2015 (8) TMI 512 - HC - Income Tax

Treatment of the currency seized during the search and seizure operations conducted u/s 132 - Assessees claim that the amounts seized to be accounted for as payment of advance tax on the date of seizure and interest chargeable under Section 234A, 234B and 234C of the Act ought to be computed accordingly confirmed by Tribunal - according to the Revenue, it cannot be treated as payment of tax till the filing of the return by the Assessee surrendering the seized amount as payment of tax or a demand being raised pursuant to a regular assessment - Held that - Section 132(5) of the Act serves to protect interest of the Revenue as well as the Assessee; whilst sufficient assets to meet the liability of the Assessee are retained in the custody of the Income Tax Authority, the concerned Authority is not permitted to retain assets in excess or what may be required to meet the Assessee s liability. The words retained in his custody are key operative words which, clearly, indicate that the ITO retains the assets in his custody and the same are not appropriated towards payment of tax. Section 132(5) of the Act does not contemplate appropriation of assets towards any liability, whether existing or in future, but is limited to permitting the ITO to retain the seized assets to be applied as provided under the Act.The expression existing liability as used in Section 132(5) of the Act would mean a liability which has been determined and crystallized and, thus, is capable of being specified in an order under Section 132(5) of the Act. In absence of any return filed, any assessment made or any determinative process undertaken, the question of the ITO specifying a liability under clause (iii) of Section 132(5) of the Act does not arise. Thus, plainly, the reference to an existing liability as used in Section 132(5)(iii) of the Act would mean such liability that has already been determined and crystallized such demands outstanding in respect of prior years where assessment have been made for or any other liability that stands crystallized by any determinative process under the Act. In view of the aforesaid, the conclusion of the CIT(A) as well as the Tribunal that liability of the Assessee would stand discharged to the extent of cash seized from the date of the order under Section 132(5) of the Act is not sustainable as Section 132(5) of the Act does not deal with appropriation of the assets seized. Although it cannot be disputed that the Assessee had the liability to pay the advance tax, nonetheless, this liability could not have been determined by the AO prior to the assessment under the Act. Advance tax is, essentially, to be paid by an assessee on the amount of taxable income estimated by it. The AO can determine whether payment of advance tax paid fell short of the required amount only when an assessee s income is assessed. Thus, at the stage of Section 132(5) of the Act, such liability in respect of the Assessee s income for the Previous Year 1990-91 could not be specified under clause (iii) of Section 132(5) of the Act. - Decided in favour of the Revenue

Summary

Issues Involved:
1. Treatment of currency seized during search and seizure operations under Section 132 of the Income Tax Act.
2. Computation of interest under Sections 234A, 234B, and 234C of the Income Tax Act.
3. Appropriation of seized assets towards tax liability.

Issue-wise Detailed Analysis:

1. Treatment of Currency Seized During Search and Seizure Operations:

These appeals involve the treatment of currency seized during search and seizure operations conducted under Section 132 of the Income Tax Act. The Assessees claimed that the amounts seized should be accounted for as payment of advance tax on the date of seizure, impacting the computation of interest under Sections 234A, 234B, and 234C of the Act. The Revenue contended that the seized currency could not be treated as payment of tax until the filing of the return by the Assessee or a demand being raised pursuant to a regular assessment.

2. Computation of Interest Under Sections 234A, 234B, and 234C:

The Tribunal had held that the liability to pay advance tax by the Assessee stood discharged on the date of the order under Section 132(5) of the Act, as the amount seized had to be applied in accordance with Section 132B. The Tribunal reasoned that the AO was bound to adjust the cash seized after passing the order under Section 132(5), and thus, the adjustment of tax should relate back to the date of the order under Section 132(5). However, the High Court disagreed, stating that Section 132(5) does not deal with the appropriation of assets seized, but only their retention to meet the Assessee's liability.

3. Appropriation of Seized Assets Towards Tax Liability:

The High Court noted that Section 132(5) of the Act does not contemplate the appropriation of assets towards any liability, whether existing or future, but is limited to permitting the ITO to retain the seized assets. The term "existing liability" in Section 132(5)(iii) refers to a liability that has been determined and crystallized. The Court concluded that the seized assets could not be appropriated towards the payment of tax until the Assessee had filed a return indicating the application of seized cash towards its tax liability or until an assessment was framed for the relevant assessment year.

Conclusion:

The High Court answered the question of law framed by an order dated 12th February 2004 in the negative and in favor of the Revenue. The appeals were allowed, and no order as to costs was made.