Oriental Insurance Company Ltd v. Deputy Commissioner Of Income Tax

$~48 *IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 21.03.2017 + W.P.(C) 2602/2017 ORIENTAL INSURANCE COMPANY LTD ...... PetitionerThrough: Mr. M.S. Syali, Sr. Adv. with Mr.Mayank Nagi, Adv. ..... Petitioner versus DEPUTY COMMISSIONER OF INCOME TAX ..... RespondentThrough: Mr. Rahul Chaudhary and Ms. LakshmiGurung, Advs. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI S. RAVINDRA BHAT, J (Oral) W.P.(C) 2602/2017 & CM No. 11239/2017 1.Issue notice. 2.Mr. Rahul Chaudhary accepts notice for the respondent. Withconsent, the petition was heard finally. 3.The petitioner is aggrieved by the impugned notice dated15.03.2017, received by it the next day, purporting to curtail – byexercising discretion under proviso to Section 220 of the Income TaxAct, 1961 (in short the Act), the normal period for complying withdemand for payment (income tax) from 30 days to 7 days. For AY2011-12 the assessee was subject to a determined penalty underSection 271(1)(c) for the sum of ` 342.7 crores.The assessee/ petitioner contends that the impugned notice is in flagrant violation ofproviso to Section 220(1) of the Act, in as much as, it does not furnishany reasons why the precipitate discretion to shorten the normalperiod of demand was made.The learned counsel relies upon thejudgment of this Court in Sony India Ltd. Vs. CIT 276 ITR 278(Del.). 4.It is submitted that the assessee had to suffer penalty for AY2011-12 on account of the Revenue’s interpretation with respect toincome derived from sale of securities.The learned counselhighlights that for previous years i.e. AY 1996-97, 2001-02, 2004-05,2007-08 and a subsequent year i.e. 2013-14, such income has beentreated as arisen from insurance business. It is further submitted thatsuch investments were made on account of the mandate of the law asper Insurance Act, 1938.The learned counsel urges that theimpugned order is not sustainable because the reasons to believe donot fulfil the two tests spelt out in Sony India Ltd. (supra) i.e.existence of reasons of valid income and that the belief should havedirect nexus to the conclusion that granting the full period forpayment will be detrimental to the Revenue. 5.The learned counsel for the Revenue, who appears on advancenotice, had copies of the “reasons to believe”, which were furnishedto the Court in a sealed cover. It is submitted that the AO’s reason tobelieve is valid, given the fact that for the AY in question i.e. 2011-12, a penalty of ` 342.7 crores has been levied, and that if such orderis not made, the refunds to the credit of the petitioner would no longer be available for adjustment. It is further submitted that the petitioneris in fact likely to incur losses and in these events, it would bedifficult for the Revenue to realise the tax dues. 6.Section 220 of the Income Tax Act, in so far as it is relevant tothe circumstances of the case, reads as follows: “..220 (1) Any amount, otherwise than by way ofadvance tax, specified as payable in a notice ofdemand under section 156 shall be paid within thirtydays of the service of the notice at the place and tothe person mentioned in the notice: Provided that, where the Assessing Officer has anyreason to believe that it will be detrimental to revenueif the full period of thirty days aforesaid is allowed,he may, with the previous approval of the JointCommissioner direct that the sum specified in thenotice of demand shall be paid within such periodbeing a period less that the period of thirty daysaforesaid, as may be specified by him in the notice ofdemand...” 7.In Sony India Ltd. (supra), the Court apparently recorded asfollows: “..220 (1) Any amount, otherwise than by way ofadvance tax, specified as payable in a notice ofdemand under section 156 shall be paid within thirtydays of the service of the notice at the place and tothe person mentioned in the notice: Provided that, where the Assessing Officer has anyreason to believe that it will be detrimental to revenueif the full period of thirty days aforesaid is allowed,he may, with the previous approval of the JointCommissioner direct that the sum specified in thenotice of demand shall be paid within such periodbeing a period less that the period of thirty daysaforesaid, as may be specified by him in the notice ofdemand...” 7.In Sony India Ltd. (supra), the Court apparently recorded asfollows: “.....12.The proviso has the effect of divestingthe assessee of a legitimate right therefore, recourseto such provision has to be for good reasons and withcaution. Mere apprehension that dues of the Revenuemay not be recoverable without any material orinformation on the record of the Assessing Officer tosupport such an apprehension, would in our view benot permissible under the legislative scheme of thisprovision.Wehavealreadynoticedthattheconsequence of default under the provisions ofSection220areofaseverenatureincludingimposition of interest and penalty. In the normal circumstances, an assessee would have 30 daysperiod to meet this demand and it is only after theexpiry of such period that the assessee would entailthe liabilities afore-referred. The assessee would stillhave the right to pray to the Assessing Officer not totreat the assessee as an 'assessee in default' in respectof the demand entries under Section 226 of the Act.Where the assessee would be deprived of seekingrecourse to such remedy on the one hand, there on theother he would be exposed to liability of interest andpenalty immediately on the expiry of the reducedperiod. Thus, an order of the Assessing Officer underproviso to Section 220 (1) vests the assessee withserious consequences. Once such are the seriousconsequences of the default in compliance to thedirection for payment of tax in the reduced period,greater would be the obligation upon the AssessingOfficer to act fairly and judiciously. There has to bedefinite cause or reason before the Assessing Officercapable of being understood by the person of commonprudence that but for such an order there will bedetriment to the Revenue. In other words, therecovery of the demand raised by the Revenue islikely to be defeated if the full prescribed period isgranted to the Assessee. Invocation of such provisionsin a routine or a mechanical manner would not bepermissible. The language of the Section does notsuggest that legislature intended to arm the AssessingOfficer with powers carte blanche. Higher the power,greater is the obligation to act judiciously. Reason isthe sole (sic) of any judicious order. The ordersupported by record should demonstrate existence ofa proper cause as contemplated in the language of thelaw. Validly the reasons or cause should not bemerely apprehensive or remote in their substance. Tovalidly enforce its statutory discretion, the AssessingOfficer must have (a) Relevant and valid reasons forforming a belief and (b) The belief must have a direct nexus to the conclusion that grant of full period of 30days to the assessee for payment of tax would bedetrimental to the revenue. Both these ingredients aresine qua non for appropriate compliance to therelevant provisions and violation thereof would becuasa sine qua non and would defeat the very basis ofquasi-judicial exercise of power by the AssessingOfficer. Despite the fact that inbuilt balances andchecks have been provided in the Section itself,compliance to basic rule of law would be mandatoryto counter-balance the extent of discretion vested inthe Assessing Officer. nexus to the conclusion that grant of full period of 30days to the assessee for payment of tax would bedetrimental to the revenue. Both these ingredients aresine qua non for appropriate compliance to therelevant provisions and violation thereof would becuasa sine qua non and would defeat the very basis ofquasi-judicial exercise of power by the AssessingOfficer. Despite the fact that inbuilt balances andchecks have been provided in the Section itself,compliance to basic rule of law would be mandatoryto counter-balance the extent of discretion vested inthe Assessing Officer. 13.To discuss this aspect in some further elucidation,it may be appropriate to refer to certain illustrationswhether mischief would be covered under proviso toSection 220 (1):- (i) If an assessee is intending toleave the territorial jurisdiction with intention toevade payment of demand. (ii) A case where anassessee is liquidating his assets, except in due courseof its business; again with the intention of evading topay tax and defeat the demand raised under Section156 of the Act, (iii) an assessee is intending to leavethe country; (iv) Is doing such act and deeds whichwould render it impossible for the Revenue to recoverits dues on account of arrears or current demand, and(v) Closing of business by the assessee coupled withsuch other factors as may be deemed relevant by theAssessing Officer to reach to a conclusion that in theinterest of the Revenue, period should be curtailed. 14.These are mere illustrations and are not intendedto give any exhaustive dimensions to the limitationson the powers of Assessing Officer under theseprovisions. These reasons supported by record of theAssessing Officer could constitute a valid cause forinvoking the provisions of Section 220 (1) of the Act.AnalogoustotheseillustrativecasesaretheprovisionsofOrder48oftheCodeofCivilProcedure. Under Order 38 Rule 1, at any stage of the suit where the Court is satisfied that thedefendants with an intention to delay or to avoid anyprocess of Court or obstruct or delay the decree thatmay be passed against the defendant, the defendanthasabscondedorleftthelimitationsofthejurisdiction of the court, is about to do so or hasdisposed of or removed his property or any partthereof under the jurisdiction of the Court, the courtcould issue a warrant of arrest with a direction thatsuch defendant be brought before the Court and bedirected to furnish security subject to such term andconditions as the court may deem fit and proper.Under different rules of this Order 38, vast powershave been vested in the Court in relation to thedefendant as well as the property in suit, or both.Attachment before judgment is one of the knownconcepts. In civil law, this jurisdiction is quitefamiliar and the procedure is known as saisieconservatorie whereby the assets of a debtor may beimpounded before a judgment, and orders commonlyknown as Mareva Injunction often practiced in BritishAustralianandeveninIndianlawundertheprovisions of the said order. Even if a power to passan order or grant an injunction is vested it would begranted only if it is right to do so. Legal and equitableconsideration should weigh with the Assessing Officerfor taking a final view as to whether in the facts andcircumstances of a given case, the Assessing Officerought or ought not to reduce the period granted to theassessee for meeting the demand under Section 220(1) of the Act......” 8.Reverting to the facts of the case, this Court in Sony India Ltd.(supra) observed as follows: “…..21.In terms of the directions issued by theAssessing Officer, the assessee had furnished a 8.Reverting to the facts of the case, this Court in Sony India Ltd.(supra) observed as follows: “…..21.In terms of the directions issued by theAssessing Officer, the assessee had furnished a complete details in regard to note of business activity,details of bank accounts, addition to fixed assetsincluding the fact that in addition to providingclarification to all other question raised by theAssessing Officer. From the reading of the ordersheet, it is clear that the Assessing Officer did notrecord his dis-satisfaction in regard to these matterswhich obviously has a connection to the reasonsprovided in the above noting leading to passing of theorderunderSection220(1)oftheAct.Therespondents have not placed on record any materialto show that the manufacturing activity was reducedby the company with an intention to evade payment oftax due from the assessee. While one reason isfactuallyincorrect,theotheriswithoutanyfoundation. The Assessing Officer could have easilycalled upon the assessee to show the proof if theassessee had paid the advance tax on 18th March,2005 or even 21st March, 2005, when admittedly therepresentative of the assessee had appeared beforethe Assessing Officer. In the counter affidavit beforeus, it is admitted that installments of advance taxwere paid by the assessee on 15th March, 2005. Thisfact, the Assessing Officer could even departmentallyverify but no attempt was made by him in thisdirection. Therefore, this could not be treated as avalid ground for reduction of the period in terms ofthe proviso to Section 220 (1) of the Act. The reasonsrecorded by the Assessing Officer for forming anopinion that it would be detrimental to the revenue togrant full period were relevant material and had adirect bearing on the object of the Section. 22.The provisions of proviso to Section 220 (1) of theAct is an exception to the Rule entitling the assesseeto pay the demand of tax within 30 days. The reasonsto believe 'should be cogent and proper reasons' andshould not be imaginary or without any record'. Thereasons to believe of the Assessing Officer should be relatable to the record on the file. It is not expected ofthe Assessing Officer to record detailed reasons in theorder but the formation of belief should be record-based reasonthat grant of full period would bedetrimental to the revenue. 23. In the present case the reasons were factually notcorrect and secondly there was no material before theAssessing Officer which can lead a person of commonprudence to believe that the demand would becomeunrecoverableorthatitwouldotherwisebedetrimental to the revenue. The provisions of Section220 have an inbuilt mechanism to prevent theassessee from evading the tax demand. To avoidinterest and penalty, the assessee should pay thedemand within the stipulated period. 24. This would further cast an obligation upon theAssessing Officer to form his belief on valid grounds.The belief of the Assessing Officer should not bebased on untenable apprehensions or assumptions.Record-based reasons leading to such a belief wouldhelp in really protecting the interest of the revenueandthattoowithoutgeneratingunnecessarylitigation and burdening the assessee with avoidablepre-judicial consequences….”Assessing Officer to form his belief on valid grounds.The belief of the Assessing Officer should not bebased on untenable apprehensions or assumptions.Record-based reasons leading to such a belief wouldhelp in really protecting the interest of the revenueandthattoowithoutgeneratingunnecessarylitigation and burdening the assessee with avoidablepre-judicial consequences….” 9.In this case the “reasons to believe”, which forms thesubstratum of the impugned demand notice dated 15.3.2017, reads asfollows: “... Subject: Request for granting approval u/s 220(1)for reducing the time limit in demand notice.for reducing the time limit in demand notice. In this case a demand of Rs. 3,42,78,67,342/- is beingraised by levy of penalty u/s 271(1)(c) of the IncomeTax Act, 1961.raised by levy of penalty u/s 271(1)(c) of the IncomeTax Act, 1961. 9.In this case the “reasons to believe”, which forms thesubstratum of the impugned demand notice dated 15.3.2017, reads asfollows: “... Subject: Request for granting approval u/s 220(1)for reducing the time limit in demand notice.for reducing the time limit in demand notice. In this case a demand of Rs. 3,42,78,67,342/- is beingraised by levy of penalty u/s 271(1)(c) of the IncomeTax Act, 1961.raised by levy of penalty u/s 271(1)(c) of the IncomeTax Act, 1961. 2. Further, it is noted that appeal effect is being given in the case of the assessee for different years (A.Ys.2004-05, 2013-14, 2001-02, 1996-97) which willresult in refund of more than Rs. 200 crores whichmay be adjusted against the demand for A.Y. 2011-12being raised through levy of penalty u/s 271(1)(c) ofthe Act. 3. Therefore, I have reasons to believe that it will bedetrimental to revenue if the full period of 30 days isallowed andtherefore, if approved, the demandperiod u/s 156 of the Act may be reduced from 30days to 7 days. 4. In view of the above facts, it is kindly requested togrant approval for issuing demand notice u/s 156 tothe assessee for payment of demand within 7 days ofreceiving of notice....” 10.It is evident ex-facie from the above that the Revenue wasacutely conscious of the fact that for at least three previousassessment years and one subsequent assessment year (2013-14)refunds on account of additions were available to the assessee’saccount.Apparently for AY 2005-06 penalty was levied on theadditions of income derived from sale of securities which was deletedby the CIT(A). The CIT(A), in fact, held as follows: “.... The return of income for assessment yearinvolved, was filed on 31.03.2005, while even theorderofAOforA.Y.04-05inreassessmentproceedings is dated 25.01.2007, while in A.Y. 05-06it is dated 03.12.2007. From a perusal of these facts,it is held that the issue involved, was a question oflaw which was of debatable nature and there hasbeen no non-disclosure of material facts in the returnof income filed.Consequently, the addition made,does not come within the definition of deemed concealment under explanation 1 to section 271(1)(c).As a result, penalty corresponding to this addition iscancelled.....” 11.The Revenue is conscious or at least expected to be consciousof these circumstances. In the present case it appears that the AO wasauthorized to file an appeal to the Income Tax Appellate Tribunal(ITAT) and did so against the findings of the CIT(A). Given the factthat the additions were made on account of a highly contentious andan entirely debatable issue, and the fact that the assessee hadsucceeded in past years – and at least in one year the penalty imposedwas deleted, the exercise of discretion in this case under proviso toSection220(1),inthisCourt’sopinionwasunwarranted.Furthermore, if one keeps the logic in Sony India Ltd. (supra) inmind, the reasons to believe in exercise of discretion should beactuated by some external fact such as the assessee’s imminent threatof decamping from the jurisdiction or liquidating its assets. In factthe Division Bench in Sony India Ltd. (supra) even drew an analogythat the provisions of the Code of Civil Procedure, 1908 relating toattachment before judgment and like circumstances, impel a Court toexercise restraint before passing an attachment order. In the presentcase no such factor appears on the record.The Revenue seems tohave been entirely motivated in ensuring that the refunds due to thepetitioner / assessee are somehow not given effect to and that thedemand is made so as to ensure that all other periods, available to thepetitioner, are shortened.This is a plain case of abuse of powerunder Section 220(1) which no Court can countenance. 12For these reasons, the impugned notice is hereby quashed. Thewrit petition is allowed. S. RAVINDRA BHAT, J NAJMI WAZIRI, J MARCH 21, 2017/kk