Income Tax Department to pay cost of Rs 50 Lakh on Arbitrary Demand and Proceedings

The petitioner is a partnership firm engaged in the business of running cold storage. It filed its return of income on 17.10.2017 for the Assessment Year 2017-18 declaring a total income of Rs.11,55,016. The assessment of the petitioner was completed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act, 1961’) accepting the total income as declared by the petitioner. On 31.03.2021, the Assessing officer issued a notice to initiate proceedings under Section 147/148 of the Act, 1961 alleging that information has been received that the petitioner has deposited a sum of Rs. 13,67,24,000 in its Bank of Baroda, bank account which is undisclosed income, and escaped assessment to tax. Hence cash deposits of Rs. 13,67,24,000 made by the assessee are added to the total income of the assessee as income u/s. 68 of the Income Tax Act, 1961 as unexplained cash credit. Aggrieved with the notice under Section 148 the petitioner filed a writ petition on the ground that the decision was wholly without jurisdiction.

The Court found that there was absolutely no cash deposit by the petitioner in Bank of Baroda whereas the entire reassessment proceedings under Section 147/148 of the Act, 1961 against the petitioner, were initiated on the alleged information of a cash deposit of Rs.13,67,24,000/- by the petitioner in its bank account with Bank of Baroda. Thus, the reason to believe for initiating proceedings under Section 147/148 was totally unfounded and false. In fact initiation of proceedings and passing the impugned reassessment order was 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.

The court decided in favour of the petitioner and held that the respondents have acted arbitrarily, illegally without jurisdiction, caused harassment to the petitioner and abused power conferred under the Act, 1961, which resulted in the creation of illegal demand for Income Tax of Rs. 16,90,61,731, it was found it a fit case to impose a cost of Rs.50,00,000 (Rupees Fifty Lakhs) upon the respondents which shall be deposited by the respondents in the Prime Minister National Relief Fund within three weeks from today The relevant part of the court order is as under:

As a result, the writ petition is allowed with a cost of Rs.50,00,000 on the respondents, which shall be deposited in the Prime Minister’s National Relief Fund within three weeks from today.

The impugned notice dated 31.03.2021 under Section 148, the impugned order dated 24.03.2022, and the impugned reassessment order dated 31.03.2022 for the Assessment Year 2017-18 under Section 147 read with Section 144B of the Act, 1961 and all consequential proceedings are hereby quashed and following directions are issued:

(i) Respondent No.1 shall ensure that all necessary steps are taken within one month and a mechanism is developed and put in place within one month so that assessees may not be harassed and may not suffer on account of own fault of the department in its database/portal.

(ii) Respondent No.1 shall provide a mechanism and put it in place within one month from today that the information fed on the database/ portal is verified in reality and not as an empty formality as has been done in this case by the Deputy Director of Income Tax (Inv.), Unit-III, Kanpur, before initiating proceedings under Section 148A/148/147 of the Act, 1961 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.

(iii) Respondent No.1 shall consider developing a mechanism of the 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.

(iv) A circular be issued forthwith by respondent No.1 in the light of the direction given in paragraph 52 above.

The Payment of cost has been deferred till the next date. The matter will be put up on 01.09.2022 at 02:00 P.M. for arguments only on the quantum of costs. A copy of the order was asked to be sent to the Finance Secretary of the Government of India for compliance.

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