V.K. Packaging Industries vs Tax Recovery Officer and Others

This writ petition has been filed for a writ of certiorari to quash the impugned notice u/s 226 of the Income Tax Act, 1961, vide annexure 5 to the writ petition. The petitioner has also prayed for a mandamus directing respondent No. 1 to refund the amount recovered under the notice u/s 226 with interest. The petitioner has also prayed for a direction to respondent No. 1 to refund Rs. 75,000 deposited by the petitioner with interest and has also prayed that respondent No. 3 be directed to decide the appeal of the petitioner on merits expeditiously.

Heard learned counsel for the parties.

The petitioner is a registered partnership firm which is doing the business of manufacture of corrugated boxes/card board boxes. The relevant assessment year is 1997-98 and in this year the petitioner filed a return on October 31, 1997, disclosing income of Rs. 27,374.28. The petitioner has alleged that it has maintained regular and proper books of account in the ordinary and regular course of business.

The petitioner appeared before the Assessing Officer/income tax Officer, Ward No. 5, Allahabad, and the Assessing Officer by his order dated March 15, 2000, determined the petitioner''s income at Rs. 7,40,750. True copy of the assessment order dated March 15, 2000 is annexure 1 to the writ petition. This assessment was made, u/s 143(3) of the Income Tax Act.

It is alleged in para. 7 of the petition that during the course of the hearing the Assessing Officer issued notices u/s 133(6) of the Income Tax Act to M/s. Shiv Datt and Sons, M/s. K. Lal and Company and M/s. Shakumbari Pulp and Paper Mills Ltd., apart from other parties. It is alleged that these notices were issued only for obtaining copies of accounts of the petitioner''s firm from the books of the above three respective parties in compliance to the notices u/s 133(6) of the Act. The parties sent copies of the accounts to the Assessing Officer, and on the basis of those copies of accounts additions were made in the hands of the petitioner on the allegation that there are differences in the accounts. Those differences were added in the hands of the petitioner as undisclosed income. The major additions were of Rs. 4,25,000 and Rs. 50,080. The addition of Rs. 4,25,000 was made on the allegation that payment of the said amount was made by M/s. Shakumbari Paper and Pulp Mills, but no entries were recorded in the petitioner''s books, though the entries were recorded in the books of Shakumbari Paper and Pulp Mills. The other additions were also on similar ground.

It is alleged in para. 8 of the petition that the copies of the said accounts of the aforesaid three parties were not supplied to the petitioner, nor were the parties summoned, nor were the books examined, and instead the additions were made simply on the basis of these copies of the accounts. In fact the Assessing Officer himself admitted in the assessment order dated March 15, 2000, in para. 6 that due to shortage of time it was impossible to verify the facts properly and hence the additions were made.

Against the assessment order the petitioner filed an appeal before the Commissioner of Income Tax (Appeals). The appellate authority fixed the hearing on various dates, but it is alleged that copies of the accounts were not supplied to the petitioner despite repeated requests in writing as well as orally. Copy of the application filed by the petitioner before the appellate authority praying for supplying of these documents is annexure 2 to the petition. The petitioner stated before the Assessing Officer as well as the Commissioner of Income Tax (Appeals) that the records were misplaced somewhere by the chartered accountant and therefore the petitioner was helpless in conducting the appeal. However, the Commissioner of Income Tax (Appeals) decided the appeal by the ex parte order dated April 30, 2002. True copy of the said order is annexure 3 to the writ petition.

Thereafter a second appeal was filed by the petitioner before the Tribunal on May 28, 2002, which was decided on December 30, 2002 vide annexure 4. The Tribunal by its order dated December 30, 2002, set aside the order of the Commissioner of Income Tax (Appeals) and remanded the matter back to the Commissioner of Income Tax (Appeals) with certain directions as stated in para. 5 of this order. The main direction of the Tribunal was that the party should be provided copies with the accounts of the third parties and the matter should be decided after considering each and every ground taken by the petitioner. True copy of the order of the Tribunal dated December 30, 2002, is annexure 4 to the petition. The appeal is now pending before the Commissioner of Income Tax (Appeals).

In the meantime respondent No. 1, the Tax Recovery Officer, issued notices u/s 226 for realisation of the demand assessed by the Assessing Officer. True copy of this notice issued to various parties is annexure 5 to the writ petition.

It is alleged in para. 15 of the petition that due to the notice u/s 226 issued to Saraiya Distillery Limited, Gorakhpur, by respondent No. 1, the Saraiya Distillery Ltd., Gorakhpur, has deducted Rs. 2 lakhs from the account of the petitioner and has deposited the same with the Income Tax Department vide annexure 6 to the petition. The Saraiya Distillery Limited has also withheld the payment which is due to the petitioner on supply of the packaging materials to them on the ground of notice u/s 226. Thus a huge amount of the petitioner has been detained by Saraiya Distillery Limited, Gorakhpur, because of the notice u/s 226 of the Income Tax Act which is said to have adversely affected the business of the petitioner.

It is alleged in para. 16 of the petition that the petitioner had already deposited Rs. 75,000 with the Income Tax Department on account of the demand for the assessment year 1997-98. Copy of three challans of deposits of Rs. 75,000 is annexure 7. During the pendency of the appeal the petitioner gave an application to the Tax Recovery Officer requesting him to revoke the order passed u/s 226. The petitioner deposited Rs. 75,000 in three instalments.

However, the Tax Recovery Officer has again initiated proceedings u/s 226 and consequently on receiving the notice the Saraiya Distillery Limited, Gorakhpur, deducted Rs. 2 lakhs from the account of the petitioner and has deposited the same with the Income Tax Department.

It is alleged in para. 18 of the petition that due to illegal proceedings u/s 226 initiated by the Tax Recovery Officer the petitioner is facing great hardship as it will not get the payment for its supply of packaging materials from its customers. These customers are taking the supply of packaging materials for running the business. The petitioner needs the money for the supply for keeping its regular turnover of the business. It is alleged that since the incoming of the money for the supplied materials has been stopped due to notice u/s 226 of the Income Tax Act the petitioner is in great financial crisis and is on the verge of closure.

It is alleged that the demand u/s 226 is illegal and is based on illegal assessment. The Assessing Officer has himself stated in the assessment order that due to shortage of time it was impossible to verify the facts properly and therefore he made major additions. He has also stated that the difference of Rs. 4,25,000 which has been stated to have been paid by the assessee to other parties could not be verified due to shortage of time.

For the same assessment year a notice u/s 148 of the Income Tax Act was issued by the Income Tax Officer, Ward No. 5, Allahabad. The petitioner gave a letter to the Joint Commissioner of Income Tax, Allahabad, requesting him to withdraw the demand against the petitioner for the assessment year 1997-98. In that letter the petitioner stated that when a notice is issued u/s 148 then the order dated March 15, 2000, should remain under abeyance and hence the demand should be withdrawn. True copy of the letter dated October 22, 2001, is annexure 8 to the writ petition.

The petitioner relied on the decision of this court reported in Saran Engineering Co. Ltd. Vs. Commissioner of Income Tax, , in which it was observed (head-note) :

"Once reassessment proceedings are started, the earlier order cease to exist, and the Income Tax Officer starts the assessment proceedings afresh."

The ratio of this decision has been affirmed by the Supreme Court in Income Tax Officer and Another Vs. K.L. Srihari and Others, .

On the basis of the said decision it is alleged in para. 22 of the petition that since a notice u/s 148 has been issued the assessment order dated March 15, 2000, has become non-existent, and hence the Income Tax Department cannot make any demand on the basis of the assessment order dated March 15, 2002. True copy of the notice u/s 148 is annexure 9 to the writ petition.

It is alleged in para. 23 of the petition that Saraiya Distillery Ltd., Gorakh-pur, has deducted Rs. 2 lakhs from the petitioner''s account on the basis of the illegal notice u/s 226 and has also detained other payments from the petitioner for supplying packaging material on the basis of illegal notices u/s 226 of the Income Tax Act which is adversely affecting the business of the petitioner.

A counter affidavit has been filed on behalf of the respondents and we have perused the same.

It is alleged in para. 8 of the counter affidavit that the original assessment order is good and effective till it is substituted by a reassessment order. Mere issuance of notice u/s 148 does not affect the validity of the original assessment order.

It is alleged in para. 9 of the counter affidavit that respondent No. 1 has rightly issued the notice u/s 226 as no stay order has been passed by the Commissioner of Income Tax (Appeals) in the appeal pending before him.

In para. 10 of the counter affidavit it is alleged that the petitioner was duly supplied the relevant documents as required by him on September 2, 2002.

A rejoinder affidavit has also been filed.

In para. 4 thereof it is stated that there is no statutory provision for filing an appeal/objection against the impugned order of the Commissioner of Income Tax (Appeals), and hence there is no alternative remedy.

Learned counsel for the petitioner has relied on the decision of this court in Kanhaiya Lal Vs. Commissioner of Income Tax and Another, and the decision of the Punjab and Haryana High Court in Chiranji Lal Steel Rolling Mills Vs. Commissioner of Income Tax, for the proposition that where the copies of the third party''s account are not supplied to the petitioner the assessment order is illegal.

Learned counsel for the petitioner has also submitted that the petitioner filed a stay application along with his appeal but there was no Commissioner of Income Tax (Appeals) for hearing the appeal for a long time. The financial condition of the petitioner was bad and the firm has become sick, and hence it was wholly arbitrary and illegal to attach the petitioner''s property.

From the facts mentioned above it appears that the assessment order dated March 15, 2000 (annexure 1 to the writ petition), on the basis of which the impugned notice u/s 226 was issued merged into the order of the Commissioner of Income Tax (Appeals) dated April 30, 2002, copy of which is annexure 3 to the writ petition, and the aforesaid order of the Commissioner of Income Tax (Appeals) in turn merged into the order of the Income Tax Appellate Tribunal dated December 30, 2002, copy of which is annexure 4 to the writ petition. A perusal of the order of the Tribunal dated December 30, 2002, shows that the Tribunal has set aside the order of the Commissioner of Income Tax (Appeals) on the ground that the Assessing Officer as well as the Commissioner of Income Tax (Appeals) had not given copies of the accounts of the third party to the petitioner.

Thus under the doctrine of merger the orders of the Assessing Officer dated March 15, 2000, and the Commissioner of Income Tax (Appeals) dated April 30, 2002, have both merged into the order of the Tribunal dated December 30, 2002. Hence, the orders of the Assessing Officer dated March 15, 2000, and the Commissioner of Income Tax (Appeals) dated April 30, 2002, ceased to exist after the order of the Tribunal dated December 30, 2002.

In Kunhayammed and Others Vs. State of Kerala and Another, , the Supreme Court observed (page 368) :

"Once the superior court had disposed of the lis before it either way --whether the decree or order under appeal is set aside or modified or simply confirmed, it is the decree or order of the superior court, Tribunal or authority which is the final, binding and operative decree or order wherein merges the decree or order passed by the court, Tribunal or the authority below."

Similarly, in Raj Singh v. Board of Revenue [1967] ALJ 1054, this court observed :

"It is well settled that the decree of the trial court merges in that of the appellate court. The effect of merger is that in the eye of law it dies a civil death. The trial court''s decree loses its identity."

In these circumstances we fail to understand how any demand could be issued against the petitioner and how any sum could have been realised from the petitioner in pursuance of the assessment order dated March 15, 2000, when the said assessment order dated March 15, 2000, has in fact ceased to exist. Merely because the Tribunal has remanded the matter to the Commissioner of Income Tax (Appeals) it does not follow that the assessment order dated March 15, 2000, has revived. Consequently, we are of the opinion that the impugned notice u/s 226 of the Income Tax Act was wholly illegal as there was no valid demand against the petitioner.

In our opinion the petitioner is entitled to restitution in respect of any amount of tax realised in pursuance of the assessment order dated March 15, 2000. It is well settled that when a decree or order is set aside or modified in appeal it is the duty of the court to grant restitution.

In South Eastern Coalfields Ltd. Vs. State of M.P. and Others, , the Supreme Court observed (page 826 of [2003] 1 RC):

"The word ''restitution'' in its etymological sense means restoring to a party on the modification, variation or reversal of a decree or order, what has been lost to him in execution of decree or order of the court or in direct consequence of a decree or order (see Zafar Khan and Others Vs. Board of Revenue, U.P. and Others, ).... The principle of restitution has been statutorily recognised in Section 144 of the Code of Civil Procedure, 1908. Section 144 of the CPC speaks not only of a decree being varied, reversed, set aside or modified but also includes an order on par with a decree. The scope of the provision is wide enough so as to include therein almost all the kinds of variation, reversal, setting aside or modification of a decree or order. The interim order passed by the court merges into a final decision. The validity of an interim order, passed in favour of a party, stands reversed in the event of final decision going against the party successful at the interim stage. Unless otherwise ordered by the court, the successful party at the end would be justified with all expediency in demanding compensation and being placed in the same situation in which it would have been if the interim order would not have been passed against it."

On the facts and circumstances of the case we quash the notice u/s 226 and the recovery made in pursuance of the impugned notice u/s 226 of the Income Tax Act. Any amount realised from the petitioner in pursuance of the notice u/s 226 and the assessment order dated March 15, 2000, shall be refunded to him forthwith with interest at 12 per cent, per annum from the date of realisation to the date of refund. The refund must be made within a month from the date of production of copy of this order before the authority concerned.

We hope and trust that the appeal pending before the Commissioner of Income Tax (Appeals) in pursuance of the remand order of the Tribunal will be decided expeditiously by the said authority. The petition is allowed. No order as to costs.

Before parting with the case we would like to state that we cannot appreciate this practice of the Income Tax Department of hurriedly passing assessment orders shortly before the limitation period is about to expire and justifying this practice by saying that there was shortage of time and hence it was impossible to verify the facts properly, and hence the additions were being made. It is common knowledge that when the limitation for making an assessment is about to expire (usually on 31st March) there is a sudden rush and scramble to complete the assessments. If this practice is countenanced the citizens of the country will be put to great harassment as exorbitant demands can be made against them merely by saying that there was shortage of time and hence additions were being made for this reason without verifying the facts correctly. It is the duty of the Department to make a correct assessment and not to make an excessive assessment merely on the ground of shortage of time.

No doubt the Department has to assess and collect the correct tax, but for this purpose it should devise and set up a rational scheme in accordance with law. It should certainly not make assessments hurriedly merely by saying that there is shortage of time (as often happens), thus putting the citizens to great harassment.