2019 (9) TMI 615 - HC - Income Tax

Scaling down of the demand of the Income Tax Department - The widow of the original respondent no.1 Aarti Abhay Narottam had also expired. His sole surviving legal heir is respondent no.1(a) who has since been brought on record. The Custodian filed Report no. 03 dated 7th March, 2007 seeking directions from this Court for distribution of asset - Attachment of properties - HELD THAT - Erroneous and questionable standards were adopted. On one hand the Special Court appointed Auditors report has been relied upon for some facts yet the conclusion of the auditor that the amounts reflected in the accounts pertain to liability has not been accepted /dealt with. The tax department was unable to accept the conclusion of the auditors, that the amount in the account of Abhay Narottam were only liabilities. There is no explanation forthcoming from the department nor has it has been urged by the revenue as to why the conclusion of the auditor is incorrect. The fact remains that the bank had advanced monies to the notified party and that money had not been repaid. These monies were therefore outstanding and repayable by the notified party. Even assuming that the assessment is not on the basis of best judgment, there is no explanation why the department has chosen to reject the conclusions drawn by the auditors classifying the amounts as a liability. Indeed nothing prevented Assessing Officer or the Appellate authority from taking its analysis of the auditors report to its logical conclusion. Thus to my mind there can be no doubt that what we are faced with is an assessment on best judgment basis. The first of these criteria are therefore clearly satisfied. Facts of the case justifies intervention to scale down the demand since the decision of the tax authorities is clearly on a discretionary assessment. In the case at hand we are concerned with arriving at a suitable formula for scaling down the demand of the income tax department based on best judgment assessment and as against decrees passed by this Court and in my view it would not be appropriate that the extent of scaling down should take into consideration the demand of the revenue and the distinct payments made by the Custodian. The applicants have analysed scaling down on the basis of their computation based on the affidavit in reply dated 11th September, 2008 and levying a tax rate @ 40% and surcharge @ 12% in respect of each of the items. Scaling down has to be done on a proportional basis. In my view scaling down should be on the following basis The dues of the tax authorities are said to be ₹ 199,38,96,650/- for assessment year 1992-93 and ₹ 11,69,24,483/- for assessment year 1993-94. In that view of the matter I find that the total amount claimed towards tax for the assessment year 1992-93 and 1993-94 is ₹ 211,08,21,133/-. As against this the decretal amount is ₹ 374,35,18,354/- On the basis of the 36 64 ratio between the two amounts scaling down should be restricted to 64% of the amount that has been paid over to the Income Tax department pursuant to various orders on various dates commencing from 18th June, 1996 till 26th March, 2013. There is no dispute of the fact that the total amount paid over 77,15,19,52,217/- and in my view the applicant would be entitled to receive 64% of the said amount viz, ₹ 49,37,72,492/-. Upon rounding of it is computed at ₹ 49,38,00,000/-. The income tax department by virtue of their various undertakings including those of Ms.Vineeta Rai, Secy Government of India dated 31st January 2004 (₹ 29.42 lakhs), Mr. Jaswant Singh CIT Central II dated 7th May 2008 (₹ 75 Crores) and Mr. Kiran Oberoi Vasudev, Chief CIT dated 5th May 2008 (₹ 1.5. Crores) is bound to pay over to the Custodian such amounts as may be ordered by this court along with interest at such rate that this court specifies within four weeks of such direction. For all the above reasons pass the following order (i) The Income tax department shall pay over a sum of ₹ 49,38,00,000/(Rupees Forty nine crores thirty eight lakhs only) to the Custodian towards amount payable upon scaling down of the tax demands and which shall be paid to the Custodian along with interest @ 6% per annum from 11th June, 2008 when the bulk of the amount of ₹ 75,00,00,000/- (Rupees Seventy five crores) was paid over to the tax department. Revenue to comply within a period of twelve weeks from today. (ii) Liberty reserved to the Applicants to apply after the tax department deposits the amount specified in (i) above. (iii) Mr. Daruwalla on behalf of the Custodian states that in view of this order he is not pressing Custodian Report no. 18 of 2016. Accordingly, Custodian Report no. 18 of 2016 is disposed. Liberty to apply.

Summary

Issues Involved:
1. Scaling down of tax demands by the Income Tax Department.
2. Validity of the assessment orders and their reliance on "best judgment".
3. Allegations of fraud, collusion, and miscarriage of justice in the assessment process.
4. Proportionality of tax demands in relation to the assets of the notified party.
5. Nexus between the amounts decreed in favor of the applicants and the amounts included in the income of the notified party.
6. Treatment of oversold securities and the completion of transactions.

Detailed Analysis:

1. Scaling Down of Tax Demands:
The applicants sought to scale down the demands of the Income Tax Department prior to payment from the attached assets of the notified party. The claims were based on three suits for recovery of diverse sums of money from the notified party, resulting in decrees amounting to ?374,35,18,354/-. The applicants argued that the tax demands were disproportionate to the assets available and should be scaled down.

2. Validity of the Assessment Orders:
The assessment orders for the years 1992-93 and 1993-94 were based on "best judgment" as the notified party failed to file returns despite repeated reminders. The assessment orders were upheld and enhanced by the Commissioner of Income Tax (Appeals) [CIT(A)], increasing the assessed income due to unaccounted investments in oversold securities. The applicants contended that the assessments were based on assumptions and lacked proper material evidence.

3. Allegations of Fraud, Collusion, and Miscarriage of Justice:
The applicants did not allege fraud or collusion but argued that there was a miscarriage of justice in the assessment proceedings. The court examined whether the assessments were based on proper material and whether the taxes assessed were grossly disproportionate to the assets in the hands of the Custodian. The court found that the assessments were indeed based on "best judgment" and involved questionable standards, leading to a conclusion of miscarriage of justice.

4. Proportionality of Tax Demands:
The court applied the principle of proportionality, considering whether the tax demands inflicted an unnecessary burden on the affected parties. The court found that the tax demands were highly disproportionate to the assets of the notified party and justified scaling down the liability.

5. Nexus Between Decreed Amounts and Income:
The court examined whether there was a nexus between the amounts decreed in favor of the applicants and the amounts included in the income of the notified party. The applicants argued that the funds advanced to the notified party were not used to purchase securities, and no delivery of securities was made. The court found that the nexus was established as money is fungible and the funds received by the notified party formed part of the common pool of funds.

6. Treatment of Oversold Securities:
The court considered whether the transactions involving oversold securities were complete and whether only the difference between the sale price and purchase price should be taxed. The court found that the assessments were based on assumptions and lacked proper evidence of delivery of securities. The auditors' reports indicated that the oversold securities were liabilities, but this was not accepted by the Income Tax Department.

Conclusion:
The court concluded that the tax demands were required to be scaled down due to the miscarriage of justice in the assessment proceedings and the disproportionate nature of the tax demands. The court ordered the Income Tax Department to pay over a sum of ?49,38,00,000/- to the Custodian along with interest at 6% per annum from 11th June 2008. The court also reserved liberty for the applicants to apply after the tax department deposits the specified amount. The Custodian Report no. 18 of 2016 was disposed of with liberty to apply. No orders as to costs were made.