Advance tax payable is liable to be adjusted against an amount illegally retained with the department, upon specific request: Delhi High Court

Matter: Vishwanath Khanna v. Union of India, decided on 03 June, 2011

Assessment Years: 1995-96, 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04

Relevant Facts:

1. A search and seizure operation was carried on at M/s Foto Traders in which cash and bullion worth approx Rs 5, 00,000 were seized.

2. Under an order u/s 132(5), the AO assessed the income of M/s Foto Traders as an unregistered partnership and passed the assessment. This was opposed by the petitioner.

3. The petitioner approached the Settlement Commission and the Commission ordered that the concern M/s Foto Traders is a sole proprietorship and assessed it accordingly.

4. The assessee was to file Income tax returns for the AY’s in question save 1995-96, but did not pay the advance tax due to the fact that a huge amount was lying with the department.

5. The department sought to levy interest u/s 234 A, B, C and 220(2) upon the assessee for non-payment of advance tax.

Questions of law:

1. Whether interest under Sections 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the petitioner, sufficient amount of the petitioner was lying deposited with the Department wherever advance tax could be adjusted?

2. From which date the petitioner is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Upholding the appeal of the Assessee, the Hon’ble Court held that:

1. The respondent would not be justified in levying interest, as the amount of advance tax payable by the petitioner for these assessment years could be adjusted from the amount lying with the Department in the petitioners own account. (para 15)

2. Interest is payable to the assessee u/s 132B(4) and 244A as well alongwith costs of Rs. 10,000.

The decision is available here.

Recording of reasons is a condition precedent for proceeding for action u/s 158BD (material of another person found during search): Delhi High Court

Lead Matter: CIT XIII v. Radhey Shyam Bansal, decided on on 30 May, 2011, ITA No.582/2008

Relevant Facts:

1. A search was conducted under Section 132 of the Income Tax Act (the “Act”) in the premises of one Manoj Aggarwal of Baldev Park, Delhi on 30.8.2000.

2. In the course of search it was found that there were a lot of bogus accommodation entries found. Consequently, the Assessing Officer (“AO”) of Mr. Agarwal wrote to the AO of the respondent assessee, Mr. Radhey Shyam Bansal that he was acting as mediator in transactions of bogus accommodation entries.

3. Upon a notice being served, the assessee Mr. Bansal filed a block return from AY 1991-92 to 2001-02.

4. AO: Income by way of commission to the extent of Rs. 50,85,315/- was added. Also an amount of Rs. 9,81,29,575 was added u/s 69 as unexplained investment. The order of the AO was challenged before the CIT (A) who did not provide any relief to the assessee.

5. The Tribunal set aside the orders on the basis:-

a. There was no satisfaction of the AO recorded.

b. The issue of notice was beyond the limitation period.

Questions of law:

1. Whether the Assessing Officer is bound to record satisfaction within the meaning of Section 158BD of the Act, during the process of Assessment of the person searched under Section 158BC of the Act?

2. Whether satisfaction as contemplated in Section 158BD of the Act has been duly recorded regard being had to be letter dated 15.7.2003 or in the assessment order, wherein undisclosed income of the respondent-assessee has been reflected and negation of such satisfaction by the Income Tax Appellate Tribunal is erroneous and perverse for not accepting such satisfaction?

Dismissing the appeal of the Department, the Hon’ble Court held that:

1. Recording of satisfaction by the assessing officer of the searched person is a condition precedent. Satisfaction must be recorded by the said assessing officer that any undisclosed income belongs to any person, other than the person searched.

2. No satisfaction is borne out by the statements of the AO.

The decision is available here.

Gujarat High Court: The Court not to act as a regular appellate authority in the grant of sanction u/s 132

Neesa Leisure Limited v. Union of India Through Secretary decided on 4 March, 2011

SPECIAL CIVIL APPLICATION No. 13498 of 2010

Assessment Year: 2010-2011

Relevant facts:

A search action came to be conducted under section 132 of the Income Tax Act, 1962 (the Act) on 8.9.2010, 9.9.2010 and 11.9.2010 on various Companies of the Neesa Group.

Subsequent to the search and survey, the respondent authorities issued summons to the Group Companies asking them to file information/documents for the period since 1.4.2004 till date bank book, unsecured loans, ledger accounts of capital assets, land acquisitions details, documents, equity capital received and loans and advances given. After the search, the Assistant Director of Income Tax, in charge of the search operations, issued several notices under section 131(1A) of the Act. The petitioner wrote several letters to the respondent No.4, Deputy Director (Investigations) as well as other officials in respect of the action taken by the income tax authorities alleging that the action is taken with ulterior motive to harm the business interest of the petitioners.

It is the case of the petitioners that, the conditions precedent for exercise of powers under section 132 of the Act have not been satisfied and that the subsequent inquiry under section 131(1A) of the Act is bad in law as the said powers are required to be exercised prior to the search and not subsequent thereto.

Question/s before the Hon’ble Court:

1. Whether the authorization granted u/s 132(1) has been granted validly in the facts and circumstances of the present case?

2. Whether the issue of notice u/s 131(1A) after the search operations carried out u/s 132, shows a malafide intention of the authorities and renders the search operations invalid on such grounds?

Dismissing the petition of the assessee, the Hon’ble Court held that:

Para 8: “From the principles enunciated in the above referred decisions, it is apparent that for the purpose of exercise of powers under section 132 of the Act, two conditions precedent are required to be satisfied. The first condition is that the concerned officer must have some information in his possession, and the second condition is that, in consequence of such information he must have reason to believe that the statutory conditions for exercise of the power to order search exist. The basis for exercise of power must be some material which can be regarded as information which must exist on the file on the basis of which the authorising officer can have reason to believe that action under section 132 is called for. Such information should be fairly reliable and should not be a mere rumour or an unverified piece of gossip or a hunch…

The court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether the action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of authorization under section 132 is arbitrary or malafide or whether the satisfaction recorded is such which shows lack of application of mind on the part of the appropriate authority.”

Para 11: “The main plank of the submissions advanced by the learned counsel for the petitioners was that issuance of notices under section 131(1A) of the Act subsequent to the search proceedings was fatal and would render the search proceedings invalid even if the requisite satisfaction had been recorded prior to issuance of authorization under section 132(1) of the Act. This Court does not find any merit in the said contention, inasmuch as if there is sufficient and tangible material available on record, prior to the search, based on which the concerned officer has formed the requisite belief under section 132(1) of the Act, merely because certain other information has been sought for by the authorised officer or any of the officers mentioned in section 131(1A) of the Act, the same would not render the search proceedings invalid.

The decision is available here.

Technological Assistance for the IT Dept.

During the recent raids at homes of leading bollywood actresses, the IT Department has pressed into service its newly acquired 'weapon': FREDDIE (Forensic Recovery of Evidence Device Diminutive Interrogation Unit).
It collects voluminous data in very less time and is a counter to logic bombs.

The powers of the IT Department relating to Search and Seizure are laid down in section 132 of the Income Tax Act, 1961.

Read more about the recent usage of FREDDIE here.

Mumbai ITAT: No penalty u/s 271(1)(c) for tax evasion when final determination of income on Minimum Alternate Tax basis.

Ruchi Strips & Alloys Ltd. v. DCIT, on 21^st January, 2011

Assessment Year/s: 2003-04, 2005-06

Question/s before the Hon’ble Tribunal: Whether penalty can be imposed in respect of the assessment of total income under the normal provisions of the act when ultimately the total income is determined u/s. 115 JB of the Income Tax Act?

Relevant facts: There was a search and seizure operation u/s. 132 of the Income Tax Act, 1961 (the Act) carried out by the department in the business premises of the assessee on 17.11.2005. In the return of income filed after the search for Assessment year 2003-04 and 2005-06, the income surrender at the time of search was duly offered for tax. Since the total income computed as per the normal provision of the Act in both the aforesaid assessment years was less than the book profits computed u/s. 115 JB of the Act. The AO ultimately levied tax on the total income computed under the provision of section 115 JB of the Act.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 7: "In the facts and circumstances of the present case no penalty could have been imposed on the assessee because there was no tax sought to be evaded because the addition in respect of which penalty was imposed was made while computing total income under the normal provisions of the Act and ultimately the total income of the Assessee was determined on the basis of book profits u/s.115JB of the Act. We, therefore, cancel the penalty imposed by the Assessing Officer and confirmed by the CIT(A)."

The decision is available here.