S.narayanan v. The Commissioner Of Income-Tax Central - Ii

IN THE HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON : 14.12.2016 DELIVERED ON : 07.03.2017 Coram The Honourable Mr.Justice RAJIV SHAKDHER Writ Petition No.10791 of 2014 & M.P.No.2 of 2014 S.Narayanan Vs. .. Petitioner 1.The Commissioner of Income-tax Central - II No.108 Uthamar Gandhi Salai, Nungambakkam, Chennai - 600 34. 2.Assistant Commissioner of Income-tax (Now) Deputy Commissioner of Inocme-tax Central Circle-II(4), No.108, Uthamar Gandhi Salai, Nungambakkam, Chennai - 600 034. .. Respondents PETITION under Article 226 of The Constitution of Indiapraying for the issuance of Writ of Certiorarified Mandamuscalling for the records of the 2nd respondent in GIR No.24701-Ndated 25.06.1998 and quash the penalty order under section 271(1)(c)Consequential Interest Under Section 220(2) and furtherdirect the 2nd respondent to refund the amount of Rs.50,78,928/-in pursuance of the order passed under Section 154 of theassessment year 1994-95 dated 22.10.2012. For Respondents : Mr.T.Pramod Kumar Chopda 1. This Writ Petition is directed against the order dated25.06.1998, whereby, penalty is levied under Section 271(1)(c)of the Income Tax Act, 1961, ( in short the 1961 Act), inrespect of the Assessment Year (AY) 1994-95 and qua notice ofdemand issued, thereupon, under Section 156 of the 1961 Act.Furthermore, a challenge is also made to the consequentialinterest, levied under Section 220(2) of the 1961 Act. Inaddition to this, and as a necessary concomitant, refund is https://hcservices.ecourts.gov.in/hcservices/ sought, in the a sum of Rs.50,78,928/-, pursuant to an orderdated 22.10.2012, passed by respondent No.2 under Section 154 ofthe 1961 Act. 1.1. As would be evident from the cause title and thenumber of the writ petition that the petition was filed only in2014 - to be more precise, was presented in this Court on10.04.2014. 1.2. Given the aforesaid facts, the immediate instigation,for moving this Court via the captioned Writ Petition appears tobe, the communication/order dated 21.12.2012, whereby, therefund, in the sum of Rs.50,78,928/-, granted to the petitionervide order dated 22.10.2012, passed under Section 154 of the1961 Act, as indicated above, was sought to be adjusted towardspenalty and interest, by respondent No.2. Prefatory facts: 2. In order to adjudicate upon this Writ Petition and, in asense, to untangle the web of circumstances obtaining in thecase as well as the prayers made in the Writ Petition, thefollowing brief facts are required to be noticed. 2.1. The petitioner, who, evidently, at the relevant pointin time, was an employee of Arignar Anna Sugar Mills, a unit ofTamil Nadu Sugar Corporation Limited, was assessed to tax, on aprotective basis, vide order dated 10.03.1997. 2.2. Upon search being conducted under Section 132 of the1961 Act, in respect of a person, by the name,Sri.A.N.Dyaneswaran, Fixed Deposit Receipts (in short FDRs) of acumulative value of Rs.17.97 lakhs, albeit, in the name of thepetitioner, were discovered. Consequently, the FDRs were seizedand, on protective basis, the said FDRs and the interest accruedthereon, was assessed, as indicated above, protectively, in thehands of the petitioner, under the head "other sources", asunaccounted investments of the petitioner, under Section 69 ofthe 1961 Act. The said assessment order was passed on10.03.1997. 2.3. The respondents/Revenue claim that vide order dated25.06.1998, penalty was levied, equivalent to a sum ofRs.16,51,046/- 2.4. It appears that the Government of India had floated aKarvivad Samadhan Scheme (in short 'the Scheme'), under ChapterIV of Finance (No.2) Act, 1998. The said Scheme came into forceon 01.09.1998. This Scheme was floated by the Government ofIndia (GOI) to settle tax arrears of those, locked inlitigation, albeit, at a substantial discount. https://hcservices.ecourts.gov.in/hcservices/ 2.3. The respondents/Revenue claim that vide order dated25.06.1998, penalty was levied, equivalent to a sum ofRs.16,51,046/- 2.4. It appears that the Government of India had floated aKarvivad Samadhan Scheme (in short 'the Scheme'), under ChapterIV of Finance (No.2) Act, 1998. The said Scheme came into forceon 01.09.1998. This Scheme was floated by the Government ofIndia (GOI) to settle tax arrears of those, locked inlitigation, albeit, at a substantial discount. https://hcservices.ecourts.gov.in/hcservices/ 2.5. Pertinently, the Scheme was portrayed as a recoveryScheme, and not as a litigation settlement scheme. 2.6. The Scheme, broadly, provided that any tax arrear underdirect or indirect laws, could be settled by declaring the sameand, upon payment of the prescribed amount in respect of thearrears towards tax. The Scheme, inter alia, offered immunityfrom penalty and prosecution. 2.7. The petitioner, evidently, attempted to avail of thebenefits of the Scheme, by filing a declaration under theprescribed Form IA. This declaration was filed, in consonancewith Section 89 of Finance (No.2) Act, 1998, on 30.11.1998. 2.8. Notably, the petitioner filed the declaration under theScheme, not only for the Assessment Year in issue, i.e., AY1994-95, but also for AYs 1993-94 and 1995-96. Consequently,the petitioner, who had an outstanding demand of Rs.17,67,808/-,against his name (which included tax equivalent to Rs.8,25,523/-on the value of FDRs and interest accrued thereon as alsointerest charged, under Section 234A, 234B and 234C of the 1961Act, amounting to Rs.9,42,285/-) - by virtue of the order dated10.03.1997 (after availing the benefits of the Scheme), obtaineda waiver of Rs.12,09,016/-. 2.9. Resultantly, the petitioner was called upon to paytowards tax only a sum of Rs.5,58,792/-. This amount was paidby the petitioner, on 22.02.1999, along with a sum ofRs.5,992/-, albeit, for the AY 1993-94. 3. Consequently, a certificate was issued by therespondents/Revenue in favour of the petitioner, on 01.06.1999.Pertinently, the certificate issued to the petitioner carriedthe following endorsement: ".... It has already been made clear to youthat your declaration was entertained at your risk.However, this Form No.3 is issued without prejudicetothedepartment'sfindingsinShri.A.N.Dyaneswaran's case and the acceptance ofthe declaration in your case does not vest any rightin you to advance your case vis-a-vis "substantiveassessment". In other words, this cannot be citedbefore the Hon'ble ITAT in the pending appealagainst the assessment made in the case of ShriA.N.Dyaneswaran." 3.1. The record shows that Sri.A.N.Dyaneswaran challengedthe substantive assessment made in his hands, which wassustained, right till the Supreme Court. Consequently, necessarydeletion was made qua the FDRs and the interest accrued thereon,in the hands of A.N.Dyaneswaran. This order was passed,evidently, on 29.12.2007. https://hcservices.ecourts.gov.in/hcservices/ 4. Resultantly, on an application being made by thepetitioner to respondent No.2 with regard to refund of fixeddeposit amount and the interest accrued thereon, as indicatedabove, the order dated 22.10.2012, was passed under Section 154of the 1961 Act. Respondent No.2, thus, directed that a sum ofRs.50,78,928/-, which included the principal fixed depositamount and the interest accrued thereon, be refunded to thepetitioner. 4.1. However, the refund ordered in favour of the petitionercould not see the light of the day, in view of another orderpassed by respondent No.2 on the very same day, i.e.,22.10.2012, under Section 220(2) of the 1961 Act. https://hcservices.ecourts.gov.in/hcservices/ 4. Resultantly, on an application being made by thepetitioner to respondent No.2 with regard to refund of fixeddeposit amount and the interest accrued thereon, as indicatedabove, the order dated 22.10.2012, was passed under Section 154of the 1961 Act. Respondent No.2, thus, directed that a sum ofRs.50,78,928/-, which included the principal fixed depositamount and the interest accrued thereon, be refunded to thepetitioner. 4.1. However, the refund ordered in favour of the petitionercould not see the light of the day, in view of another orderpassed by respondent No.2 on the very same day, i.e.,22.10.2012, under Section 220(2) of the 1961 Act. 4.2. Via this order, respondent No.2 attempted to bring tothe notice of the petitioner that a demand qua penalty in thesum of Rs.16,51,046/- was raised vide order dated 25.6.1998 andthat the said notice was served on the petitioner on 30.06.1998.It was further asserted via the said order that, since, the saiddemand had not been liquidated, interest, under Section 220(2)of the 1961 Act, for the period, spanning between 29.07.1998 and28.10.2012, had been imposed. Thus, towards interest, apartfrom penalty, a demand, in the sum of Rs.32,15,323/- was raisedon the petitioner. 4.3. In effect, the penalty and interest demanded for AY1994-95, substantially, effaced the refund, which was ordered infavour of the petitioner, by respondent No.2 vide order dated22.10.2012. 5. As a matter of fact, respondent No.2 videcommunication/order dated 21.12.2012; a fact, to which, I havemade a reference above, indicated to the petitioner, the mannerin which the refund had been adjusted. 5.1. For the sake of convenience, the adjustment made byrespondent No.2, in its communication/order dated 21.12.2012, isset forth below: 5.2. It is, this adjustment, which, according to thepetitioner, is contrary to the terms of the Scheme - that hasbrought the petitioner to this Court. Submissions of Counsels: 6. In the background of the aforesaid facts, submissionshave been advanced by Mr.J.Naresh Kumar, on behalf of thepetitioner, while the respondents/Revenue are represented byMr.T.Pramod Kumar Chopda. 7. Broadly, Mr.J.Naresh Kumar, submitted as follows : i) Once, the petitioner, had availed of the Scheme and paidthe requisite tax, then, the respondents/Revenue could not havesought to recover penalty, vis-a-vis, a transaction, which was,subject matter of the Scheme. ii)The penalty order dated 25.06.1998, which was stated tohave been delivered on 30.06.1998, was not received by thepetitioner. Furthermore, no document has been filed by therespondents /Revenue, except for a bare assertion in theaffidavit, that the order, was sent by a recorded delivery andserved on the petitioner. iii) The adjustment of the amounts, which were to berefunded to the petitioner, was made without any opportunitybeing given to the petitioner to articulate his stand in thematter.In sum, the adjustment carried out was not inaccordance with law. iv) The communication/order dated 21.12.2012, was only anintimation of the factum of adjustment, which did not provide anopportunity to the petitioner to object to the adjustment ofrefund granted by the very same respondent (i.e., respondentNo.2), albeit, by a separate order of even date, i.e.,22.10.2012. v) Since, the fixed deposit amount and the interest accruedthereon were included on a protective basis in the hands of theassessee, in law, no penalty order on protective basis couldhave been passed. vi) Once, a certificate is issued under the Scheme, theproceedings cannot be reopened, save and except, where a falsedeclaration has been made. https://hcservices.ecourts.gov.in/hcservices/ iv) The communication/order dated 21.12.2012, was only anintimation of the factum of adjustment, which did not provide anopportunity to the petitioner to object to the adjustment ofrefund granted by the very same respondent (i.e., respondentNo.2), albeit, by a separate order of even date, i.e.,22.10.2012. v) Since, the fixed deposit amount and the interest accruedthereon were included on a protective basis in the hands of theassessee, in law, no penalty order on protective basis couldhave been passed. vi) Once, a certificate is issued under the Scheme, theproceedings cannot be reopened, save and except, where a falsedeclaration has been made. https://hcservices.ecourts.gov.in/hcservices/ vii) Since, it is not even the case of therespondents/Revenue that a false declaration had been made, acircuitous route could not have been used to reopen theproceedings, which had attained finality under the Scheme. viii) The Scheme, in any event, offers immunity fromprosecution and imposition of penalty. ix) The stand of the respondents/Revenue taken in thecounter affidavit that, since, the penalty order was passedafter 31.03.1998 (which is the date relevant for determinationof arrears of tax), and, therefore, no immunity was available,is untenable, in view of the directions issued by the CentralBoard of Direct Taxes (in short the Board), vide circularbearing number, F.No.149/145/98-TPL, dated 03.09.1998 (in short'the Circular'). 7.1. In this behalf, reliance was placed by the counsel forthe petitioner on the answers given to Question Nos.5, 7 and 9in the Board's Circular. 7.2. In support of the aforesaid submissions, reliance wasplaced on the following judgments: i) Metal Stores V. Commissioner of Income Tax, [1990] 186ITR 612 (Gau) ii) Commissioner of Income Tax V. Super Steel (Sales) Co.,[1989] 178 ITR 451 (cal) iii) Commissioner of Income Tax, Pattiala - II V. Behari LalPyare Lal, [1983] 141 ITR 32 (P&H) iv) Smt.Susila Rani V. Commissioner of Income Tax andanother, [2002] 253 ITR 775 (SC) 8. On the other hand, Mr.Chopda, learned counsel appearingon behalf of the Revenue, submitted that, after a search wasconducted at the premises of Sri.A.N.Dyaneswaran, FDRs wererecovered, which were found to be in the name of the petitioner,which led to issuance of notice under Section 148 of the 1961Act. 8.1. The petitioner, it is stated, filed a return of incomeon 19.03.1996 for AY 1994-95, admitting therein, that he had atotal income of Rs.1,10,240/- and agricultural income ofRs.1,42,000/-. 8.2. It was stated that upon the case being transferred torespondent No.2, the return of the petitioner was processed, andafter the petitioner had been given due opportunity, his total https://hcservices.ecourts.gov.in/hcservices/ income was assessed at Rs.19,07,241/-, albeit, on protectivebasis, in respect of AY 1994-95 on 10.03.1997. 8.3. According to the learned counsel, while passing thesaid order on 10.03.1997, it was specifically noted, thatpenalty action under Section 271(1)(c) of the 1961 Act should beinitiated separately. Therefore, it was the submission of thelearned counsel for the respondents/Revenue that upon noticebeing issued and reply being received, the order dated25.06.1998 came to be passed, whereby, penalty in the sum ofRs.16,51,046/- was levied on the petitioner. 8.4. Learned counsel further submitted that as against theprotective assessment order dated 10.03.1997, the petitioner hadpreferred an appeal to the Commissioner of Income Tax (Appeals)[in short CIT (A)] and that, while the appeal was pending, thepetitioner applied under the Scheme, which was floated by GOI,in 1998. 8.3. According to the learned counsel, while passing thesaid order on 10.03.1997, it was specifically noted, thatpenalty action under Section 271(1)(c) of the 1961 Act should beinitiated separately. Therefore, it was the submission of thelearned counsel for the respondents/Revenue that upon noticebeing issued and reply being received, the order dated25.06.1998 came to be passed, whereby, penalty in the sum ofRs.16,51,046/- was levied on the petitioner. 8.4. Learned counsel further submitted that as against theprotective assessment order dated 10.03.1997, the petitioner hadpreferred an appeal to the Commissioner of Income Tax (Appeals)[in short CIT (A)] and that, while the appeal was pending, thepetitioner applied under the Scheme, which was floated by GOI,in 1998. 8.5. It was, thus, the contention of the learned counselthat the Scheme was available to the assessee, only in respectof arrears of tax, which had accrued, or/were due, as on31.03.1998. In other words, the submission of the learnedcounsel was that, since, penalty was imposed after the due due,i.e., 31.3.1998, by virtue of the order dated 25.06.1998, theimmunity claimed by the petitioner qua payment of penalty wasnot available to him. 8.6. In support of this submission, learned counsel reliedupon the conditions mentioned in the certificate dated01.06.1999, issued to the petitioner. Learned counsel, thus,justified the adjustment of the amount reflected in the refundorder dated 22.10.2012, on the ground that, the penalty imposedwas not covered under the Scheme and since, it remainedunsatisfied, the petitioner was rightly called upon to pay theinterest on the unliquidated amount, claimed towards penalty. 8.7. Furthermore, learned counsel also drew my attention toparagraph 5 of the counter affidavit in support of hissubmission that the penalty order dated 25.06.1998 was,apparently, dispatched to the petitioner via RPAD and that, itwas, consequently, served on him on 30.06.1998. Based on theassertions made in the same paragraph, learned counsel alsosubmitted that the petitioner was, once again, at his request,served with a copy of the penalty order on 31.12.2012. In sum,Mr.Chopda submitted that there was no merit in the Writ Petitionand that the same ought to be dismissed. Reasons: 9. Having heard the learned counsel for the parties andperused the record, what clearly emerges is as follows: 9.1. That, upon a search being conducted at the premises ofSri.A.N.Dyaneswaran, FDRs, amounting to Rs.21.00 lakhs, in thename of the petitioner, were discovered, out of which, FDRs, inthe sum of Rs.17.97 lakhs pertained to AY 1994-95. 9.2. The petitioner was, resultantly, issued a notice underSection 148 of the Act, whereupon, a return was filed. Upon thereturn being processed, the fixed deposits along with accruedinterest, were added, albeit, on a protective basis, to theincome of the petitioner. That is, a substantive assessment wasmade by the Revenue, for the relevant block assessment years,which led to the amount reflected in the very same FDRs alongwith interest accrued thereon being added to the income ofSri.A.N.Dyneswaran. 9.3. Sri.A.N.Dyneswaran challenged the aforementionedadditions made to his income. The challenge made bySri.A.N.Dyaneswaran was successful, which was sustained righttill the Supreme Court. Consequent thereto, the income fromFDRs and interest accrued thereon, was deleted in the hands ofSri.A.N.Dyaneswaran. 9.3. Sri.A.N.Dyneswaran challenged the aforementionedadditions made to his income. The challenge made bySri.A.N.Dyaneswaran was successful, which was sustained righttill the Supreme Court. Consequent thereto, the income fromFDRs and interest accrued thereon, was deleted in the hands ofSri.A.N.Dyaneswaran. 9.4. The petitioner, had also raised a challenge to theassessment order dated 10.03.1997, passed under Section 143(3)read with Section 147 of the 1961 Act, before the CIT(A). Theappeal, was disposed by CIT(A) vide order dated 28.11.1997.While disposing of the appeal, CIT(A), indicated that the amountwas being assessed in the hands of the petitioner, albeit, on aprotective basis. A specific observation was made by CIT(A)that, if, substantive addition was made in the hands ofSri.A.N.Dyneswaran, then, the addition, made, in the hands ofthe petitioner, would stand vacated. 9.5. The petitioner carried the matter in appeal to theIncome Tax Appellate Tribunal (in short ITAT). While the appealwas pending with the ITAT, the petitioner attempted to avail ofthe benefit of the Scheme, by filing the requisite Form, on30.11.1998. Under the Scheme, the petitioner obtained a waiverequivalent to a sum of Rs.12,09,016/- and, thus, paid tax,amounting to Rs.5,58,792/-. 9.6. As a matter of fact, on that particular date, thepetitioner was in arrears of tax to the extent of Rs.8,25,523/-.The ITAT recognising this fact, vide order dated 15.03.2004,declared, that the appeal had been rendered infructuous, in viewof the petitioner having paid the tax, as quantified under theScheme. 10. On 22.10.2012, respondent No.2 passed two (2) orders:the first order was passed under Section 154 of the 1961 Act, https://hcservices.ecourts.gov.in/hcservices/ whereby, he ordered refund of Rs.50,78,928/- in favour of thepetitioner. The second order, was passed under Section 220(2)of the 1961 Act. By this order, respondent No.2 brought to forethe factum of outstanding penalty amount of Rs.16,51,046/-,which was imposed, apparently, vide order dated 25.06.1998 and,thus, went on to levy interest under Section 220(2) of the 1961Act, equivalent to an amount of Rs.32,15,323/-. 10.1. The fact that the amount of Rs.50,98,928/-, which wasordered to be refunded in favour of the petitioner had beenadjusted against penalty and interest, as adverted to above, wasintimated to the petitioner by respondent No.2 via a subsequentcommunication/order, issued nearly two (2) months later, i.e.,on 21.12.2012. 11. Given the aforesaid facts, what clearly emerges is,that, the petitioner was rightly issued an order of refund byrespondent No.2. The justification given by respondent No.2 foradjustment of the refund was that, a demand towards penalty wasoutstanding, which was imposed vide order dated 25.06.1998. 11.1. According to the respondents/Revenue, this order wasserved on the petitioner on 30.06.1998. Therefore, the firstquestion that requires to be answered is: whether penalty andinterest could be charged on arrears of tax, which, though,outstanding as on 31.03.1998, had been settled and paid underthe Scheme? 12. On this score, the argument of the respondents/Revenueis that, since, what was settled and paid under the Scheme, wastax, in arrears, as on 31.3.1998, the penalty, which wasimposed, via order dated 25.06.1998, did not come within theambit of immunity granted under the Scheme with regard toprosecution and imposition of penalty. 13. In order to appreciate this argument, one would have toexamine Sections 2(m), 88, 89, 90 and 91 of the Scheme alongwith the provisions of the aforementioned Circular. 12. On this score, the argument of the respondents/Revenueis that, since, what was settled and paid under the Scheme, wastax, in arrears, as on 31.3.1998, the penalty, which wasimposed, via order dated 25.06.1998, did not come within theambit of immunity granted under the Scheme with regard toprosecution and imposition of penalty. 13. In order to appreciate this argument, one would have toexamine Sections 2(m), 88, 89, 90 and 91 of the Scheme alongwith the provisions of the aforementioned Circular. 13.1. A reading of Section 88 would show that a person couldmake a declaration, with respect to tax arrears, in accordancewith the provisions of Section 89 of the Scheme, after01.09.1998, but before 31.12.1998. The declaration had to bemade to a designated authority and, once, a declaration wasmade, tax qua arrears was payable by the declarant, depending onwhich clause of Section 88(a) of the Scheme, the declarant'scase, fell in. 13.2. Furthermore, within sixty (60) days of receipt of suchdeclaration, the designated authority, under Section 90 of theScheme, was required to determine the amount, payable by the https://hcservices.ecourts.gov.in/hcservices/ declarant, in accordance with the provisions of the Scheme and,thereafter, issue a certificate, in the form prescribed, to thesaid declarant, setting forth therein, the particulars ofarrears of tax and sum payable, after such determination,towards full and final settlement of tax arrears. 13.3. The first proviso to Section 90 (1) indicates that,the only instance, in which a proceeding could be reopened was,where the declaration submitted was found to be false. The firstproviso creates a deeming fiction, to the effect, that, if, adeclaration is found to be false, then, it would be presumed, asif, a declaration was never made and the declarant wouldthereafter, be visited with every consequence under the relevantenactment, with the added liability of having the pendingproceedings being deemed as having been revived. 13.4. The second proviso to Section 90(1), however, provideda leeway to a designated authority to amend the certificate,issued under the Scheme, for reasons to be recorded in writing. 13.5. Sub-section (2) of Section 90 of the Scheme requiredthe declarant to pay, the sum determined by the designatedauthority, within 30 days of an order being passed in thatbehalf. The declarant was also required to intimate the factumof payment to the designated authority along with the proof ofpayment, whereupon, the declarant was entitled to, issuance of acertificate under the Scheme. 13.6. Sub-section (3) of Section 90 of the Scheme clearlyprovides that every order made under Sub-section (1) of Section90, would be conclusive as regards matters stated therein and,the aspects covered by such an order would not be reopened inany other proceedings under direct tax enactment or, indirecttax enactment or, any other law time being in force. 13.7. Sub-section (4) of Section 90 of the Scheme providesthat where an appeal or, a reference or, a reply to a show causenotice which gave rise to tax arrears, was pending before anyauthority, tribunal or Court, then, those proceedings would bedeemed as having been withdrawn on the day, when, the designatedauthority passed an order under sub-Section (2) of Section 90 ofthe Scheme. 13.8. In so far as the superior Courts were concerned, i.e.,the High Court or the Supreme Court, the proviso to sub-section(4) to Section 90 required the declarant to move an application,before such forums, to seek withdrawal of the proceedingspending before them, whether in the form of a writ petition or,in the form of an appeal or, even a reference, albeit, with theleave of the concerned Court. The proof of such withdrawal wasrequired to be submitted along with an intimation, sent to the https://hcservices.ecourts.gov.in/hcservices/ designated authority, constituted under sub-section (2) ofSection 90. 13.8. In so far as the superior Courts were concerned, i.e.,the High Court or the Supreme Court, the proviso to sub-section(4) to Section 90 required the declarant to move an application,before such forums, to seek withdrawal of the proceedingspending before them, whether in the form of a writ petition or,in the form of an appeal or, even a reference, albeit, with theleave of the concerned Court. The proof of such withdrawal wasrequired to be submitted along with an intimation, sent to the https://hcservices.ecourts.gov.in/hcservices/ designated authority, constituted under sub-section (2) ofSection 90. 14. In so far as Section 91 is concerned, it mandates thedesignated authority to grant immunity to the declarant againstprosecution and imposition of penalty, in respect of matterscovered in the declaration made under Section 88 of the Scheme,subject to conditions imposed under Section 90. 15. Therefore, what is required to be ascertained is:whether the declaration made, under Section 88 of the Scheme bythe petitioner, covered the penalty amount and the interestlevied thereon by the respondents/Revenue. 15.1. The respondents/Revenue, in rebuttal to the standtaken by the petitioner, have relied upon the definition of term"tax arrear", as obtaining in Section 2(m)(1) of the Scheme.For the sake of convenience, the said provision is extractedhereafter: " (m) "tax arrear" means.-(i) in relation to direct tax enactment, theamount of tax, penalty or interest determined on orbefore the 31st day of March, 1998 under thatenactment in respect of an assessment year as modifiedin consequence of giving effect to an appellate orderbut remaining unpaid on the date of declaration;......" 16. A careful perusal of the definition of "tax arrear"would show that it relates to the amount of tax, penalty orinterest determined on or before 31.03.1998 under 1961 Act inrespect an Assessment Year, which, as modified in consequence ofgiving effect to an appellate order, remains unpaid on the dateof declaration. 17. In the instant case, the assessment made (under Section143 read with Section 147 of the 1961 Act), on 10.03.1997, addedthe amounts reflected in the FDRs and the interest accruedthereon, on a protective basis to the income of the assessee.The order dated 10.03.1997 mooted the initiation of penaltyproceedings under Section 271(1)(c) of the 1961 Act. 18. In this context, the arguments advanced on behalf of thepetitioner were two (2) fold: first that, since, penalty relatedto the matter qua which tax was in arrears, with the issuance ofthe certificate under the Scheme, penalty could not be imposed,as this act triggered immunity qua the petitioner under Section91 of the Scheme. Since, it was neither the case of falsedeclaration nor, was an attempt made by the respondents/Revenueto amend the certificate, the certificate issued to thepetitioner had to hold and, therefore, no penalty and/or https://hcservices.ecourts.gov.in/hcservices/ interest could be levied and thus, adjusted against the refundorder. 18.1. Second, if, there was any confusion with regard to theright to impose penalty, and interest, since, they were notdetermined on 31.3.1998, the said confusion was settled byvirtue of the Circular issued by the Board. 18.2. In this behalf, emphasis was laid on answers given inthe aforementioned Circular to Question No.5, 7 and 9. For thesake of convenience, the said Question and answers are extractedhereafter: "...... Question No.5.: In a case where taxesare outstanding on 31st March, 1998 and also on thedate of declaration but the order of penalty is passedafter 31st March, 1998, will the declarant be entitledto the waiver of penalty? https://hcservices.ecourts.gov.in/hcservices/ interest could be levied and thus, adjusted against the refundorder. 18.1. Second, if, there was any confusion with regard to theright to impose penalty, and interest, since, they were notdetermined on 31.3.1998, the said confusion was settled byvirtue of the Circular issued by the Board. 18.2. In this behalf, emphasis was laid on answers given inthe aforementioned Circular to Question No.5, 7 and 9. For thesake of convenience, the said Question and answers are extractedhereafter: "...... Question No.5.: In a case where taxesare outstanding on 31st March, 1998 and also on thedate of declaration but the order of penalty is passedafter 31st March, 1998, will the declarant be entitledto the waiver of penalty? Answer: Section 91 empowers the DesignatedAuthority to grant immunity from the imposition ofpenalty in respect of income which is the subject-matter of declaration. As the taxes outstanding on31st March, 1998 will be covered under the declarationthe Designated Authority can grant waiver of suchpenalty........Question No.7: The Scheme offers full waiver ofinterest and penalty where the tax arrear includessuch interest or penalty along with tax. What kind ofinterest and penalty would be open for such waiver? Answer: All interest and penalties that aredirectly related to assessed income or arrears oftaxes will be open for full waiver, if the taxes areoutstanding on the specified dates, e.g., interestunder section 234A, 234B, 234C, 139 (8),215,216,217,158BFA 220(2) or penalties under section271(1)(c), 221, 158BFA, 273 etc. But where theinterest or penalty is not directly related toassessed income/arrears of tax, waiver of only 50 percent thereof is available, e.g., interest undersection 201(1A), penalties under section 271(1)(b),271B, 271BB, 271C, 271D, 271E, 271F, 272A, 272AA,272BB etc. ....Question No.9: Whether the Scheme covers caseswhere taxes are outstanding on 31st March, 1998 butthe appeal is filed after 31st March, 1998? Answer: Yes, the pendency of appeal etc., shouldbe on the date of declaration......" (Emphasis is mine) 19. I tend to agree with the submissions made in this behalfby the learned counsel for the petitioner. A perusal of Answersto Question No.5 and 7, to my mind, would clearly establish thatunder Section 91 of the Scheme, a designated authority isempowered to grant waiver from imposition of penalty andinterest in respect of income, which is subject matter of thedeclaration. Since, penalty and interest was levied in theinstant qua tax, which was in arrears, as on 31.3.1998, thedeclaration issued by the designated authority, according to theBoard's circular, would cover the penalty and interest,determined at a later point in time. 19.1. The circular, to my mind, was binding on the Revenue.Especially, in the circumstance, that, it seeks to explain as tohow the Scheme is to operate - UCO Bank V. CIT [1999] 237 ITR889 (SC); Navnit Lal C. Javari V. K.K.Sen, AAC, [1965] 56 ITR198; and Varghese (K.P.) V. ITO, [1981] 131 ITR 597 (SC). 20. Having regard to the aforesaid, it cannot be argued bythe Revenue that, since, the penalty order was issued on25.06.1998, i.e., after 31.3.1998, it would not covered by thecertificate issued to the petitioner under the Scheme. 21. The other submission advanced on behalf of thepetitioner, which, in my view, also, has merit, is that, therespondents/Revenue, on 25.06.1998 could not have issued anorder of "protective" penalty, as order dated 10.03.1997 itselfwas an order that added the amounts reflected in the FDR (alongwith interest accrued therein) in the hands of the petitioner ona protective basis. 20. Having regard to the aforesaid, it cannot be argued bythe Revenue that, since, the penalty order was issued on25.06.1998, i.e., after 31.3.1998, it would not covered by thecertificate issued to the petitioner under the Scheme. 21. The other submission advanced on behalf of thepetitioner, which, in my view, also, has merit, is that, therespondents/Revenue, on 25.06.1998 could not have issued anorder of "protective" penalty, as order dated 10.03.1997 itselfwas an order that added the amounts reflected in the FDR (alongwith interest accrued therein) in the hands of the petitioner ona protective basis. 21.1 As rightly argued by the learned counsel for thepetitioner, while there can be a protective order quaassessment, there cannot be a protective order in respect ofpenalty. [see : (i) Metal Stores V. Commissioner of IncomeTax, [1990] 186 ITR 612 (Gau); (ii) Commissioner of Income TaxV. Super Steel (Sales) Co., [1989] 178 ITR 451 (cal); and (iii)Commissioner of Income Tax, Pattiala - II V. Behari Lal PyareLal - [1983] 141 ITR 32 (P&H).] 22. This apart, what is even more disconcerting, is that,the communication/order dated 21.12.2012, whereby, adjustment ofrefund was made, no opportunity was given to the petitioner topresent his side of the case. 22.1. In an attempt to defend an order, which was clearly,in breach of principles of natural justice, recourse was soughtto be taken to the provisions of Section 245 of the 1961 Act.Mr.Chopda's contention, in this behalf, was that, respondentNo.2 was empowered to adjust the refund against the outstandingpenalty and interest, by virtue of power vested in him underSection 245 of the 1961 Act. 23. To my mind, a careful reading of the provisions ofSection 245 of the 1961 Act would show that the refund could,perhaps, have been adjusted against any amount remaining payableunder the Act, provided intimation in writing is given to theconcerned person, (in this case, the petitioner) of the action"proposed to be taken", under the said provision. 23.1. Therefore, quite clearly, in my opinion, what isenvisaged, is that, in the first instance, a proposal foradjustment, by way of a show cause notice, will have to beserved on the person, to whom, refund is due. The proposal, tobe meaningful, would have to set out the details and the reasonsas to why adjustments is required to be carried out by theRevenue, against the refund due. Only after issuance of such aproposal/show cause notice and upon consideration of reply, ifany, received - could a decision be taken as to whether or notan adjustment of refund is necessitated. Anything short of suchminimum opportunity would, to my mind, result in a completebreach of principles of natural justice. 23.2. Therefore, in my opinion, the communication/orderdated 21.12.2012 cannot be sustained. 24. Therefore, having regard to the conclusions reachedhereinabove by me, the other issue, with regard to the serviceof the order dated 25.06.1998, whereby, penalty was imposed onthe petitioner, loses its significance. I must, however,indicate that apart from the averment made in the affidavit, nomaterial was placed to show dispatch, or, receipt of the saidorder by the petitioner. 25. Thus, for the foregoing reasons, the Writ Petition hasto be allowed. Consequently, the notice of demand and penaltyorder dated 25.06.1998 and the consequential order of interestdated 22.10.2012 are quashed. As a logical corollary, theadjustment order dated 21.12.2012 will be rendered inefficaciousin law. Resultantly, the petitioner would be entitled to refundin terms of the order dated 22.10.2012. https://hcservices.ecourts.gov.in/hcservices/ 26. Accordingly, the Writ Petition is disposed of in theaforementioned terms, leaving the parties to bear their owncosts. Consequently, the connected Miscellaneous Petitionstands closed. Sd/- Asst.Registrar /true copy/ Sub Asst. Registrar To 25. Thus, for the foregoing reasons, the Writ Petition hasto be allowed. Consequently, the notice of demand and penaltyorder dated 25.06.1998 and the consequential order of interestdated 22.10.2012 are quashed. As a logical corollary, theadjustment order dated 21.12.2012 will be rendered inefficaciousin law. Resultantly, the petitioner would be entitled to refundin terms of the order dated 22.10.2012. https://hcservices.ecourts.gov.in/hcservices/ 26. Accordingly, the Writ Petition is disposed of in theaforementioned terms, leaving the parties to bear their owncosts. Consequently, the connected Miscellaneous Petitionstands closed. Sd/- Asst.Registrar /true copy/ Sub Asst. Registrar To 1.The Commissioner of Income-tax Central - II No.108 Uthamar Gandhi Salai, Nungambakkam, Chennai - 600 34. 2.Assistant Commissioner of Income-tax (Now) Deputy Commissioner of Inocme-tax Central Circle-II(4), No.108, Uthamar Gandhi Salai,Nungambakkam, Chennai - 600 034. +1cc to Mr.T. Pramod Kumar Chopda, Advocate SR. 14654+1cc to Mr.J. Naresh Kumar, Advocate SR. 14572 Pre-Delivery Order in Writ Petition No.10791 of 2014& M.P.No.2 of 2014AD(CO)VR(10/03/2017)