Nawan Estates P. Ltd. v. Tax Recovery Officer — 1975 DIGILAW 207 (CAL)

JUDGMENT 1. IN this case the petitioner challenges two orders of the Tax Recovery officer both dated 22nd July 1972. In order to appreciate the controversy in this case it would be necessary to refer to certain facts briefly. The assessee is a private limited company which owns several house property and holds shares in the companies. For the assessee year 1967-68 the Income-tax officer by an order dated 20th July, 1968 assessed the total income at Rs. 3,41,809 taking into account income from property and income from other sources. In the said assessment the income-tax Officer charged interest under section 215 of the Income-tax act, 1961 for the sum of Rs. 11,955/-In the said assessment, the Income-tax officer disallowed, interalia, the claim of interest of Rs. 85,466/- paid to the shareholders. Upon this assessment being made, the Income-tax Officer, collection, issued notice of demand under section 156 of the Act demanding rs. 1,84,131/ -. The assessee thereafter preferred an appeal before the Appellate assistant Commissioner. In the meantime, the Income-tax Officer levied penalty of Rs. 10,000/- under section 221 (1) of the Income-tax Act on the ground that the assessee had failed to pay the demand as per notice issued by him. Thereafter, the assessee preferred an appeal against the order of penalty. The aforesaid two orders came up in appeal along with other appeals for other assessment years before the appellate Assistant Commissioner and the appellate Assistant Commissioner confirmed both the order of assessment as well as the order of penalty. The assessee thereafter preferred appeals before the Income-tax Appellate Tribunal both against assessment of tax and the levy of penalty for the assessment year 1967-68. The Appellate Tribunal by its consolidated order dated 23rd November, 1971, following the earlier decisions directed on the question of disallowance, inter alia, as follows :- "after hearing both the parties and after going through the Tribunal's order for the earlier years, we are of the view that we do not have sufficient material on record to come to a correct conclusion. The Appellate Assistant Commissioner is already in seisin of the appeal proceedings revived by the tribunal for the assessment years 1960-61 and 1961-62 and it would be expected of either party to assist the enquiries which the Appellate Assistant Commissioner has been directed to make by the tribunal We, therefore, set aside the relevant portion of the Appellate Assistant Commissioner's order in appeal before us and direct the Appellate assistant Commissioner to re-decide the point along with the assessment years 1960-61 and 1961-62 which he would be making in pursuance of the tribunal's order for the earlier years. . . . . . . . . . " in the concluding portion, the tribunal observed, interalia, as follows ; "in the result the appeal should be treated as partly allowed for statistical purpose. " 2. SO far as the question of imposition of penalty is concerned, the tribunal by another consolidated order overruled the legal objection against imposition of penalty but reduced the quantum from Rs. 6,000/- to 5,000/-relating to the assessment year 1967-68. In the meantime, the Income tax Officer, Collection, on or about 21st March, 1970 forwarded a certificate under section 222 (1) of the Income-tax Act, 1961, to the Tax Recovery Officer to recover from the petitioner the sum of Rs. 2,08,989/- which sum comprised of income-tax of Rs. 1,72,176/- penal interest of Rs. 11,955/- under section 215 of the Act and interest of Rs. 24,858/-under section 220 (2) of the Act for the assessment year 1967-68. The Income-tax Officer then forwarded another certificate to the Tax Recovery Officer to recover from tax petitioner a sum of Rs. 10, 798/- which sum comprised of penalty of Rs. 10,000/- levied under section 221 (1) of the Act and interest of Rs. 798/- under section 220 (2) of the Act for the aforesaid assessment year. The Tax Recovery Officer by two separate, notices of demand dated 14th December, 1971 demanded the aforesaid sums from the assessee in default, of which the petitioner was warned that the Tax Recovery Officer would take steps to realise the sums in accordance with the provisions of the second schedule of the Income-tax Act. 1961. Thereafter, the Tax Recovery officer on the 26th June, 1972, issued an order of attachment. 1961. Thereafter, the Tax Recovery officer on the 26th June, 1972, issued an order of attachment. On the 22nd july, 1972, the assessee through his advocate presented a petition to the tax Recovery Officer denying the liability to pay the sum under the a fore said two certificates, interalia, contending that the Income-tax Officer had no jurisdiction to forward the certificate as the tribunal in its appellate order had set aside the disallowance of interest claimed by the assessee. By the order passed on 22nd July, 1972 the tax Recovery Officer rejected the said petition. Against the propriety of the said two decisions passed by the Tax recovery Officer the petitioner has moved this Court under Article 226 of the constitution and obtained this rule, In this connection, counsel on behalf of the petitioner contended before me that as a result of the tribunal's appellate order setting aside the Appellate Assistant Commissioner's orders which had confirmed the disallowance of the sum Rs. 85,000/- claimed by the petitioner to have been paid as interest to the shareholder, the assessment became incomplete and inchoate and the demand was void. It was further, submitted that the Income-tax Officer's order having merged. in the order of the Appellate Assistant commissioner and the said having merged further in the order of tribunal, there was no enforceable order at this stage. It was submitted that section 225 (4) had no application because it was not a case of reduction but a case where there was no assessment. Counsel further submitted that in a case of reduction fresh notice under the Income-tax 1961 was obligatory. He drew my attention to section 156 of the Act and the provisions of section 225 and contended that for harmonious construction of section 225 (4) read with section 156 of the Act, I should construe the provisions to mean that in case of reduction fresh notice off demand was obligatory before certificate could be enforced against the assessee. It was, further, contended that section 225 of the Income-tax Act had no application because this was not a case of reduction but of setting aside the assessment. In other words, counsel for the petitioner, contended that there was no enforceable demand after the tribunal had set aside the order of title Appellate Assistant Commissioner on disallowance. It was, further, contended that section 225 of the Income-tax Act had no application because this was not a case of reduction but of setting aside the assessment. In other words, counsel for the petitioner, contended that there was no enforceable demand after the tribunal had set aside the order of title Appellate Assistant Commissioner on disallowance. It was urged that when the order of lower authority had been taken in appeal and appellate order was passed, the order of lower authority merged in the order of the appellate authority. In support of this proposition reliance was placed on several decisions namely, in the case of Metropolitan Structural Works Ltd. vs. Union of India, 28 I. T. R. 432, Commissioner of Income-tax vs. Amritlal bhogilal and Co., 34 I. T. R. 135., Madan gopal Rungta vs. Secretary to the Government of Orissa, A. I. R. 1962 S. C. 1513. In the case of Income-tax-Officer vs. Seghu Buchiah Setty, 52 I. T. R. 538, the majority judges of the Supreme court held that on the amount of tax assessed being reduced as a result of the orders of the Appellate Assistant commissioner, fresh demand notices had to be served on the assessee before he could be treated as a defaulter and recovery proceedings initiated against him. It was contended in the a fore said case before the Supreme Court that in view of orders of the Appellate Assistant Commissioner in that case the earlier orders, notices of demand and the certificates should be deemed to have been superseded and the attachments therefore, ceased to be effective from the date of the earlier orders and could no longer be proceeded with Sarkar, J. as the learned Judge then was, at page 544 of the report observed, "it may be that when an appellate order confirms the original order, the default earlier incurred and all steps taken pursuant thereto remain unaffected, for such an order may maintain in tact the original order. Now it is not in dispute that when the appellate order annuls the earlier order, the default disappears. It is said that that is because the debt ceased to exist. I do not quite follow this. It has never been questioned that the debt becomes due when demand is made under section 29 and section 29 and section 45 of the Act: (see) Doorga Prosad chamaria vs. Secretary of State. It is said that that is because the debt ceased to exist. I do not quite follow this. It has never been questioned that the debt becomes due when demand is made under section 29 and section 29 and section 45 of the Act: (see) Doorga Prosad chamaria vs. Secretary of State. Therefore, if a debt is to cease to exist it must be because the source from which it spring, namely, the original order, has been annihilated by the appellate order annulling it". 3. THE learned Judge further observed that there was not much difference between annulling an order and setting it aside and both wiped out the original order. After the aforesaid decision the Legislature passed the taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. Section 3 of the said Act deals with the continuation and validation of certain proceedings and provides that where government dues are enhanced a notice of demand must be served by the taxing authority upon the assessee. Where, however, such government dues fire reduced the taxing authority shall give intimation of the fact of such reduction to the assessee and where a certificate has been issued to the tax recovery officer for the recovery of such amount, also to that officer. It was, however, contended on behalf of the petitioner that the aforesaid Act could not apply because firstly, it was urged that the aforesaid Act did not deal with a case where the assessment was set aside and also the said Act, according to counsel for the petitioner, dealt with the validation of proceedings that were pending at the time of coming into operation of the Act. As the proceeding in the instant case was not pending, according to counsel for the petitioner, the said Act would not affect the instant case. 4. IN my opinion the theory of merger cannot be applied in this case. What has happened in this case is that in the appeal from the original order of the Income-tax Officer there was no stay when the case went up in appeal to the Appellate Assistant Commissioner. When the Appellate Assistant commissioner passed the order, it could not be said that the Income-tax Officer's order merged into the Appellate Assistant Commissioner's order. That is not the position here. The Appellate Assistant Commissioner really confirmed the Income-tax Officer's order. Thereafter there was further appeal to the tribunal. When the Appellate Assistant commissioner passed the order, it could not be said that the Income-tax Officer's order merged into the Appellate Assistant Commissioner's order. That is not the position here. The Appellate Assistant Commissioner really confirmed the Income-tax Officer's order. Thereafter there was further appeal to the tribunal. The tribunal set aside that portion of the order of the Appellate Assistant Commissioner which confirmed the Income Tax Officers order on this point and had remanded the case back to the Appellate Assistant Commissioner. Therefore, the position is, that there is no order of the Appellate Assistant Commissioner and an appeal is pending before the Appellate Assistant Commissioner. That is the correct position in law. Therefore, if the theory of merger is applied in the instant case, the effective portion of the order is the order of the Appellate Tribunal where the appellate Assistant Commissioner's order was set aside and the appeal was restored to the file of the Appellate assistant Commissioner for determination of this question. At that stage if there was no order staying recovery of the dues, then in my opinion no question of assessment being set aside and there being no subsisting demand, arises. In this connection it would be relevant to refer to the observations of the Supreme Court in the case of The state of Madras vs. Madurai Mills, Co. Ltd. 19 Sales Tax Cases 144, where the supreme Court observed at page 149 of the report as follows : - "but the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. " In this case, as mentioned hereinbefore, the effective order, is, the order of the appellate tribunal setting aside the order of the Appellate Assistant Commissioner so far as the disallowance of the interests paid to the shareholders is concerned. " In this case, as mentioned hereinbefore, the effective order, is, the order of the appellate tribunal setting aside the order of the Appellate Assistant Commissioner so far as the disallowance of the interests paid to the shareholders is concerned. The position, therefore, is that the effective order of the tribunal is that the appeal is pending before the Appellate Assistant Commissioner from the order of the Income-Tax Officer on this question and that is the effective portion of the order. At that stage there is no impediment of the original certificate, which was issued on notice of demand under section 156 of the Income-tax Act, 1961, in respect of the original assessment, in view of the fact that there is no stay of realisation of demand pending the appeal. Counsel. for the petitioner, however, contended relying on the concluding portion of the order of the tribunal that the appeal was still pending before the Appellate Tribunal. In my opinion that is not the correct way of reading the order of the Appellate Tribunal. I have set out before the relevant portion of the order of the tribunal. The expression that the appeal is partly allowed, is for the purpose of keeping records of the Tribunal. In the aforesaid view of the matter, I am of the opinion, that there is no impediment in enforcing the certificate in respect of the dues covered by the certificate is sued on account of the income tax dues. In the premises so far as the order dated the 22nd July, 1972, certificate case no 10671-I. T. C. /70-71 is concerned, I find no infirmity in the order of the Tax Recovery Officer. So far as the order dated the 22nd July, 1972, in respect of the certificate case 10674-I. T. C. /70-71 relating to penalty is concerned in view of the fact that the penalty was reduced by the Appellate tribunal and no intimation had been given to the assessee about the reduction of the amount and in view of the fact that no intimation had also been given to the Tax Recovery Officer, in my opinion, in view of the provisions of the Taxation Laws (Continuation and validation of Recovery Proceedings)Act, 1964, the said certificate cannot be enforced without first giving the assessee an intimation of paying the reduced amount and without intimating the reduced amount to the Tax Recovery Officer. In this connection counsel for the petitioner contended that the said statute did not have any application in respect of a proceeding which was not pending when the said act came into operation, i. e., 12th May, 1964. The preamble to the Act provides as follows: - "an Act to provide for the continuation and validation of proceedings, in relation to government dues and for matters connected therewith. " 5. COUNSEL for the petitioner contended that the Act only affected or applied to proceedings which were then pending. In my opinion it is not correct to read the provisions of the Act in that way. The expression 'continuation and Validation of Proceedings' has been used with reference to the subject matter of the Act, namely, in respect of the proceedings for recovery of dues which might be continued after the appellate orders. As a matter of fact section 5 of the Act makes it abundantly clear that the Act applies to the present proceedings. In this connection reliance may also be placed on the observations of the Allahabad High Court in the case of behari Lal Baldeo Prasad vs. Commissioner, Jhansi Division and Ors., 63 I. T. R, 555 and the observations of the Court at page 559 of the report. In the aforesaid view of the matter I reject the contention of the petitioner so far as the order on the 22nd July, 1972, in respect of certificate case No. 10671/i. T. C. 70-71 is concerned on account of income tax dues. I further direct that so far as certificate case No. 10674-I. T. C. /70-71 in respect of the penalty is concerned, the same would not be enforced until the reduced amount is intimated to the assessee and also to the Tax Recovery Officer. 6. THE Rule is made absolute to the extent indicate above. Let a Writ in the nature of mandamus issue accordingly. Save as aforesaid there will be no further order on this application. Save as aforesaid all interim orders are vacated. There will be no order as to costs. Operation of this order is stayed for eight weeks. Rule made absolute.