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HC holds that ITO should not act as a mere tax gatherer but as a quasi judicial authority vested with public duty!

“Administrative directions for fulfilling recovery targets for the collection of revenue should not be at the expense of foreclosing remedies which are available to assessees for challenging the correctness of a demand. The sanctity of the rule of law must be preserved.” With these observations, the Bombay High Court has come down heavily hammer and tongs, sharply criticizing the attitude of the tax officials in making coercive recoveries from taxpayers through attachment of their bank accounts.

Delivering a landmark decision in the case of ‘UTI Mutual Fund vs. Income Tax Officer’ on March 14, 2012, the High Court has held that, “The remedies which are legitimately open in law to an assessee to challenge a demand cannot be allowed to be foreclosed by a hasty recourse to coercive powers. Assessing officers & appellate authorities perform quasi-judicial functions under the Act. Applications for stay require judicial consideration. Rejecting such applications without hearing the assessee, considering submissions and indicating at least brief reasons, is impermissible.”

The assessee, a mutual fund, was a beneficiary of a trust named India Corporate Loan Securitization. The Trust received interest of Rs.21.49 crores in respect of a loan and distributed the income to its beneficiaries in their respective shares. The Assessing Officer (AO) passed an assessment order on the trust in the capacity of an association of persons (AOP). Though a stay application was filed, the AO, without disposing of the stay application, demanded that 50% of the demand be paid. He also directed the assessee to pay Rs. 9.63 crores on the ground that it was a member of the AOP (Trust) and was jointly and severally liable in respect of the demand against the AOP.

The assessee filed a stay application which was disposed of by the AO on 9.3.2012 (received by the assessee on 13.3.2012). On 12.3.2012, the AO attached the assessee’s bank account u/s 226(3). The assessee filed a writ petition pointing out that the action had been in pursuance of the CBDT Chairman’s letter dated 7.2.2012 promising postings commensurate with tax recovery. 

Allowing the assessee’s petition and directing the lifting of the bank attachment, the High Court observed that the Revenue has made an unfortunate and hasty attempt to make a recovery of the demand without enabling the assessee to take reasonable recourse to the remedies available in law. Noting that the guidelines in regard to the manner in which applications for stay should be disposed as laid down by the Bombay High Court in KEC International (251 ITR 158) and Coca Cola India (285 ITR 419), the Court lamented that unfortunately these guidelines are now being breached by the Revenue.

The Court has reiterated its earlier guidelines that no recovery of tax should be made pending the expiry of the time limit for filing an appeal or disposal of a stay application, if any, moved by the assessee and for a reasonable period thereafter to enable the assessee to move a higher forum, if so advised. It has also held that when a bank account has been attached, before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law.

The Court has further observed that, “In exercising the powers of stay, the ITO should not act as a mere tax gatherer, but as a quasi judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate hardship to the assessee. Though the AO has made an assessment, he must objectively decide the application for stay considering that an appeal lies against his order and the matter must be considered from all its facets, balancing the interest of the assessee with the protection of the Revenue.”

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