Recovery of Income tax –Provisions and Procedures

Presented by

Shankar BoseInspector of Income-tax

MSTU, Puri

Primary duty of collection of the demand is with the Assessing Officer who has raised the demand

Planning

Collect all the details of assets during the course of assessment

Make provisional attachment u/s 281B with the approval of the CIT, if required

Serve the demand notice as early as possible

Precaution

o Study from records whether allowing full 30 days will be detrimental to the revenue

Proviso to Sec. 220(1)

Record the reason to believe. Obtain approval from Addl. CIT Allow reduced period for payment of

the demand Take recovery measures as early as

possible

RESPONSES

Assessee has paid the demandwithin due date

Assessee has filed an applicationwithin due date for extension of

time/installment

Assessee has filed an appeal andhas applied for stay of the demand

Neither has paid the demand nor prayed for stay

Section 220(3)

Extension oftime or stay of

demandGranting Installment

Conditions u/s 220(3) Application must be made within the due

date Reasonable opportunity is to be given Each case should be judged on merit Security/bank guaranty may be obtained

in suitable cases Do not allow much time to pay and in no

case, more than 18 installments be granted

Order u/s 220(3)

Make a speaking Order mentioning time allowed and terms of payment

Mention the amount to be paid and the date of payment

Review the position after a certain intervals

Maintain the installment register

Non- compliance

Has not paid withinthe extended time

Commits default in payment of any of the installments within fixed

time

Treat the assessee as deemed to be in default and take measures

to collect the demand

Installment petition rejected

Assessee makes part payment

Fate?

Stay petition- Sec. 220(6)

Where the assessee has presented an appeal u/s 246

The AO has the discretion to grant time

He may impose conditions as he thinks fit

He may treat the assessee not being in default

Instruction No.96 dated21.08.69

Where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more , the collection of the tax should be held in abeyance till the decisions in appeal.

Instruction No-1914

Stay petitions have to be dealt with in accordance with the guidelines stipulated in Instruction No-1914 dated 02.12.1993 and it supersedes earlier instructions

Merit of the case

Points of dispute relate to facts or are a consequences of different interpretation of law.

The additions have been made as a result of detailed investigation.

They are based on materials gathered through enquiry/survey/search & seizure operation

Important points

Mere filing of appeal is not a criteria for granting stay.

Opportunity must be given before rejecting the petition .

Stay petitions shall always be dealt with utmost care

Issues to be considered

Points of dispute have been decided in favour of the assessee in an earlier order by the CIT/ITAT/High Court

The disputed point arises because the AO has taken an interpretation of law in respect of which there exist conflicting decisions

Conditions

Stay only the demands attributable to disputed points

Require the assessee to offer suitable security

Require the assessee to pay a reasonable amount in lump sum or in installment

Further Conditions

Reserve a right to review the order passed after a reasonable time to consider the development during the period.

Require an undertaking from the assessee that he will cooperate in early disposal of appeal

Mention that if any refund becomes payable by the Depptt. will be adjusted against the demand stayed

Other measures

When the demand is more than 1 lakh the AO will intimate the details pending appeal, the quantum demand stayed and conditions imposed to the JCIT.

The JCIT will request the CIT to write to the concerned CIT(A) for early disposal of appeal

Authorities who can stay

Stay should normally be entertained by theAO/JCIT

CIT can interfere when the assessment is unreasonably high or there will be genuine hardship of the assessee

Power of CIT(A)

The CIT(A) is also vested with the powers of granting stay order, which is not only necessary but also expedient for effective adjudication of appeal.

Prem Prakash Tripathi vs CIT [1994]

208 ITR 461 (All)

Demand should be stayed when It is unreasonably high

Allahabad agricultural Institute (2007)

VsUOI

291 ITR 116(All)

MGM Transport (Madras)(P) Ltd.(2007)

VsITO

207 CTR (Mad) 90

A demand of Rs 66 lakh was raised u/s158BC. The assessee has Rs 24 lakh in the bank account. On a stay petition, the AO asked to pay Rs 5 lakh initially and pay the balance in 10 fortnightly installments.

The High court treated the order as harsh It directed to make an initial payment of Rs 15

lakh and to obtain a security for the balance payment

Important phrases

Assessee deemed to

be in default

Assessee in default

Assessee not being in default

Recovery measures

Persuasive measures Coercive measures

Penalty u/s 221 When the assessee is in default or

deemed to be in default Issue show cause letter giving an

opportunity May not be imposed when there is

good or sufficient reason Quantum of penalty is discretionary

but it should not be more than tax arrear

• Imposition of penalty is not a recovery measure, it is merely a punishment for the default of the taxpayer

• Default must be willful and not merely accidental

Penalty order Penalty cannot be imposed for non-

payment of interest Penalty can not be imposed for non

payment of penalty. The order imposing the penalty should be

speaking and clearly specify the amount of penalty payable

Example

• Assessee became in default on 31.3.2009

• Penalty notice u/s 221 was issued on 15.05.2009

• Demand paid on 20.05.2009 i,e, before the date of hearing

Can the penalty be imposed in this case?

Attachment of salary-Section 226(2)

• AO can require the employer to remit a portion of salary towards the arrears of tax due

• Portion exempt u/s 60 of CPC can not be attached.

Exempted items

Pension Provident Fundgratuity

Example

• The assessee is due to receive an honorarium of Rs 50,000/ from All India Radio

Is it attachable u/s 226(2)?

Attachment u/s 226(3)

When money is due or may become due to the assessee

Any person holds or may subsequently hold on account of the assessee

AO will issue the notice to pay the money to him forthwith or within the time specified in the notice.

Scope of attachment

Debtors Bank Accounts Rent receivable Retention money of a contractor Security money/Deposit Compensation receivable

Attachment of Fixed Deposits

Vysya bank/ Global Trust Ltd vs Joint CIT [2000] 241ITR 178 (Kar)

AND Administrator, Unit trust of India vs

B.M.Malani[2007] 164 Taxman 463 (SC)

CAUTION

This power must be exercised with utmost care and circumspection

Not to exercise this power hastily, indiscriminately and capriciously

The AO must be in possession of prima facie information

Jagannath Bawri vs CIT [1998] 234 ITR464( Gauhati)

Service of notice

• A copy of the notice to be served to the assessee to his last address

• In case of joint holders, notice is to be served to all the joint holders to their last known addresses

Compliance of the person

o To whom a notice is issued is bound to comply with the notice

o When a notice is issued to a post office, banking company or insurer , it is not necessary to produce the pass book, deposit receipt , policy or any document

o When a person objects , a statement on oath is to be recorded

Personal liability

A false statement is given on oath Discharges any liability to the

assessee after receipt of the notice

Deemed to be in default

• When the person fails to pay even after the notice shall be treated as deemed to be in default

• Proceedings may be taken against him in the manner provided in section 222 to 225

A question

• Can the salary of the third party debtor be attached for non-compliance?

Example

• The AO attached the bank account of the assessee showing the demand as Rs 5 lakh but it was found subsequently that the demand is actually Rs 6.5 lakh.

Will the notice be void?

Money in custody of court-226(4)

• Money belonging to the assesse is in custody of any court

• The AO shall apply to the court for payment of the money sufficient to discharge the tax

Attachment

• At the time of attachment the money must be at custody of the court

• Where the court has already passed a rateable distribution order , the money cannot be attached

Priorities

Govt. dues get priority over unsecured creditors

As for the Govt. dues not secured by any charges, the first Depptt attaches the property will get precedence over others.

Distraint and sale

The AO may recover the arrears of tax due by distraint and sale of movable property of the assessee

The AO should be authorized by the CITIt should be done as per procedure laid

down in Third schedule

Procedure

• First verify, whether any rectification petition, stay petition or appeal effect is pending.

• A notice must be given indicating the amount due

• Issue the distraint warrant in the name of Inspector

• The Inspector will make a discreet enquiry about the time the assessee will available in the premises

Execution of the warrant

• The inspector will enter the premises along with team members

• He will serve the warrant on the assessee to make the payment forthwith.

• If the assessee makes the payment, he will issue the cash receipt

• If he does not make payment within reasonable time he will make attachment of the movable properties

Attachment

attachment means taking possession by way of actual seizure

He should first seize the cashThen attach all other movable assets as

per requirement and make inventories.It should be done in presence of two

witnesses and a panchnama be prepared.

Others

Seizure should not be done in excessive

Seized items should be kept in safe custody

Arrangement of sale is to be made as early as possible.

Section 281

During pendency of any proceeding, afterCompletion but before service of notice u/r 2 of

2nd schedule

Transfers by way of sale ,mortgage,Gift, exchange or any other mode

Become void

Exception

When transferred for adequate consideration and without notice of pendency of such proceeding or demand

With the permission of the AO

Applicable

• This section is applicable only when the demand payable is more than Rs 5000/ and the asset transferred is more than Rs 10000/

Assets -illustration

LandBuildingPlantMachinerySharesSecuritiesFixed deposits in bank

Whether automatic

TRO VS Gangadhar Biswanath Ranade

234 ITR 188 (SC) (1998)

Recovery survey

The idea of recovery survey was introduced in the action plan in the year 1996-97

It is like other survey u/s 133A

Plan

When there is no visible asset of the assessee .

He has a businessThis can be done by TRO alsoThis can be done jointly with the TRO.

Cash

• Make an inventory

• Request the assessee to deposit in the bank account and attach the bank account

• If there is huge amount of cash may be converted to search an seizure

• If it is a certificated case, the TRO may authorize his inspector to attach and seize

Bank account

There may be bank accounts in the name of assessee or his benamidars

Make an inventoryAttach the bank accounts, if possible

FD/NSC

Make inventory of FD/NSC found Verify whether shown in the returnAttach wherever possible

DOCUMENTS

Examine the documents to find out any information regarding any asset

Take extract or impound

Immovable property

• Examine the purchase deeds or agreements found during the survey, if any

• Whether these are in the names of any benamidar

Legal representative

• When a person dies, his legal representative is liable to pay any sum which the deceased would have been liable to pay.

• Legal representative can not transfer any asset when the liability is undischarged.

Who is a legal representative

• Besides administrator, executors and heirs-in-law, a stranger taking possession of deceased’s estate is liable to be proceeded against as legal representative. An agent holding power of attorney from an executor of the deceased is a legal representative.

James Anderson vs CIT (1960) 39 ITR (sc)

How to proceed

• In the case of death of assessee after service of demand notice, make an investigation to find out the legal representative. Keep them on record.

• Issue fresh demand notices to each of the legal representatives.

liability

• The legal representative is liable only to the extent of estate or property of the deceased which has come to his hands and not been duly disposed of.

Firm -188A

• Every person who was the partner during the previous year shall be jointly and severally liable along with the Firm for the amount of the tax.

• Legal representative of such partner who is deceased shall also be liable.

Dissolved Firm-189(3)

In the case of discontinuance or dissolution of the Firm, the partners of the firm of the relevant period or legal representative in respect of the partner who is deceased will be liable

An example

• A Firm which had two partners, had a demand of Rs 5.5 lakh for the AY 2004-05.

The business of the firm was taken over by one of the partners on 01.04.2004 and made it a proprietorship concern.

Who will be liable to pay the demand?

Company in liquidation

• Every liquidator within 30 days of becoming liquidator give a notice of his appointment to the concerned AO

• The AO will notify to the liquidator within three months of the receipt of information the amount which will be payable by the company

Duty of the liquidator

• Shall not part with any asset without the permission of the CIT/CCIT before notification by the AO

• Set apart an amount equal to the amount notified by the AO.

PERSONAL LIABILITY

• If the liquidator fails give notice to the AO

• Fails to set apart the amount notified by the AO

• Parts with any asset of the company in his hand in contravention of provisions

He will be personally liable.

Priority

Priority of Govt dues over unsecured creditors has been accepted by Hon’ble Supreme Court

Builders Supply Corporation vs UOI 56 ITR 91

Important Case law

Imperial Chit Fund vs ITO 219 ITR 499 (SC)

Companies Act- Contradictory position

Section 529A has been introduced in the year 1985 to give priority to the payment to workmen and secured debts

RECENT JUDGEMENTS

• Strait India Ltd vs CIT 242 ITR 247 (Bom)

• Syndicate bank vs CIT 242 ITR 281 (Bom)

Private Company-Sec 179

• The private company the demand of which can not be recovered .

• Every person who were directors during the relevant year will be jointly and severally liable to pay the tax

• No action can be taken against the director if he can prove that non-recovery can not be attributed to any gross neglect, misfeasance, breach of provision on his part.

Procedure

Be sure that no recovery can be made from the

company

Make investigation to make the directors

liable

Order u/s 179

First part of the order will contain the details of the actions taken to recover the demand from the company.

Second part will contain what investigation/ enquiries have been made to make the director liable jointly and severally

Third part will be the decision.

Receiver

• Property in the hand of the receiver can not be attached without the permission from the court which has appointed the receiver.

Declared insolvent-1

Assessee received income and filed return

Declared insolvent before filing

AO assessed and raised demand

Insolvent is liable to tax

Declared insolvent-2

Assessment made in his name

Adjudicated insolvent after assessment butBefore collection of demand

AO can claim it as a debt against the estate of the assessee from official assignee

Declared insolvent-3

Adjudicated insolvent

Official assignee has received income after that or carries on business

Tax will be collected from the official assignee

BIFR

An Industrial undertaking which has filed reference in BIFR under the provisions of SICA 1985 for its revival, IT demand against such company can not be recovered.

Exception- for recovery Showing that despite the claim of

sickness the company has resources to meet the dues

Revealing through evidences that this is a case of diversion of fund/asset stripping by the directors

All petitions before BIFR are to be made through DGIT (Admn) who is the nodal agency

DRAWING UP CERTIFICATE

The procedure of drawing up certificate has been modified w,e,f, 01.04.1989

U/S 222, the TRO will draw up certificate when the assessee is in default or deemed to be in default in making the payment of tax

Guideline

New guideline regarding drawing up certificate has been has been given in CBDT letter in FNo.396/3/90-ITCC dated 13.02.1990

Procedure The AO will first exhaust the actions

u/s 221 and 226 He will obtain an approval from the

JCIT to that effect. He will prepare a statement of assets

and fill up the relevant columns of Form No 57

Send these to the TRO for drawing up certificate

Quarterly review

The AO will make quarterly review of the cases to be referred to the TRO

The TRO and the AO will meet after a certain interval to review the position of certificated cases

JCIT will monitor the cases

Time limit

There is no time limit of drawing up certificate as section 230 has been omitted w.e.f. 01.04.1989

Thank You