Liability u/s 132(5) can be determined only if proper Assessments is made

 Facts of the Case

In the present facts of the case there was a search and seizure under section 132 in which the currency was seized. The Assessee claim that the amounts seized during the search ought to be accounted for as payment of advance tax on the date of seizure. But, according to the Revenue, the particular currency could not be treated as payment of tax till the filing of the return. On 10th May, 1991 the AO passed an order retaining the cash seized to be dealt with in accordance with provisions of Section 132B of the Act. The Assessee filed his return of income on 26th April, 1993 declaring a total income of Rs.56,56,380/- for the relevant period (i.e. Previous Year 1990-1991 relevant to the Assessment Year 1991-92). The said return was processed under Section 143(1)(a) and a demand of Rs.58,49,796/- was raised. This demand included interest payable under Section 234A, 234B & 234C of the Act. The cash seized during search operations was appropriated against the aforesaid demand.

The assessee agitated before the ld. AO but he rejected the Assessee’s application under Section 154 of the Act.

Held by ld. CIT(A)

The Assessee after getting no relief from AO agitated before the ld. CIT(A) where he contended that the demand of tax would necessarily relate back to the relevant accounting year since the liability of income tax crystallises on the last date of the accounting year, which in this case was 31st March, 1991. Further it was contended that he had surrendered income under Section 132(4) and not demanded any refund of the amount seized. Also, he contended for making certain adjustments.

The ld. CIT(A) held that the amount seized during the search, ought to be adjusted from the date of the order under Section 132(5). The CIT(A) also directed that the interest under Section 234A, 234B, 234C of the Act be computed only up to the date of 10th May, 1991 and further interest be charged only on the balance amount, if any, remaining after adjustment of the cash seized as on 10th May, 1991.

 Held by the Hon’ble Tribunal

The order of Ld. CIT(A) was challenged by both the parties. The Hon’ble Tribunal upheld the contention of the Revenue that the seized cash could not be treated as payment of advance tax on the date of the seizure. However, the Tribunal held that the liability to pay advance tax by the Assessee stood discharged on the date of the order under Section 132(5) of the Act, as the amount seized had to be applied in accordance with Section 132B of the Act. The Hon’ble Tribunal further held that the liability to pay advance tax had occurred during the financial year 1991 and, therefore, had to be treated as an existing liability as mentioned in clause (iii) of Section 132(5) of the Act.

Contentions of the Revenue

The ld. Counsel for the Revenue contended that an order under Section 132(5) of the Act did not permit appropriation of the assets seized but, only empower the AO to retain the assets to be applied in a manner as provided under the Act. He further contended that the amount retained by the AO could only be appropriated towards the income tax liability once the Assessee had filed a return accepting the same as payment of tax or on a regular assessment being made. He stated that unless an assessment had been framed, there would be no determination of any liability for the relevant year and, thus, the assets seized could not be applied towards any such liability.

Held by the Hon’ble High Court

The Hon’ble High Court heard Revenue but nobody was present on the side of Assessee. The Hon’ble High Court after considering Sections 132(4), 132(5) & 132B observed that any disclosure made by an Assessee with regard to its income under section 132(4) would only serve as evidence required for carrying out the assessment and also any declaration made under Section 132(4) of the Act is not a substitute for a return of income by an Assessee. A plain reading of Section 132 of the Act indicates that once the search and seizure operations have been conducted and assets have been seized from the Assessee, the Income Tax Officer has to estimate the amount/assets required to meet the Assessee’s known and estimated liability and retain the same. Section 132(5) of the Act does not contemplate appropriation of assets towards any liability, whether existing or in future, but is limited to permitting the ITO to retain the seized assets to be applied as provided under the Act. In view of the aforesaid, the conclusion of the CIT(A) as well as the Tribunal that liability of the Assessee would stand discharged to the extent of cash seized from the date of the order under Section 132(5) of the Act is not sustainable as Section 132(5) of the Act does not deal with appropriation of the assets seized. The Hon’ble High Court further held that in absence of any return filed, any assessment made or any determinative process undertaken, the question of the ITO specifying a liability under clause (iii) of Section 132(5) of the Act does not arise. Further, the Hon’ble High Court held that they were unable to accept the Tribunal’s view that payment of advance tax was an existing liability as on the date of the order under Section 132(5) of the Act and, thus, seized assets could be applied towards the said liability as on that date. Although it cannot be disputed that the Assessee had the liability to pay the advance tax, nonetheless, this liability could not have been determined by the AO prior to the assessment under the Act. Advance tax is, essentially, to be paid by an assessee on the amount of taxable income estimated by it. The AO can determine whether payment of advance tax paid fell short of the required amount only when an assessee’s income is assessed. Thus, at the stage of Section 132(5) of the Act, such liability in respect of the Assessee’s income for the Previous Year 1990-91 could not be specified under clause (iii) of Section 132(5) of the Act. It is not disputed that the Assessee had also not made any request that the amount seized by the ITO be applied towards the discharge of its liability under the Act. Thus, the assets retained by the ITO could not have been appropriated towards the payment of tax until the Assessee had filed a return indicating the application of seized cash towards its tax liability or till an assessment was framed for the Assessment Year 1991-1992. Accordingly, Appeals of the revenue were allowed.