2017 (4) TMI 664 - HC - Income Tax

Penalty under Section 271(1)(c) - violation of proviso to Section 220(1) - precipitate discretion to shorten the normal period of demand was made - Held that - In the present case it appears that the AO was authorized to file an appeal to the Income Tax Appellate Tribunal (ITAT) and did so against the findings of the CIT(A). Given the fact that the additions were made on account of a highly contentious and an entirely debatable issue, and the fact that the assessee had succeeded in past years and at least in one year the penalty imposed was deleted, the exercise of discretion in this case under proviso to Section 220(1), in this Court s opinion was unwarranted. Furthermore, if one keeps the logic in Sony India Ltd. (2005 (5) TMI 39 - DELHI High Court) in mind, the reasons to believe in exercise of discretion should be actuated by some external fact such as the assessee s imminent threat of decamping from the jurisdiction or liquidating its assets. In fact the Division Bench in Sony India Ltd. (supra) even drew an analogy that the provisions of the Code of Civil Procedure, 1908 relating to attachment before judgment and like circumstances, impel a Court to exercise restraint before passing an attachment order. In the present case no such factor appears on the record. The Revenue seems to have been entirely motivated in ensuring that the refunds due to the petitioner / assessee are somehow not given effect to and that the demand is made so as to ensure that all other periods, available to the petitioner, are shortened. This is a plain case of abuse of power under Section 220(1) which no Court can countenance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the impugned notice dated 15.03.2017 under proviso to Section 220(1) of the Income Tax Act, 1961.
2. Compliance with the legal standards for curtailing the period for payment of tax demand.
3. Examination of the "reasons to believe" provided by the Assessing Officer (AO).

Detailed Analysis:

1. Validity of the Impugned Notice:
The petitioner challenged the notice dated 15.03.2017, which curtailed the period for complying with the tax demand from 30 days to 7 days, asserting that it violated the proviso to Section 220(1) of the Income Tax Act, 1961. The petitioner argued that the notice lacked any valid reasons for the precipitate discretion to shorten the normal period of demand, relying on the judgment in Sony India Ltd. Vs. CIT 276 ITR 278 (Del.).

2. Compliance with Legal Standards:
The petitioner contended that the reasons provided by the AO did not meet the two tests established in Sony India Ltd.: (a) existence of valid reasons for forming a belief, and (b) the belief must have a direct nexus to the conclusion that granting the full period for payment would be detrimental to the Revenue. The court in Sony India Ltd. emphasized that the proviso to Section 220(1) should be invoked only for good reasons and with caution, and that mere apprehensions without material support are not permissible. The court highlighted that the AO must act fairly and judiciously, with definite cause or reason capable of being understood by a person of common prudence.

3. Examination of "Reasons to Believe":
The reasons provided by the AO for curtailing the period were examined. The AO cited the levy of a penalty of ?342.7 crores for AY 2011-12 and the potential refunds for previous years as reasons for the reduced period. The court found that these reasons did not align with the standards set in Sony India Ltd., which required the reasons to be cogent, proper, and based on the record. The court noted that the AO's reasons appeared to be motivated by a desire to prevent the petitioner from receiving refunds rather than any imminent threat to the Revenue, such as the petitioner decamping from the jurisdiction or liquidating its assets.

The court referred to the CIT(A)'s findings, which had previously deleted penalties on similar grounds, indicating that the issue was highly contentious and debatable. The court concluded that the exercise of discretion under Section 220(1) was unwarranted and amounted to an abuse of power, as the reasons provided did not justify the curtailment of the period for payment.

Conclusion:
The court quashed the impugned notice, allowing the writ petition, and emphasized that the Revenue's actions were not justified under the legal framework provided by Section 220(1) and the standards established in Sony India Ltd. The court reiterated the need for the AO to act judiciously and fairly, with valid and cogent reasons for any curtailment of the period for payment of tax demand.