$~23
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 3127/2017
GECAS SERVICES INDIA PVT. LTD. ..... Petitioner
Through: Mr. Sachit Jolly, Advocate.
Versus
INCOME TAX OFFICER & ORS. ..... Respondents
Through: Mr. Rahul Chaudhary, Sr. Standing
Counsel
CORAM: JUSTICE S.MURALIDHAR
JUSTICE PRATHIBA M. SINGH
ORDER
% 11.07.2017
Dr. S. Muralidhar, J.
Question involved
1. An interesting question of law that has been raised in this writ petition by
GECAS Services India Pvt. Ltd. is whether it was mandatory for the Income
Tax Department (`Department') to have issued a notice to the Petitioner
under Section 226 (3) (iii) of the Income Tax Act, 1961 ('Act') prior to
issuing a notice dated 27th February, 2017 to the garnishee, i.e., the Branch
Manager, HSBC (with which the Petitioner has an account) under Section
226 (3) (i) of the Income Tax Act, 1961 (the Act)?
Background facts
2. The background facts are that the Petitioner (herein after `Assessee') is a
wholly-owned subsidiary of the GE Group. 99.5% of the shares in the
W.P.(C) No.3127/2017 Page 1 of 12
Petitioner are held by GECAS Services Ltd., Ireland and the remainder is
held by GE Capital Aviation Funding, Ireland. The Petitioner is stated to be
engaged in the business of providing marketing support, liaising and
administrative services in connection with leasing of aircrafts in India to its
parent company.
3. The Assessee filed its return of income for Assessment Year (`AY') 2014-
15 declaring an income of Rs. 21,37,610. The return of income was picked
up for scrutiny. By an order dated 19th December, 2016 the Income Tax
Officer, Ward 11(3) [(hereinafter Assessing Officer (`AO')] framed the
assessment under Section 143 (3) of the Act making an addition of Rs.
2,14,78,118.90 to the Assessee's income thereby raising a tax demand of Rs.
94,51,390.
4. The Assessee states that it received a copy of the aforementioned
assessment order on 24th December, 2016. On 23rd January, 2017, the
Assessee electronically filed an appeal before the Commissioner of Income
Tax (Appeals) [CIT(A)]. According to the Assessee, the AO was
electronically intimated about the filing of the appeal before the CIT (A).
5. It is stated that on 25th March, 2017, the Assessee received a notice dated
27th February, 2017 issued under Section 226 (3) (i) of the Act addressed to
the HSBC bank attaching the Assessee's bank account held there and any
other amount held in recurring deposit/fixed account and current account
held with the said bank towards the recovery of the entire tax demand of Rs.
94,51,390.
W.P.(C) No.3127/2017 Page 2 of 12
6. The Assessee states that it was shocked to learn that the AO had already
recovered the entire demand of Rs. 94,51,390 on 9th March, 2017 much
before the dispatch of notice dated 27th February, 2017 to the Assessee. A
copy of the transaction statement of the debit entry in the Assessee's bank
account has been enclosed with the petition.
The present petition
7. It is in the above circumstances that the present petition was filed praying
that this Court should quash the said notice dated 27th February, 2017 issued
by the AO to the HSBC Bank under Section 226 (3) (i) of the Act and
further direct the Department to refund to the Assessee the amount
recovered in excess of 15% of the entire demand for AY 2014-15.
8. When this petition came up for hearing on 12th April, 2017, the Court
directed notice to issue to the Respondents. Pursuant thereto, a counter-
affidavit has been filed on behalf of the Department in which it is inter alia
stated that a demand notice in the sum of Rs. 94,51,390 under Section 156 of
the Act was served upon the Assessee on 24th December, 2016. The period
of 30 days for payment of the demanded sum expired on 24th January, 2017.
Although the Assessee filed an appeal before the CIT(A), it, admittedly, did
not file any application for stay of recovery of the demand. Since the
Assessee had neither paid the demand nor filed the said stay application till
24th January, 2017, it was deemed that the Assessee was in default under
Section 220 (4) of the Act.
9. It is claimed by the Department in para 2.6 of its counter-affidavit that on
1st February, 2017 a notice under Section 221 (1) of the Act was issued to
W.P.(C) No.3127/2017 Page 3 of 12
the Assessee asking it to furnish a reply by 9th February, 2017 as to why
penalty should not be levied on it for being an Assessee in default. It is
claimed that no reply was received to the said notice.
10. Thereafter, in para 2.7 of the counter-affidavit, it is stated as under:
"2.7 In view of the above facts, notice under Section 226
(3) of the Act was issued by the Assessing Officer to the
Petitioner's banker on 27.02.2017 to recover the
outstanding demand of Rs.94,51,390/-. The banker issued
a Cheque/Pay Order of the aforesaid amount which was
received at the DAK Counter of the Ward on 15.03.2017,
and was put up before the AO on 16.03.2017.
18.03.2017 (Saturday) and 19.03.2017 (Sunday) were
holidays. On 21.03.2017 copy of the notice (dated
27.02.217), was sent to the Speed Post Department by the
Assessing Officer and was, thereafter, finally
booked/sent by the Speed Post Department on
22.02.2017 to the Petitioner/Assessee. The aforesaid
copy of the notice sent by speed post was received by the
Petitioner/Assessee on 25.03.2017."
Submissions on behalf of the Assessee
11. Mr. Sachit Jolly, the learned counsel appearing for the Assessee,
submitted that it was incumbent upon the Department to have issued notice
to the Assessee, if not prior to the sending a notice to the Bank, at least
simultaneously and should have allowed the Assessee an opportunity of
showing why it should not be treated as an Assessee in default. He relied on
the CBDT Instruction No. 1914 dated 2nd December, 1993 partially modified
by Office Memorandum (`OM') dated 29th February, 2016 which states that
the Department should not recover more than 15% of the total outstanding
tax demand which stands disputed before the CIT (A). He submitted that it
W.P.(C) No.3127/2017 Page 4 of 12
was evident from the counter affidavit filed by the Department that although
the notice issued to the Assessee was dated 27th February 2017, it was
withheld and dispatched only on 21st March, 2017. This itself demonstrated
the illegality of the action of the Department.
12. Mr. Jolly placed reliance on the decisions of the Division Benches of the
Allahabad and Bombay High Courts in Farrukhabad Gramin Bank v.
Additional Commissioner of Income Tax (2005) 277 ITR 320 (All) and
UTI Mutual Fund v. Income Tax Officer (2012) 345 ITR 71 (Bom.) and of
the Single Judges of the Calcutta, Punjab and Haryana and Kerala High
Courts in Purnima Das v. Union of India (2010) 329 ITR 278 (Cal),
Mohan Singh v. Commissioner of Income Tax 1993 (204) ITR 571 (P&H)
and Suntec Business Solutions Private Ltd. v. Union of India 2014 (3) KLJ
226.
13. Mr. Jolly submitted that an amount in excess of 15% of the total tax
demand could not possibly have been sought to be recovered at this stage
from the Assessee when its appeal before the CIT(A) was pending. He also
disputed the assertion of the Department that the Assessee had been served a
notice dated 1st February, 2017 under Section 221(1) of the Act. He pointed
out that no proof of service of such notice was enclosed with the counter
affidavit.
Submissions on behalf of the Revenue
14. Countering the above submission, Mr. Rahul Chaudhary, the learned
Senior Standing Counsel for the Department maintained that the Assessee
had in fact been issued a notice under Section 221 (1) of the Act on 1st
W.P.(C) No.3127/2017 Page 5 of 12
February, 2017. He stated that the proof thereof would be available in the
records of the Department. He pointed out that the CBDT Circular No. 1914
applied only if a stay application had been preferred by the Assessee along
with its appeal before the CIT(A). Likewise, the decisions of the Division
Bench of the Allahabad High Court in Farrukhabad Gramin Bank v.
Additional Commissioner of Income Tax (supra) and of the Bombay High
Court in UTI Mutual Fund v. Income Tax Officer (supra) would apply
only in the circumstances where an application for stay had been filed by the
Assessee along with its appeal. In the present case, admittedly, no such
application for stay has been filed till date.
15. Mr. Chaudhary pointed out that in Purnima Das v. Union of India
(supra), the learned Single Judge of the Calcutta High Court had failed to
notice an earlier judgment of the another Single Judge of the same High
Court in Golam Momen v. Asstt. Commissioner of Income Tax (2003) 263
ITR 69 (Cal) which held to the contrary. This anomaly was noticed in a
subsequent judgment of another learned Single Judge of the Calcutta High
Court in Anil Kumar Banerjee v. Union of India (2014) 44 taxmann.com
465 (Cal). Therefore, as far as the Calcutta High Court is concerned, the two
judgments of the learned Single Judge held that it was not mandatory under
Section 226 (3) (iii) of the Act for a notice to be issued to the Assessee prior
to attachment of its bank account towards recovery of the tax demand.
16. Mr. Chaudhary submitted that Section 226 (3) (iii) of the Act only
required a copy of the notice to be "forwarded to the assessee" and not
served upon the Assessee prior to or simultaneously with the issuance of
W.P.(C) No.3127/2017 Page 6 of 12
notice to the bank under Section 226 (3) (i) of the Act. In support of this
proposition, he placed reliance on the decision in P.P. Kanniah Chetty v.
Income Tax Officer & Anr. (1976) 105 ITR 622 (Mad.) and Third ITO v.
Damodar Bhat, (1969) 71 ITR 806 (SC). He pointed out that even
according to the Assessee, it was under liquidation and there is no prospect
of the tax demand being recovered from it in the event of its appeal being
dismissed.
Analysis and reasons
17. The above submissions have been considered. Under Section 156 of the
Act, it is incumbent on the AO to serve upon the Assessee a notice of
demand of tax, interest, penalty, fine or any other sum specifying the same
to be payable. In the present case, it is not in dispute that such a notice was
in fact issued to the Assessee by the AO on 19 th December, 2016 and was
served on the Assessee on 24th December, 2016.
18. Under Section 221 (1) read with Section 220 (4) of the Act, the Assessee
is deemed to be an Assessee in default if it fails to make the payment of the
demand within 30 days of the service of notice under Section 156 of the Act.
In the present case, the Assessee acknowledges that it was served with a
notice of demand under Section 156 of the Act on 24th December, 2016.
Therefore, the Assessee was aware that under Section 221 (1) read with
Section 220 (4) of the Act, it would be deemed to be an Assessee in default
upon its failure to pay tax within 30 days. The Assessee is unable to explain
why it did not file an application for stay of recovery of demand along with
its appeal filed on 23rd January, 2017 before the CIT(A). In fact, it has not
W.P.(C) No.3127/2017 Page 7 of 12
filed any such stay application till date.
19. With the Assessee not having paid the amount within 30 days of the
service of notice under Section 156 of the Act, the Department was justified
in proceeding to treat it as an Assessee in default and in proceeding to take
the necessary action to recover the demanded amount.
20. At this juncture, it requires to be noticed that Para 2B of Instruction No.
1914 of the CBDT dated 2nd December, 1993 on the subject of recovery of
demands is titled `Stay Petitions'. Para 2C gives `Guidelines for Staying
Demand' wherein the AO "may impose such conditions as he may think fit."
The above Instruction No. 1914 was further modified by the OM dated 29th
February, 2016. In para 4 of the OM, it is stated that the guidelines were
being modified in order to streamline the process of grant of stay. Paras (A)
and (B) therein, which are relevant for the present purpose, read thus:
"(A) In a case where the outstanding demand is disputed
before CIT(A), the assessing officer shall grant stay of
demand till disposal of first appeal on payment of 15% of
the disputed demand, unless the case fails in the category
discussed in para (B) hereunder.
(B) In a situation where,
(a) the assessing officer is of the view that the nature of
addition resulting in the disputed demand is such that
payment of lump sum amount higher than 15% is
warranted (e.g. in a case where addition on the same
issue has been confirmed by appellate authorities in
earlier years or the decision of the Supreme Court or
jurisdictional High Court is in favour of Revenue or
addition is based on credible evidence collected in a
search or survey operation, etc.) or,
W.P.(C) No.3127/2017 Page 8 of 12
(b) the assessing officer is of the view that the nature of
addition resulting in the disputed demand is such that
payment of a lump sum amount lower than 15% is
warranted (e.g. in a case where addition on the same
issue has been deleted by appellate authorities in earlier
years or the decision of the Supreme Court or
jurisdictional High Court is in favour of the assessee,
etc.), the assessing officer shall refer the matter to the
administrative Pr.CIT/CIT, who after considering all
relevant facts shall decide the quantum/ proportion of
demand to be paid by the assessee as lump sum payment
for granting a stay of the balance demand."
21. Instruction No. 1914 dated 2nd December, 1993 and the OM dated 29th
February, 2016 are in the context of the AO considering a stay application
filed by the Assessee. The Instruction or the OM will have no application
where there is no application for stay filed by the Assessee. The decisions of
the Division Bench of the Allahabad High Court in Farrukhabad Gramin
Bank v. Additional Commissioner of Income Tax (supra) and of the
Bombay High Court in UTI Mutual Fund v. Income Tax Officer (supra)
have to be understood in this context.
22. In Farrukhabad Gramin Bank Bank v. Additional Commissioner of
Income Tax (supra), the AO had attached two bank accounts maintained by
the Assessee by giving a period of only 1 day's time in the notice of demand
under Section 156 of the Act and without serving a notice under Section 226
(3) of the Act. What appears to have weighed with the High Court is that
instead of granting 30 days' time under Section 221 of the Act, the AO had
reduced the time for making payment of the demand to just one day.
W.P.(C) No.3127/2017 Page 9 of 12
23. The further observations of the Allahabad High Court that the action of
the Department in proceeding to recover the demanded amount from the
accounts of the Assessee without serving a notice under Section 226 (3) of
the Act rendered the action arbitrary and illegal appears to run contrary to
the decision of the Supreme Court in Third ITO v. Damodar Bhat (supra)
where the contention of the Assessee that it should have been issued a notice
under Section 226 (3) prior to the AO issuing the garnishee order to the third
part was negatived by the Supreme Court. Following the said decision of the
Supreme Court, the Madras High Court in P.P. Kanniah Chetty v. Income
Tax Officer (supra) held: "in order to issue a garnishee order, it is not
necessary that the person from whom the tax is due in respect of which the
garnishee order is issued be a defaulter within the meaning of Section 46 of
the Indian Income Tax Act 1922 or the corresponding provision of the
Income Tax Act 1961."
24. Consequently, this Court is unable to accept the contention of the
Assessee that the decision of the Allahabad High Court in Farrukhabad
Gramin Bank v. Additional Commissioner of Income Tax (supra) on the
question of the mandatory nature of the requirement of prior service of
notice upon the Assessee under Section 226 (3) (iii) of the Act reflects the
correct position in law.
25. Turning to the decision of in UTI Mutual Fund v. Income Tax Officer
(supra), it is plain from the facts of the case that there was an application for
stay moved by the Petitioner before the AO immediately on the receipt of
the demand. Thereafter, the Petitioner moved the CIT seeking his
W.P.(C) No.3127/2017 Page 10 of 12
intervention apprehending that the AO may not entertain the application for
stay. The application for stay was disposed of by the AO thereafter. Within
3 days of the disposal of the stay application, the AO took action under
Section 226 (3) of the Act calling upon the bankers of the Petitioner to pay
to the Revenue the demanded amount. It was in the above context that the
Division Bench of the Bombay High Court held that "when a bank account
has been attached, before withdrawing the amount, reasonable prior notice
should be furnished to the assessee to enable the assessee to make a
representation or seek recourse to a remedy in law." All of the guidelines
issued by the Division Bench of the Bombay High Court in UTI Mutual
Fund v. Income Tax Officer (supra) were in the context of the Assessee
having filed an application for stay. However, in the context of the present
case where the Assessee has not filed any such application for stay, the
question of application of those guidelines does not arise.
26. Likewise, the Court is not persuaded to hold that the decisions of the
learned Single Judges of the Punjab & Haryana High Court in Mohan Singh
v. Commissioner of Income Tax (supra) or of the Kerala High Court in
Suntec Business Solutions Private Ltd. v. Union of India (supra) correctly
expostulate the legal position under Section 226 (3) (iii) of the Act. As far as
the Calcutta High Court is concerned, the two decisions of the learned
Single Judges of that Court in Golam Momen v. Asstt. Commissioner of
Income Tax (supra) and Anil Kumar Banerjee v. Union of India (supra)
correctly explain the legal position. The Court considers the contrary view
of another learned Single Judge in Purnima Das v. Union of India (supra)
as not laying down the correct legal position.
W.P.(C) No.3127/2017 Page 11 of 12
27. In other words, the Court respectfully follows the view expressed by the
Supreme Court in Third ITO v. Damodar Bhat (supra) and concurs the
view of the Madras High Court in P.P. Kanniah Chetty v. Income Tax
Officer (supra).
28. In the present case there was no illegality committed by the Department
in not issuing to the Assessee a notice under Section 226 (3) (iii) of the Act
simultaneously with or prior to the notice issued to its bank under Section
226 (3) (i) of the Act for recovery of the tax demand from its account. The
Court accepts the submission of the Revenue that requirement under Section
226 (3) (iii) is only that a copy of the notice should be "forwarded to the
assessee" and not that a copy should be served on the Assessee in advance
or simultaneously.
Conclusion
29. For all the aforementioned reasons, the Court finds no merits in this writ
petition which is dismissed but in the circumstances, with no other as to
costs.
S.MURALIDHAR, J
PRATHIBA M. SINGH, J
JULY 11, 2017
`anb'
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