JODHPUR, JAN 23, 2012: THE issues before the Bench are - Whether the first appellate authority has inherent and implied powers to grant stay even though the provisions of section 246, 246A, 250 and 251 of the Act do not confer any specific power as such first appellate authority to grant stay against the recovery of disputed demand and whether where the income assessed is several times than the returned income, Instruction no. 95 dated 21/08/1969 has to be considered which is binding on all the assessing authorities. And the verdict goes in favour of the assessee.
Facts of the case
AO made trading additions rejecting regular Books of Accounts of the assessee u/s 145 (3) by applying GP rate of preceding years. Assessee filed an appeal before CIT (A) and an application for early hearing of appeal stating that the demand created by AO was arbitrary and AO was pressing hard for recovery and might take coercive steps for such recovery. A rectification application u/s 154 was also filed. An application u/s 220(3) and 220(6) for stay of entire disputed demand was filed before the AO. AO rejected the stay application stating that as business of the assessee was already closed and to project the interest of revenue it was not possible to linger on recovery of demand. Any failure on the part of the assessee for payment of outstanding demand would be treated as the assessee in default and coercive majors would be taken as provided.
AO initiated coercive process by undertaking garnishee proceedings u/s 226 (3) and a notice was sent to bankers for attachment of bank account of the assessee. Assessee also filed an stay application before CIT and thereafter writ petition was filed and with the additional affidavit the assessee produced the copy of the order of CIT directing the assessee to pay part amount in three installments and the balance was stayed till the disposal of the first appeal or 30th Sep, whichever is earlier. Assessee failed to pay the installment and CIT withdraw the order passed for installment and stay of the demand.
Assessee contended that a very high pitched assessment was made and the GP for the preceding assessment years could not have been applied as a thumb rule on a ten fold increase in the turnover. The audited books of accounts and return of income could not have been brushed aside. The recovery of such demand would frustrate the very purpose of filing appeal before the CIT (A) which was yet to be decided. Even though the provisions of Sections 246, 246A, Section 250 and 251 of the Act do not confer any specific power on such first appellate authority to grant stay against the recovery of disputed demand, such a power should be read as 'inherent powers' and the stay applications filed before such appellate authorities should be decided on merits touching upon the relevant factors for grant of stay like prima-facie case, irreparable injury, balance of convenience and nature of demand, so also, hardship likely to be caused to the assessee from such recovery etc. The assessee also referred the Instruction No.95 dated 21.08.1969 issued by the CBDT wherein referring to observations made by the then Dy. Prime Minister, the CBDT had issued instructions to subordinate authorities that where the income determined on assessment was substantially higher than the returned income viz. twice the later amount or more, the collection of the taxes in dispute to be held in abeyance till the decision of the appeals provided there was no fault on the part of the assessee. Thus it was urged that entire demand should be kept in abeyance till the first appeal filed by the assessee was decided on merits. If no stay was granted against such recovery, the very purpose of filing of the appeal would be frustrated. While various other fiscal statutes like Central Excise Act, Customs Act and various Sales Tax laws of the State, contain the provision for pre-deposit of certain portion of disputed demand of tax raised by the Assessing Authority, no such provision had been made in the Income Tax Act, 1961. Therefore, the provisions of Section 220 (6) of the Act should be construed to mean that recovery of the disputed demand during the pendency of first appeal, should automatically remain stayed and the assessee cannot be treated in default entailing the consequences of interest u/s 220(2) and penalty u/s 221. The provisions contained in Section 220 cannot be equated with the power to grant stay and it is a negative power or a discretion given to the AO in negative terms, empowering him to not to treat the assessee in default, subject to certain conditions, which he may impose, as long as such appeal remains undisposed of. During pendency of the first appeals, assessee cannot be treated in default at all unless there are over-riding reasons like assessee having not cooperated in the assessment proceedings or is likely to fly away from the scene etc. If high pitched assessments are made by the AO arbitrarily, the very purpose of filing of first appeal for redressal of grievance, can be rendered nugatory and infructuous, if upon a harmonious reading of various provisions in the scheme of the Act they are not construed to mean that during the pendency of first appeal normally demand at least under the high pitched assessment orders should be kept in abeyance especially in view of CBDT Instruction No.95 dated 21.08.1969.
Revenue contended that in the absence of any specific provision conferring power to grant stay upon the first appellate authority, such powers cannot be inferred. Power u/s 220 (6) has enough protection for the assessee in case where first appeals are pending and for the given reasons, the AO himself can treat the assessee as not in default, saving him from the interest and penal consequence subject to such conditions, as may be imposed, by the AO and looking to the huge demand, in the interest of Revenue, the AO was justified in rejecting the application of the petitioner u/s 220 (3) and 220 (6).
After hearing both the parties, the High Court held that,
AO made trading additions rejecting regular Books of Accounts of the assessee u/s 145 (3) by applying GP rate of preceding years. Assessee filed an appeal before CIT (A) and an application for early hearing of appeal stating that the demand created by AO was arbitrary and AO was pressing hard for recovery and might take coercive steps for such recovery. A rectification application u/s 154 was also filed. An application u/s 220(3) and 220(6) for stay of entire disputed demand was filed before the AO. AO rejected the stay application stating that as business of the assessee was already closed and to project the interest of revenue it was not possible to linger on recovery of demand. Any failure on the part of the assessee for payment of outstanding demand would be treated as the assessee in default and coercive majors would be taken as provided.
AO initiated coercive process by undertaking garnishee proceedings u/s 226 (3) and a notice was sent to bankers for attachment of bank account of the assessee. Assessee also filed an stay application before CIT and thereafter writ petition was filed and with the additional affidavit the assessee produced the copy of the order of CIT directing the assessee to pay part amount in three installments and the balance was stayed till the disposal of the first appeal or 30th Sep, whichever is earlier. Assessee failed to pay the installment and CIT withdraw the order passed for installment and stay of the demand.
Assessee contended that a very high pitched assessment was made and the GP for the preceding assessment years could not have been applied as a thumb rule on a ten fold increase in the turnover. The audited books of accounts and return of income could not have been brushed aside. The recovery of such demand would frustrate the very purpose of filing appeal before the CIT (A) which was yet to be decided. Even though the provisions of Sections 246, 246A, Section 250 and 251 of the Act do not confer any specific power on such first appellate authority to grant stay against the recovery of disputed demand, such a power should be read as 'inherent powers' and the stay applications filed before such appellate authorities should be decided on merits touching upon the relevant factors for grant of stay like prima-facie case, irreparable injury, balance of convenience and nature of demand, so also, hardship likely to be caused to the assessee from such recovery etc. The assessee also referred the Instruction No.95 dated 21.08.1969 issued by the CBDT wherein referring to observations made by the then Dy. Prime Minister, the CBDT had issued instructions to subordinate authorities that where the income determined on assessment was substantially higher than the returned income viz. twice the later amount or more, the collection of the taxes in dispute to be held in abeyance till the decision of the appeals provided there was no fault on the part of the assessee. Thus it was urged that entire demand should be kept in abeyance till the first appeal filed by the assessee was decided on merits. If no stay was granted against such recovery, the very purpose of filing of the appeal would be frustrated. While various other fiscal statutes like Central Excise Act, Customs Act and various Sales Tax laws of the State, contain the provision for pre-deposit of certain portion of disputed demand of tax raised by the Assessing Authority, no such provision had been made in the Income Tax Act, 1961. Therefore, the provisions of Section 220 (6) of the Act should be construed to mean that recovery of the disputed demand during the pendency of first appeal, should automatically remain stayed and the assessee cannot be treated in default entailing the consequences of interest u/s 220(2) and penalty u/s 221. The provisions contained in Section 220 cannot be equated with the power to grant stay and it is a negative power or a discretion given to the AO in negative terms, empowering him to not to treat the assessee in default, subject to certain conditions, which he may impose, as long as such appeal remains undisposed of. During pendency of the first appeals, assessee cannot be treated in default at all unless there are over-riding reasons like assessee having not cooperated in the assessment proceedings or is likely to fly away from the scene etc. If high pitched assessments are made by the AO arbitrarily, the very purpose of filing of first appeal for redressal of grievance, can be rendered nugatory and infructuous, if upon a harmonious reading of various provisions in the scheme of the Act they are not construed to mean that during the pendency of first appeal normally demand at least under the high pitched assessment orders should be kept in abeyance especially in view of CBDT Instruction No.95 dated 21.08.1969.
Revenue contended that in the absence of any specific provision conferring power to grant stay upon the first appellate authority, such powers cannot be inferred. Power u/s 220 (6) has enough protection for the assessee in case where first appeals are pending and for the given reasons, the AO himself can treat the assessee as not in default, saving him from the interest and penal consequence subject to such conditions, as may be imposed, by the AO and looking to the huge demand, in the interest of Revenue, the AO was justified in rejecting the application of the petitioner u/s 220 (3) and 220 (6).
After hearing both the parties, the High Court held that,
++ the main crux is as to whether in the scheme of the Act specially after amendment of Section 254 conferring powers of granting stay upon the appellate Tribunal after insertion of sub-Section (2A) and (2B) in Section 254 of the Act by Finance Act, 1999 with effect from 01.06.1999 and further first proviso substituted by Finance Act, 2007 with effect from 01.06.2007 extending period of stay granted by the ITAT in the first instance for 180 days then extendable up to 365 days in second proviso, and this amendment purportedly having been brought on the statute book in pursuance of decision of the Hon'ble Supreme Court in the case of M.K. Mohammed Kunhi. The powers of the appellate authorities are indisputably concurrent and co-extensive with that of the AO but wider and superior in nature. Section 251 of the Act clearly stipulates that in disposing of an appeal, the CIT (Appeals) can confirm, reduce, enhance or annul the assessment. Section 251 (1) (c) of the Act further provides that in other cases, he may pass such orders in appeal as he thinks fit. These words definitely mean that powers of appellate authorities under the Act are wide enough. Such powers could not be intended to be drained out or rendered meaningless, if the power to grant stay against the recovery of disputed demand is to be taken away from the first appellate authority. The first appellate authority can even enhance the taxable income, while he has the power to reduce or completely set at naught the assessment. The words “as he thinks fit” in Section 251(1)(C) are not redundant, as no such redundancy can be attributed to the Parliament. Therefore, mere absence of words “power to grant stay” in Section 251 of the Act cannot mean that such powers are specifically excluded from the jurisdiction of the first appellate authority;
++ the three Judges bench of Supreme Court in the case of M.K. Mohammed Kunhi, dealing with words “as he may think fit”, which were available to the ITAT also while deciding appeals before it and in the face of absence of clear provisions for grant of stay against the disputed demand of tax, held that such power is inherent in the appellate powers and the Tribunal should be deemed to have such power u/s 254 of the Act. It is the duty of the judges to apply the laws, not only to what appears to be regulated by their express dispositions, but to all the cases where a just application of them may be made, and which appear to be comprehended either within the consequences that may be gathered from it;
++ the statutory provision is to be read in a manner so as to do justice to all the parties. Any construction leading to confusion and absurdity must be avoided. The Court has to find out the legislative intent and eschew the construction which will lead to absurdity and give rise to practical inconvenience or make the provision of the existing law nugatory. The construction that results in hardship, serious inconvenience or anomaly or gives unworkable and impracticable results, should be avoided. A reasonable construction agreeable to justice and reason is to be preferred to an irrational construction. The Court has to prefer a more reasonable and just interpretation for the reason that there is always a presumption against the law maker intending injustice and unreasonability/ irrationality, as opposed to a literal one and which does not fit in with the scheme of the Act. Thus, first appellate authority, namely; Deputy Commission of Income Tax (Appeals) or Commissioner of Income Tax (Appeals) have inherent, implied and ancillary powers to grant stay against the recovery of disputed demand of tax while seized of the appeal filed before them in accordance with Section 246 or 246A of the Act;
++ the powers of Assessing Officer under Section 220 (6) of the Act, cannot be said to be power to grant stay against the recovery of disputed demand. The said provisions as quoted above, only give discretion to the Assessing Authority, not to treat the assessee in default subject to such conditions as he may think fit, to impose in the circumstances of the case, so long as such appeal filed under Section 246 or 246A of the Act is pending, so as to save the assessee from the consequences, which would otherwise follow, if the assessee is to be treated as 'assessee in default', namely, payment of interest under Section 220(2) and penalty under Section 221 of the Act. Section 220 (3) of the Act empowers the Assessing Officer to extend the time for payment or allow payment by installments, while Section 220 (3) of the Act gives power to Chief Commissioner or Commissioner to reduce or waive the amount of interest paid or payable by the assessee subject to three conditions, as enumerated thereunder. Sub-Section (7) of Section 220 makes a departure from sub-Section (6), and in cases where assessee has been assessed in respect of income arising outside India in the country, the laws of which prohibit or restrict the remittance of money to India, the Assessing Officer shall (as against words `may' used in S.220 (6), here it is mandatory) not treat the assessee as in default of respect of that part of the tax which is due in respect of that amount of his income which, by reason of such prohibition or restriction, cannot be brought into India, and shall continue to treat the assessee as not in default in respect of such part of the tax until the prohibition or restriction is removed. The words used in sub-Section (6) are “may” whereas the words used in sub-Section (7) are “shall”;
++ where on account of prohibition in law against the remittance of money to India results in automatic protection and sub- Section (7) mandates the Assessing Officer not to treat the assessee in default, the mere use of word 'may' in sub-Section (6), which normally give a discretion to the Assessing Officer, cannot be construed to mean that except the type of cases covered under sub- Section (7), the Assessing Officer cannot use such discretion, normally in favour of assessee, particularly where high pitched assessments are made and it results into situation like the demand of tax being more than twice or still higher than the declared tax liability, in the spirit of Instruction No.95 dated 21.08.1969 to grant such stay or to treat the assessee not in default in all such cases. The last words of sub-Section (6), “as long as such appeal remains undisposed of” are not without significance. The mandate of Parliament in sub-Section (6) seems to be that the lower Assessing Officer should abide by and being bound by the decision of the appellate authority, should normally wait for the fate of such appeal filed by the assessee. Therefore, his discretion of not treating the assessee in default, conferred under sub-Section (6) should ordinarily be exercised in favour of assessee, unless the overriding and overwhelming reasons are there to reject the application of the assessee under Section 220 (6) of the Act. The application under Section 220 (6) of the Act cannot normally be rejected merely describing it to be against the interest of Revenue if recovery is not made, if tax demanded is twice or more of the declared tax liability. The very purpose of filing of appeal, which provides an effective remedy to the assessee is likely to be frustrated, if such a discretion was always to be exercised in favour of revenue rather than assessee;
++ the tendency of making high pitched assessments by the Assessing Officers is not unknown and it may result in serious prejudice to the assessee and miscarriage of justice & sometimes may even result into insolvency or closure of the business if such power was to be exercised only in a pro revenue manner. It may be like execution of death sentence, whereas the accused may get even acquittal from higher appellate forums or courts. Therefore, this Court is of the opinion that such powers under sub-Section (6) of Section 220 of the Act also have to be exercised in accordance with the letter and spirit of Instruction No. 95 dated 21.08.1969, which even now holds the field and its spirit survives in all subsequent CBDT Circulars quoted above, and undoubtedly the same is binding on all the assessing authorities created under the Act;
++ the Court respectfully following the Division Bench observations of Delhi High Court in the case of Valvoline Cummins Ltd., would again urge the Central Board of Direct Taxes to issue appropriate guidelines for grant of stay in the spirit of Instruction No.95 dated 21.08.1969 to all the subordinate authorities & to clarify for uniform application all over the country at department level that first appellate authority shall have power to entertain & decide stay application during pendency of appeal before it upon relevant considerations for grant of stay against recovery of disputed demand of tax;
++ in the present case, the income assessed by the AO is almost 47 times of the income declared by the assessee. The disputed demand of tax also would be almost the same multiples of the declared and admitted tax liability or may be more because of interest & penalties. The main additions are trading additions on the basis of GP rates, the validity of which is subject matter of appeal before the C.I.T. (Appeals). Therefore, applicability of Instruction No.95 dated 21.08.1969, in the present case, is beyond the pale of doubt. The assessee has been made to pay Rs.5 lacs already besides his admitted tax liability as already paid by him before filing the return of income. Thus, this Court would stay the recovery of entire balance amount from the petitioner-assessee, while directing the C.I.T. (Appeals) to dispose of the pending appeal of the assessee within a period of six months from today. The attachment of bank accounts of the assessee already attached by the AO is also be lifted and the assessee will be free to operate its bank accounts;
++ since the CIT (Appeals) also has inherent and implied powers to grant stay, the assessee may also file stay application before the CIT (Appeals), who may also consider such stay application on its own merits upon the relevant factors as enumerated above viz. prima-facie case, balance of convenience, irreparable injury, nature of demand and hardship likely to be caused to the assessee, liquidity available to the assessee etc. It is directed that all the first appellate authorities in the cases of other appellant assessees within the State, would entertain stay applications filed before them during the pendency of appeals and would decide the same on their own merits in future also. The assessing authorities will also decide applications under Section 220 (6) of the Act in accordance with Instruction No.95 dated 21st August, 1969 and observations made herein before
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