prpri HC direction on Adjustment of Income Tax Refund towards Tax, Interest & Penalty under Karvivad Samadhan Scheme HC direction on Adjustment of Income Tax Refund towards Tax, Interest & Penalty under Karvivad Samadhan Scheme

Case Law Details

Case Name : Best India Tobacco Suppliers Pvt. Ltd. Vs CIT (Andhra Pradesh High Court)
Appeal Number : WP No. 18126/2000
Date of Judgement/Order : 24/06/2021
Related Assessment Year :

Best India Tobacco Suppliers Pvt. Ltd. Vs CIT (Andhra Pradesh High Court)

The important aspect for consideration in this writ petition is when the assessee files declaration under Karvivad Samadhan Scheme, 1998 (for short, ‘the KVS scheme’) i.e., whether the tax refund should be adjusted towards the arrears of the tax proper first and balance towards interest and penalty or conversely towards interest and penalty first and balance towards arrears of tax.

Held by High Court- writ petition is allowed and the respondent authorities are directed to adjust the tax refundable to the petitioner for the year 1996-97 of Rs.4,86,970/- to the tax arrears instead of penalty and accordingly, re-determine the amount payable by the petitioner under Section 90(1) of the Finance (No.2) Act, 1998 and grant certificate expeditiously, but not later than four (4) weeks from the date of receipt of a copy of this order.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

The important aspect for consideration in this writ petition is when the assessee files declaration under Karvivad Samadhan Scheme, 1998 (for short, ‘the KVS scheme’) i.e., whether the tax refund should be adjusted towards the arrears of the tax proper first and balance towards interest and penalty or conversely towards interest and penalty first and balance towards arrears of tax.

2. The petitioner’s case is that it is a company engaged in the business of exporting tobacco. The petitioner was assessed income tax under the Income Tax Act (I.T. Act) and has been filing its returns before the Assistant Commissioner, Circle-I, Guntur, who is the Assessing Officer. While so, for the assessment year 1986-87 the petitioner had filed returns on 23.01.1987 disclosing a net income of Rs.1,87,540/-. The Assessing Officer issued notice under Section 143(2) of the I.T. Act and passed an assessment order under Section 143(3) of the I.T. Act on 31.03.1989 computing total income of the assessee as Rs.15,55,330/- for the Assessment Year 1986-87 and accordingly, levied tax, interest and penalty. Aggrieved, the petitioner preferred an appeal before C.I.T (Appeals). The first appellate authority vide its order in I.T.A.No.A2/9/89-90 dated 03.07.1989 allowed the appeal and set aside the additions, which were made by the assessing officer.

(a) Aggrieved, the Department preferred second appeal before the Income Tax Appellate Tribunal (I.T.A.T) and the Tribunal vide its order dated 23.05.1996 was pleased to allow the I.T.A.No.1600/Hyd/1989 and reversed the order of the first appellate authority. Aggrieved, the petitioner filed Reference Application under Section 256(1) of the I.T. Act and the same was also rejected. Aggrieved, the petitioner filed I.T.C.No.145/1998 under Section 256(2) of the I.T.Act.

(b) While the matter thus pending, the Union Parliament has enacted the Finance (No.2) Act, 1998 introducing a Tax Amnesty Scheme called ‘Karvivad Samadhan Scheme’ to enable the tax payers to settle all their tax liabilities by avoiding litigation in the Courts. In tune with the provisions of the said enactment, the petitioner filed the declaration under Section 89 of the Finance (No.2) Act, 1998 on 26.12.1998 and the same was received and acknowledged by the respondent on 29.12.1998. Under the terms of the scheme, an assessee will have to withdraw the pending litigation and on showing the proof of the same, the tax liability will be determined at a flat rate on the disputed liability. In pursuance of the above, the petitioner has withdrawn I.T.C.No.145/1998 which was pending on the file of the High Court of A.P.

(c) While so, when the respondent authorities failed to determine the amount payable within 60 days from the date of receipt of declaration from the petitioner as stipulated in the KVS scheme, the petitioner filed W.P.No.4670/2000 which was disposed of by order dated 08.06.2000. Pursuant to the said order, the respondent authorities despatched the Certificate of Intimation under Section 90(1) of the Finance (No.2) Act, 1998, whereunder the respondents have determined an amount of Rs.3,70,103/- as the amount payable towards full and final settlement of petitioner’s tax arrears, pursuant to the declaration filed by the petitioner under the KVS scheme. According to the petitioner, the amount of Rs.3,70,103/- is arbitrary and illegal. The petitioner’s calculation is that for the assessment year 1996-97, the petitioner was entitled for refund of excess tax of an amount of Rs.4,86,970/-. By order dated 24.11.1997 passed under Section 143(1)(a) of the I.T. Act, the assessing authority adjusted the said amount towards arrears for the assessment year 1986-87. However, the said order was silent as to whether the amount was adjusted towards tax arrears or penalty. As a matter of fact, questioning the levy of penalty of Rs.6,10,670/- the petitioner filed first appeal to the CIT (Appeals), Vijayawada and the same is pending. In the declaration filed under the KVS scheme, the petitioner in column No.6 has clearly mentioned that a tax arrear of Rs.1,23,700/- relating to 1986-87 assessment year was pending after adjusting Rs.4,86,970/- of refund. The petitioner was under the bonafide impression that the refund amount of Rs.4,86,970/- was adjusted towards tax arrears. However, the same was adjusted towards penalty contrary to the information provided to the petitioner under the Right to Information Act by the CBDT. If the refund amount is adjusted towards regular tax, the petitioner is liable to pay only Rs.74,790/- but not Rs.3,70,103/- as determined by the respondents.

Hence, the writ petition.

3. The respondent filed counter which is somewhat dubious in nature. At one breath, it is contended that as per the Board directions, any payment or part payment of taxes should first be adjusted towards tax and balance towards interest and same was in fact correctly adopted in the instant case, while determining the tax payable under the KVS scheme. On another breath, it is contended that the refund tax of Rs.4,86,970/- was adjusted towards penalty and thereafter arrears of tax was arrived at Rs.3,70,013/- as per the provisions of the KVS scheme.

4. So, on a careful scrutiny of the counter averments, it is evident that the respondent authorities have applied the refund tax amount of Rs.4,86,970/- towards penalty only but not towards the arrears of tax. Hence, the question is whether such action of the respondent authorities is legally sustainable?

5. Heard Sri Challa Gunaranjan, learned counsel for petitioner, and Smt. M.Kiranmayee, Standing Counsel for the respondents.

6. We gave our anxious consideration to the above respective contentions of both sides. On a conspectus of material on record, we find the action of the respondents in adjusting the tax refund of Rs.4,86,970/- towards penalty is legally impermissible. As rightly argued by the learned counsel for petitioner, the circular of the Board F.No.149/145/98-TPL dated 03.09.1998 is clear on this aspect. Clarification on questions 3 & 4 is germane at this juncture and it is thus:

Question No.3: Where refund for an earlier year is adjusted against the demand of any year, will such an adjustment be regarded as the payment of tax?

Answer: Yes. The adjust of refund payable is one of the modes of payment of taxes.

Question No.4: Where the tax arrear comprises tax and interest, how will the part payment be first appropriated towards tax or interest?

Answer: The part payments are appropriated first towards tax and then towards interest.

(a) This clarification is not disputed by the respondents and on the other hand, in the counter it is claimed that the Board’s direction that any payment or part payment of taxes should first be adjusted towards tax and balance towards interest was correctly adopted while determined the tax payable under KVS scheme. If the Board’s circular is properly implemented, there is no reason for the respondent authorities to adjust the tax refund amount first to the penalty rather than arrears of the tax. No answer is provided by the respondents in this regard.

(b) In Mangilal S. Jian v. Commissioner of Income Tax1 which is similar to the case on hand, the High Court of Karnataka dealt with the question whether any amount paid towards the tax arrears (which includes the income tax and interest payable) should be taken as payment towards tax or towards interest for the purpose of the KVS scheme.

(c) Answering the above question, while referring the provisions of the Finance (No.2) Act, 1998, the Division bench of Karnataka High Court observed that the normal procedure followed under Sec.140A of the Income Tax Act to apply the amount paid by the assessee first towards interest and the balance towards the tax payable is not applicable to the provisions of the Finance (No.2) Act, 1998 and the KVS scheme thereof. The reasons for such non-application of explanation to Sec.140A(1) of the Income Tax Act are as follows:

16. It is no doubt true that if the issue is examined with reference to the Explanation to Section 140A(1) of the Income-tax Act, the contention of the Department would be correct. But the issue will have to be examined not with reference to Section 140A of the Income Tax Act, but with reference to the provisions of the KVS Scheme, as contained in Chapter IV of the Finance (No.2) Act, 1998. The Explanation to Section 140A(1) of the Income Tax Act will not apply for the following two reasons:

“(i) The provisions of Section 88 of the Finance (No.2) Act, 1998, prevail over the provisions of Section 140A of the Income Tax Act, Section 88 specifically states that ‘notwithstanding anything contained in any direct tax enactment’, the amount payable under the KVS Scheme will be as stated in the scheme.

(ii) In view of the pendency of the revision, any payment made by the assessee towards tax arrears will be on account and without prejudice subject to the final decision in the revision.”

(d) The Division Bench also considered the relevant portions of the clarifications given by the CBDT as follows:

“19. If any amount paid towards arrears during the pendency of the litigation (by way of appeal, revision, etc.) is to be irreversibly adjusted against the interest under Section 140A, that would render infructuous the pending litigation (in this case pending revision petition).…….xxxx……..The relevant portions of the clarifications (questions Nos.4 and 7 and their answers) are extracted below (page 51):

“Question No.4: Where the tax arrear comprises tax and interest, how will the part payment be first appropriated–towards tax or interest?

Answer: The part payments are appropriated first towards tax and then towards interest.

Question No. 7: The Scheme offers full waiver of interest and penalty where the tax arrear includes such interest or penalty along with tax. What kind of interest and penalty would be open for such waiver?

Answer: All interest and penalties that are directly related to assessed income or arrears of taxes will be open for full waiver, if the taxes are outstanding on the specified dates, e.g., interest under Sections 234A, 234B, 234C, 139(8), 215, 216, 217, 158BFA, 220(2) or penalties under Sections 271(1)(c), 221, 158BFA, 273, etc.” (emphasis supplied).”

On the above observations, the Division Bench set aside the method adopted by the Department and directed the 1st respondent therein to issue a fresh Certificate of Intimation in the light of the order of the Division Bench. Needless to emphasise that the above decision applies with all its fours to the case on hand.

7. Accordingly, this writ petition is allowed and the respondent authorities are directed to adjust the tax refundable to the petitioner for the year 1996-97 of Rs.4,86,970/- to the tax arrears instead of penalty and accordingly, re-determine the amount payable by the petitioner under Section 90(1) of the Finance (No.2) Act, 1998 and grant certificate expeditiously, but not later than four (4) weeks from the date of receipt of a copy of this order. No costs.

As a sequel, interlocutory applications pending for consideration, if any, shall stand closed.

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