1.1 Assessment proceedings and recovery of tax are both separate topics. It is difficult to deal with two topics in this paper. However, the attempt is made to highlight the fundamental principles in brief without discussion by placing reliance on Supreme Court and High Court decisions reported. The authorities have followed the said principles in recent judgments.
1.2 Back assessments, Search assessment and Section 144A are not within the scope of this paper.
1.3 Assessment proceeding is the base of the entire Income-tax Act. If this base is taken away the whole edifice of the Income-tax Act will collapse. Therefore, it is important proceedings that one will have to be very careful while complying with notices of the Assessing Officer [AO].
2. Assessment Proceedings
2.1 Assessment proceedings commences with the issue of notice under Section 143(2). At present in most of the cases formal 143(2) notices are issued along with the annexures. The assessee takes it lightly that it is a formal notice. This is not a correct approach since when the question whether adequate opportunity is given or not, the formal notice is also considered. The assessee should be careful while replying notices under Section 142(2) and 143(2) from time-to-time. The reply must be given with necessary evidences in respect of each query raised. For example, in case of cash credits, evidences like confirmation duly signed from the depositor, address, PAN and the source of the deposit along with copy of accounts should be furnished. It is advisable not to be indifferent towards compliance of Section 142(2) and 143(2) notices with annexures.
2.2 Whenever difficult query is raised, the assessee at times either gives vague reply or avoids to give reply. This is dangerous. In fact, the assessee should try to find out the proper reply and should give the reply with adequate evidences. This is because it is difficult to produce additional evidence before the appellate stage. Non-compliance of notices under Sections 142(2) and 143(2) attracts penalties under different provisions of law.
3. Notice under Section 143(2)
3.1 The A.O should issue notice under Section 143(2) within six months from the end of the financial year in which the income tax return is submitted. If no notice is issued within the statutory period then it cannot be issued thereafter. If the notice under Section 143(2) is issued after the expiry of statutory period, the assessment is invalid
[DCIT v. Maxima Systems Ltd. 344 ITR 204 (Guj) and DCIT v. Mahi Velly Hotels & Resorts 287 ITR 360 (Guj) approved by Supreme Court in case of ACIT v. Hotel Blue Moon 321 ITR 362 (SC)].
The Department must prove that the notice under Section 143(2) is issued within time
[CIT v. Lunar Diamonds Ltd. 281 ITR 1 (Del.)].
3.2 Notice under Section 148 cannot be issued unless the limitation period for issue of Notice under Section 142(1) or 143(2) is over
[CIT v. K.M. Pachayappan 304 ITR 264 (Mad.) and CIT v. Qatalys Software Technologies Ltd. 308 ITR 249 (Mad.) and CIT v. TCP Ltd. 323 ITR 346 (Mad.) and CIT v. Abad Fisheries 246 CTR 513 / 204 Taxman 267 (Ker.)].
4. Assessment proceedings are quasi judicial
4.1 The proceedings are quasi-judicial since conclusion or decisions taken by the Officer have some attributes of judicial decision though there are no attributes of a judicial proceeding. This attributes can be discussed in three principal aspects:
The Assessing Officer should act in a judicial manner, proceed with a judicial spirit and come to a judicial conclusion. Though he is an Executive or Administrative Officer engaged in the administration of the act, his function is fundamentally quasi-judicial. He has to very often apply the principle of judicial decisions to the facts of the case before him with due care. His duty is to administer the provision of the Act in the interest of public revenue and to prevent evasion or escapement of tax legitimately due to the state but as pointed out by the Supreme Court in
CIT v. Simon Carves Ltd. 105 ITR 212 this does not mean that he should exercise his powers only in a manner beneficial to the revenue and adverse to the assessee. However, it is also held by the Supreme Court in the case of
CIT v. Central India Industries Ltd. 82 ITR 555 that making of the assessment in a particular manner cannot be affected merely because it affects the assessee adversely. His conclusions are not final but subject to appeal. Exercise of such power, from its very nature, is governed by judicial and not arbitrary consideration and postulates the existence of reason for the conclusion arrived at. He may not act on suspicion or conjecture, or pure guess without reference to any material or evidence
[Dhakeswari Cotton Mills Ltd. v. CIT 26 ITR 775-782 SC]. He should proceed without bias, give sufficient opportunity to the assessee to place his case before him, and conduct himself in accordance with rules of justice, equity and good conscience. It is in his discretion what material he would accept and what he will reject but he cannot pick and choose some part of the material produced before him ignoring others and without considering the assessee’s explanation for discrepancies
[Indore Malwa United Mills Ltd. v. State of Madhya Pradesh 60 ITR 41 SC].
A second requirement is that the A.O. should act independently and arrive at his own conclusions. He should not, except where the statute specifically permits him, allow his superior officer to interfere in his conduct of a case or act on the opinion, advice or dictates of a superior authority
[J.K. Synthetics Ltd. v. CBDT 83 ITR 335 SC]. Nor can he claim privilege regarding his communications with his higher authorities which may have taken place contrary to law.
A third important requirement is that he should give a fair hearing to the assessee before deciding against him [M. Chockalingam and M. Meyyappan v. CIT 48 ITR 34 SC]. This would involve also a right in the assessee to inspect the records and obtain the substance of all relevant documents, such as statements, orders, reports etc. so as to be able to lead evidence in rebuttal or to cross-examine witness who have given evidence against him
[Gargi Din Jwala Prasad v. CIT 96 ITR 97 (All.)]. It also means that the assessee should be given a reasonable time and opportunity to produce such evidence as he may consider necessary
[Munnalal Murlidhar v. CIT 79 ITR 540 (All.)].
4.2 While the provisions of the Indian Evidence Act do not apply, the Assessing Officer is bound to apply general principles of evidence as to onus of proof, presumptions and consideration of evidence to contradict, vary or add to written documents
[CIT v. Umrao Lal 180 ITR 403 (All.)]. Non-registration of a compulsorily registrable document will affect its admissibility on the question of its effect on the property, though not for collateral issues.
5. Rule of natural justice to be followed
5.1 The A.O. is not fettered by technical rules of evidence and pleadings; he is not absolved of the obligation to comply with the fundamental rules of natural justice which have to be known in administrative law as the principles of jurisprudence. Compliance with the audi alteram partem rule of natural justice is an indispensable requirement of valid assessment order
[Jagdambika Pratap Narayan Singh v. CBDT 100 ITR 698 SC].
5.2 An order passed in violation of principle of natural justice may not, however, render the act one totally outside the Act. It may still be an order under the Act liable to be corrected or set-aside to be redone after complying with such principle.
5.3 If the A.O. proposes to act on such material as he might have gathered as a result of his private inquiries behind the back of the assessee, he must disclose the substance of all such material, though not the sources thereof to the assessee and if this is not done, the principle of natural justice stands violated [Kishanchand Chellaram v. CIT 125 ITR 713 SC].
5.4 The provision contained in Section 142(3) and Section 143(3)(ii) gives statutory recognition to the principle of natural justice, audi alteram partem.
5.5 Whether rule of natural justice is followed or not depends upon the facts of each case.
6. Opportunity of hearing
6.1 From the language of the Sections 142 and 143(3)(ii) as well as from the above discussion, it will be clear that an assessment under Section 143(3) can be made only after the assessee has been heard fully in three aspects:
He should be given an opportunity to produce the evidence on which he relies in support of the return [143(2)(ii)];
If, in respect of the evidence so produced or in view of other material gathered under Section 142(2) by the officer, he requires any clarifications or evidence on any specific points he should give the assessee an opportunity to furnish explanation or produce documents [143(3)(ii)]; and
If the Assessing Officer has gathered material on which he desires to rely, he should disclose to the assessee the substance of such material and give him an opportunity to have his explanation in regard thereto [142(3)].
6.2 The Assessing Officer under Sections 142 and 142(2A) has been empowered to gather material in the manner he deems necessary to complete the assessment. He can make any inquiry for the purpose of aforesaid and collect material from various sources but once he has collected that material Section 142(3) cast on him the obligation to give an opportunity to the assessee of being heard so that he may explain the material so gathered by him. Failure by him to comply with the requirements of Section 142(3) i.e. use of material gathered by him without confronting the assessee with the same would render the proceedings illegal.
7. Furnishing of information / evidences from time to time during assessment proceeding
7.1 In the course of hearing, the A.O. may seek clarifications and further information to enable him to decide whether the return should be accepted or not and, if not, the basis on which and manner in which the assessment should be completed. He can seek such information by the issue of notice under Section 142(1) or Section 143(3) or summons under Section 131 or in such manner as he may consider appropriate. Under this sub-section the Officer has discretion to call for additional evidence where he believes that the evidence produced is not sufficient but the provision does not absolve the assessee of producing all evidence in his possession or power. Unless the assessee proves his case, he cannot complain that the Officer had not asked him for further evidence.
8. Gathering of material
8.1 Section 142, expressly, and Section 143(3), by implication, confer a power in the A.O. to make such inquiries as he may consider necessary.
8.2 Such inquiries may be carried out privately or confidentially. He can also summon witnesses and record their statement in the presence of the assessee or even behind his back. Only, he should satisfy himself as to the correctness of the information and as has already been pointed out, the substance of any information sought to be used against the assessee should be put to him and he should have a fair opportunity consistent with the principles of natural justice, to rebut the same.
8.3 Evidence may be tendered on an affidavit before the AO.
8.4 The language of Section 143(3) makes it clear that the assessment order should be based on the evidence before the Officer. In the absence of any evidence, the assessment order will be vitiated.
9.1 If an assessing authority is relying on the testimony of a witness, the assessee is to be afforded an opportunity to cross-examine him
[CIT v. Eastern Commercial Enterprises 210 ITR 103-111 (Cal.)]. It is not open to the assessing authority to get over this hurdle on the plea that the witness had not been produced by the assessee
[Gargi Din Jwala Prasad v. CIT 96 ITR 97 (All.)].
9.2 In the absence of any opportunity for cross- examination, the assessment is invalid
[CIT v. D.M. Joshi & Ors. 239 ITR 315 (Guj.)]. Request for permission to cross-examine person searched not allowed. Finding that principles of natural justice not followed, the assessment is invalid
[CIT v. SMC Share Brokers Ltd. 288 ITR 345 (Del.) – SLP by Revenue dismissed 322 ITR 2 (Stat)]. However, in the absence of cross-examination the assessment is set aside by directing to provide the opportunity
[Kalra Glue Factory v. Sales Tax Tribunal 167 ITR 498 (SC)]. The cross-examination depends upon the facts of each case.
10.1 Evidence may be tendered on an affidavit before the A.O. Such evidence is legal and can be acted upon by the A.O and appellate authority. Should the A.O, or the CIT(Appeals) or the Appellate Tribunal regard the same as not sufficient proof of the contents thereof, they should cross-examine the deponent and, if dissatisfied, call upon the assessee to produce documentary evidence in support of the contents of the affidavit. If no such thing is done, the affidavit by itself should be regarded as sufficient proof as held by Supreme Court in the case of
Mehta Parikh & Co. v. CIT 30 ITR 181 (SC).
11. Books of Account and allowability of expenditure
11.1 Books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof
[Tolaram Daga v. CIT 59 ITR 632-636 (Assam)]. Even before a court of law, such books are evidence under Section 34 of the Evidence Act after the relevant entries are proved by oral evidence or are admitted. As the rules of evidence are not strictly applicable to the assessment proceedings, the A.O. should accept such books and / or entries therein, barring the special deeming and specific onus provisions, to be correct unless he has in his possession some material to the contrary
[Adl. CIT v. Jay Engineering Works Ltd. 113 ITR 389-392 (Del.)].
11.2 At the same time, book entries made by an assessee, specially when they go against the averments of the assessee, are an extremely important piece of evidence but it cannot be said that they are conclusive. It is open to the assessee to show that the entries are incorrect, and if an assessee pleads so, he should be given proper opportunity to show that book entries do not disclose the correct state of fact
[Pullangode Rubber Produce Co. Ltd. v. State of Kerala 91 ITR 18 (SC)]. Entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of the provisions contained in the Act
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].
11.3 Thus, the onus clearly lies on the assessee to prove that the entries ostensively showing receipt of money in cash are not real receipts
[Debi Burman v. CIT (1994) Tax LR 452-456 (Cal.)]. In that case, it has been held that the entries in the exercise book in the possession of the assessee and wherein the entries were made by him in his own hand are per se sufficient as evidence needing no corroboration by the paying party.
11.4 Where no specific defect is found in the books of account, accounts cannot be rejected. If there are some discrepancies, the entire books of account cannot be rejected. The addition may be made to the extent of discrepancies only
[Bharat Dana Bera v. ITO 153 ITD 421 (Mum.).
12. Value of Audit Report when books were destroyed
12.1 Where the books of account of an assessee are examined and audited under statutory provisions and audit report is submitted thereabout, reliance could be placed by the income tax authorities on such a report treating the same as “a material” in case the books of account of the assessee were destroyed by fire etc. This is so because an auditor is required by the statute to find out if the deductions claimed by the assessee in its balance sheet and profit and loss account are supported by the relevant entries in assessee’s books of account. Therefore, it may be presumed that the auditor has done so and has found that the books of account supported the claim for deductions made by the assessee [Adl. CIT v. Jay Engineering Works Ltd. 113 ITR 389-392 (Del.)].
13. Other Principles
13.1 Once the genuineness of the borrowing is proved that it is for the purpose of business, it is not in the power of the A.O. to disallow the deduction either on the ground that the rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].
13.2 Normally, the ordinary rule, namely, that revenue expenditure incurred in a particular year is to be allowed in that year, is to be applied. Thus, if the assessee claims that expenditure in that year, the Department cannot deny it. However, in a case where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of “matching concept” is satisfied, which up to now has been restricted to cases of debentures
[Taparia Tools Ltd. v. JCIT 372 ITR 605 (SC)].
13.3 The A.O. did not allow the claim of assessee under Section 80HH and Section 80I though claimed in the original return since the assessee omitted to revise the claim under Section 80HH and Section 80I while filing the revised return. The CIT(A) dismissed the appeal. The ITAT, Mumbai in the case of
Chicago Pneumatic India Ltd. v. DCIT 15 SOT 252-255 (Mum.) held as under:
“It is well-settled that the onus lies on the assessee to make right claim and such claim must be made within the framework of provisions of the Act. However, this situation may result into genuine hardship to the assessees, as the assessees would be left with the option only to proceed under Section 264, that too in case they have not gone into appeal before the Commissioner (Appeals) on the same issue or the Commissioner (Appeals) has not admitted those issues. Other option would be to approach the CBDT under Section 119 for getting the specific relief. Both these options involve time as well as engagement of other administrative authorities, which can be otherwise devoted to other important issues. Therefore, one has to look into the duties of the Assessing Officer rather than the powers of the Assessing Officer, because the Government is entitled to collect only the tax legitimately due to it, otherwise the tax not so collected would be violative of the Article 265 of the Constitution. The CBDT as back as in the year 1955 issued Circular No. 14 (XL-35) dated 11-4-1955 as to what should be a departmental attitude towards refund and reliefs to the assessees. In this circular, the CBDT has recognised the fact that responsibility for claiming refunds and reliefs rests with the assessees; even then the CBDT has directed the officers to draw the attention of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or the other. Further, the Board also issued Circular No. F. 81/27/65-IT(B), dated 18-5-1965 defining the duties of the PROs in providing assistance to the public. In this circular, the CBDT has also advised the PRO to visit the Government / commercial establishments to provide them assistance in filing correct returns and making eligible claims. These circulars issued by the CBDT almost 4-5 decades before cast a duty on the Assessing Officer to collect only the legitimate tax. It is a settled position that the Circulars issued by the Board are binding on the subordinate income-tax authorities………. Thus, there is a strong case for reciprocity to be shown by the revenue authorities while completing assessments and to avoid administrative hardships to the assessee………. Therefore, the Commissioner (Appeals) was to be directed to consider the claim of the assessee at the revised figures on merits and decide the same according to the provisions of Sections 80HH and 80-I.”
The above referred Circulars still hold good today since they are not withdrawn till now.
13.4 The Gujarat High Court in case of
S.R. Koshti v. CIT 276 ITR 165-175 laid down certain general principles in Para No. 22 which is reproduced as under:
“A word of caution. The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. This Court, in an unreported decision in case of
Vinay Chandulal Satia v. N.O. Parekh, CIT [Spl. Civil Application No. 622 of 1981 dated 20-8-1981], has laid down the approach that the authorities must adopt in such matters the following terms:
“The Supreme Court has observed in numerous decisions, including
Ramlal v. Rewa Coalfields Ltd. AIR 1962 SC 361, State of West Bengal v. Administrator, Howrah Municipality AIR 1972 SC 749 and Babutmal Raichand Oswal v. Laxmibai R. Tarte AIR 1975 SC 1297, that the State authorities should not raise technical pleas if the citizens have a lawful right and the lawful right is being denied to them merely on technical grounds. The State authorities cannot adopt the attitude which private litigants might adopt.”
14. Presumption and burden of proof in assessment
14.1 The normal presumption is in favour of good faith. This presumption applies to the
bona fides of the assessee’s transactions as well as his accounts. It cannot be presumed that an assessee is a notorious black marketeer or smuggler or that, in the circumstances prevalent in the accounting year, he must have entered into transactions not lawful, above board or dishonest.
14.2 The presumption is similarly regarding his books of account, that the entries in the account books are made in the ordinary course of business and there is no concealment of income. The books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof
[Tolaram Daga v. CIT 59 ITR 632 (Assam) and Addl. CIT v. Jay Engineering Works Ltd. 113 ITR 389 (Del.)]. It is for the department to prove to the contrary and there should be adequate grounds for disbelieving the accounts. It is for A.O. to prove that there is income from that source. The assessee cannot prove the negative.
14.3 Upon rejection of assessee’s unsatisfactory / unbelievable evidence, the burden of proof shifts to the assessee:
Where an assessee produced unsatisfactory and unbelievable evidence the department can reject the same and need not produce contrary evidence before drawing an adverse inference against the assessee. Again, if the income should be shown as having suddenly diminished from the previous year, the onus will be on the assessee to explain. The onus is on the assessee to show that his return is correct, as all the facts are exclusively in his knowledge and that he has incurred a loss.
14.4 Burden of proof as regards status – on the assessee:
Again, it is for the assessee to prove his status viz., that he is a partner or a member of an Undivided Hindu Family, or a member of an association of persons or a person not ordinarily resident etc.
In general, the onus is on the revenue authorities to show that the amount which is sought to tax, is liable to tax and the onus is on the assessee, who claims an allowance or exemption to establish such claim
[Parimisetti Seetharamanna v. CIT 57 ITR 532 (SC)]. But such onus would not extend to proving a mere negative, as for instance, where an assessee denies that a third person is his benamidar.
15. Onus regarding ownership of property and income – on the Department
15.1 There is no presumption that property standing in the name of a certain person is other than his property. The burden rests upon the department to show that the apparent is not the real state of affairs. In
CIT v. Durga Prasad More 82 ITR 540 (SC), the Supreme Court observed that science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore the Courts and tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law. The court also observed that though an apparent state of affairs must be presumed to be real until it was shown to the contrary, this rule should not be blindly applied to all situations. In a case where a party relied on self serving recitals in his own documents, it was for that party to establish the truth of those recitals. The taxing authorities are entitled to look closely into all the circumstances to find out the reality of such recitals.
16. Possession of valuables – ownership can be presumed
16.1 The Supreme Court in
Chuharmal v. CIT 172 ITR 250 has opined that what is meant by saying that the Evidence Act does not apply to proceedings under the Income-tax Act is that the rigour of the rules of evidence contained in the Evidence Act are not applicable; but that does not mean that when the taxing authorities are desirous of invoking the principles of the Evidence Act in proceedings before them, they are prevented from doing so. Section 100 of the Evidence Act embodies a salutary principle of common law jurisprudence viz. whereas a person is found in possession of anything, the onus of proving that he is not the owner is on that person. This principle can be attracted to a set of circumstances that satisfy its condition and is applicable to taxation proceedings.
17. Admission by Parties
17.1 Assessment based on admission of assessee that particular amount is liable to be included in his total income, is a valid assessment
[Ratanchand Bholanath v. CIT 210 ITR 682 (MP)]. An admission made by the assessee is a good, relevant and substantial piece of evidence that can be used against him and is, very often, the best evidence that can be available against him
[Murugesan & Bros. v. CIT 88 ITR 342 (SC) and Kanshi Ram Wadhwa v. CIT 138 ITR 830 (P&H)]. But it is not conclusive and it is open to the assessee to show that it was incorrect or was given under some erroneous impression
[Pullangode Rubber Produce Co. Ltd. v. State of Kerala 91 ITR 18 (SC) and Greenview Restaurant v. ACIT 263 ITR 169 (Gau)]. But the admission should be construed as a whole and with regard to the circumstances and context in which it was made. The effect of the admission should be limited to the fact admitted and does not extend to claims or contentions that may be open to an assessee otherwise [Palwankar v. CIT 117 ITR 768 (MP)]. An admission regarding facts by a duly authorised counsel is equally binding on the assessee unless withdrawn [Jayshree Chit Fund & Services v. CIT 127 ITR 740 (Ker.) and CIT v. Jyoti Tubewell Co. 164 ITR 301 (Pat.) and CIT v. Dayaram Vasudev 57 Taxman 209 (Bom.)].
18. Method of Accounting and Income Computation and Disclosure Standards
18.1 Profits and gains from business and income from other sources should be computed either on mercantile or cash basis in accordance with method of accounting regularly followed by the assessee subject to Section 145(2). Section 145 provides option to the assessee either to follow mercantile system or cash system but it should be in accordance with the method of accounting regularly followed. If the books of account are maintained say on mercantile basis in accordance with the method of accounting regularly followed such books should normally be accepted except the A.O. points out the defects in the method of accounting. This method should be followed consistently. It does not mean that the wrong method should be followed consistently. Even if the wrong method is followed consistently, the A.O. has a statutory duty to make the adjustment according to the right method of accounting. The assessee valued the closing stock and work in progress on the basis of cost of raw material but did not include the overheads. In fact the overheads should be the part of the cost of raw material. Therefore it was held that even if the method is followed consistently, it is the statutory duty of the A.O. to make the adjustment since the method found was such that the correct income cannot be deduced therefrom since each year is a self contained assessment year
[CIT v. British Paints India Ltd. 188 ITR 44 (SC)].
18.2 Section 145(2) empowers the government to notify income computation and disclosure standards to be followed by any class of assessee or in respect of any class of income. The words accounting standards is substituted for Income Computation and Disclosure Standard [ICDS] by Finance (No. 2) Act, 2014 with effect from 1-4-2015. The Central Government has notified on 31-3-2015 – 10 Income Computation and Disclosure Standards with effect from 1-4-2015 i.e. Financial Year 2015-2016 relevant to A.Y. 2016-2017. The notification provided that Income Computation and Disclosure Standards should be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “ Income from other sources”. Preamble to each standard provided that each standard should be followed for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account. Income Computation and Disclosure Standards are not to be applied for cash method of accounting followed by the assessee who is carrying on business or profession or has income from other sources and also to the assessees who have income from salary, property and capital gain. The accounting standards prescribed by the ICAI are required to be followed for maintenance of books of accounts. Therefore, the computation of income from A.Y. 2016-2017 is going to be cumbersome.
18.3 Preamble to each standard also provides that in case of conflict the provisions of Act shall prevail. Section 145(1) is subject to Section 145(2). However, if there is conflict between sub-section (1) and (2), sub-section (1) shall prevail and the profits and gains of business or income from other sources should be computed either on mercantile or on cash basis in accordance with method of accounting regularly followed by the assessee.
19.1 The assessment order should determine not only the total income of the assessee but also the amount payable by him. The Assessing Officer should apply his mind to the facts before him, apply the relevant law and come to a positive conclusion that the income assessed belongs to the assessee before him. The assessments under the Act have to be made every year and even if there is a dispute regarding the ownership of the income, the officer must come to a conclusion and cannot hold up his decision till the dispute is resolved in the ordinary courts [CIT v. Hirjee (H) 23 ITR 427 (SC)].
20. Remand Proceedings
20.1 The CIT(A) has now no power to set-aside the assessment. However the CIT(A) can call for the remand report on specific issues. The A.O. should submit the remand report only on those issues on which the remand report is called for and should not travel beyond that. The powers of the Tribunal are confined to the subject matter of appeal as constituted by the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal. Thus, when the Tribunal allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of A.O. is confined to such subject matter only. If the specific direction is given then there is no scope whatsoever for the A.O. to travel beyond those directions or restrictions
[Kochhar (SP) v. ITO 145 ITR 255 (All.).
Recovery of Tax
21. When assessee is deemed to be in default
The amounts specified in the demand notice as payable should be paid within 30 days from the date of receipt of notice. However, if the A.O. is of the opinion that it is detrimental to the revenue he may require the assessee to pay the demand in a shorter period as may be specified in the notice. The interest @ 1% per month shall be payable for the delay in making payment of demand.
21.1 The attention is drawn to the provisions of Section 220(1A) read with 2nd proviso to Section 220(2) which is inserted with effect from 1-10-2014 by Finance (No. 2) Act, 2014. It is provided that interest as per the original demand notice payable is reduced as a result of appellate authority and increased as a result of higher appellate authority, the assessee shall be liable to pay interest under Section 220(2) from the date of original demand notice till the amount is paid. It appears that Section 220(1A) read with 2nd proviso to Section 220(2) are inserted in consonance with the decision of the Delhi High Court in the case of
Girnar Investment Ltd. v. CIT 340 ITR 529 which has distinguished Supreme Court decision in the case of
Vikrant Tyres Ltd. v. ITO 247 ITR 821 (SC) on facts. To illustrate the addition of Rs. 1.00 crore is made. The assessee has made stay petition which is granted. The assessee has not paid any demand towards outstanding demand. The addition is deleted by CIT(A) and therefore there is no demand. Subsequently, Revenue prefers appeal to the ITAT which is dismissed. The appeal to the High Court by Revenue is also dismissed. The appeal to the SC is finally allowed in favour of revenue and against the assessee. The assessee is required to pay the demand plus interest on demand of Rs. 1.00 crore from the date of original demand notice i.e. if the SC decides say after 20 years than the assessee will be required to pay the interest for 20 years @ 1% per month though there was no demand after giving effect to the CIT(A) order till Supreme Court decides. If the ITAT sets-aside the order to recompute the disallowance then on the reduced disallowance the interest is payable from the date of original demand
[ACIT v. HCL Corporation Ltd. 68 SOT 272 (Del) URO]. The levy of interest under Section 220(2) is appealable under Section 246A
[ITO v. Rajeswari Hospitals 34 ITR(T) 371 (Cochin)].
21.2 The interest may be reduced or waived under Section 220(2A) if the Commissioner is satisfied that the genuine hardship to the assessee is caused and that the non-payment of interest is due to the circumstances beyond the control of the assessee and that the assessee has co-operated in any inquiry during assessment proceedings and recovery proceedings. The discretion for waiver or reduction of interest has to be exercised judiciously. How the discretion is to be exercised judiciously
[Supreme Court in the case of B.M. Malani v. CIT 306 ITR 196]. It is observed as under:
“The provision for levy of interest for non-payment of tax within time, although statutory in nature, has to be interpreted by the principle of purposive construction. That principle should also be applied for the purpose of determining whether any hardship had been caused or not.
The ingredients of genuine hardship must be determined by the dictionary meaning thereof and the legal conspectus attending thereto. For that purpose another well-known principle, namely, that a person cannot take advantage of his own wrong, may also have to be borne in mind. Another principle that has to be borne in mind is that a statutory authority must act within the four corners of the statute.
A genuine hardship would, inter alia, mean a genuine difficulty. That per se would not lead to the conclusion that a person having large assets would never be in difficulty as he can sell those assets and pay the amount of interest levied.
The Commissioner has discretion not to accede to the request of the assessee but that discretion has to be judiciously exercised. He has to arrive at the satisfaction that the three conditions laid down in Section 220(2A) of the I.T. Act, 1961 have been satisfied. They are (i) payment of the amount has caused or would cause genuine hardship to the assessee (ii) default in payment of the amount on which interest has been paid or was payable was due to circumstances beyond the control of the assessee and (iii) the assessee has co-operated in any inquiry relating to the assessment or any proceedings for the recovery of the amount due from him.”
21.3 The Finance Act, 2012 has inserted sub-clause (2B) to Section 220 with effect from 1-7-2012 whereby it is provided that if the interest is charged for failure to deduct or to make the payment of tax deducted as per intimation under Section 200A(1) then the interest under Section 220(2) shall not be charged. This provision is with a view to avoid charging of interest twice. In other words, for failure to deduct tax or for making payment of the tax deducted the interest @ 1% per month shall be charged either under Section 220(2) or under Section 201(1A) but not under both the sections.
21.4 The Finance Act, 2015 has inserted sub-clause (2C) to Section 220 with effect from 1-6-2015 whereby it is provided that if the interest is charged for failure to collect the tax or to make the payment of tax collected as per intimation under Section 206(CB) then the interest under Section 220(2) shall not be charged. This provision is with a view to avoid charging of interest twice. In other words, for failure to collect tax or for making payment of the tax collected the interest @ 1% per month shall be charged either under Section 220(2) or under Section 206C(7) but not under both the sections.
21.5 In the absence of demand notice which is a basic requirement for invoking the provision of Section 220 of the Act, the assessee could not have been treated to be an assessee in default and therefore the subsequent proceedings under Sections 220 to 226 of the Act are without jurisdiction
[Saraswati Moulding Works v. CIT 347 ITR 161 (Guj.)].
21.6 If the assessee fails to make the payment of tax demanded within 30 days or in the instalments, if granted under Section 220(3) then the assessee shall be deemed to be in default.
22. Stay of Recovery [Section 220(6)]
If the assessee has preferred an appeal and if the AO grants the time on such terms and conditions as may be specified the assessee shall not be deemed to be in default Section 220(6).
22.1 The assessee can apply to A.O. under Section 220(6) for keeping the demand in abeyance till the disposal of appeal. If the A.O. reject the application than the application may be made to the higher authorities. The A.O. normally rejects the application on the ground that mere filing of appeal is no ground for stay of demand as per CBDT Instruction No. 1914 dated 2-12-1993. It is a rule that the instructions are to be read as a whole and not in part. It is stated in Para Nos. B & C of the said instruction that the higher authorities may grant stay following the CBDT Instruction No. 1914 dated 2-12-1993 on the ground that the assessee’s case is covered by the appellate order in his own case or is covered by the SC or High Court judgments or it is highpitched or due to severe financial crises etc. The CIT(A) has also power to grant the stay.
22.2 The Rajasthan High Court in the case of
Maheshwari Agro Industries v. Union of India 346 ITR 375 (Raj) has discussed all the Instructions and Circulars issued by the CBDT from time to time. The Rajasthan High Court has taken a view that the CBDT Instruction No. 96 dated 21-8-1969 still holds good following the Delhi High Court judgment in the case of
Valvoline Cummins Ltd. v. DCIT 307 ITR 103 and held that CIT(A) is empowered to grant the stay. The Delhi High Court in the case of
Soul v. DCIT 323 ITR 305 and Rajasthan High Court in the case of
Urban Improvement Trust v. ACIT 209 Taxman 22 (Raj.) (Mag) also held that Instruction No. 96 dated 21-08-1969 still holds good to the effect that if the income assessed is twice than the return, it is unreasonably highpitched.
22.3 The authorities are not in habit of passing speaking order. The Gujarat High Court in the case of
Hitech Outsourcing Services v. ITO 372 ITR 582 held as under:
“…………………………………In our view, when the matter is to be considered for grant of stay against any demand made of tax, it may be required for the authority to prima facie consider the merits and balance of convenience and also irreparable injury. None has been examined nor considered. In any event, as the appeal is pending, we leave it at that. Suffice it to observe that when the application is to be considered and decided, it would be required for the concerned authority to record the reasons and then to reach to the ultimate conclusion as to whether the stay should be granted or not and if yes on what condition. In absence of any reasons, the order cannot be sustained ……………………………… In any event, until fresh order is passed below the stay application and/or final order in appeal, whichever is earlier, the ad interim relief granted by this Court for not to take coercive action shall remain in operation.”
22.4 If the assessee has preferred an appeal to the ITAT, he may apply to ITAT for stay of demand. The department is not supposed to recover till the disposal of stay petition by the Tribunal. This is so held by Gujarat High Court in the case of
Gujarat Maritime Board v. ACIT 220 CTR 390. The Bombay High Court in case of
DIT(E) v. ITAT 361 ITR 469 by following its earlier decision in the case of
UTI Mutual Fund v. ITO 345 ITR 71 (Bom.) held that ITAT was within its power to order the refund of the amount withdrawn forcibly from the bank account before the expiry of time limit for filing the appeal before the Tribunal and before the disposal of stay petition by ITAT. The Bombay ITAT in the case of Maharashtra Housing and Area Development Authority v. ADIT 66 SOT 66 by following its earlier decision in the case of
Maharashtra Electricity Co. Ltd. v. CIT 81 ITD 299 (Bom.) held that the Assessing Officer contradicted the basic principles laid down in the decisions viz. (i) that the Assessing Officer had taken the coercive action before the expiry of time of filing the appeal against the order of the Commissioner (Appeals); (ii) the action was taken even prior to the disposal of the stay application of the assessee; and (iii) no prior notice was given to the assessee before taking the recovery action under section 226(3). Thus, in view of the above judicial principles the Assessing Officer has misused his powers and the action of recovery from the bank account of the assessee is a gross violation of the directions as well as the basic rule of law and principle of natural justice. Accordingly, the revenue is directed to refund the entire amount to the assessee within 10 days from the date of receipt of order.
22.5 Section 254(2A) is empowered to grant the stay up to 180 days initially and grant further stay up to 365 days only and that the Tribunal shall dispose off the appeal within the time specified in the order granting the stay. The ITAT is also empowered even to grant the stay beyond 365 days for valid reasons. This is so held by Gujarat High Court in the case of
CIT v. Vodafone Essar Gujarat Ltd. Special Civil Appli. No. 5014 of 2015 pronounced on 27th June 2015. The reliance was placed by the Gujarat High Court on SC decision in the case of Commissioner of Customs and Central Exercise,
Ahmedabad v. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC) and
Commissioner v. Small Industries Development Bank of India Tax Appeal No.341 of 2014 (Guj.)
23. Penalty for failure to make the payment of tax as per demand notice
If the assessee defaults in making the tax payable within the time allowed then over and above interest under Section 220(2) he is liable for penalty of any amount not exceeding the total demand. The penalty under Section 221 is not automatic but discretionary. The discretion has to be exercised judiciously and not arbitrarily. The A.O. may not levy the penalty even if there is default in making the payment of the outstanding demand if it is shown to the A.O. that the default is due to genuine difficulty and hardship. The A.O. may also issue the certificate to TRO who is empowered to recover as per Rules of the 2nd Schedule. The recovery may be enforced by attachment and sale of movable and immovable property or by appointing Receiver.
24. Garnishee Order – Section 226(3)
The A.O. is empowered to recover the outstanding demand from the assessee by issue of notice under Section 226(3) i.e. garnishee order. It is obvious that the object of Section 226(3) is to follow up the money due to the Income-tax department in the hands of either the assessee or any person who is holding money on behalf of the assessee. The section, however, does not empower the A.O. to follow the money in hands of the bona fide transferee from the assessee even before the dues have accrued. Section 226(3) is applicable only if the amount is payable and not otherwise. The service of notice before attachment is mandatory at the last known address by the A.O. The property which is exempt from attachment cannot be attached. For example, balance of PPF Account cannot be attached since it is exempt from attachment
[Dineshchandra Bhailalbhai Gandhi v. TRO 362 ITR 380 (Guj.)].
25.1 While complying the notices under Sections 142(1) and 143(2) if above referred principles are kept in mind it will help in the assessment proceedings and also in the appellate proceedings.
[Source: Article published in Souvenir of National Tax Conference held at Ahmedabad on 11th and 12th July, 2015.]
CA Ashvin C. Shah