2023 (2) TMI 711 - HC - Income Tax

Stay of rececovery of demand - Capacity/status of a Assessee as Trust OR status of a Firm - Petitioner contended that no addition could be made u/s 69 of the Act and that the assessment had been done on the basis that the Petitioner was a firm instead of an individual - HELD THAT - We are unable to accept the contentions of the respondents that they have considered all the contentions of the petitioner inasmuch as the revert relied upon at page no.234 and page no.269 clearly evince that the respondents have not considered the various letters addressed by the petitioner from time to time and their request to change their status from a Firm to a Trust. Apropos the judgement in the case of UTI Mutual Fund 2012 (3) TMI 333 - BOMBAY HIGH COURT laying down the parameters for disposing of the application for stay, none of parameters have not been considered by the respondents in true letter and spirit as is evident from the orders passed that are based on the petitioner s status as a Firm instead of as a Trust. Apropos the judgment in the case of UTI MUTUAL FUND 2012 (3) TMI 333 - BOMBAY HIGH COURT held that in considering whether a stay of demand granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case is made out and serious triable issues are raised that would warrant a dispensation of deposit. It was further held that calling upon petitioner to deposit, would itself occasion undue hardship where a strong prima facie case has been made out. We are of the opinion that the respondents have failed to consider the ratio of the judgment in its true letter and spirit inasmuch as respondents called upon the petitioner to deposit 10% of the demand when the petitioner had a strong prima facie case. In our view, the deposit would itself occasion undue hardship to the petitioner who are Trust created for the purpose of benefiting the employees. In the case UMUZA CONSULTANTS 2022 (12) TMI 804 - BOMBAY HIGH COURT his Court has held that where a prima facie case in favour of the petitioner was found and it appeared that the assessment was high pitched, a stay was granted with regard to the impugned demand notices. In this case too it appears that the petitioner would have a strong prima facie case and they would not be liable to pay such a high demand if their assessment was considered in their capacity/status of a Trust as against the status of a Firm. We are in agreement with the legal propositions enunciated in the aforesaid three judgments of this Court and are bound by it and do not propose to take a different view. Accordingly, we are of the opinion that both the matters deserve to be remanded back with a direction that the Respondents to consider the Petitioner s application under their status as a Trust and try to dispose of the matter preferably within a period of 4 months from the date of this order.

Issues Involved:
1. Rejection of the Petitioner's application for stay of recovery of income tax demand.
2. Incorrect assessment of the Petitioner as a firm instead of a trust.
3. Non-consideration of the Petitioner's contentions and technical difficulties.
4. Applicability of Section 69 of the Income Tax Act.
5. Financial hardship due to the tax demand.
6. Compliance with legal parameters for deciding stay applications.

Detailed Analysis:

1. Rejection of the Petitioner's application for stay of recovery of income tax demand:
The Petitioner challenged the orders dated 5th May 2022 and 13th July 2022, rejecting their application for stay of recovery of the tax demand for AY 2014-15. The Petitioner argued that the Respondents arbitrarily and capriciously rejected their stay application without considering the merits of the addition made in the assessment order. The court observed that the Respondents failed to adhere to the parameters laid down in the case of KEC International v. B R Balakrishnan, which mandates that the Income Tax Officer must balance the interest of the assessee with the protection of the Revenue.

2. Incorrect assessment of the Petitioner as a firm instead of a trust:
The Petitioner contended that the assessment was incorrectly done under the status of a firm instead of a trust. The court noted that the Respondents did not consider the various letters addressed by the Petitioner requesting a change of status from a firm to a trust. The court emphasized that the assessment should have been conducted under the new PAN allotted to the Petitioner as a trust.

3. Non-consideration of the Petitioner's contentions and technical difficulties:
The Petitioner highlighted technical difficulties in filing the return of income due to the change in PAN status and issues with the Income Tax Utility. The court found that the Respondents did not adequately consider these technical difficulties and the Petitioner's contentions regarding the incorrect computation of tax at the rate of 30% instead of applying slab rates.

4. Applicability of Section 69 of the Income Tax Act:
The Petitioner argued that the conditions laid down in Section 69 of the Income Tax Act were not fulfilled, and thus, the addition made under this section was unjustified. The court noted that the Respondents failed to dispute that the investments were recorded in the balance sheet and that the source of investments was explained by the Petitioner.

5. Financial hardship due to the tax demand:
The Petitioner contended that the tax demand would cause undue financial hardship, especially since the Petitioner was created for the benefit of employees. The court referred to the CBDT Instruction No. 96, which states that when the assessed income is substantially higher than the returned income, the recovery of tax should be kept in abeyance until the appeal decision. The court found that the Respondents did not consider this instruction and the financial hardship that the demand would impose on the Petitioner.

6. Compliance with legal parameters for deciding stay applications:
The court referred to the judgments in UTI Mutual Fund v. Income-tax Officer and Humuza Consultants v. Assistant Commissioner of Income Tax, which emphasize considering financial hardship and the existence of a strong prima facie case when deciding stay applications. The court concluded that the Respondents failed to consider these legal parameters and the Petitioner's strong prima facie case, which warranted a dispensation of deposit.

Conclusion:
The court remanded the matter back to the Respondents with a direction to consider the Petitioner's application under their status as a trust and dispose of the matter within four months. The court also ordered that no coercive steps be taken against the Petitioner for the recovery of the demand in pursuance of the impugned notice dated 30th March 2022. The petitions were disposed of with no order as to costs.

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