By TIOL News Service

CHENNAI, MAR 23, 2017: THE ISSUE IS - Whether the declaration made under Kar vivad Samadhan Scheme by the Assessee, would cover the penalty and interest levied by the Revenue Authority in case of tax arrears. YES is the verdict.

Facts of the case:

During the subject year, a search u/s 132 was conducted, wherein FDRs of a cumulative value of Rs.17.97 lakhs in the name of the Assessee were discovered. Consequently, the FDRs were seized and the said FDRs and the interest accrued thereon was assessed protectively in the hands of the Assessee under the head "other sources", as unaccounted investments of the Assessee u/s 69. The assessment order was passed.Penalty was levied. Government of India had floated a KarvivadSamadhan Scheme was floated by the Government of India (GOI) to settle tax arrears of those, locked in litigation, albeit, at a substantial discount.The Assessee attempted to avail of the benefits of the Schemefor the Assessment Year AYs 1994-95, 1993-94 and 1995-96by filing a declaration under the prescribed Form IA. Assessee, who had an outstanding demand of Rs.17,67,808/-, against his name obtained a waiver of Rs.12,09,016/-. Resultantly, the Assessee was called upon to pay towards tax only a sum of Rs.5,58,792/-. This amount was paid by the Assessee along with a sum of Rs.5,992/-, albeit, for the AY 1993-94.Consequently, a certificate was issued by Revenue in favour of the Assessee. Sri.A challenged the substantive assessment made in his hands, which was sustained, right till the Supreme Court. Consequently, necessary deletion was made qua the FDRs and the interest accrued thereon, in the hands of Sri A.Resultantly, on an application being made by the Assessee with regard to refund of fixed deposit amount and the interest accrued thereon, order was passed under Section 154 in which it was directed that a sum of Rs.50,78,928/-, which included the principal fixed deposit amount and the interest accrued thereon, be refunded to the Assessee. On the very same day, an order was passed u/s 220(2) wherein an attempt was made to bring to the notice of the Assessee that a demand qua penalty in the sum of Rs.16,51,046/- was raised vide order dated 25.6.1998 and that the said notice was served on the Assessee on 30.06.1998. It was further asserted via the said order that, since, the said demand had not been liquidated, interest u/s 220(2) for the period, spanning between 29.07.1998 and 28.10.2012, had been imposed. Thus, towards interest, apart from penalty, a demand, in the sum of Rs.32,15,323/- was raised on the Assessee.

On appeal, the HC held that,

++ a careful perusal of the definition of "tax arrear" would show that it relates to the amount of tax, penalty or interest determined on or before 31.03.1998 under 1961 Act in respect an Assessment Year, which, as modified in consequence of giving effect to an appellate order, remains unpaid on the date of declaration. In the instant case, the assessment made u/s 143 r/w/s 147 added the amounts reflected in the FDRs and the interest accrued thereon, on a protective basis to the income of the assessee. The order mooted the initiation of penalty proceedings u/s 271(1)(c). It is seen that u/s 91 of the Samadhan Scheme, a designated authority is empowered to grant waiver from imposition of penalty and interest in respect of income, which is subject matter of the declaration. Since, penalty and interest was levied in the instant qua tax, which was in arrears, the declaration issued by the designated authority, according to the Board's circular, would cover the penalty and interest, determined at a later point in time. This circular was binding on the Revenue;

++ the Revenue could not have issued an order of "protective" penalty, as order itself was an order that added the amounts reflected in the FDR (along with interest accrued therein) in the hands of the Assessee on a protective basis. While there can be a protective order qua assessment, there cannot be a protective order in respect of penalty. It is seen that the communication/order, whereby adjustment of refund was made, no opportunity was given to the Assessee to present his side of the case. What is envisaged, is that, in the first instance, a proposal for adjustment, by way of a show cause notice, will have to be served on the person, to whom, refund is due. The proposal, to be meaningful, would have to set out the details and the reasons as to why adjustments is required to be carried out by the Revenue, against the refund due. Only after issuance of such a proposal/show cause notice and upon consideration of reply, if any, received - could a decision be taken as to whether or not an adjustment of refund is necessitated. Anything short of such minimum opportunity would, to my mind, result in a complete breach of principles of natural justice. Therefore, the communication/order cannot be sustained. Accordingly, the notice of demand and penalty along with consequential order of interest are quashed. Resultantly, the assessee would be entitled to refund.

(See 2017-TIOL-544-HC-MAD-IT)