Allahabad HC quashes demand notice of Rs 16.90 crore after IT authority admits assessment based on faulty info

The HC has directed the Union Government to set up a mechanism within a month to ensure that assessees are not harassed and that they “do not suffer” on account of fault of the department in its data-base portal.

Urvi MahajaniUpdated: Friday, August 19, 2022, 03:47 PM IST
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Allahabad High Court | Wikimedia Commons

Observing that the Income Tax Authorities acted “arbitrarily, illegally, without jurisdiction” which resulted in “illegal demand” of Rs 16.90 crore as tax thereby causing “harassment” to the petitioner, the Allahabad High Court has imposed a cost of Rs 50 lakh on the authorities.

A division bench of Justices Surya Prakash Kesarwani and Jayant Banerji, on August 11, set aside the demand raised by the income tax authorities observing that the demand notice was sent by the income tax authorities under the Faceless Scheme without physically verifying the details and relying on faulty details reflecting in its data-base portal.

“... We find it a fit case to impose a cost of Rs.50,00,000/- upon the respondents which shall be deposited by the respondents in the Prime Minister National Relief Fund within three weeks,” said the judges.

Also, the union government has been asked to put in place system to “verify in reality” the information fed on the database/ portal and “not as an empty formality”… “so that on one hand bona fide assessees may not face harassment and on the other hand tax evaders may not escape due to lapses of departmental officers.”

In addition, a mechanism has to be put in place to ascertain “accountability of the officers who either do not observe statutory provisions of the Act, 1961 or fail to discharge their quasi-judicial function or act in complete breach of principles of natural justice.”

The HC has directed the Union Government to set up a mechanism within a month to ensure that assessees are not harassed and that they “do not suffer” on account of fault of the department in its data-base portal.

The central government has been directed to issue a circular forthwith to inform its directions to all the officers concerned. The order has to be communicated to the Finance Secretary to the Government of India for compliance.

The directions were given by the HC while hearing a petition filed by SR Cold Storage challenging the demand notice dated MArch 31, 2021, sent by the IT under its Faceless Scheme of assessment thereby asking it to pay tax of Rs 16,90,61,731.

The petitioner is a partnership firm engaged in the business of running a cold-storage. It filed its return of income on October 17, 2017, for the Assessment Year 2017-18 declaring a total income of Rs 11,55,016.

The assessing officer completed by assessment and claimed that the petitioner had deposited a sum of Rs 13,67,24,000 in its bank account which is undisclosed income and escaped assessment to tax. Based on this, income tax demand notice was sent to the petitioner.

Abhinav Mehrotra and Satya Vrata Mehrotra, counsels for the petitioners, pointed out the the affidavit filed by the IT which showed that in insight portal the cash deposited by the petitioner was shown as Rs 13,67,24,000 in the bank account of the Bank of Baroda, Kanpur, which was 4 times of the actual cash deposit of Rs 3,41,81,000 in Union Bank of India.

Additional solicitor general of India (ASGI) Gaurav Mahajan, appearing for the Union of India and IT, admitted that the “information received (by IT) and used against the assessee – which was made basis to initiate reassessment proceeding and to pass the impugned reassessment order – was the result of mistake on the part of the respondents”.

Quashing the demand notice, the HC noted that the basis of the demand was “totally unfounded and false”. “In fact initiation of proceedings and passing the impugned reassessment order dated 31.03.2022 is a glaring example of highhandedness, arbitrary actions and abuse of power by the respondents on the one hand and on the other hand, flagrant violation of principles of natural justice by them,” observed HC in its 36-page order.

Further rapping the IT authorities, as it failed to consider the justification provided by the petitioners, the HC said: “Thus, right to reason which is an indispensable part of a judicial system, has been deliberately violated by the respondents.”

After the order was passed, the ASGI requested the court to defer the amount of cost and he may be permitted to argue on the question of quantum of cost.

Accepting the request, the HC has kept the matter for argument on quantum of cost on September 1.

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