise amount due under certificate In case of sale of share in undivided property, bid of co-sharer have preference No sale after expiry of 3 years from end of FY in which the demand order became conclusive and in case of re-sale or set aside, the period extends by 1 year June 2010

12. Properties exempt from Attachment (Rule 10 read with Section 60 of CPC) • Salary: First 1000 + 2/3rd of remaining • Personal ornaments of women as per religious usage • Stipend + gratuities allowed to pensioners • Compulsory deposits + Other sums in or derived form PF Act, 1925 or PPF • Money payable under Policy of Insurance of life June 2010

13. Arrest & Detention (Part V of Schedule II) • Show Cause Notice necessary • Satisfaction of TRO to be recorded: • Assessee has dishonestly transferred, concealed or removed any property after drawing up of Certificate, or • Assessee has means to pay the Arrears but refuses to neglects to pay • Where assessee does not appear in reference to TRO’s notice, he can be arrested and produced before TRO June 2010

14. Remedies against AO’s Action • Application u/s 220(3) for extension of time /allowing payment in installment. • Application u/s 220(6) for not treating the Assessee to be in default. • Application before the Appellate Authority where appeal is pending. • Writ petition under Article 226 against the Rejection Order. June 2010

15. CBDT’s Instruction No. 96 [F. No. 1/6/69-ITCC], dated 21st August 1969 Where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapse on the part of the assessee. Followed by the Madhya Pradesh High Court in the case of M.G.M. Transports (Madras) (P) Ltd. vs. ITO & Anr. (2008) 303 ITR 15 and also in Jain Cycle Spares and Co. vs. CIT (2004) 267 ITR 60. June 2010

16. Circular No. 530 dated 6th March, 1989 Circular No. 589 dated 16th Jan. 1991 The Board has clarified that the AO will exercise his discretion u/s 220(6) where demand: (i) arises because AO had adopted an interpretation of law in respect of which, there exist conflicting decisions of one or more High Courts or, the High Court has adopted a contrary interpretation but the Department has not accepted that judgment, or (ii) relates to issue that have been decided in favour of the assessee in an earlier order by an appellate authority or Court in assessee’s own case. June 2010

17. Followed by the Orissa High Court in the case of Bhubaneshwar Stock Exchange vs. Union of India (2006) 283 ITR 562 and by Gujarat High Court in the case of Gujarat State Fertilizers & Chemicals Ltd. vs. Dy. CIT (1997) 226 ITR 270. In respect of cases not covered by the aforesaid criteria, the AO, while considering the situation for treating the assessee to be not in default, would consider all relevant factors having a bearing on the demand raised and communicate his decision to the assessee in the form of a speaking order. • CBDT’s letter F.No. 404/132/70-ITCC dated 14th Sept. 1970 Further clarified that these discretionary powers are to be exercised in respect of disputed taxes only. June 2010

18. Remedies against TRO’s Action • Objections before TRO to the attachment or sale of any property. • Appeal before CCIT/CIT u/r 86 of Schedule II against non-conclusive orders. • Writ Petition under Article 226 against conclusive orders: • If full, firm & adequate investigation into objections not carried out by TRO • On Other grounds June 2010

19. Important Judgements-Modes of Recovery- K.A. Veerichetty & Sons vs. ITO & Anr. (1976) 102 ITR 225 (Kar): • Money must be due or may become due to the assessee. • Or he must hold or may subsequently hold money on account of assessee. Where assessee in default is an AOP and a person owes, to the member of AOP, then not justified to invoke section 226(3) against that person. June 2010

20. Important Judgements -Modes of Recovery- Bhishma Pithamaha Vs. TRO (2009) 316 ITR 63 (Kar): In case of wrongful sale of attached properties, where the department could not recognize the succession, there is no provision under the Act which confers the power to the Department to proceed against a person who wrongfully sells the property of the assessee and recover the monies from him, merely because they have attached the properties. June 2010

21. Important Judgements -Modes of Recovery- K.M. Adam vs. ITO (1958) 33 ITR 26 (Mad): • There must be a debt to be attached. • An unutilized overdraft account does not render the bank a debtor in any sense. • Therefore, bank does not fall within the expression “person from whom money may become due”. • ITO cannot make a garnishee order in respect of difference between the overdraft limit allowed by the banker to the assessee and the amount of overdraft drawn by the assessee. June 2010

22. Important Judgements -Modes of Recovery- Administrator of the Specified Undertaking of UTI vs. B.M. Malani & Ors. (2008) 296 ITR 31 (SC): • Where certain amount has been invested by a assessee in UTI units having lock-in period. • Untill assessee did not exercise the option of repurchase of units, no money becomes due to him. • In such a case, UTI cannot pay such amount to the deptt. in compliance of notice u/s 226(3) issued to it. • UTI is not authorised to dispose the units on its own without any notice to the holder of the units. June 2010

23. Important Judgements -Modes of Recovery- P.K. Trading Company vs. ITO (1970) 78 ITR 427 (Cal): • A garnishee order can only be issued on a debtor of the assessee. • By treating some other person as benamidar of the assessee firm or the partners of the assessee firm, ITO is not entitled to issue notice u/s 226(3). • Also notice cannot be issued on the debtor of the alleged benamidar. June 2010

24. Important Judgements-Modes of Recovery- Ezy Slide Fastners Ltd. vs. Joint CIT (2004) 269 ITR 548 (Guj): • An assessee registered as a sick industrial company by BIFR is entitled to protection u/s 22 of the Sick Industrial Companies Act, 1985 in respect of arrears of income tax. • However, deptt. can obtain consent from BIFR for recovery that it proposes to ma ke. • Accordingly, interim relief granted restraining the IT authorities from enforcing any notice u/s 226(3). • They first have to obtain consent of BIFR as provided in section 22(1) of the said Act. This view has been affirmed by Hon’ble Supreme Court in case of Tata Davy Ltd. vs. State of Orissa & Ors. AIR (1998) SC 2928 & Gram Panchayat vs. Shree Vallabh Glass Works Ltd. AIR (1990) SC 1017. June 2010

25. Important Judgements-Modes of Recovery- • However, Hon’ble Supreme Court has taken a different view in the case of Dy. CTO & Ors. Vs. Corromandal Pharmaceuticals & Ors. AIR (1997) SC 2027. • The sickness of an industrial company is no bar for the collection and recovery of the moneys due towards taxes especially when such moneys have been collected which are payable to the Government. • Accordingly, any liability towards sales-tax which had become payable after the sanction of the scheme of rehabilitation by BIFR would be liable to be paid. • The company cannot take shelter under section 22(1) of SICA. • Although the judgment had been rendered in the context of sales-tax, the same ratio would apply for excise, customs and allied taxes. June 2010

26. Important Judgements-CIT does not have Jurisdiction u/ 220(6)- Mrs. N. Savithri Sam vs. ITO (1969) 72 ITR 730 (Mad); Pradeep Ratanshi vs. Asstt. CIT (1996) 221 ITR 502 (Ker) • ITO’s jurisdiction u/s 220(6) is quasi judicial. • Exclusively entrusted to him by statute. • In question of grant of stay, his decision is not guided or controlled by the higher administrative authority including CIT. • Although CIT is higher in hierarchy, he cannot give any direction to ITO with respect to a quasi judicial function. June 2010

27. Important Judgements-Power of Appellate Authority to grant Stay of Recovery Proceedings is Independent of Section 220(6- Tin Manufacturing Co. of India vs. CIT & Ors. (1995) 212 ITR 451 (All); Kesav Keshew Company vs. Dy. CIT (1994) 210 ITR 1014 (Ker) • Power of Appellate Authority to stay recovery proceedings is independent of section 220(6). • Not necessary for an assessee to approach AO u/s 220(6) before moving the appellate authority for invoking the inherent jurisdiction to stay the recovery of demand in respect of appeal pending before him. June 2010

28. Important Judgements-Power of Appellate Authority to grant Stay of Recovery Proceedings is Independent of Section 220(6) SHIV SHAKTI RUBBER & CHEMICALS WORKS vs. ITAT & ORS. (1995) 213 ITR 299 (All) • Tribunal has implied powers to grant stay. • Should consider the stay application on merits. • Wrong to observe that stay would not solve any problem. • Need to consider all aspects of the matter in order to determine that the requirements for grant of stay are fulfilled. • Assessee can move second stay application which the Tribunal should consider on merits. June 2010

29. Important Judgements-Mere fact of Pendency of Appeal does not operate as a Stay- If the assessment is taken as non - existent with the filing of the appeal, this provision becomes meaningless. Vikrambhai Punjabhai Palkiwala vs. S.M. Ajnabi, Recovery Officer & Ors. (1990) 182 ITR 413 (Guj) Mere filling of an appeal or an application for stay in such an appeal will not ipso facto grant stay of further proceedings in a tax recovery matter. Union of India vs. B.C. Nawn & Ors. (1972) 84 ITR 526 (Cal) There is nothing in the Act to show that the assessed sum becomes not recoverable during the pendency of appeal if filed or with the filing of the appeal. June 2010

30. Important Judgements-Power coupled with responsibility- M.L.M. Mahalingam Chettiar vs. Third ITO & Anr. (1967) 66 ITR 287 (Mad) • Not a naked and arbitrary power. • The officer has to take all facts & circumstances into consideration. • Make an appropriate order. • The request cannot be merely rejected on the basis that the power is with him but that he is not bound to exercise it. June 2010

31. Important Judgements-Specific opportunity of hearing- Golam Momen vs. Dy. CIT & Ors. (2002) 256 ITR 754 (Cal) • In proceedings initiated by assessee for stay u/s 220(6), the AO, cannot refuse to give specific opportunity of being heard. • On the ground that the same has been granted in the assessment proceedings. • It is completely a different consideration. • The opportunity of hearing is implicit in the provision itself. June 2010

32. Important Judgements-Discretion to be exercised Judiciously- Shivangi Steels (P) Ltd. vs. Asstt. CIT (2004) 266 ITR 62 (All) • Asstt. CIT rejected application of assessee u/s 220(6), after one year on the ground that he had not deposited the amount even after expiry of more than one year. • Without giving any reasons. • Exercise of discretion was not judicious and liable to be set aside. June 2010

33. Important Judgements-Payment of whole amount not a precondition- Maruti Udyog Ltd. vs. Additional CIT (2003) 264 ITR 487 (Del) • Direction to pay whole amount in dispute. • As a precondition for stay of recovery of demand at the stages when the first appeal is pending is not reasonable. • Directed not to take coercive steps for recovery till disposal of appeal on assessee’s depositing specified sum by the specified dates. June 2010

34. Important Judgements ITO vs. K.A. GOVINDASWAMY & ORS. (1978) 113 ITR 593 (MAD) • Rule of priority in favour of Department for realization of dues can prevail only against unsecured creditors and not secured creditors. • Department could not have prior charge over the claim of secured creditor out of the sale proceeds of property in the hands of official assignee of property of defaulter. June 2010

35. Important Judgements Pappu Reddiar & Anr. Vs. Union Of India (1962) 46 ITR 825 (MAD): • Where money was brought in Court in a suit for administration of the estate of the deceased. • The Government would have a preferential claim in respect of its income-tax dues. • Notwithstanding that other creditors had taken enormous trouble in bringing the money to Court. June 2010