Humuza Consultants Vs ACIT (Bombay High Court)
Bombay High Court granted interim protection to Humuza Consultants by staying recovery of the disputed income-tax demand arising from an assessment which was alleged to be high-pitched. For AY 2017-18, the assessee had returned income of about Rs.68.33 crore, whereas the assessed income was stated to be about Rs.461.72 crore. A substantial amount relating to profit on sale of shares had been added under Section 68 after the Assessing Officer rejected the assessee’s exemption claim.
The assessee contended that reference to Section 10(34), instead of Section 10(38), in the return was merely a typographical error and sought to place additional evidence before the CIT(A) under Rule 46A. Its earlier stay was not extended and the assessee was directed to pay 20% of the disputed demand. The High Court noted that CBDT Instruction No. 1914 had superseded the earlier Instruction No. 96 and specifically contemplated interference in cases involving an unreasonably high-pitched assessment or genuine hardship.
It further observed that the assessee had been attempting to place additional documents on record and that the pending Rule 46A application ought to have been decided before a view was taken on their genuineness and veracity. Finding a prima facie case in favour of the assessee, the Court stayed recovery under the impugned demand notices and directed the Appellate Authority to decide the Rule 46A application as well as the substantive appeal within three months. The interim protection was made subject to the assessee not deliberately delaying disposal of the appeal.
Background of Assessment and Section 68 Addition
The assessee filed its return of income for assessment year 2017-18 on 28 July 2017 declaring total income of Rs.68,33,07,135 and exempt income of Rs.39,75,96,305. The return was processed under Section 143(1) and a demand of Rs.175,52,26,440 was raised.
The case was thereafter selected for scrutiny under CASS on the identified issue of expenses incurred for earning exempt income. During assessment proceedings, the assessee stated that interest earned on fixed deposits had been offered to tax and that profit from sale of listed shares had been claimed as exempt.
The Assessing Officer held that Section 10(34) dealt with dividends and not profit from sale of listed shares. The AO further held that the assessee had failed to substantiate the acquisition, holding and sale of shares through concrete and authentic documentary evidence.
Consequently, profit on sale of shares amounting to Rs.393,39,28,268 was treated as unexplained and added to the assessee’s total income under Section 68.
Assessee Claimed Section 10(34) Reference Was a Typographical Error
Before the High Court, the assessee contended that mentioning Section 10(34) in its return was merely a typographical error and that the exemption was actually intended to be claimed under Section 10(38).
Following the assessment order dated 29 December 2019 under Section 143(3) and the consequential demand notice under Section 156, the assessee filed a stay application on 3 March 2020 and also preferred an appeal before the CIT(A) under Section 246A.
The Assessing Officer initially granted a blanket stay on recovery for six months up to 31 December 2020 or disposal of the appeal by the CIT(A), whichever was earlier.
Additional Evidence Filed Before CIT(A) Under Rule 46A
The assessee sought early hearing of its appeal and also filed an application seeking admission of additional evidence before the CIT(A).
The additional material included documents relating to the share transactions. The assessee stated that the Assessing Officer called upon it to explain the additional evidence and that written submissions were also furnished explaining why such evidence could not be filed during assessment proceedings.
As the earlier stay was due to expire on 31 December 2020, the assessee repeatedly sought early disposal of the appeal and extension of the stay.
AO Refused Extension and Required Payment of 20% Demand
The assessee’s application for extension of stay was rejected on 18 December 2020. It was directed to pay 20% of the demand in terms of the applicable CBDT instructions, failing which coercive recovery action could be considered.
The assessee thereafter approached the CIT(A) seeking stay and early hearing and also instituted an earlier writ petition challenging refusal to extend the stay.
In that proceeding, the High Court directed the CIT(A) to consider and dispose of the stay application in accordance with law by passing a speaking order.
CIT(A) Rejected Stay Application
Pursuant to the earlier High Court order, the CIT(A) passed an order dated 30 November 2022 under Section 220(6).
The CIT(A) rejected the assessee’s reliance upon CBDT Instruction No. 96 dated 21 August 1969. The assessee had relied upon the instruction for the proposition that where assessed income was substantially higher than returned income, collection of disputed tax ought to remain in abeyance.
The CIT(A) held that unconditional stay was not justified and directed the assessee to pay 20% of the disputed demand.
As regards the additional documents, the appellate authority observed that they would first have to be admitted under Rule 46A and that their genuineness and veracity could be examined when the substantive appeal was considered.
High-Pitched Assessment and CBDT Instruction No. 1914
The assessee argued before the High Court that there had been no material change in circumstances warranting refusal to continue the earlier stay. It further contended that the assessment was high-pitched and therefore recovery deserved to be stayed.
The Court considered the effect of CBDT Instruction No. 96 dated 21 August 1969 and Instruction No. 1914 dated 2 February 1993.
It observed that Instruction No. 1914 had been issued in supersession of earlier instructions on the subject and therefore had, by necessary implication, superseded Instruction No. 96.
Importantly, Instruction No. 1914 contemplated intervention by higher authorities in exceptional circumstances, including where an assessment appeared to be unreasonably high-pitched or where genuine hardship was likely to be caused to the assessee.
Pending Rule 46A Application Ought to Have Been Decided
The High Court also noticed that the assessee had been making attempts to place additional documents on record under Rule 46A.
According to the Court, the application for admission of additional evidence ought to have been decided because sufficient time was available with the appellate authority. Only thereafter could an appropriate view have been taken regarding the genuineness and veracity of those documents.
The appellate authority had nevertheless not decided the Rule 46A application despite the assessee’s request.
Bombay High Court Finds Prima Facie Case in Assessee’s Favour
The High Court found a prima facie case in favour of the assessee. It took note of the submission that, as against returned income of approximately Rs.68.33 crore, income had been assessed at approximately Rs.461.72 crore.
The Court therefore considered the assessment to be prima facie high-pitched for the purpose of granting interim protection.
Recovery of Tax Demand Stayed
The Bombay High Court stayed recovery pursuant to the impugned demand notices.
At the same time, it directed the Appellate Authority to decide the pending Rule 46A application as well as the substantive appeal within three months, notwithstanding pendency of the writ petition before the High Court.
The Court clarified that its directions would be liable to be vacated if it was reported that the assessee had made any deliberate attempt to delay final disposal of the appeal.
Cases Discussed
- Valvoline Cummins Ltd. v. DCIT, 307 ITR 103 (Delhi) — Relied upon by the assessee in support of its contention that recovery should be stayed where the assessed income is substantially higher than the returned income. The Bombay High Court referred to the Delhi High Court’s observations concerning a high-pitched assessment and the CBDT instructions governing stay of demand.
- Soul v. DCIT, 323 ITR 305 (Delhi) — Relied upon by the petitioner along with Valvoline Cummins Ltd. in support of the plea for stay of recovery on account of the high-pitched assessment.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
A return of income came to be fled by the Petitioner assessee for the assessment year 2017-18 on 28th July, 2017 declaring a total income of Rs.68,33,07,135/- and exempt income of Rs.39,75,96,305/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (“the Act’) and a demand of Rs.175,52,26,440/- raised.
Subsequently the case was selected for scrutiny assessment under CASS on the identifed issue of “expenses incurred for earning exempt income”. Notice under Section 142(1) of the Act alongwith questionnaire were issued and among others, the Petitioner was asked to provide details of exempt income and expenditure incurred to earn exempt income. The Petitioner submitted its response stating that it had earned income in the nature of interest on fixed deposits, which had been duly offered to tax. It was also stated that profit from sale of listed shares had been claimed, which were exempted in accordance with provisions of Section 10(34) of the Act. The Assessing Officer (A.O.) finally passed an order of assessment dated 29th December, 2019, holding that Section 10(34) dealt with “dividends”’ and not “profit earned from sale of listed shares” and it was further held that the assessee could not substantiate through any concrete and authentic documentary evidence the factum of acquisition, holding and sale of shares of the fund fow for all these transactions.
The A.O. further held that the assessee had failed to show as to how profit on sale of shares amounting to Rs.393,39,28,268/- was exempt under any Section of the Act and proceeded to reject that plea and while rejecting the claim of the Petitioner, drew a conclusion that the claim of the assessee regarding the source of income of Rs.393,39,28,268/-, which was credited to the profit and loss account as per the income tax return for the assessment year 2017-18 and the 5 WP(L).38423.2022 OS.doc statement of profit and loss filed in submissions, remain unexplained and accordingly added the said amount back to its total income under Section 68 of the Act.
2. Learned Counsel for the Petitioner stated that in fact it was just a typographical error that while filing its return instead of mentioning Section 10(38), the Petitioner had claimed exemption in accordance with the provisions of Section 10(34) of the Act. Consequent upon the passing of the order of assessment dated 29th December, 2019 under Section 143(3) of the Act as also the notice of demand under Section 156 of the Act, and with a view to seek a stay on the recovery notice under Section 220 of the Act issued by Respondent No. 1, the Petitioner claims that a stay application was filed with Respondent No. 1 on 03rd March, 2020 and appeal also came to be preferred before the CIT(A) under Section 246A of the Act against the said order of assessment.
3. The Respondent No. 1 by virtue of order dated 24th June, 2020 granted a blanket stay on the demand for a period of six months up to 31st December, 2020, or the disposal of the appeal by the CIT(A), whichever was earlier. According to learned Counsel for the Petitioner, this was possible when the A.O. held satisfed upon going through the additional documents fled before it, which were in the shape of contract notes issued by the stock broker namely JM Financial Services Limited as also considering the fact that securities transaction tax had been paid on the sale of shares.
4. The case set up by the Petitioner is that since the Petitioner was protected only till 31st December, 2020, it was imperative that the appeal fled by the Petitioner was decided and, therefore, an application for early hearing of the appeal was fled. Besides this, the Petitioner claims that an application for additional evidence in support of the appeal was also fled with CIT(A). In consequence thereof it is stated that comments were called from Respondent No. 1 by Respondent No. 3 the Appellate Authority in regard to the additional evidence so submitted in the appeal proceedings. It is stated that the A.O. directed the Petitioner to appear before him on 28th October, 2020 to explain the additional evidence so submitted, which was duly explained including the reasons as to why the same could not be fled during the assessment proceedings. It is stated that written submissions were also communicated through email in support of the admission of the additional evidence.
5. The case set up is that on 28th November, 2020, the Petitioner wrote to Respondent No. 3 by email requesting him to schedule the hearing of the appeal, in view of the fact that the stay granted by Respondent No. 1 was expiring on 31 st December, 2020. This was followed by another email on 04th December, 2020.
6. On 06th December, 2020 the Petitioner claims that an application for extension of stay was fled with the A.O. Respondent No. 1 seeking extension of stay as the appeal had not been heard by the CIT(A), however, it appears that this application for extension of stay was rejected vide the order dated 18th December, 2020, not only this, Respondent No. 1, directed that an amount of 20% of the demand be paid in terms of Offce Memorandum [F.No.404/72/93-ITCC] dated 29th 5 WP(L).38423.2022 OS.doc February, 2016 and amended Instruction dated 31st July, 2017, failing which the Petitioner was informed that coercive action would be considered for recovering the demand.
7. On 22nd December, 2020, the Petitioner claims that an application was filed with Respondent No. 3 requesting to grant a stay on demand and to take up the matter for final hearing as Respondent No. 1 had refused to extend the stay beyond 31st December, 2020. A writ petition also came to be filed bearing WP(L) No.10011 of 2020 challenging the order whereby the stay granted on 24th June, 2020 was not extended. In the said petition, the Petitioner sought a direction in the nature of mandamus, directing Respondent No. 3 to take up the appeal of the Petitioner out of turn for disposal as also prayed for a mandamus directing Respondent No 1 to pass an order extending the stay on the outstanding demand. The argument was that the order dated 18th December, 2020 whereby the Petitioner was directed to pay 20% of the demand was arbitrary, as the terms of the stay could not have been modified, without any change in the facts and circumstances of the case.
8. The Petitioner in the aforesaid petition had prayed for a writ of certiorari for quashing the order impugned dated 18th December, 2020 as also prayed for issuance of writ of mandamus. The Court however by virtue of order dated 31st December, 2020 did not grant any relief to the Petitioner as was prayed in the said petition including the writ of certiorari for quashing the order dated 18th December, 2020 or for mandamus seeking extension of the stay, however, it directed the CIT(A) to hear and dispose of the stay application in accordance with law by passing a speaking order, inasmuch as the Petitioner had in the meantime also fled an application for stay before the CIT(A).
9. It is pursuant to the order dated 31st December, 2020 that the CIT(A) has passed the order dated 30th November, 2022 under Section 220(6) of the Act, which is impugned in the present petition. The CIT(A) in the order impugned rejected the contention of the Petitioner in reference to CBDT Instruction No. 96 dated 21 August, 1969, which was pressed 5 WP(L).38423.2022 OS.doc by the Petitioner to support and buttress the proposition that if the assessed income was substantially higher than the returned income, the collection of tax in dispute ought to be held in abeyance.
10. It was held that the circular would be applicable only if there was no lapse on the part of the assessee and not otherwise as in the present case where the assessee had failed to provide the documents, despite repeated opportunities granted in that regard. It was held that considering the fact that the assessee had not claimed that it was under any financial distress or was unable to pay the disputed demand, there was no reason to grant unconditional stay as prayed more so when the case of the assessee did not satisfy any of the conditions of the Instruction No.1914 dated 29th February, 2016 r/w Instruction dated 31st July, 2017.
Insofar as the merits of the stay application are concerned, the Appellate Authority held that the documents sought to be referred to by the assessee having not been produced before the A.O., the same ought to be first admitted in terms ofRule 46A of the Income Tax Rules, 1962 and further that admissibility of the said documents under Rule 46A of the Rules and the genuineness and veracity of the said documents would be gone into only at the time of consideration of the main appeal.
11. It was in the aforementioned circumstances that the CIT(A) while rejecting the stay application of the Petitioner assessee directed to pay 20% of the disputed amount in terms of Instruction No. 1914 dated 29th February, 2016 and Instruction dated 31st July, 2017.
12. Learned Counsel for the Petitioner vehemently urged that the CIT(A) could not have refused to extend the stay order which was earlier granted by the A.O. on 24th June, 2020 and further that since there was no change in the circumstances between 24th June, 2020, as also the date when the A.O. rejected the application for extension of stay on 18th December, 2020, the rejection of the prayer of the Petitioner for extension of stay was illegal and unjustifed. It was urged that CIT(A) ought to have appreciated the said fact and granted stay of the demand on that basis alone. The second point urged was that since the demand was high pitched, the same ought to have been stayed in terms of the circulars and instructions discussed hereinabove. Reliance was placed upon Valvoline Cummins Ltd. V/s. Dy. CIT 1 and Soul V/s. Dy. CIT (2008) 173 Taxman 468 (Delhi).
13. In the case of Valvoline Cummins Ltd. the Court in paragraph 41 observed as under:
“41. A perusal of paragraph 2 of the aforesaid extract would show that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till the decision on the appeal is taken. In this case, as we have noted above, the assessment is almost 8 times the returned income. Clearly, the above extract from Instruction 96, dated 21-81969 would be applicable to the facts of the case.”
A reference to paragraph 2 of the Instruction No. 96, dated 21st August, 1969 read as under:
“(2) The then Deputy Prime Minister had observed as under:
…where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapse on the part of the assesse.”
14. It however appears that Instruction No.1914, dated 02nd February, 1993 was issued, which was in supersession of all the earlier instructions on this subject and by necessary implication would have superseded Instruction No.96, dated 21st August, 1969, which was relied upon by the Delhi High Court in the case of Valvoline Cummins Ltd.. However, Instruction No.1914, dated 02nd February, 1993 in clause – B(iii) specifically envisage as under:
“(iii)The decision in the matter of stay of demand should normally be taken by Assessing Officer/TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances e.g. where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.
15. It, therefore, transpires that the proviso contained in paragraph 2 of the Instruction No. 96 dated 21st August, 1969, which envisages that there should be no lapses on the part of the assessee for purposes of claiming the tax in dispute to be held in abeyance was conspicuously missing from Instruction No. 1914, dated 02nd February, 1993. The CIT(A), it appears, while rejecting the prayer of the Petitioner for grant of stay, relied upon the instruction which appears had since been superseded. We have also noticed that the Petitioner had all along been making desparate attempts for placing on record documents as additional evidence in terms of Rule 46A of the Rules, which application ought to have been decided inasmuch as there was sufficient time with the Appellate Authority to pass orders in that regard. Only thereafter a view then could have been taken as regards their genuineness or veracity.
16. In the present case it appears that the Appellate Authority did not even deem it appropriate to decide the said application even when the Petitioner claims that a prayer was made for such a decision in that regard. We accordingly find prima facie case in favour of the Petitioner as it appears that the assessment was high pitched as was claimed by Mr. Mistry, learned Senior Counsel for the Petitioner, who stated that as against the returned income of Rs.68,33,07,140/-, the income has been assessed at Rs.461,72,35,403/-.
17. Be that as it may, we stay the recovery based upon the impugned demand notices. Notwithstanding the fact that we have passed an interim order today, we direct the Appellate Authority to decide the application under Rule 46A, which is pending before it, as also the appeal within three months from today, Notwithstanding the pendency of the present petition before this Court. The directions passed today shall be liable to be vacated, in case it is reported that any deliberate attempt has been made before the Appellate Authority to delay the fnal decision in the appeal. Objections be fled to the writ petition within six weeks.
18. List on 13th March, 2023, for consideration.
