2004 (1) TMI 62 - HC - Income Tax

Writ petition has been filed for a writ of certiorari to quash the impugned notice under section 226(3) - petitioner has also prayed for a mandamus directing respondent No. 1 to refund the amount recovered under the notice under section 226(3) with interest. The petitioner has also prayed for a direction to respondent No. 1 to refund Rs. 75,000 deposited by the petitioner with interest and has also prayed that respondent No.3 be directed to decide the appeal of the petitioner on merits expeditiously - Merely because the Tribunal has remanded the matter to the Commissioner of Income-tax (Appeals) it does not follow that the assessment order dated March 15, 2000, has revived. Consequently, the impugned notice under section 226(3) of the Income-tax Act was wholly illegal as there was no valid demand against the petitioner Held that assessee is entitled to refund the amount recovered under the notice under section 226(3) with interest

Issues Involved:

1. Legality of the notice under section 226(3) of the Income-tax Act, 1961.
2. Refund of the amount recovered under the notice with interest.
3. Direction to refund Rs. 75,000 deposited by the petitioner with interest.
4. Expeditious decision on the appeal pending before the Commissioner of Income-tax (Appeals).

Issue-wise Detailed Analysis:

1. Legality of the notice under section 226(3) of the Income-tax Act, 1961:

The petitioner, a registered partnership firm, challenged the notice issued under section 226(3) for the recovery of tax assessed by the Assessing Officer for the assessment year 1997-98. The petitioner's income was initially assessed at Rs. 7,40,750, with major additions based on discrepancies in third-party accounts which were not verified due to a shortage of time. The Tribunal later set aside the assessment order and remanded the case, directing that copies of third-party accounts be provided to the petitioner. The High Court observed that under the doctrine of merger, the initial assessment order ceased to exist after the Tribunal's order. Consequently, the notice under section 226(3) was deemed illegal as it was based on a non-existent assessment order.

2. Refund of the amount recovered under the notice with interest:

The High Court ruled that any amount recovered from the petitioner under the invalid notice must be refunded with interest at 12% per annum from the date of realization to the date of refund. The court emphasized the principle of restitution, which mandates restoring the petitioner to the position they would have been in if the illegal notice had not been issued.

3. Direction to refund Rs. 75,000 deposited by the petitioner with interest:

The petitioner had deposited Rs. 75,000 with the Income-tax Department during the pendency of the appeal. The High Court directed that this amount, along with any other sums realized under the invalid notice, be refunded forthwith with interest, reinforcing the principle of restitution.

4. Expeditious decision on the appeal pending before the Commissioner of Income-tax (Appeals):

The High Court expressed hope that the appeal pending before the Commissioner of Income-tax (Appeals) would be decided expeditiously, in line with the Tribunal's directions. The court criticized the practice of hurriedly passing assessment orders near the limitation period, leading to undue harassment of taxpayers due to unverified additions.

Conclusion:

The High Court quashed the notice under section 226(3) and ordered the refund of any amounts recovered under it with interest. The court underscored the need for the Income-tax Department to avoid rushed assessments and ensure accurate and fair tax determinations. The petition was allowed, with no order as to costs, and the court urged for a rational scheme to be devised for tax assessments to prevent harassment of taxpayers.

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