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2017 (3) TMI 1241 - HC - Income TaxPenalty proceedings u/s 271(1)(c) - protective assessment - Reopening of assessment - amounts reflected in the FDRs and the interest accrued thereon on a protective basis to the income of the assessee - adjustment of refund claim with the dues - Held that - As under Section 91 of the Scheme a designated authority is empowered to grant waiver from imposition of penalty and interest in respect of income which is subject matter of the declaration. Since penalty and interest was levied in the instant qua tax which was in arrears as on 31.3.1998 the declaration issued by the designated authority according to the Board s circular would cover the penalty and interest determined at a later point in time. The circular to my mind was binding on the Revenue. Especially in the circumstance that it seeks to explain as to how the Scheme is to operate - UCO Bank V. CIT 1999 (5) TMI 3 - SUPREME Court .Having regard to the aforesaid it cannot be argued by the Revenue that since the penalty order was issued on 25.06.1998 i.e. after 31.3.1998 it would not covered by the certificate issued to the petitioner under the Scheme. The other submission advanced on behalf of the petitioner which in my view also has merit is that the respondents/Revenue on 25.06.1998 could not have issued an order of protective penalty as order dated 10.03.1997 itself was an order that added the amounts reflected in the FDR (along with interest accrued therein) in the hands of the petitioner on a protective basis. As rightly argued by the learned counsel for the petitioner while there can be a protective order qua assessment there cannot be a protective order in respect of penalty. See Metal Stores Versus Commissioner Of Income-Tax. See Metal Stores Versus Commissioner Of Income-Tax 1990 (8) TMI 131 - GAUHATI High Court To my mind a careful reading of the provisions of Section 245 of the 1961 Act would show that the refund could perhaps have been adjusted against any amount remaining payable under the Act provided intimation in writing is given to the concerned person (in this case the petitioner) of the action proposed to be taken under the said provision. Therefore quite clearly in my opinion what is envisaged is that in the first instance a proposal for adjustment by way of a show cause notice will have to be served on the person to whom refund is due. The proposal to be meaningful would have to set out the details and the reasons as to why adjustments is required to be carried out by the Revenue against the refund due. Only after issuance of such a proposal/show cause notice and upon consideration of reply if any received - could a decision be taken as to whether or not an adjustment of refund is necessitated. Anything short of such minimum opportunity would to my mind result in a complete breach of principles of natural justice. Writ Petition has to be allowed in favour of assessee. Consequently the notice of demand and penalty order dated 25.06.1998 and the consequential order of interest dated 22.10.2012 are quashed.
Issues Involved:
1. Legality of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961. 2. Adjustment of refund against penalty and interest without providing an opportunity to the petitioner. 3. Applicability of the Karvivad Samadhan Scheme for waiver of penalty and interest. 4. Compliance with principles of natural justice in the adjustment of refund. Detailed Analysis: 1. Legality of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961: - The petitioner was assessed to tax on a protective basis due to the discovery of Fixed Deposit Receipts (FDRs) during a search operation. - Penalty of Rs. 16,51,046 was levied on 25.06.1998, which the petitioner claimed was not received. - The court noted that while there can be a protective order for assessment, there cannot be a protective order for penalty. This principle was supported by precedents from various High Courts, such as Metal Stores v. Commissioner of Income Tax and Commissioner of Income Tax v. Super Steel (Sales) Co. 2. Adjustment of refund against penalty and interest without providing an opportunity to the petitioner: - The petitioner was granted a refund of Rs. 50,78,928 on 22.10.2012, which was adjusted against the penalty and interest by the respondents without giving the petitioner an opportunity to present his case. - The court emphasized that any adjustment against a refund must be preceded by a proposal or show cause notice, allowing the petitioner to respond, in adherence to principles of natural justice. - The communication/order dated 21.12.2012, which adjusted the refund, was found to be in breach of these principles and thus could not be sustained. 3. Applicability of the Karvivad Samadhan Scheme for waiver of penalty and interest: - The petitioner availed of the benefits of the Scheme by filing a declaration and paying the requisite tax, which led to the issuance of a certificate granting immunity from penalty and prosecution. - The respondents argued that since the penalty was imposed after 31.03.1998, it did not fall within the Scheme's immunity provisions. - The court referred to the Central Board of Direct Taxes (CBDT) Circular, which clarified that penalties related to tax arrears outstanding as of 31.03.1998 would be covered by the Scheme. - The court concluded that the penalty and interest levied were indeed covered by the Scheme, and the petitioner was entitled to immunity from such penalties. 4. Compliance with principles of natural justice in the adjustment of refund: - The court highlighted that the adjustment of the refund without prior notice to the petitioner was a violation of natural justice. - Section 245 of the Income Tax Act requires that any proposed adjustment of a refund must be communicated to the concerned person, allowing them to respond. - The court found that the respondents failed to follow this procedure, rendering the adjustment order dated 21.12.2012 invalid. Conclusion: - The writ petition was allowed, and the penalty order dated 25.06.1998, along with the consequential interest order dated 22.10.2012, was quashed. - The adjustment order dated 21.12.2012 was also rendered inefficacious in law. - The petitioner was entitled to the refund as per the order dated 22.10.2012. - The court disposed of the writ petition, leaving the parties to bear their own costs.
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