Court Orders Tax Authority to Hear Petitioner's Stay Application, Halts Tax Recovery

Get the full picture - access the original judgement of the court order here

Case Name: 

Pentium Construction Private Limited & Anr. vs Income Tax Officer (High Court of Karnataka)

Writ Petition No.8531 of 2020 (T-IT)

Date: 20th July 2020

Key Takeaways:

1. The court emphasized the importance of tax authorities considering all relevant information before passing assessment orders.

2. It highlighted the necessity of giving taxpayers a fair hearing before deciding on stay applications.

3. The judgment underscores the court's willingness to intervene when procedural fairness is not observed in tax proceedings.

Issue:

Did the Income Tax Department err in disallowing the petitioner's expenses without properly considering the evidence, and was the PCIT's order for partial payment without hearing the petitioner valid?

Facts:

1. On December 30, 2019, the Income Tax Officer passed an assessment order disallowing expenses of nearly Rs. 7.87 crores incurred by the petitioner for payments to contractors .

2. The Assessing Authority instructed the bank to freeze the petitioner's account on March 12, 2020 .

3. The petitioner filed a stay application, which was rejected on March 23, 2020 .

4. The petitioner then filed a stay application with the PCIT under Section 246A (of Income Tax Act, 1961) .

5. While the writ petition was pending, on July 17, 2020, the PCIT passed an order directing the petitioner to deposit 20% of the tax amount in six installments, without giving the petitioner a hearing .

Arguments:

Petitioner's Arguments:

1. The Assessing Authority disallowed expenses without properly appreciating the replies from contractors .

2. Two contractors (M/s SanWe MEP Contracting Private Limited and M/s Credai Calicut) had submitted replies before the assessment order was passed, which were not considered .

3. The PCIT's order for partial payment was passed without notice and without hearing the petitioner .

Respondent's Arguments:

1. The appeal is pending before the appellate authority, and the PCIT has partly allowed the stay application.

2. A writ petition challenging the assessment order is not maintainable when an appeal is pending.

Key Legal Precedents:

The judgment doesn't explicitly mention any specific legal precedents. However, it refers to Section 246A (of Income Tax Act, 1961), which deals with appealable orders before a Commissioner (Appeals) .

Judgment:

1. The court found that the Assessing Authority overlooked replies from contractors received under Section 133(6) (of Income Tax Act, 1961) .

2. It criticized the PCIT for disposing of the stay application without hearing the petitioner .

3. The court ordered the PCIT to grant an opportunity to the petitioner to present its case regarding the stay application .

4. The PCIT was directed to hear the petitioner (in person or via video conference) and dispose of the application within four weeks of the petitioner's appearance .

5. The court halted any coercive steps to recover the tax amount until the PCIT passes an order .

FAQs:

1. Q: What was the main issue in this case?

  A: The main issue was whether the Income Tax Department properly considered evidence before disallowing expenses and whether the PCIT's order for partial payment without a hearing was valid.

2. Q: Why did the court intervene in this case?

  A: The court intervened because it found that the tax authorities had not properly considered evidence and had not given the petitioner a fair hearing.

3. Q: What does this judgment mean for taxpayers?

  A: This judgment emphasizes the importance of procedural fairness in tax proceedings and the right of taxpayers to be heard before decisions are made that affect them financially.

4. Q: Did the court decide on the merits of the tax assessment?

  A: No, the court didn't decide on the merits of the tax assessment. It focused on the procedural aspects and ordered the PCIT to hear the petitioner's stay application.

5. Q: What happens next in this case?

  A: The PCIT will need to hear the petitioner's stay application and make a decision within four weeks. Until then, no coercive steps can be taken to recover the tax amount.

Though this matter is listed for orders regarding completion of service of notices to respondents. Shri E.I.Sanmathi, learned Standing Counsel appears for respondents No.1 & 3, the Income Tax Department.

2. The matter being in a short compass, as prayed for by learned advocates for petitioner and respondents No.1 & 3, it is taken up for final disposal.

3. Petitioner has challenged the assessment order dated 30th December 2019 (Annexure-A) passed by the 1st respondent- Income Tax Officer, Bengaluru. On 12th March 2020, the Assessing Authority instructed second respondent bank to freeze petitioner’s Bank account. Petitioner has filed an application before the Assessing Authority on 20th March 2020 seeking stay of assessment order and the Assessing Authority rejected the same on 23rd March 2020. Thereafter, petitioner filed an application for stay before third respondent namely, the Principal Commissioner of Income Tax-5, Bengaluru (‘the PCIT’ for short)) under Section 246A (of Income Tax Act, 1961). Since no orders were passed by the PCIT, the petitioner has approached this Court with a prayer to quash the assessment order.

4. Shri Raghuraman, learned advocate for petitioner submitted that whilst this writ petition is pending consideration, on 17th July 2020, the PCIT has passed an order directing petitioner to deposit 20% of the tax amount in six installments. The said order has been passed without notice and without hearing the petitioner.

Shri Raghuraman further submitted that the Assessing Authority has disallowed expenditure of nearly Rs.7.87 crores, which the petitioner has incurred by making payment to its contractors. The list of eighteen such contractors has been recorded in the assessment order. Notices were issued to the said contractors and they have given reply to the Assessing Authority. However, without properly appreciating the replies, the Assessing Authority has disallowed the expenditure and assessed the payment of tax of Rs. 3.35 Crores.

5. To substantiate his submission, Shri Raghuraman adverted to letter dated 24th December 2019 written by M/s SanWe MEP Contracting Private Limited and email by M/s Credai Calicut on 26th December 2019.

He submitted that these replies were given prior to date of assessment order namely, 30th December 2019. He argued that though this is the factual matrix, the Assessing Authority has called these expenses as ‘bogus expenses’ and disallowed. Petitioner is thus not liable to pay any tax. Therefore, the conditional order passed by the PCIT directing the petitioner to pay 20% of the amount assessed in the assessment order is also not sustainable in law. Accordingly, he prayed for allowing this petition.

6. Shri Sanmathi argued opposing the petition. He submitted that the appeal is pending before the appellate authority and the PCIT has partly allowed the stay application and directed payment of 20% tax amount in six easy installments. When the appeal is pending, a writ petition challenging the assessment order is not maintainable.

7. I have carefully considered rival submissions and perused the records.

8. It is not in dispute that the assessment order is passed on 30th December 2019. M/s SanWe MEP Contracting Private Limited have sent their reply to the Income Tax Officer on 24th December 2019 and M/s Credai Calicut on 26th December 2019. As per Raghuraman’s submission, all the contractors have submitted their reply and petitioner is prepared to furnish them before the PCIT. The said two letters addressed to the Income Tax Officer prima facie show that the Assessing Authority has not taken note them while passing the assessment order on 30th December 2019. The Assessing Authority has disallowed the expenditure of Rs.7.87 crores, by calling the expenditure as ‘bogus’. As noticed herein, the replies of two contractors are on record and the same are admittedly received prior to the date of assessment order. Therefore, saddling on the assessee to pay taxes by disallowing the expenditure without appreciating replies received under Section 133(6) (of Income Tax Act, 1961) will meet an assessee with consequences of making the payment. It is always expected of the Assessing Authority to take note of and examine the replies of the recipients of such expenditure. In the instant case, it appears the same is overlooked.

9. Admittedly, an application was filed before the PCIT seeking stay of assessment order. The same has also been disposed of without hearing the petitioner. Generally, in all cases, an application filed before any quasi judicial authority is required to be heard before any orders are passed and more so, in the case of this nature, where the assessee becomes liable to pay huge taxes. The application has been presented before the PCIT on 30th April 2020 and the order has been passed on 17th July 2020. Though the application was pending for more than two months, petitioner has not been heard.

10. In the facts and circumstances of the case, the submission of Shri Sanmathi, seeking to defend the Revenue by contending that petitioner has been shown concession to pay 20% of the tax amount, that too in six equal installments is too fragile to be countenanced.

11. Hence, the following:

ORDER

The third respondent- PCIT shall grant an opportunity to petitioner to put forth its case so far as the application for stay is concerned. The PCIT, subject to his convenience, may either hear the petitioner in person or through the video conference. The petitioner shall appear before the PCIT on 30th July 2020 and take further instructions. The PCIT, after hearing the petitioner, shall dispose of the said application within a period of four weeks from the date of petitioner’s appearance. No coercive steps to recover the tax amount shall be initiated till PCIT passes his order.

12. The writ petition is accordingly disposed of. No costs.

Sd/-

JUDGE