RECOURSE TO SECTION 226(3) OF INCOME TAX ACT, 1961 WHILE STAY PETITION IS PENDING

[Mr. M. GOVINDARAJAN]

Section 226 of the Income Tax Act, 1961 (‘Act’ for short) deals with other modes of recovery of income tax by the authorities of the Revenue. Section 226(3) (i) of the Act provides that the assessing officer is empowered by a notice in writing to require any person from whom money is due or may become due to the assessee, or to any person who holds or may subsequently hold money for or on account may subsequently to pay to the assessing officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice so much of the money as is sufficient to pay the amount due by the assessee in respect of the arrears.

Section 226(3)(iii) requires a copy of the notice to be forwarded to the assessee at his last address known to the assessing officer and in the case of a joint account to all the joint account holders at their last addresses known to the assessing officer. The issue to be discussed in this article is whether the Revenue can take recourse to Section 226 (3) while there is a stay petition pending before the appellate authority with reference to decided case law.

In ‘Society of Franciscan (Hospitaller) Sisters V. Deputy Directors of Income tax (Exemption)’ – 2013 (2) TMI 240 - BOMBAY HIGH COURTthe petitioner is a public registered trust conducting educational institutions all over India as well as homes for early elderly, hostels for small children and health centers for the poor and needy. The petitioner was granted registration on 14.07.1975 under Section 12A. The petitioner made an amendment to the objects by which in the object clause a reference was incorporated to the rendering of services primarily for Catholics and in consonance with catholic principles.

For the assessment year 2009-10 an order of assessment was passed under Section 143(3) denying exemption under Section 11 of the Act on the ground that the objects clause had been amended. Orders were also passed under Section 143(7) read with section 147 for the assessment years 2004-05 and 2006-07 withdrawing the exemption which had been granted already. Against the order the petitioner filed an appeal before the Commissioner of Income Tax (Appeals). A stay petition has also been filed. While this stay petition is pending the Revenue issued a communication for recovery of demands for the assessment years 2004-05 and 2006-07. The petitioner requested Revenue to keep in abeyance pending the disposal of the appeal. The petitioner also filed written submission.   Despite of this the Revenue issued a notice for recovery of outstanding amount of Rs.11.72 crores for the said assessment years.

The Deputy Director of Income Tax (Exemption) also issued a notice to the petitioner’s bank under Section 226(3) calling upon the bank to pay over an amount of Rs. 11.72 crore towards the demand raised on the petitioner.   The bank was also informed that its officers must not contact the assessee till the payment is made to the Department.

The petitioner put forth the following submissions before the High Court:

• The application for stay of demand for the assessment years 2004-05, 2006-07 and 2009 – 10 are pending before the Commissioner of Income Tax (Appeals);
• The petitioner has sought for a hearing, to demonstrate that notwithstanding the change in the objects clause, every institution is open to all communities irrespective of religious affiliation, which has been denied;
• Section 226(3) requires that a copy of the notice should be forwarded to the assessee. However a copy of the notice was received after the monies had been withdrawn leaving no recourse to the assessee. Further, even the branch manager of the bank was informed not to contact the assessee;
• Since the action is completely without the authority of law, this Court would be within jurisdiction in directing that the monies should be refunded. At the present stage, however, a reasonable amount is required to carry on the day to day operations of the trust and unless some funds are provided back, it would be impossible to run the institutions. Relief to such an extent should, it was urged, be granted.

The Revenue contended that the action under Section 226(3) was followed in accordance with law having regard to the fact that there is a demand outstanding in the sum of Rs.11.72 crores for Assessment Years 2004-05, 2006-07 and 2009-10. The High Court held as follows:

• The appeals filed by the assessee are pending before the CIT (A) and the assessee had sought an opportunity of being heard and filed applications for stay, there was no justification whatsoever to proceed hastily with the enforcement of the recovery of the demand without disposing of the application for stay;
• Applications for stay cannot be treated by the assessing officers or for that matter by appellate authorities as meaningless formalities. Quasi judicial authorities have to apply their mind in an objective and dispassionate manner to the merits of each application for stay. While the interest of the Revenue has to be protected, it is necessary for assessing officers to realize that fairness to the assessee is an intrinsic element of the quasi judicial function conferred upon them by law;
• Applications for stay must be disposed of at an early date. Such applications cannot be kept pending to obviate compliance with the need to evaluate the contentions of the assessee until after monies are recovered using the coercive arm of the law. Appellate authorities must set down time schedules for disposal of stay applications with reasonable expedition;
• The manner in which recourse has been made to the coercive process of law, leaves much to be desired and the High Court was of the view that the action which was pursued was completely high handed and arbitrary.
• There could have been absolutely no apprehension that the assessee in the present case was likely to spirit out the monies which were invested in Fixed Deposit Receipts. The assessee is an age old trust which carries on welfare activities.

The High Court ordered that-

• The Commissioner of Income Tax (Appeals)-I before whom the appeals are pending for A.Ys. 2004-05, 2006-07 and 2009-10, shall dispose of the applications for stay of demand within a period of three weeks from the receipt of an authenticated copy of this order;
• Out of the amount of Rs.4.76 crores that was withdrawn by the First Respondent in pursuance of the notices under Section 226(3) dated 10 January 2013 and 11 January 2013, an amount of Rupees One crore shall be repatriated to the bank account of the Petitioner held in Bank of India, Bandra (West), Mumbai-400 050 forthwith upon receipt of an authenticated copy of this order;
• The balance of the amount which has been recovered in pursuance of the notice under Section 226(3) shall abide by the orders that may be passed by the CIT(A)-I subject to such further remedies as may be available to the Petitioner, if an adverse order is passed.