T. C. A. Ramanujam

T. C. A. Ramanujam on a case where the taxman curtailed the period of compliance

"REGRETTABLY, the Task Force received large number of complaints from taxpayers across the country about lack of accountability of any tax administrator for actions that were sometimes mala fide. It is necessary for the tax administration to be even handed both with the taxpayers and its officials and staff." That was Dr Vijay Kelkar pointing out deficiencies in the tax administration.

One of the areas requiring attention relates to harassment. Recovery proceedings give maximum scope for harassment, resulting in huge disputed demands that are often not stayed.

The income-tax law permits payment of taxes within a month of the demand notice being served. But there is also a provision enabling the Department to curtail the period for compliance.

These an enabling provision to be used sparingly, when there is a fear of alienation of properties or the defaulting taxpayer vanishing. Overzealous tax officials often use these provisions to harass the taxpayer.

Relief granted

Farrukhabad Gramin Bank was established under the Regional Rural Banks Act. Half the shares were held by the Government of India, 35 per cent by Bank of India and 15 per cent by the Uttar Pradesh Government.

The bank claimed exemption for extension of credit facilities to members. The claim was disallowed and the bank was assessed on a total income of over Rs 3 crore. A demand was raised calling upon the bank to pay Rs 1,28,32,270 within a day of the notice being served; the notice was dated March 29, 2005.

Request for granting stay of demand was rejected. The bank filed an appeal challenging the denial of exemption. As expected, the first Appellate Authority passed no order on the application for stay of demand pending the disposal of the appeal.

The Income-Tax Department served a garnishee notice on State Bank of India, Farrukhabad, attaching the current account of Farrukhabad Gramin Bank.

SBI paid Rs 94,14,608 into government account within 24 hours of the issuance of the notice. Copies of the garnishee notices were served on the assessee bank only after SBI made the payments, and coercive measures were initiated for recovery of the balance demand.

The assessee bank moved the Allahabad High Court. The department contended that an alternative remedy by way of appeal was available and, therefore, the writ petition should not be entertained by the court. The bank had huge, easily realisable assets of around Rs 275 crore.

The Allahabad High Court pointed out that it is the bounden duty of the court to intervene and give relief wherever there is gross violation of the law and where injustice is perpetrated or is about to be perpetrated. Denial of relief may lead to public mischief, causing irreparable damage or shaking citizens' faith in the public administration.

According to the court, the only issue for consideration before the Revenue was whether allowing the full period of 30 days would be detrimental to its interests. However, in the instant case, the grounds given by the department happened to be irrelevant and reducing the period for payment to one day were not sustained.

The entire action was taken arbitrarily and in haste, merely to pre-empt and foreclose the option available to the bank to approach the higher authorities for grant of interim relief.

The Allahabad High Court quashed the demand notice and ordered the return of the entire amount, which was arbitrarily recovered. It also allowed compensation (197 CTR 366).

In Union of India vs Upendra Singh (207 ITR 782 SC), the Supreme Court had suggested that disciplinary action be taken wherever a tax official was found to be reckless or negligent.

The Kelkar Task Force had recommended that the current system based on punitive enforcement, often bordering on harassment, be replaced by a system based on trust.

Separate groups have been set up under the Finance Ministry to suggest redrafting of the I-T laws; one of them is to go into matters concerning refund and recovery of taxes.

The Act, at present, confers far-reaching powers on tax officials in matters concerning recovery. Assurances were given in Parliament several decades back that recovery steps will not be initiated whenever the disputed demand exceeded double the amount of admitted tax. These assurances are seldom honoured.

The first Appellate Authority has the judicial discretion to stay recovery of demand till the disposal of appeal. Unfortunately, this discretion is never exercised and disputed appeals are also not disposed of early.

(The author is a former Chief Commissioner of Income-tax.)

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