Tax Default Due to Circumstances Beyond Control: Court Grants Interest Waiver

Case Name**: DR. K. M. MEHABOOB VS CHIEF COMMISSIONER OF INCOME TAX & ORS. 

**Key Takeaways**:

1. Default in tax payment due to circumstances beyond the assessee's control can qualify for interest waiver.

2. Cooperation in recovery proceedings and prompt payment upon notification are crucial factors.

3. The court considers the time gap between the assessment year and the recovery notice.

4. Genuine hardship to the assessee is a significant consideration for interest waiver.

**Issue**: 

Was the petitioner, Dr. K. M. Mehaboob, entitled to a waiver of interest under Section 220(2A) of the Income-tax Act for tax arrears of a dissolved firm?

**Facts**:

1. The petitioner was a partner in a firm that was dissolved in 1993. 

2. The tax demand was for the assessment year 1987-88. 

3. A certificate under Section 222 of the Income-tax Act was served to the petitioner on 27.7.2005, demanding tax arrears. 

4. The petitioner immediately paid the demanded tax upon receiving the notice. 

5. He then applied for a waiver of interest under Section 220(2A) of the Income-tax Act, which was rejected. 

**Arguments**:

Petitioner's Arguments:

1. He was unaware of any tax arrears, believing all taxes were paid at the time of firm dissolution.

2. He couldn't trace documents after 17 years related to the assessment.

3. All ingredients of Section 220(2A) were satisfied in his case.

Income-tax Department's Arguments:

1. None of the ingredients of Section 220(2A) were satisfied.

2. The petitioner didn't make such a case in his original application to the Income-tax Commissioner.

**Key Legal Precedents**:

The judgment doesn't explicitly mention any specific legal precedents. However, it heavily relies on the interpretation and application of Section 220(2A) of the Income-tax Act.

**Judgement**:

1. The court quashed the order rejecting the petitioner's application for interest waiver.

2. It declared that the petitioner is entitled to waiver of interest under Section 220(2A) of the Income-tax Act. 

3. The court directed the respondents to pass appropriate orders in line with this declaration expeditiously.

4. The petitioner was to be given all consequential reliefs.

The court's reasoning:

1. The significant delay between the assessment year (1987-88) and the recovery notice (2005) was considered.

2. The petitioner's immediate payment of tax upon notification and cooperation in recovery proceedings were noted.

3. The court found that all three ingredients of Section 220(2A) were satisfied:

  a) Genuine hardship to the assessee

  b) Default due to circumstances beyond the assessee's control

  c) Cooperation in inquiry and recovery proceedings 

**FAQs**:

1. Q: What is Section 220(2A) of the Income-tax Act?

  A: It's a provision that allows the Chief Commissioner or Commissioner to reduce or waive interest on tax arrears if certain conditions are met.

2. Q: Why did the court consider the delay in recovery significant?

  A: The long gap (18 years) between the assessment year and recovery notice supported the petitioner's claim of being unaware of the tax dues.

3. Q: How did the petitioner's immediate payment of tax influence the decision?

  A: It demonstrated the petitioner's willingness to cooperate, which is one of the criteria for interest waiver under Section 220(2A).

4. Q: What constitutes "circumstances beyond control" in this case?

  A: The petitioner's lack of awareness about the tax dues, given that he was not the managing partner and the firm had been dissolved years ago.

5. Q: Does this judgment set a precedent for similar cases?

  A: While each case is unique, this judgment emphasizes the importance of considering the assessee's circumstances and cooperation in tax recovery cases.

1. The petitioner was the erstwhile partner of a firm which became defunct. The firm was dissolved in the year 1993. By Ext.P1 certificate dated 27.7.2005, arrears of income tax due from the firm for the assessment year 1987-88 was demanded from the petitioner. The petitioner submits that the firm was managed by the erstwhile managing partner and the petitioner was under the impression that at the time of dissolution of the firm, all taxes payable were duly paid. The petitioner could not also trace out any documents after 17 years in respect of the assessment as well. The petitioner immediately paid the tax demanded and submitted an application under Section 220(2A) of the Income-tax Act for waiver from the interest demanded under Section 220(2) of the Income-tax Act, 1961. But the same was rejected by Ext.P6 order. It is challenging that order, the petitioner has filed this writ petition.

2. The learned counsel for the petitioner submits that he does not dispute the liability to pay. The petitioner submits that all the ingredients of Section 220(2A) of the Income-tax Act have been satisfied in the petitioner's case and therefore rejection of the petitioner's application for waiver of interest under Section 220(2A) is clearly unsustainable.

3. With the help of a statement filed on behalf of the respondents, counsel for the Income-tax Department vehementally opposes the prayer of the petitioner. He would submit that none of the ingredients of Section 220(2A) are satisfied in this case and even in Ext.P4 application before the Income-tax Commissioner, the petitioner had no such case. He would therefore submit that the petitioner is not entitled to waiver of interest.

4. I have considered the rival contentions in detail.

5. Section 220(2A) of the Income-tax Act Reads as follows:

“(2A) Notwithstanding anything contained in sub- section (2) the Chief Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by an assessee under the said sub-section if he is satisfied that--

(i) payment of such amount has caused or would cause genuine hardship to the assessee;

ii. default in the payment of the amount on which interest has been paid or was payable under the said sub-section was due to circumstances beyond the control of the assessee; and

iii. the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.”

I am of opinion that the question as to whether these ingredients have been satisfied in the petitioner's case has to be considered in the background of the delay in recovery itself. Admittedly, the tax demanded is for the assessment year 1987-88. Ext.P1 certificate under Section 222 of the Income-tax Act was served on the petitioner only on 27.7.2005. It is not disputed before me that the firm was dissolved in 1993. Of course, the petitioner was one of the erstwhile partners of the firm. He would submit that he was not aware of the arrears of tax insofar as the firm was being managed by the erstwhile managing partner and the petitioner is not in possession of any records in relation to that assessment. He has specifically stated that he was under the impression that at the time of dissolution of the firm, all taxes due have been duly paid. Therefore, there cannot be any doubt that payment of such amount would cause genuine hardship to the assessee insofar as the petitioner has to suffer the burden of the tax by himself. Needless to say, the very same circumstance is more than sufficient to hold that the default in payment was due to the circumstances beyond the control of the assessee. The petitioner immediately on receipt of Ext.P1, paid the tax also and did co-operate with the proceedings for recovery. There is no case for the respondents that the petitioner had not co-operated with the enquiry relating to the assessment as well. Therefore, I am satisfied that all the three ingredients of Section 220(2A) are fully satisfied in this case. That being so, the petitioner is entitled to waiver of interest under that Section. Accordingly, Ext.P6 order is quashed. It is declared that the petitioner is entitled to waiver of interest under Section 229(2A) of the Income-tax Act. Therefore, the respondents shall pass appropriate orders in tune with the above declaration expeditiously. The petitioner shall be given all consequential reliefs also. The writ petition is disposed of as above.

Sd/- S. Siri Jagan, Judge.