2014 (6) TMI 1042 - HC - Income Tax

Seeking stay of recovery proceedings - garnishee proceedings initiated under s. 226(3) - recovery, which had been lying dormant from June, 2013 was revived just prior to the close of the financial year and recovery effected of the entire amounts demanded under the assessment order - intention of the 3rd respondent was to attach the amounts remaining in the account maintained by the petitioner with the additional 4th respondent-bank; without notice to the assessee - HELD THAT - Act of withdrawal of the amount after having validly attached the amounts, without any real presumable cause for suspecting delay or impediment in such recovery, was a clear abuse, especially since there was no notice to the assessee, which is the mandate of due process of law. The Department acted without deliberation or due cause and the unavoidable consequence is a direction for the refund of amounts withdrawn under s. 226(3), after deducting ₹ 4 crores, as stipulated in the conditional order passed by this Court on 27th March, 2014. The refund shall be made within a period of two weeks with interest from the date of withdrawal, to the date of repayment, at the rate applicable in the account of the petitioner; if the account is interest bearing. The refund shall be made without looking at the result of the appeal, which is said to have been heard on 20th March, 2014, since the same is only a first appeal and substantial amounts are already recovered and allowed to be retained with the Revenue as per the interim order of this Court. This Court does not intend to go into the conduct of the individual officer, since the learned standing counsel points out that she is new to office and had only acted in anxiety to protect Revenue. This Court cannot also discount the pressure brought upon subordinate officers; when, as referred to in UTI Mutual Fund 2012 (3) TMI 333 - BOMBAY HIGH COURT the Chairman, CBDT, himself, has addressed the Chief CIT, Director Generals, etc., of the IT Department, requiring speedy recovery and consequent weightage in the normal incidence of service. This Court has to necessarily practise the judicial restrain, it preached at the beginning. Suffice it to observe that the zeal to serve the nation shall not cross the bounds of law and result in over-zealous actions infringing upon the rights of citizens, for whom the State exists.

Summary

Issues Involved:
1. High-handed recovery action by the Income Tax Department.
2. Compliance with conditional stay orders.
3. Legality of garnishee proceedings under Section 226(3) of the Income Tax Act, 1961.
4. Requirement of notice to the assessee under Section 226(3)(iii).
5. Judicial principles and guidelines for tax recovery.

Analysis:

1. High-handed recovery action by the Income Tax Department:
The court criticized the IT Department for its high-handed recovery action, describing it as "a mountain made out of a molehill." The petitioner (assessee) was subjected to recovery without notice and without judicial restraint.

2. Compliance with conditional stay orders:
The petitioner was served with an assessment order and filed an appeal. The first appellate authority granted a conditional stay, requiring monthly payments of Rs. 50 lakhs, which the petitioner failed to comply with. This non-compliance led to the garnishee proceedings.

3. Legality of garnishee proceedings under Section 226(3) of the Income Tax Act, 1961:
The court examined the garnishee proceedings initiated under Section 226(3) of the IT Act. The AO issued a garnishee order to the petitioner's bank to recover Rs. 22,48,38,500. The petitioner moved the court upon learning of the garnishee order, leading to an interim order staying further proceedings.

4. Requirement of notice to the assessee under Section 226(3)(iii):
The court emphasized the mandatory requirement under Section 226(3)(iii) to notify the assessee of garnishee proceedings. The AO failed to enter the notice in the dispatch register or send it to the petitioner, violating the statutory mandate.

5. Judicial principles and guidelines for tax recovery:
The court referred to previous judgments, including UTI Mutual Fund v. ITO and Director of IT (Exemption) v. ITAT, which highlighted the need for reasonable opportunity and fairness in recovery actions. The court reiterated that recovery should not be hasty and should follow due process, balancing the interests of the Revenue and the assessee.

Conclusion:
The court found the IT Department's actions to be arbitrary and in violation of statutory provisions. It directed the refund of amounts withdrawn under Section 226(3), deducting Rs. 4 crores as per the interim order, with interest from the date of withdrawal to the date of repayment. The court emphasized that judicial and quasi-judicial actions must be reasonable and fair, and recovery officers should not act solely as tax gatherers but as authorities mitigating hardship to the assessee. The writ petition was disposed of with these directions, and no costs were ordered.