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J.K Industries Ltd. v. Commissioner Of Income-Tax And Others
Structured Summary of the Opinion (Ajoy Nath Ray, J.)
Factual and Procedural Background
This writ application arises from declarations filed by the assessee under the Kar Vivad Samadhan (KVS) Scheme for assessment years 1991-92 and 1992-93. The assessee stated that outstanding amounts for those years were approximately Rs. 95 lakhs and Rs. 2 crores 94 lakhs respectively, and offered to settle by payments of approximately Rs. 47 lakhs and Rs. 1 crore 47 lakhs respectively. The designated authority rejected the request on the basis of the Revenue's position that no tax was outstanding for those years because the Revenue had earlier made adjustments of refundable amounts.
The Revenue had, before and around 1995–1997, made adjustments of refundable amounts relating to other assessment years (notably 1990-91 and 1993-94 to 1996-97) aggregating approximately Rs. 6 crores. The Revenue also purported to adjust approximately Rs. 1 crore 18 lakhs recovered in cash from A.K. Chhajer (an employee of the assessee), the cash having been recovered from Chhajer's house and relating to the previous year for assessment year 1994-95.
The assessee's counsel (Dr. Pal) alleged that these adjustments were made without the prior intimations required by section 245 of the Income-tax Act, 1961. The Revenue's counsel (Mr. Mullick) contended that intimations of the adjustments were given during the period December 1995 to January 1997 and that the assessee acquiesced by not objecting.
Interim orders had been passed by the court, pursuant to which the assessee paid substantial sums on March 24, 1999 (Rs. 59,17,222 and Rs. 1,82,16,944). The court delivered a reasoned opinion and made final directions in the writ proceeding.
Legal Issues Presented
- Whether the Revenue can make adjustments of refunds without giving the prior written intimation to the assessee as required by section 245 of the Income-tax Act, 1961.
- Whether the cash recovered from A.K. Chhajer (recovered from his house) should be regarded as belonging to Chhajer under section 132(4A) and whether adjustment of that cash against the assessee before resolution of related proceedings/appeals is premature or illegal.
- Whether the assessee is disentitled to discretionary relief from the court on the ground of acquiescence by silence (i.e., whether failure to object earlier bars equitable or discretionary relief now).
- Whether the payments made by the assessee pursuant to interim orders under the KVS declarations should be accepted and what legal effect acceptance would have on the assessee's liabilities for the two assessment years.
Arguments of the Parties
Assessee's Arguments (Dr. Pal)
- Adjustments of refundable amounts for the other assessment years were made without the prior intimation required under section 245; section 245 is mandatory and akin to a rule of natural justice, and breach renders the adjustment void ab initio.
- Authorities from multiple High Courts (Bombay, Delhi, Allahabad, and Madhya Pradesh) support the mandatory nature of section 245.
- With respect to the cash recovery from A.K. Chhajer, section 132(4A) indicates that the recovered money is attributable to Chhajer (because it was recovered from his house), so adjustment against the assessee is improper; assessment or adjustment in relation to that cash while appeals/proceedings are pending is premature and illegal.
Revenue's Arguments (Mr. Mullick)
- The adjustments were made between December 1995 and January 1997 and were intimated to the assessee in writing during that period; even if prior intimation before adjustment might not have been given, intimations were issued after adjustment and no objection was raised by the assessee at the time.
- Because the assessee did not object, it acquiesced to the adjustments and is not entitled to discretionary relief from the court now; it would be wrongful for the assessee to undo what effectively became settled to its advantage later.
Table of Precedents Cited
The opinion refers generally to authorities from several High Courts and to S.L.P. references, but it does not identify or cite any specific case(s) by name in the provided text.
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court examined the wording and purpose of section 245 and concluded that the section mandates a prior written intimation to the person entitled to a refund before any set-off/adjustment is made. The court reasoned that:
- The language of section 245 indicates that the proposed adjustment must be intimated before the adjustment is effected; intimation of a "proposed" action implies notice prior to action.
- Section 245 is a special statutory departure from the general principle that assessment years and liabilities are kept separate; because it is an exception (a special right of set-off), it must be followed strictly "in letter and spirit."
- Accordingly, the Revenue lacks jurisdiction to effect an adjustment of a refund without compliance with section 245's prior-intimation requirement.
On the cash recovered from A.K. Chhajer, the court accepted the assessee's counsel's reference to section 132(4A) to the extent of noting that the money recovered from Chhajer's premises is to be regarded as belonging to Chhajer and that adjustment against the assessee in respect of that money—particularly while related proceedings/appeals are pending—was premature and unlawful.
The court considered the Revenue's contention that intimations were given in the 1995–1997 period and that the assessee acquiesced by silence, but found this argument insufficient to deprive the assessee of relief. The court observed that the KVS Scheme came into operation within about three years of the earlier adjustments and that ordinary limitation considerations did not strictly preclude KVS relief; taking advantage of a new law by paying to invoke the scheme is a permissible course in a revenue matter.
Concluding from the statutory text and the facts before it, the court held that the adjustments made by the Revenue (including the approximately Rs. 6 crores of refund adjustments and the approximately Rs. 1 crore 18 lakhs cash recovery adjustment) were ineffective because they were made without the essential prior intimations required by section 245 or were otherwise premature.
The court also took account of the payments already made by the assessee pursuant to interim orders (payments on March 24, 1999 of Rs. 59,17,222 and Rs. 1,82,16,944) and proposed to accept those payments as good; on acceptance, the liabilities for the two assessment years would be extinguished, permitting the assessee to pursue recovery of the prior adjustments by the Revenue through appropriate future proceedings.
Holding and Implications
HOLDING: The writ application succeeds. The interim order already passed is confirmed. The court held that the Revenue's adjustments of refunds/cash (as described) were ineffective for the reasons stated.
Direct Consequences and Directions:
- The provisional certificate, if any, issued by the designated authority on the basis of the payments made by the assessee shall be treated as final and permanent.
- If no provisional certificate has been issued, the designated authority is to grant the final certificate of immunity under the KVS Scheme to the assessee for assessment years 1991-92 and 1992-93 within four weeks from the date of the order.
- The assessee is at liberty to take steps for obtaining refund or recovery of the amounts adjusted by the Revenue in respect of the two assessment years; the court did not adjudicate the rights to release of those adjusted amounts and left such matters open for future proceedings in accordance with law.
- The court made the rule absolute in terms of prayers (a)(i), (a)(ii), (a)(iv), (b) and (c) of the petition, but not in respect of prayer (a)(iii), which remains a matter for future consideration.
- No order as to costs was made; a prayer for stay of operation of the order was refused.
- All parties and others concerned may act on a signed xerox copy of the dictated order on the usual undertakings.
Implications Regarding Broader Legal Principles: The court clarified its view of the mandatory nature of section 245's prior-intimation requirement and emphasized that, because section 245 is a specific statutory exception to the general separateness of assessment years, it must be strictly complied with. The opinion does not purport to record a Supreme Court pronouncement, and the court confined itself to interpreting and applying the statute to the facts before it. The court did not expressly frame this decision as setting binding precedent beyond the case's context.
Ajoy Nath Ray, J.:— In this writ application the assessee claims an acceptance of two declarations filed by the assessee in respect of the two assessment years, i.e, 1991-92 and 1992-93, whereby the assessee invoked the Kar Vivad Samadhan Scheme.
2. According to the assessee's declaration for these assessment years, the outstanding amounts were approximately Rs. 95 lakhs and Rs. 2 crores 94 lakhs and the assessee offered to settle by payments of Rs. 47 lakhs and Rs. 1 crore 47 lakhs, approximately, respectively. The designated authority turned down the request on the ground that according to the Revenue there was no tax outstanding for these assessment years.
3. The case of the Revenue at that time was, and before me also has been that adjustments were made by the Revenue prior to the coming into operation of the Finance (No. 2) Act of 1998 and thus there being no outstanding, the assessee had nothing to settle up.
4. According to the Revenue large amounts of money were adjusted at several times during the year 1996 and once each in December, 1995, and January 1997. Details of these are given in the petition and there is no dispute in regard to the amounts refundable for the assessment years for which refunds were purportedly adjusted by the Revenue; these assessment years are respectively 1990-91 and 1993-94 to 1996-97. The adjustments themselves aggregate approximately Rs. 6 crores.
5. Apart therefrom the Revenue also purported to adjust a sum of Rs. 1 crore 18 lakhs, approximately which had been recovered in cash from one A.K Chhajer, an employee of the assessee, residing in Delhi.
6. The cash recovery was made not during the previous years or the financial years relevant to the two assessment years mentioned above, but it was in respect of the previous year for the assessment year 1994-95.
7. Dr. Pal has submitted that the adjustments of the refundable amounts for the five assessment years mentioned above were made without prior intimations as required under section 245 of the Income-tax Act, 1961.
8. That section is set out below:
“245. 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) or 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.”
9. Dr. Pal gave authorities from all over India, viz., Bombay, Delhi, Allahabad and Madhya Pradesh, wherefrom, according to him, there is a concensus of opinion that section 245 is mandatory and without the giving of prior intimations to the assessee, adjustments of refunds cannot be made by the Revenue; according to Dr. Pal, the authorities lay down that the section is on the same plane as a plain rule of natural justice and that a breach of it renders the action of the Revenue not merely voidable but void ab initio.
10. Indeed from the authorities it does appear that Dr. Pal's submission is right and that there is hardly any contrary judicial opinion in India as on date.
11. Both Dr. Pal and Mr. Mullick, appearing for the Revenue, gave me references to S.L Ps., from Allahabad decisions, but there being no pronouncement of the Supreme Court, a mere admission or a rejection of a S.L.P would not be productive of any ratio decidendi and, therefore, is not of any guiding or binding effect.
12. Regarding the cash recovery Dr. Pal showed from section 132(4A) that the money is to be taken as belonging to Chhajer, because though he might be an employee of the assessee, the recovery was from Chhajer's house. Furthermore, Dr. Pal submitted that although the assessee has been sought to be assessed in regard to this sum of money for a different assessment year than the two assessment years in question, still such assessment is a subject of appeal and an adjustment in that regard even before decision of the appeal is premature and illegal.
13. Mr. Mullick submitted that the adjustments were made between December 1995 and January 1997, and those adjustments were intimated to the assessee in writing during that period. Although prior intimation before adjustment might not have been given, yet intimation of adjustments made by the Revenue was given and no objection was raised by the assessee in regard thereto at any point of time. According to Mr. Mullick, the assessee is not entitled to any discretionary relief from this court because it agreed by its silence to the adjustments; it acquiesced to such adjustment. It is wrongful on the part of the assessee now to turn back and undo a settled thing only because it will be of greater financial advantage to the assessee now.
14. Since there is no decision of our High Court on section 245, which was cited to me, my opinion on that section should be clarified.
15. The wording of the section leaves no manner of doubt that the proposed adjustment is to be intimated to the assessee. Since the adjustment at the time of intimation is only a proposed one, the intimation has to go before the adjustment has been made. If the assessee objects to the proposed adjustment, whether the Revenue can nonetheless make such an adjustment on its unilateral decision, is a point which does not fall for my consideration. But quite clearly the Revenue has no jurisdiction to make an adjustment of a refund without following section 245 and without giving a prior intimation to the assessee as required by that section.
16. Each assessment year for each assessee is generally kept separate in the Act. The assessee has no right to club together assessment years. The Revenue also has no general right to dissect an assessment year into more than one period of time or agglomerate assessment years as they please. Since section 245 is a special right of set off given to the Revenue as a departure from the general rule of keeping assessment years and rights and liabilities in regard thereto separate and isolated, it is essential that the section be followed in letter and spirit. The wording of the section is so clear that its letter and its spirit speak the same way.
17. In this view of the matter, the adjustments made, although made about two years prior to the coming into operation of the Finance (No. 2) Act of 1998, are all ineffective. Even more ineffective is the adjustment made regarding cash recovery from Chhajer's premises, which, I am told, is also a subject-matter of revenue proceedings against Chhajer personally.
18. The advantage of the assessee in winning this writ is that although it has to meet 50 per cent, of the liability for the two assessment years in question, yet on meeting these, all the adjustments made by the Revenue would become releasable to the assessee if the assessee's submission regarding release are right and proper. Since these must and should form the subject-matter of future proceedings, I do not want to say any more than is absolutely necessary for writing a consistent and clear opinion. The rights of the parties in regard to the release of the adjusted amounts are not adjudicated upon herein and parties will be at liberty to take future steps and proceedings in that regard.
19. To show the bona fides of the assessee and to show that they genuinely wish to press their legal point about the ineffectiveness of the adjustment of refund and cash money, they paid large sums of money pursuant to interim orders passed by me. These were paid to the designated authority. The payments were made on March 24, 1999 (Rs. 59,17,222) and March 24, 1999 again (Rs. 1,82,16,944).
20. These two payments were made pursuant to the declarations of the assessee filed for the two assessment years. If these payments are accepted as good, which I propose to do, the liability of the assessee for the two assessment years would get completely wiped out. The assessee will then be free to pursue the assessee's remedy in regard to the adjustments purportedly made in respect of these two financial years.
21. In my opinion, Mr. Mullick's submission that the assessee has disentitled itself to discretionary relief from this court is not, with respect, well founded. It so happened that the coming into operation of the KVS Scheme was not delayed beyond three years of even the first adjustment made by the Revenue. It was one month short of three years. Thus the ordinary period of limitation is not strictly applicable.
22. Regarding the enforcement of legal rights by the assessee, seeking to take advantage of new law and seeking to undo its long continued silence, it is in my opinion, a permissible procedure in a revenue matter. An assessee is entitled to proceed in accordance with law and claim refunds in accordance with law. If it appears to the assessee that payment of Rs. 21/2 crores now will, by operation of law, throw open the doors towards recovery by the assessee of nearly Rs. 5 or 6 crores later on, then I do not see how such payment, if legally made now, can be a matter to be taken against the assessee in the matter of exercise of the writ court's discretion.
23. If the Revenue made adjustments without the essential perquisites, the Revenue was keeping the matter uncertain; if the assessee never objected, well and good. If the assessee objected, everything gets undone, as it is getting undone today.
24. Where 5 or 10 crore rupees are involved it is important to proceed in accordance with law and take the steps properly in the interest of all parties concerned. If there are loopholes, advantage is bound to be taken thereof by a party if he can legally take it.
25. The writ application accordingly succeeds. The interim order already passed will stand confirmed. The provisional certificate, if any issued by the designated authority, on the basis of the payments made by the assessee shall hereafter be treated as final and permanent. The assessee will be at liberty to take steps for obtaining refund or recovery of the amounts adjusted in the two assessment years; such steps to be taken in accordance with law and no pronouncement is made in that regard here. Whether the rule was issued or not there will be a rule absolute in terms of prayers (a)(i), (a)(ii), (a)(iv), (b) and (c) but not (a)(iii) which is a matter for the future.
26. If provisional certificate has not been issued by the designated authority, the final certificate of immunity under the KVS Scheme is to be given to the assessee for the assessment years 1991-92 and 1992-93 within four weeks from date.
27. There will be no order as to costs. Stay of operation of this order is prayed for but the same is refused.
28. All parties and all others concerned to act on a signed xerox copy of this dictated order on the usual undertakings.
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