By TIOL News Service

PATNA, APRIL 05, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether an innocent taxpayer can be fastend with the tax liability of a debtor u/s 226(3)(x) who has defaulted in payment of tax dues and has escaped assessment. NO IS THE VERDICT.

Facts of the case:

The Assessee being a registered company, had participated in the tender process pursuant to the notice inviting tender for settlement of Sand Ghats located in different districts in the State of Bihar for the period of 2015–2019 including Sand Ghats located in Bhagalpur district. The Assessee being the highest financial bidder was declared successful and awarded settlement for the purpose of mining for a period of five years. As per the tender notice, the assessee was required to pay settlement amount in three instalments with simultaneous payment of the required amount of tax to the Sales Tax Department. Therefore, the assessee deposited the entire settlement amount for the year 2015 and likewise for the year 2016. The assessee was required to deposit third and last instalment of settlement amount with the Department of Mines and Geology in the month of September 2017 in terms of the notice inviting tender. In the meanwhile, the assessee received notice bearing reference number 372 issued by the ITO in purported exercise of power u/s 226(3) and the assessee was called upon to deposit a sum of Rs.73,75,573 being the income tax liability of the District Mining Office, Bhagalpur. In the said notice, it was indicated that the ITO proposes realization of said tax dues by means of recovery of arrears of tax. The assessee also received a notice for attachment of the bank account of District Mining Officer, Bhagalpur till payment of the demanded amount.

Accordingly, the assessee sought legal opinion as to the notice u/s 226(3)(x) and found that, it had happened due to garnishee proceeding initiated on account of income tax dues not of the assessee but of the District Mining Officer. The assessee learnt that the District Mining Officer, Bhagalpur owed a sum of Rs. 73,75,559/- as tax liability including interest to the Income Tax Department. The Assessee therefore requested the Collector of Bhagalpur and the District Mining Officer, Bhagalpur to issue necessary guidelines. The Assessee therefore pleaded for grant of extra time to deposit third instalment of tender settlement amount.

High Court held that,

++ it is not in dispute that there are no dues today to be paid by the assessee either in connection with the settlement of Sand Ghat or in the matter of payment of income tax liability. It is also admitted fact that primarily, the Mines And Geology Department was liable for payment of the tax collected at source. It is not also in dispute that the assessee was fastened with the liability of the other settlee despite withdrawal of settlement and its acceptance. Even if the contention of Income Tax Department that debtor is liable to pay the tax liability is accepted, there is no justification for saddling the assessee for liability of Mining Department. The Income Tax Department has not conducted any enquiry whether other settlees of Mines and Geology Department have to pay settlement amount or not and whether the other settlees are debtor and liable to pay Income Tax liability u/s 226(3)(x) of Income Tax Act. The order passed by this court in the present proceedings are indicative of the fact that from day one, this court has made it clear that the assessee is not liable to pay any amount and as such the Mines and Geology Department and the Income Tax Department were directed to workout mechanism to refund the amount illegally and arbitrary deducted from the bank account of assessee. This Court has already indicated in the previous order that the assessee has to be refunded the amount deducted from his bank account with interest. But neither the Income Tax Department nor the Mines Department came out with any corrective measures to refund the amount deducted arbitrarily from the bank account of assessee;

++ during the course of argument, the Revenue's counsel submitted that under the Income Tax Act particularly Section 226(3)(x), opportunity was provided to the assessee and thereafter the bank account was seized and amount was recovered. Therefore, this Court is required to decide whether for the lapse of the Mines And Geology Department in not collecting the tax liability under the settlement or failure of the Mines Department in depositing the amount collected and the remedy available to the ITO u/ss 276B and 276BB, yet the assessee has been sandwiched in the dispute between Mines & Geology Department and Income Tax Department on failure of the Mines & Geology Department in paying the tax liability the Income Tax Department recovering the same from the Bank account of the assessee is lawful or not. Neither contextual nor dictionary meaning of the debtor permits innocent taxpayer to be declared debtor of the Mines And Geology Department after surrender of lease and since the Income Tax Department has not carried out any factual enquiry to examine whether there was any liability to be paid by the assessee in connection with the settlement of Sand Ghat or not and in the absence of factual enquiry, proceeding against the assessee treating him as debtor is not justified. Further, the action of Income Tax Department in attaching the assessee's bank account and recovering the tax liability of the Mines And Geology Department by recovering that amount from the bank account of assessee, is not justified. In the peculiar facts of the case, when there is failure on the part of Mines and Geology Department in not collecting the TCS/TDS and failure to deposit the collected amount to the Income Tax Department, whether for the failure of the Mines Department, the law-abiding innocent taxpayer can be fastened with any accountability by Income Tax Department as well as Mines Department;

++ this Court is of the considered view that for the lapse of the Departments, the assessee cannot be fastened with any liability particularly when there is no factual enquiry determining the exclusive liability of assessee as debtor. It is also noticed that the assessee has kept on requesting the authorities in the matter of payment of tax u/s 226(3)(x), but the Mining Department has not issued any guideline rather insisted upon payment of third instalment of settlement amount and coerced the assessee. This Court is therefore of the considered view that the ITO (TDS) Bhagalpur cannot act arbitrarily and extend favour to the Mining Department and release their Bank account and decide to attach the Bank account of assessee and recover the tax liability from his Bank account. As such, the Income Tax Department is directed to forthwith return the amount recovered from the bank account of assessee and also pay interest at the rate applied by the Income Tax Department while calculating the dues from the date of recovery from assessee's Bank account till the date of refund. In the event of failure to refund the said amount within a period of three months from today, the Department will be liable to pay the cost of Rs. one lakh also which shall be recovered from the pocket of the ITO of the Income Tax Department. In addition, the Mines and Geology Department is directed to pay cost of Rs. one lakh to the assessee, as for whose lapse the assessee has to suffer not only uncalled for litigation but has to face the ordeal of the litigation.

(See 2018-TIOL-624-HC-PATNA-IT)