Tax Case Review-Sany Antony(BA0130052)

MAHESHWARI AGRO INDUSTRIES vs. UNION OF INDIA & ORS.

HIGH COURT OF RAJASTHAN

Decision in favour of Assessee

Asst. Year 2008-09

Counsel appeared : Dinesh Mehta, for the Assessee : K.K. Bissa, for the Revenue

Facts of the case

The petitioner-assessee, M/s Maheshwari Agro Industries, Jodhpur, engaged in the business of
manufacturing and trading of oils, for asst. yr. 2008-09, as a partnership firm filed its return of
income through e-filing system on 30th Sept., 2008 declaring the income of Rs. 3,48,140.
Initially, the case was processed under s. 143(1) of the Act on 22nd April, 2009 on refund,
however, the case of the assessee was selected for scrutiny, since a survey was conducted on 18th
March, 2007 at the business place of the petitioner under s. 133A of the Act, his case was fixed
for assessment upon scrutiny, and accordingly, a notice under s. 143(2) of the Act was issued to
him on 24th April, 2009. The assessee produced relevant record and books of accounts before the
assessing authority and the assessing authority ultimately passed the impugned assessment order
Annex. 1 for the said asst. yr. 2008-09 on 20th Dec., 2010 and making additions in the declared
income of Rs. 3,48,140, the total income assessed by the assessing authority was to the tune of
Rs. 1,44,42,320. The interest under the provisions of ss. 234A, 234B, 234C, 244A(3) and 234D
was charged separately, and also penalty proceedings under s. 271(1)(c) of the Act for
concealment of income were initiated separately. The nature of the additions in the declared
income was briefly likely this :

The main addition of Rs. 1,21,17,057 appears to be on account of trading additions on the ground
that rejecting regular books of accounts of the assessee under s. 145(3) of the Act, the learned
ITO applied the GP rate of 20.20 per cent, which the assessee declared in the asst. yr. 2006-07
and the same GP rate was applied for the present asst. yr. 2008- 09 also; even though the assessee
has declared GP rate of only 9.79 per cent in the present assessment year. The comparative GP
rates based on turnover of the assessee for three assessment years was noticed by the assessing
authority in the impugned order itself and the same is also as under :

As against the turnover of Rs. 58,36,980 in the asst. yr. 2006-07, in which the GP rate of 20.20
per cent was declared, the assessee declared GP rate of 9.79 per cent on the tenfold increased
turnover in asst. yr. 2008-09 on Rs. 5.46 crores. In the middle year asst. yr. 2007-08, on the
turnover of Rs. 1.89 crore, the GP rate of 9.90 per cent was declared. It is not in dispute that the
assessee was liable to tax audit also, as per provisions of s. 44AB of the Act, and such audit
reports were also produced before the assessing authority. Drawing the inference of concealment
of income on the basis of such difference in GP rates, the learned assessing authority applying
the higher GP rate of 20.20 per cent, the assessing authority made the addition of Rs. 1.21 crore
and assessed the assessee's declared income of Rs. 3,48,140 at Rs. 1.44 crores. This resulted in
issuance of the impugned demand for recovery to the tune of Rs. 58 lacs vide Annex. 5 dt. 21st
Jan., 2011 after some rectification of the arithmetical errors by the assessing authority.

The petitioner-assessee preferred first appeal under s. 246A of the Act before the learned CIT(A)
against the said assessment order dt. 24th Dec., 2010 on 31st Dec., 2010 vide Annex. 2 and
shortly thereafter filed an application before the CIT(A) vide Annex. 3 alleging therein that the
demand created by the learned ITO is arbitrary and since he is pressing hard for recovery and
may take coercive steps for such recovery, the appeal may be heard as early as possible. The
assessee also appears to have filed an application for rectification of the order under s. 154 of the
Act vide Annex. 4 on 20th Jan., 2011 upon which Annex. 5 order for rectification was passed by
the learned ITO on 21st Jan., 2011. The formal notice for demand vide Annex. 6 was issued to
the assessee on 21st Jan., 2011 for Rs. 58,48,697.

The petitioner-assessee filed also an application under ss. 220(3) and 220(6) of the Act for stay of
entire disputed demand before the assessing authority ITO, Ward-I(3), Jodhpur himself on 20th
Jan., 2011 and raised various grounds for seeking the stay of entire disputed demand in the said
application relying upon several case laws.

Issue

Whether in the scheme of the Act specially after amendment of s. 254 of the Act conferring
powers of granting stay upon the Tribunal after insertion of sub-ss. (2A) and (2B) in s. 254 of the
Act by Finance Act, 1999 w.e.f. 1st June, 1999 and further first proviso substituted by Finance
Act, 2007 w.e.f. 1st June, 2007 extending period of stay granted by the Tribunal in the first
instance for 180 days, then extendable upto 365 days in second proviso, and this amendment
purportedly having been brought on the statute book in pursuance of decision of the Hon'ble
Supreme Court in the case of M.K. Mohammed Kunhi , the question is as to whether such
powers to grant stay can still be implied as inherent power of the first appellate authority,
namely, CIT(A) and Dy. CIT(A) or not.

Argument-Assessee Side

The petitioner, submitted that in the present case, apparently a very high-pitched assessment has
been made by the learned assessing authority for asst. yr. 2008-09 and high GP rate of 20.20 per
cent, which was declared by the assessee for the asst. yr. 2006-07 could not have been applied as
a thumb rule for present asst. yr. 2008-09 also, and on a ten-fold increase in turnover, the lower
GP rate of 9.79 per cent declared by the assessee was correct and genuine. The audited books of
accounts and return of income as filed by the assessee could not have been brushed aside by the
assessing authority and applying such high GP rate mechanically, the impugned demand of Rs.
58 lacs has been raised by the assessing authority, which could not be recovered from the
petitioner-assessee and such recovery would frustrate the very purpose of filing appeal before the
learned CIT(A), winch is yet not decided. Learned counsel for the petitioner further urged that
even though the provisions of ss. 246, 246A, ss. 250 and 251 of the Act do not confer any
specific power on such first appellate authority to grant stay against the recovery of disputed
demand, such a power should be read as 'inherent powers' and the stay applications filed before
such appellate authorities should be decided on merits touching upon the relevant factors for
grant of stay like prima facie case, irreparable injury, balance of convenience and nature of
demand, so also, hardship likely to be caused to the assessee from such recovery etc. He relied
upon the decision of Hon'ble Supreme Court in the case of ITO vs. M.K. Mohammed Kunhi 1,
wherein the Hon'ble Supreme Court dealing with the powers of Tribunal under s. 254 of the Act,
in which provision also at that point of time, there was no specific power available to the
Tribunal to grant any stay against the demand of tax raised by the assessing authority, the
Hon'ble apex Court held that such power to grant stay was inherent and was liable to be read into

1 (1969) 71 ITR 815 (SC) : AIR 1969 SC 430

powers deciding the appeal itself; and therefore, such Tribunal was bound to decide the stay
application on merits. He also relied upon subsequent judgments of some of other High Courts to
support his contentions that even the first appellate authority like CIT(A) or Dy. CIT(A) should
be deemed to have such inherent powers to decide the stay applications even though there is no
specific power conferred by the statute under s. 246/264A of the Act in this regard.

Argument- Revenue

The learned counsel appearing for the Revenue vehemently submitted that in the absence of any
specific provision conferring power to grant stay upon the first appellate authority, namely, Dy.
CIT(A) and CIT(A), such powers cannot be inferred and in view of later amendment in s. 254 of
the Act conferring such powers only on Tribunal, by necessary implication on the other hand, it
should be construed that Parliament deliberately did not want to confer any such power upon the
first appellate authority and, therefore, despite decision of the Hon'ble Supreme Court in the case
of M.K. Mohammed Kunhi2 no such inherent power can be inferred from the provisions of the
Act available with the first appellate authority. He, therefore, submitted that power under s.
220(6) of the Act has enough protection for the assessee in case where first appeals are pending
and for the given reasons, the assessing authority himself can treat the assessee as not in default,
saving him from the interest and penal consequence subject to such conditions, as may be
imposed by the assessing authority; and in the present writ petition, looking to the huge demand,
in the interest of Revenue, the learned assessing authority was justified in rejecting the
application of the petitioner under ss. 220(3) and 220(6) of the Act.

2 ibid
Judgment

The Court obsereved that the powers of the appellate authorities are indisputably concurrent and
co-extensive with that of the assessing authority but wider and superior in nature. Sec. 251 of the
Act clearly stipulates that in disposing of an appeal, the CIT(A) can confirm, reduce, enhance or
annul the assessment. Sec. 251(1)(c) of the Act further provides that in other cases, he may pass
such orders in appeal as he thinks fit. These words harmoniously read, definitely mean that
powers of appellate authorities under the Act are wide enough. Such powers could not be
intended to be drained out or rendered meaningless, if the power to grant stay against the
recovery of disputed demand is to be taken away from the first appellate authority. Such implied,
necessary and inherent power must necessarily be read into these provisions conferring the
powers upon the appellate authority to modify the impugned assessment order in any manner. In
specific terms, the first appellate authority can even enhance the taxable income, while he has the
power to reduce or completely set at naught the assessment. The words "as he thinks fit" in s.
251(1)(c) are not redundant, as no such redundancy can be attributed to the Parliament.
Therefore, mere absence of words "power to grant stay" in s. 251 of the Act cannot mean that
such powers are specifically excluded from the jurisdiction of the first appellate authority.

Thus in this case the Court obsereved that the income assessed by the AO is almost 47 times of
the income declared by the assessee viz. Rs. 1,44,42,320 against the declared income of Rs.
3,48,140. The disputed demand of tax also would be almost the same multiples of the declared
and admitted tax liability or may be more because of interest and penalties. The main additions
are trading additions on the basis of GP rates, the validity of which is subject-matter of appeal
before the CIT(A). Therefore, applicability of Instruction No. 95 dt. 21st Aug., 1969, in the
present case, is beyond the pale of doubt. Against the net demand of Rs. 58 lacs raised vide
Annex. 5 dt. 21st Jan., 2011 for asst. yr. 2008-09, the assessee has been made to pay Rs. 5 lacs
already besides his admitted tax liability as already paid by him before filing the return of
income. The Court stayed the recovery of entire balance amount from the petitioner assessee,
while directing the CIT(A) to dispose of the pending appeal of the assessee within a period of six
months from today. The attachment of bank accounts of the petitioner-assessee already attached
by the respondent-assessing authority is also to be lifted and the assessee will be free to operate
its bank accounts. As already held, since the CIT(A) also has inherent and implied powers to
grant stay, the assessee-petitioner may also file stay application before the CIT(A), who may also
consider such stay application on its own merits upon the relevant factors as enumerated above
viz. prima facie case, balance of convenience, irreparable injury, nature of demand and hardship
likely to be caused to the assessee, liquidity available to the assessee etc. It is directed that all the
first appellate authorities in the cases of other appellant assessees within the State of Rajasthan
also, would entertain stay applications filed before them during the pendency of appeals and
would decide the same on their own merits in future also. The assessing authorities will also
decide applications under s. 220(6) of the Act in accordance with Instruction No. 95 dt. 21st
Aug., 1969 and observations made by the court in this regard.

Conclusion

The issue here is that, the assessee offered Rs. 3.48 lakhs. The AO made a high-pitched
assessment of Rs. 1.44 crores. The AO rejected the assessees stay application and issued s.
226(3) garnishee notices. The assessee filed a Writ Petition to challenge the rejection of the stay
application. The Court observed few observations in this regard which are as follows :

1. Under Section 226 (6) the AO has the discretion not to treat the assessee as being in
default during the pendency of the appeal. The AO has to normally use this discretion in
favour of assessee particularly when high pitched assessments are made and the demand
of tax is several times the declared tax liability in the spirit of Instruction 3 and grant stay.
The mandate of Parliament in s. 220 (6) is that the AO should normally wait for the fate
of the appeal filed by the assessee. Therefore, the discretion conferred by s. 220(6) of not
treating the assessee in default should ordinarily be exercised in favour of assessee unless
there are overriding and overwhelming reasons to reject the assessees stay application.
The application cannot normally be rejected by merely describing it to be against the
interest of Revenue if recovery is not made, if tax demanded is twice or more of the
declared tax liability. The very purpose of filing of appeal, which provides an effective
remedy to the assessee, is likely to be frustrated, if such a discretion was always to be
exercised in favour of revenue rather than assessee.
2. The tendency of making high pitched assessments by the AO is not unknown and it may
result in serious prejudice to the assessee and miscarriage of justice & sometimes may
3 No.95 dated 21.08.1969
 even result into insolvency or closure of the business if such power was to be exercised
only in a pro-revenue manner. It may be like execution of death sentence, whereas the
accused may get even acquittal from higher appellate forums or courts. Therefore, the
powers u/s 220 (6) has to be exercised in accordance with the letter and spirit of
Instruction4 which holds the field and is binding on the AO
3. The CIT (A) has inherent powers to grant stay against recovery of disputed demand of tax
if an appeal u/s 246A is filed. The relevant factors to be considered are prima-facie case,
balance of convenience, irreparable injury, nature of demand and hardship likely to be
caused to the assessee, liquidity available to the assessee etc.

The case was decided in the assessees favour and the Writ petiotion challenging the postion of
the stay was allowed.

4 No. 95 dated 21.08.1969