1. Absence of service of notice under section 148(1)-reopening is bad-in-law

CIT vs. Hotline International (P) Ltd. [2007] 211 CTR 207 (Del).

The assessee, before the Hon’ble Court, had filed returns declaring the loss. The same was accepted by passing an order under section 143(3). The assessment sought to be reopened by issuing the notice under section 148(1). The notice server of the Department tried to serve the notice at the factory on a public holiday due to ‘Holi’ festival. The factory was closed, thus, the notice was served by affixture. The Assessment was completed by determining the total income at Rs. 38,43,937/-. The Assessee preferred an appeal against the Assessment Order. The learned CIT(A) confirmed the Assessing Officer’s action. Before the Appellate Tribunal, the assessee, challenged the validity of the reassessment proceedings by raising additional grounds. The assessee contended that the notice under section 148(1) was never served on it.

The Appellate Tribunal allowed the appeal filed by the assessee on the ground that no proper service of notice issued under section 148 of the Act was effected by the AO on the assessee and therefore, the reassessment proceedings are bad in law and accordingly quashed the order passed by the AO under section 147 of the Act.

The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that there was no valid service of notice under section 148. When the notice is not served on the assessee or his agent nor refused by them, no effort was made by serving officer to locate the assessee before affixation and notice sent by registered post was not accompanied by Acknowledgment due, hence reassessment is bad in law.

2. Deposit – retention of sale proceeds by Kachcha Arhatiya is not deposit for the purpose of penalty of personality under sections 271d & 271e

CIT vs. Hissaria Bros. [2007] 211CTR 156(Raj.)

The assessee before the Hon’ble Rajasthan High Court was a firm engaged in the business as Kachcha Arhatiya. It was acting as agent for its constituents, who are agriculturists who used to bring their crops to the assessee for sale and the assessee in this relationship used to sell their crops and keep/return the sale proceeds of crops so as to be adjusted against their withdrawal from time to time and buying the goods. The AO found use of the money received by the assessee through sale of crops of his farmers constituents to be in the nature of deposits and invoked the provisions of s. 269SS as applicable to the amount received by a person as deposit from the depositors and the amount utilized by the farmers as withdrawal from the deposits by way of repayment inviting operation of s. 269T. Finding that such transactions of deposit and repayment were not through the bank, penalty proceedings under ss. 271D and 271E, respectively concerning the deemed deposits and deemed repayments of loan were initiated during the assessment proceedings for the three assessment years stated hereinabove and as a result of initiating penalty proceedings under ss. 271D and 271E, the AO imposed penalties in each case. Being aggrieved by the order of the Assessing Officer the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The first appellate authority allowed the appeal filed by the assessee.

Being aggrieved by the above order of the Commissioner of Income Tax (Appeals), the revenue filed an appeal before the Income Tax Appellate Tribunal. However, the Hon’ble Tribunal has dismissed the appeal filed by the department and held the issue in favour of the assessee.

Being aggrieved by the above order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Madras High Court under section 260A of the Act. The Hon’ble High Court held that the retention of sale proceeds by Kachcha Arhatiya for remitting it to the constituents could not be considered as a deposit and subsequent remittance or adjustment of such amount by discharging obligation of the constituents or remittance of such amount to the constituents did not amount to repayment of deposits or loans and, therefore, penalties under sections 271D and 271E cannot be levied.

3. Deduction of Tax at Source – failure by employer to issue tds certificate to employee – No cessation of liability of employer Yashpal Sahni vs. Rekha Hajarnavis, ACIT and Others [2007] 293 ITR 539 (Bom.)

The assessee before the Hon’ble Bombay High Court was an individual. On March 28, 1996 he was appointed the assessee as “Managing Director-Information technology” on a basic salary of Rs, 1,20,000 plus other permissible benefits. During the period from April to December 1996, the assessee was paid salary after deducting TDS totalling to Rs. 6,66,000. Thereafter, disputes arose between the assessee and the employer parties and ultimately respondent terminated the services of the assessee in March, 1997.

The assessee had filed return of income claiming credit of TDS amounting to Rs. 6,60,000/- on September 30, 1997. The Assessing Officer processed the return u/s. 143(1)(a) denying the credit of TDS. The assessee made an application u/s. 154 of the Act seeking rectification of intimation issued u/s. 143(1)(a) of the Act on the ground that the credit of the TDS cannot be denied to the assessee. It was point out that in any event the TDS amount with interest cannot be recovered from the assessee in view of the bar contained in section 205 of the Act. However, no order was passed on the said application. The assessee addressed several letters to various authorities including a letter addressed to the Income-tax Officer TDS Circle, Hyderabad calling upon them to initiate necessary action against the employer-respondent so as to recover the TDS amount collected and to compel the respondent to issue the TDS certificate in favour of the assessee. Instead of recovering the TDS amount with interest from the respondent the Income-tax authorities in furtherance of the intimation issued u/s. 143(1)(a) initiated the penalty proceedings against the assessee under section 221(1) of the Act and by attaching the bank account of the assessee recovered a sum of Rs. 17,89,587/- from the assessee.

The matter was carried to the High Court. Hon’ble High Court has allowed the petition filed by the assessee by observing that the assessee had furnished monthly pay slips and bank statements to show that from his salary, tax was deducted at source by respondent-employer. The authenticity of the said pay slips and bank statements had been disputed by the Revenue. Thus, the assessee had established that from his salary income, tax had been deducted at source by respondent and therefore the Revenue had recover the said amount with interest and penalty from respondent alone and the Revenue could not seek to recover the said amount from the assessee in view of the specific bar contained in section 205. The fact that the assessee was not entitled to credit of the tax deducted at source for the non-issuance of the certificate by the respondent could not be a ground to recover the amount of tax deducted at source from the assessee.

4. Powers of Income Tax authorities to retain documents – retention for more than eighteen months – Permission granted without application of mind – Retention not valid

Raj and Raj Investments vs. Income-tax Officer and others [2007] 293 ITR 57 (Karn.)

The assessee before the Hon’ble Karnataka High Court was a partnership firm. The premises of the assessee firm were surveyed on 22.6.2006. The object of conducting the survey was to gather information. The survey lasted for not less than 12 hours in the premises. During the course of which the Income Tax Authorities claimed that they came across voluminous documents, books of account, and other incriminating material, which in their opinion was required to be processed further and as such impounded all the documents. The Income Tax Department having not returned the impounded documents even after several requests and more than five months having elapsed after the impounding, the assessee has approached the Hon’ble High Court by filing a writ petition under Article 226 of the Constitution of India.

Hon’ble High Court allowed the writ petition of the assessee and held that the Chief Commissioner had accorded permission for retention of documents without examining the need for such retention. It was a fact that the impounded documents lay with the Department for over six months. There was no justification for the Department to plead that there was non-co-operation on the part of the assessee for investigation etc. When the Department had impounded all the documents, there was nothing that could be done by the assessee. The submission that the assessee had stated before the Joint Commissioner that he would file the return of income offering income of Rs. 10 lakhs to be taxed, and he had not complied with it so far was relevant. If at all, the authorities were expecting or hoping that the retention of the documents would pressurise the assessee to abide by what he had agreed. The exercise of power under the Act could only be for bona fide purpose and not for whimsical or arbitrary action. The defence put up by the Department even in terms of the statement of objections being not tenable in law and also indicating lack of bona fides, the Department should pay costs quantified at a sum of Rs. 5,000/-. The documents had to be returned.

5. Block Assessment – Limitation to pass assessment order – Search to extend the time limit not justified

CIT vs. Sarab Consulate Marine Products (P) Ltd. [2007] 211 CTR 54 (Del).

The assessee before the Hon’ble Delhi High Court was carrying on the business of fishing in the high seas. A search operation in respect of the assessee was conducted under section 132 of the Act on 6th November, 1996. During the search operation, some documents were seized and some fishing vessels/trawlers belonging to the assessee were searched and a restraint order under section 132(3) was passed in respect of those vessels. The restraint order under section 132(3) was extended on 30th March, 1997 up to 30th September, 1997 when no further orders were passed. On 16th December, 1997 a notice was issued to the assessee under section 158BC to file a return for the block period 1-4-1986 to 6-11-1996. The return was filed by the assessee on 15th September, 1998 and an assessment order was made on 30th September, 1998. In the meanwhile, a further search was conducted on the fishing vessels/trawlers on 14th September, 1998. There was no seizure but a Panchnama was drawn up. The assessment was completed by levying tax on the assessee. Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The first appellate authority had affirmed the view of the learned. Assessing Officer. Being aggrieved by the above order, assessee preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal had allowed the appeal of the assessee.

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Delhi High Court under Section 260A of the Act. Hon’ble High Court has upheld the order of the Appellate Tribunal with the observation that search and seizure operations stood concluded on 6th November, 1996 when some documents were seized and Panchnama was drawn and not on 14th September, 1998 when another Panchnama was drawn without any seizure but only a restraint order under section 132(3) which also was not valid and therefore limitation started from 6th November, 1996 and assessment order passed on 30th September, 1998 was barred by limitation.

6. Merely because the claim for deduction is refused and disallowed the same, it cannot be said that the assessee had concealed its income – Penalty under section 271(1)(c) cannot be levied

Balaji Vegetable Products (P) Ltd. vs. CIT (2007) 211 CTR 38 (Kar)

The assessee before the Karnataka High Court was a private limited company. The assessee had filed the return of income and claimed deductions on account of lease rent paid to its licensor among other deductions. However, the learned. Assessing Officer has passed the Assessment Order by disallowing the lease rent paid on the ground that same is not taxable. On appeal the Commissioner of Income Tax (Appeals) confirmed action taken by the Assessing Officer and the same has become final.

The I.T.O. while completing the assessment has also issued notice under section 271(1)(c) of the Act on the ground that the assessee has filed a false return of income. The assessee has filed its objection contending that they have no mala fide motive in avoiding the payment of legitimate tax dues and therefore requested to drop the penalty proceedings. However the I.T.O. rejected the explanations of the assessee and passed the penalty order under section 271(1)(c). On appeal the Commissioner of Income Tax (Appeals) confirmed the action taken by the I.T.O.

Being aggrieved by the order of the Commissioner of Income Tax (Appeals) the assessee preferred an appeal to the Income Tax Appellate Tribunal. The Appellate Tribunal dismissed the appeal filed by the assessee.

The assessee being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Karnataka High Court under section 260A of the Act. The Hon’ble High Court allowed the appeal filed by the assessee by observing that the revenue having not disputed the payment made by the assessee to the licensor but refused to accept the claim for deduction thereof and disallowed the same, it cannot be said that the assessee had concealed its income and, thus, penalty under section 271(1)(c) cannot be levied.