2020 (2) TMI 1182 - HC - Income Tax

Waiver of interest under Section 234A, Section 234B and Section 234C read with Section 119 (2) (a) - petitioner Company being wound up - HELD THAT - Section 119 of the Income Tax Act, 1961 has been incorporated to grant waiver from payment of interest in case of genuine hardship. Therefore, the Central Board of Direct Taxes has given power to issue instructions and direction to be followed while granting waiver of interest. This power is either exercised by the Board and/or by senior officers of the Income Tax Department like the first respondent. From a reading of CBDT s Notification dated 26.06.2006 bearing reference No.400/29/2002-IT(B) petitioner is not specifically covered by any of the situation contemplated in the above notification. Therefore, no fault can be found with the impugned order of the 1st respondent as the 1st respondent is bound by the above notification though the petitioner company was ordered to be wound up by an order. The Central Board of Direct Taxes while issuing the above notification has not factored a situation like the present case where an assessee is legally incapacitated from making any payments as it was ordered to be wound up. It was under a legal disability. Though the notification has not considered the above situation petitioner is entitled for a partial relief for the above reason dehors the above notification. The date of winding up dates back to the date of petition and during the aforesaid period, there was a legal disability to pay the tax by the company as the official liquidator obtained leave of the company court under the Companies Act, 1956. Since the 1st respondent has no power to grant waiver of interest in the light of the specific instruction of the Central Board Of Direct Taxes, the Court in the exercise of its power under Article 226 of the Constitution of India can order waiver applying the legal principles applicable in the case of winding up of a company, The effect of an order of winding up is to put the company into the hands of the official liquidator for completing the process of liquidating it. Till an order of the Court for distribution of the company s assets is obtained and assets are distributed, the properties of the company continue to be that of the company. The company under liquidation continues to exist as a juristic personality only till an order under Section 481 of the Companies Act, 1956 is passed for its eventual dissolution. It is only thereafter, the company ceases to exist in the eye of law. Thus, during the period in dispute between 18.06.2001 and 27.10.2006, the petitioner company by itself was under a disability and could not discharge any liability without the permission of the court. In this case no attempt was made for recovery of tax from the petitioner company by the Income Tax Authorities by obtaining suitable orders of this court nor the official liquidator took any steps in that direction. It should also be borne in mind that the petitioner had filed income tax return in time which also culminated in separate assessment orders of the assessing officers on 16.03.1998, 25.03.1999 and 31.03.1999 respectively for the respective Assessment Years. During this period, the petitioner company was facing a threat of being wound up apart from threat of arrest of its directors. The petitioner has also demonstrated that there was an en mass resignation by the directors of the company on account of financial difficulties which plagued the petitioner company and that the petitioner company was unable to defend itself effectively in these proceedings. The Managing Director of the petitioner company was also later arrested and was remanded to judicial custody. During the aforesaid period, the company had become a shell company. During the aforesaid period, notices under Section 148 of the Income Tax Act, 1961 were issued to the petitioner for the Assessment Year 1996-1997 on 13.06.1999 and for the Assessment Year 1997-98 on 11.10.2000 to reopen the assessment. Thus, the petitioner company was handicapped from paying the tax that was re-assessed as it was ordered to be wound. At that stage, the interest of the petitioner was to be represented by the Official Liquidator before the Income Tax Authorities by filing appeal against the re-assessment orders who failed to do so. As the petitioner was under a legal disability during the period between 18.06.2001 and 27.10.2006, during the subsistence of winding up order and since the petitioner company was under the control of this court and the official liquidator, I am of the view, this is a fit case for granting partial relief to the petitioner. There should be a waiver of interest under Section 234A, Section 234B and Section 234C of the Income Tax Act, 1961 for the period between 18.06.2001 and 27.10.2006 alone. Remit the case back to the 2nd respondent to compute the interest payable by the petitioner from the due date upto 18.06.2001 and for the period commencing from 27.10.2006 upto the actual date of payment under the aforesaid provision of the Income Tax Act, 1961. While computing the interest payable by the petitioner, the 2nd respondent shall exclude the period between 18.06.2001 and 27.10.2006. 2nd respondent shall compute the interest and communicate to the petitioner for the aforesaid period within a period of 30 days from date of receipt of a copy of this order. Petitioner shall pay the amount determined by the 2nd respondent within 15 days thereafter. In case, there is a failure on the part of the petitioner to pay an amount within the aforesaid period, the relief granted to the petitioner herein shall come to an end sine die and the impugned order shall stand revived.

Summary

Issues Involved:
1. Waiver of interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961.
2. Financial difficulties and legal incapacitation of the petitioner company.
3. Applicability of CBDT’s Circular dated 26.06.2006.
4. Jurisdiction and power of the Chief Commissioner of Income Tax and the Court under Article 226.

Issue-wise Detailed Analysis:

1. Waiver of Interest under Sections 234A, 234B, and 234C:
The petitioner sought waiver of interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961, citing financial hardships and legal incapacitation. The Chief Commissioner of Income Tax rejected this request, stating that the petitioner’s case did not fall within the circumstances specified in the CBDT’s Circular dated 26.06.2006 (Para 1, 11).

2. Financial Difficulties and Legal Incapacitation:
The petitioner company faced significant financial difficulties, including the arrest of its Managing Director and the resignation of all directors and principal officers. The company was also ordered to be wound up by the court, which led to a legal disability in managing its affairs and paying taxes (Para 7, 9, 10, 24, 26).

3. Applicability of CBDT’s Circular dated 26.06.2006:
The CBDT’s Circular specifies conditions under which interest can be waived, including search and seizure situations, unexpected income, retrospective amendments, and unavoidable circumstances. The court found that the petitioner’s situation did not fall within these specified conditions (Para 18, 19, 20).

4. Jurisdiction and Power of the Chief Commissioner and the Court:
The Chief Commissioner is bound by the CBDT’s Circular and thus could not grant the waiver. However, the court, under Article 226, has the power to grant relief in cases of genuine hardship. The court recognized the petitioner’s legal incapacity during the winding-up period and granted partial relief by waiving interest for the period between 18.06.2001 and 27.10.2006 (Para 22, 34, 35).

Conclusion:
The court acknowledged the petitioner’s financial and legal difficulties and granted partial relief by waiving interest for the specified period. The case was remitted back to the 2nd respondent to compute the interest payable excluding the waived period, with instructions for timely communication and payment (Para 36, 37, 38).