Mohd. Ali Khan (2) Sarswati Stores vs Commissioner of Income Tax and Another

Nagendra Rai J.

In both the applications the petitioners have challenged the orders rejecting their declaration under the Kar Vivad Samadhan Scheme, 1998 (hereinafter referred to as "the Scheme"), and as such they have been heard together and are being disposed of by this common order.

In C.W.J.C. No. 3317 of 1999(R), the petitioner has challenged the order dated 25-2-1999, passed by the Commissioner of Income Tax, Ranchi, Camp-Jamshedpur (respondent No. 1), rejecting the declaration under the scheme on the ground that the petition filed before the Income Tax Appellate Tribunal u/s 254(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), cannot be considered as a pendency of appeal in terms of clause 95(i)(c) of the scheme.

In C.W.J.C. No. 3318 of 1999(R), the petitioner has challenged the order of the same date passed by respondent No. 1 rejecting the declaration under the scheme on the ground that there is no outstanding demand as the same has been collected through the adjustments of refunds of the assessment year 1994-95. Photocopies of the order in both the applications have been annexed as annexure-2 to the writ applications.

The petitioner of C.W.J.C. No. 3317 of 1999(R) is engaged in the business of scrap, etc. He is an assessee under the Income Tax Act. He filed a return for the accounting period relevant to the assessment year 1984-85 showing total income of Rs. 1,20,258. The assessing authority of Jamshedpur completed the assessment at a total income of Rs. 3,80,288. The petitioner preferred an appeal before the Commissioner (Appeals), Jamshedpur. which was allowed in part. Thereafter, the petitioner filed a second appeal before the Income Tax Appellate Tribunal, Patna, which was disposed of on 30-4-1998, whereby the Tribunal allowed certain claims of the petitioner but certain additions made by the assessing authority were upheld. On 30-4-1998, the petitioner filed an application before the Appellate Tribunal u/s 254(2) of the Act for rectification of the mistake apparent from the record. While the said application was pending the petitioner filed an application on 31-1-1999, under the aforesaid scheme, which has been rejected on 25-2-1999, vide annexure 2. The application filed by the petitioner u/s 254(2) was rejected as withdrawn by the Tribunal on 20-4-1999, vide annexure A to the counter-affidavit.

According to the petitioner, the Tribunal has wrongly rejected the application by taking a narrow view with regard to the application filed u/s 254(2) of the Act. As the application was filed to rectify the mistake apparent on the record, the same has to be treated as an appeal filed before the Tribunal or at least continuation of the appeal, which was disposed of earlier. If the aforesaid application u/s 254(2) is treated as an appeal then the petitioners declaration under the scheme cannot be held to be not maintainable.

The stand of the respondent-department on the other hand is that the application u/s 254(2) of the Act cannot be treated as an appeal pending before the Appellate Tribunal and as no appeal was pending the petitioner is not entitled to take the benefit under the scheme. The further stand of the department is that, according to the terms of the scheme, the assessee can take the benefit on fulfilment of four conditions, namely : (i) a demand should be raised on or before 31-3-1998 ; (ii) such demand or part of such demand should remain outstanding on the date of filing of declaration under the scheme ; (iii) appeal/reference/writ petition or revision should be pending in respect of such demand on the date of filing of declaration ; and (iv) the application should not come within the purview of clause 95 of the Act, which contains category to which the provision of the scheme shall not apply. In the case of the petitioner clause 95(i)(c) is attracted and as no appeal was pending before the appellate authority on the date of filing of declaration he was not entitled to the benefit under the scheme.

The petitioner has filed a rejoinder to the counter-affidavit and asserted the very same fact which has been asserted in the writ application and has annexed the application filed u/s 254(2) of the Act as annexure 3.

The petitioner of C.W.J.C. No. 3318 of 1999(R) is a partnership firm engaged in the business of wholesale food grains. Certain taxes were outstanding against him as on 31-3-1998, with regard to the assessment year 1995-96. After the coming into force of the scheme he filed a declaration for the voluntary settlement of the taxes for the aforesaid year. A copy of the said application has been annexed as Annexure 1. The said application was rejected on 25-2-1999, by the respondent-Commissioner on the ground that there is no outstanding demand against him as the demand has been collected through adjustment of refunds of the assessment year 1994-95.

It is stated on behalf of the petitioner that the adjustment of the amount of refund by the authority was in total breach of provision of section 245 of the Income Tax Act as no prior intimation of adjustment of refund was given and as such the said adjustment cannot be treated as a valid adjustment out of the refunds and on the relevant date in terms of the scheme, there was outstanding demand against the assessee and the rejection of declaration under the scheme was wholly unjustified.

The stand of the department on the other hand is that one of the conditions for availing of the benefit of the scheme was that there should be a tax outstanding as on 31-3-1998, and that should remain unpaid on the date of declaration under the scheme. The scheme opened on 1-9-1998. On receipt of the appellate order of the Commissioner (Appeals) on 13-8-1999, the department proceeded to give effect to the appellate order and outstanding tax against the assessee for the said assessment year was collected by way of adjustments from the refunds of the assessment year 1994-95 u/s 245 of the Income Tax Act and the excess balance amount was refunded to the petitioner. The amount was adjusted on 26-8-1998, much before the commencement of the scheme. It is further stated that before adjustment of the demand the assessing officer had sent notice to the assessee and as per report of the notice server the petitioner had not accepted the notice nor the petitioner had made any objection after receipt of the refund along with intimation of adjustment. After adjustment the excess amount was sent to the assessee on 31-8-1998, and an application was filed on 31-12-1998, and as such on the date when the application was filed there was no outstanding tax demand against the petitioner. As such no benefit under the scheme could be given to the petitioner.

The petitioner has filed a rejoinder to the counter-affidavit reiterating the very same fact which has been asserted in the writ application. The scheme was introduced by the Finance (No. 2) Act, 1998, and the same is contained in Chapter IV of the Finance Act and consists of sections 86 to 98 (both inclusive) as also a schedule. The scheme has been introduced by the government for settling the tax arrears which remained unpaid due to litigation. In substance, the scheme is a recovery scheme and the object of the scheme was explained by the Finance Minister in his speech while introducing the same. The relevant speech is as follows :

"Litigation has been the bane of both direct and indirect taxes. A lot of energy of the revenue department is being frittered in pursuing large number of litigations pending at different levels for long periods of time. Considerable revenue also gets locked up in such disputes. Declogging the system will not only incentivise honest taxpayers, enable the government to realise its reasonable dues much earlier but coupled with administrative measures, would also make the system more user-friendly. I, therefore, propose to introduce a new scheme called Samadhan."

The Scheme came into force on 1-9-1998, and remained effective till 31-12-1998. According to the provisions of the scheme, if the declaration is in terms of the scheme then the tax payable is in terms of clause 88 of the scheme. To avail of the benefit of the scheme the following conditions are to be fulfilled :

(i) the demand should be raised on or before 31-3-1998 :

(ii) demand or part of the same should remain outstanding on the date of filing of the declaration under the scheme ;

(iii) appeal/reference/writ petition or revision should be pending in respect of such demand on the date of filing of declaration under the scheme ; and

(iv) the case is not covered by any of the sub-clauses of clause 95 of the scheme.

For the purpose of C.W.J.C. No. 3317 of 1999(R) clause 95 is relevant which provides that the provisions of the scheme shall not apply in respect of the matters enumerated therein. Clause 95(i)(c) provides that the provisions of the scheme shall not apply to a case where no appeal or reference or writ petition is admitted and pending before any appellate authority or High Court or the Supreme Court on the date of filing of declaration or no application for revision is pending before the Commissioner on the date of filing declaration.

In C.W.J.C. No. 3318 of 1999(R), the question for consideration is as to whether on the date when the application under the scheme was filed an appeal was admitted and pending before any appellate authority or not.

Admittedly, the appeal was disposed of on 3-4-1998, and the application under the scheme was filed on 31-1-1999. Prior to that the petitioner filed an application on 30-4-1998, u/s 254(2) of the Act. The question is as to whether the said application has to be treated as continuation of the appeal or will be treated as pending appeal before the appellate authority on the relevant date. If the answer is in the affirmative then, in that case, clause 95(i)(c) will not be attracted and the declaration cannot be rejected on the grounds of applicability of the aforesaid clause.

An appeal before the Appellate Tribunal is filed u/s 253 of the Act and u/s 254(1) of the Act, the appellate authority passes a final order after hearing the appeal. Sub-section (2) of section 254 provides that the Appellate Tribunal within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1) and shall make such amendment if the mistake is brought to its notice by the assessee or the assessing officer. The Appellate Tribunal has only been given the power to rectify the mistake apparent on the record. The power is very limited one and it has only to see as to whether any mistake has been committed which is apparent from the record. The same cannot be treated by any stretch of imagination as continuation of the appeal nor can it be treated as an appeal at all. Here the Appellate Tribunal has only limited scope to see as to whether any mistake apparent on the record has been committed or not.

The scheme, as stated above, has been framed for the recovery of the taxes and it is not a litigation settlement scheme. No person should be allowed to act mala fide to avail of the remedy under the scheme.

In this case, the petition u/s 254(2) of the Act has been appended with C.W.J.C. No. 3317 of 1999 (R). From a perusal of the same, it appears that the rectification has been sought for only on the ground of non-consideration of certain materials on the record and not on the ground that there was any mistake apparent from the record. The said petition was also withdrawn subsequently by making a false statement before the authority that the declaration has been accepted, which, as stated above, has already been rejected.

In my view, an application u/s 254(2) cannot be treated as an appeal and as no appeal was pending on the date when the application was filed for taking benefit of the scheme. Clause 95(i)(c) is attracted and as such the petitioner was not entitled to the benefit of the scheme. The respondents have rightly rejected the declaration under the scheme.

In the case of C.W.J.C. No. 3318 of 1999(R), the question to be considered is as to whether there was any outstanding demand on the date of filing of the declaration under the scheme or not.

There was a tax liability against the petitioner for the relevant assessment year. Certain amounts were refundable to the petitioner for the assessment year 1994-95. The authorities adjusted the aforesaid amount on 26-8-1999, u/s 245 of the Act. The stand of the petitioner is that as the adjustment from the refunds of the previous year was not in terms of section 245 of the Act the said adjustment is not adjustment in the eye of law and as such on the date of filing of the application the demand was outstanding against the petitioner and the respondents wrongly rejected the declaration made by the petitioner.

To appreciate the aforesaid point. it is relevant to quote section 245 of the Act which runs as follows :

"Where under any of the provisions of this Act, a refund is found to be due to any person, the assessing officer, Deputy Commissioner (Appeals), Commissioner (Appeals), Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to. whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section."

A bare reading of the aforesaid provision shows that the authorities have power to adjust the refund against the tax payable by the assessee. However, before adjusting the refund an intimation in writing of the proposed adjustment is to be given to the person to whom the refund is due.

According to the department, notice was given to the petitioner before the adjustment of the amount of the refund and the petitioner refused the same. As such the requirement of section 245 of the Act was complied with. In this connection, the report of the notice server, vide annexure B shows that one notice was sent to the assessee. However, that is not clear either from annexure B or from the statements made in the counter-affidavit that any prior intimation in writing in terms of section 245 was sent with regard to the proposed adjustment from the refunds to the assessee. It is difficult to accept the said stand of the department that an intimation in writing was sent to the assessee prior to adjustment from the refunds and as such it has to be held that no prior intimation in writing was given to the assessee with regard to the adjustment from the refunds. As such the requirement of section 245 has not been complied with. It has been consistently held by almost all the High Courts that the requirement of intimation in writing is mandatory and non-compliance of the same vitiates the adjustment made u/s 245 of the Act.

It is not necessary to over burden this order by making reference to all the cases. Suffice it to refer to two cases, one of the Bombay High Court in the case of Suresh B. Jain Vs. A.N. Shaikh, Sixteenth Income Tax Officer and Others, , and the other of the Calcutta High Court in the case of J.K. Industries Ltd. Vs. Commissioner of Income Tax and Others, wherein it has been held that the provisions of section 245 with regard to the intimation in writing prior to adjustment are mandatory and without giving-prior intimation to the assessee adjustment from refunds cannot be made.

As I have held that in case no prior intimation in writing was given to the assessee with regard to the adjustment, the adjustment made is in breach of provision of section 245 of the Act. The said adjustment cannot be treated as a valid adjustment in the eye of law. Accordingly, the tax liability was outstanding on the date of filing of the application under the scheme and the respondent-Commissioner has wrongly rejected the application on the ground that no demand was outstanding against the petitioner.

However, I may clarify that no direction can be given for refund of the amount already adjusted as the department has power u/s 245 of the Act to adjust the amount. However, for the purpose of benefit of the scheme it has to be treated that the assessee was in arrear of tax on the date of filing of the application.

In the result, the application being C.W.J.C. No. 3317 of 1999(R) is dismissed and the application being C.W.J.C. No. 3318 of 1999(R) is allowed and the order contained in annexure 2 is quashed and the Commissioner is directed to consider the matter in terms of the scheme.

A. K. Sinha J. I agree.