Court Stays Recovery Proceedings in Tax Exemption Dispute

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Case Name: 

International Institute of Bio Technology & Toxicology Vs Deputy Commissioner of Income Tax (High Court of Madras)

Writ Petition No.18336 of 2016 and W.M.P.No.16043 of 2016

Date: 1st July 2016

Key Takeaways:

1. The court emphasized the importance of proper discretion in tax matters.

2. Previous favorable decisions by the Income Tax Appellate Tribunal were given weight.

3. The court refrained from commenting on the merits of the assessment order.

4. Recovery proceedings were stayed pending the appeal's outcome.

Issue: 

The main question here is: Should the court grant a stay on tax recovery proceedings while the institute's appeal against the assessment order is pending?

Facts: 

1. The petitioner is a research institute dealing with biotechnology and toxicology.

2. They were denied a tax exemption under Section 10(21) (of Income Tax Act, 1961) for the assessment year 2013-14.

3. The institute asked for a complete stay on recovery proceedings while their appeal was pending.

4. The tax department (first respondent) instead asked them to pay 15% of the demand (Rs.78,90,583/-).

5. This wasn't the first time this happened - there was a similar case for the 2012-13 assessment year.

6. In previous years (1997-98, 1998-99, 2000-01), the Income Tax Appellate Tribunal had ruled in favor of the institute.

Arguments:

The institute's side:

- They've consistently been granted exemption under Section 10(21) (of Income Tax Act, 1961) in previous years.

- The Income Tax Appellate Tribunal has ruled in their favor multiple times.

- They argue that if the exemption issue is decided in their favor, other disputed points would naturally follow.

The tax department's side:

- They claim to have filed appeals against the previous Tribunal decisions (though there's some uncertainty about this).

- They argue that the court shouldn't comment on the correctness of the assessment order in this proceeding.

Key Legal Precedents:

The court referred to its own previous decision in W.P.No.17949 of 2015, dated 14.06.2016, which dealt with the same institute for the assessment year 2012-13. In that case, the court had also granted a stay on recovery proceedings.

Judgement:

The court decided to stay the recovery proceedings until the appeals are heard and disposed of by the second respondent (likely the Commissioner of Income Tax (Appeals)). Here's why:

1. The institute made a good prima facie case.

2. Previous Tribunal orders were in the institute's favor.

3. There's no evidence that these Tribunal decisions were overturned or stayed.

4. The court had granted interim stay when it first heard this petition.

FAQs:

1. Q: Does this mean the institute won't have to pay taxes?

  A: Not necessarily. It just means they don't have to pay right now while their appeal is being heard.

2. Q: Why didn't the court comment on the correctness of the assessment order?

  A: The court's role here was to decide on the stay of recovery, not to judge the assessment itself. That's for the appeals process to handle.

3. Q: What happens next?

  A: The appeal will be heard by the Commissioner of Income Tax (Appeals). The recovery proceedings are on hold until then.

4. Q: Is this decision final?

  A: For now, yes. But the tax department could potentially challenge this decision in a higher court.

5. Q: Why did previous years' decisions matter so much?

  A: Consistency in tax treatment is important. If the institute was granted exemption before, it strengthens their case for the current year, unless circumstances have significantly changed.

1. Heard Dr. Anitha Sumanth, learned counsel appearing for the petitioner and Mr. J. Narayanaswamy, learned counsel appearing for respondents.

2. The petitioner has filed this Writ Petition, challenging the order, dated 10.05.2016, passed by the first respondent, whereby, the request made by the petitioner, for grant of absolute stay of the recovery proceedings, pending disposal of the Appeal Petition before the Commissioner of Income Tax (Appeals) filed against the assessment order, for the year 2013-14, was not granted, rather, a condition was imposed on the petitioner, requiring the petitioner to pay 15% of the demand of Rs.78,90,583,/- and to submit a copy of the challan to the first respondent.

3. I am reminiscent of the fact that, in respect of the same assessee, for the assessment year, 2012-13, similar orders were passed by the Assessing Officer, on 10.06.2015 which was challenged by the assessee/petitioner in W.P.No.17949 of 2015, and by order, dated 14.06.2016, the said Writ Petition was disposed of by me, and the operative portion of the order, dated 14.06.2016, reads as follows:- reminiscent

2. The petitioner has challenged the order passed by the first respondent dated 10.06.2015 whereby the request made by the petitioner for the grant of absolute stay on the recovery proceedings pending disposal of the appeal before the Commissioner of Income Tax (Appeals) filed against the order of assessment dated 31.03.2015 for the Assessment Year 2012-13 was not granted, but a condition has been imposed by the first respondent that the petitioner has to pay 50% of the demand immediately on receipt of the impugned communication.

3. After elaborately hearing the parties and carefully perusing the materials on record, this Court is of the view that the only issue which needs to be considered is as to whether the exercise of discretion on the part of the first respondent is proper and does the impugned order call for interference? The core issue involved in the matter is as to whether the petitioner is entitled for the grant of exemption under Section 10(21) (of Income Tax Act, 1961).

4. The case of the petitioner is that in respect of the earlier assessment orders, especially in respect of the Assessment Years 1997-98, 1998-99 and 2000-01, the petitioner's case has been considered by the Income Tax Appellate Tribunal and the Tribunal held that the petitioner is entitled for exemption under Section 10(21) (of Income Tax Act, 1961). At this stage it would be useful to refer to one such order passed by the Income Tax Appellate Tribunal dated 26.05.2006 for the Assessment Years 1997-98:

“The denial of exemption by the Assessing Officer is based on the fact that the Assessee is classified as an Institution. It is the case of the Department that the Assessee-society is classified as an insitution and not as an Association and as per the provisions of Section 10(21) (of Income Tax Act, 1961), exemption is available only to an Association. But once the fact that the Assessee – Society is engaged in research work regarding agriculture related activities and it is recognized as a leading National Body in the field of Research in Bio-Technology and Toxicology. Further, the Central Board of Direct Taxes has classified the Assessee- Society as an Association in the year 1997, after due verification of the object as well as its activities and there is no change in the objectives of the Assessee-society from its inception till date. In view of the these facts and circumstances of the case and respectfully following the Tribunal's decision cited supra, we hold that the Assessee is entitled to exemption under Section 10(21) (of Income Tax Act, 1961) as the Assessee society is engaged in research work in agriculture related activities.

9. In the result, the appeal of the Assessee is allowed.” Similar orders have been passed for the other two years as well. The petitioner had placed these orders for the consideration while finalizing the assessment before the Assessing Officer himself. However, the Assessing Officer, while passing the Assessment Order dated 31.03.2015, in paragraph 3.4 therein, has stated that as against the decisions of the Tribunal for the Assessment years 1997-98 & 1998-99, appeals have been filed under Section 260A (of Income Tax Act, 1961) before this Court. According to the petitioner, despite diligent effort being taken by them, they were unable to get the details as regards the pendency of such appeal. Therefore left with no other option, the counsel for the petitioner addressed a letter dated 08.06.2015 enclosing a letter of the petitioner dated 04.06.2015 requesting for details with regard to the said appeals said to have been filed by the Department. However, it appears that the petitioner has not been favoured with any reply till date. Be that as it may, the first respondent, while considering an application under Section 220(2) (of Income Tax Act, 1961), has to consider as to whether the petitioner has made out a prima facie case for the grant of absolute stay.

5. Undoubtedly, the first respondent has power to exercise his discretion. Nevertheless, such discretion should be exercised in a proper manner and should contain reasons. In the instant case, the petitioner has been able to establish that in respect of previous years, the core issue which has been raised by the petitioner before the first respondent and subject matter of the previous Assessment Years, is regard to the exemption under Section 10(21) (of Income Tax Act, 1961). The other two pertain to rejection of claim of depreciation on fixed assets and rejection of charitable status on application of provisions of Section 2(15) (of Income Tax Act, 1961).

6. The learned counsel for the petitioner would submit that if the issue relating to Exemption under Section 10(21) (of Income Tax Act, 1961) is decided in favour the petitioner/assessee, then the other two issues would have to be held in favour of the petitioner. However, for this submissions, learned standing counsel for the respondent Department has certain reservations and would submit that this Court is not testing the correctness of the assessment order and what is being tested is correctness of the order passed by the first respondent in the stay petition filed by the petitioner.

7. It is true that this Court is not considering the correctness of the Assessment Order dated 31.03.2015. Therefore, this Court refrains from making any observation touching upon the merits of the Assessment order. Nevertheless, this Court is convinced that the petitioner has made out a good prima facie case supported by three orders passed by the Income Tax Appellate Tribunal for the earlier years and as of now, there is nothing on record to show that the decision of the Income Tax Appellate Tribunal has been either reversed or modified or stayed by this Court in an appeal filed by the Department before this Court. That apart, when this Court entertained the writ petition, has passed a speaking order on 23.06.2015, granting an order of interim stay.

8. Taking into consideration, the above facts and circumstances of the case, this Court is of the view that the recovery proceedings shall remain stayed till the appeals are heard and disposed of by the second respondent. With the above observation and direction, the writ petition is disposed of. No costs. Consequently, the connected miscellaneous petition is closed."

4. The learned counsel for the respondents submitted that, when the earlier Writ Petition was disposed of, the respondent-Department had not given any specific instructions to him, as to whether the Appeals have been preferred as against the order passed by the Income Tax Appellate Tribunal, but today, the learned counsel has got instructions that authorization has been given by the Department to file Appeals.

5. Be that as it may, as on date, the orders passed by the Income Tax Appellate Tribunal has not been reversed/modified/altered/stayed by this Court, and an Appeal has only been authorized to be filed.

6. Thus, taking into consideration the above facts and circumstances, and the order passed by this Court, in the earlier Writ Petition, (quoted supra) in respect of the same assessee, for the previous assessment year, 2012-13, this Court is of the view that the recovery proceedings initiated against the petitioner shall remain stayed till the Appeals are heard and disposed of by the second respondent.

7. The Writ Petition is disposed of, accordingly. Consequently, connected Miscellaneous Petition is closed. No costs.

Sd/-

Asst.Registrar (CS VI )

Sub Asst. Registrar

To

1. The Deputy Commissioner of Income Tax

(Exemptions)

Chennai Circle,

Annexe Building, III Floor,

121, Mahatma Gandhi Road,

Chennai- 600 034.

2. The Commissioner of Income Tax (Appeals)

121, Mahatma Gandhi Road,

Chennai- 600 034.

+2 cc's to Dr.Anita Sumanth, advocate,sr.37054

+1 cc to Mr.J.Narayanaswamy, Advocate,sr.37112.

bvr(co)

krd 22/7

Writ Petition No.18336 of 2016