1 BEFORE THE MADURAI BENCH OF MADRAS HIGH COURT DATED : 02.12.2011 CORAM THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN W.P.(MD)No.13221 of 2011 And M.P.(MD) No.1 of 2011 S.M.K. Nataraja Nadar & Sons, A partnership firm dissolved by its erstwhile partner Sri N.Gnanamani C/o.Theatre Amirtharaj, Virudhunagar. : Petitioner vs. 1.Commissioner of Income Tax-II, Madurai. 2.Tax Recovery Officer, Virudhunagar. : Respondents Writ Petition filed under Article 226 of the Constitution of India, praying for the issue of a Writ of Certiorarified Mandamus, calling for the records in the matter of waiver claim of the petitioner in File No.C.No.112/6/CIT-II/2010-11 of the first respondent viz., Commissioner of Income Tax-II, Madurai, quash the order dated 19.4.2011 and 27.7.2011 rejecting the claim of the petitioner and direct waiver of interest. For Petitioner : Mr.R.Srinivasan For Respondents : Mrs.S.Srimathy for Mr.R.Sathiamoorthy, Standing Counsel for Income Tax. O R D E R The petitioner has come up with the above writ petition, challenging an order passed by the first respondent rejecting the claim of the petitioner for waiver of interest under Section 220(2-A) of the Income Tax Act, 1961. 2. Heard Mr.R.Srinivasan, learned counsel for the petitioner and Mr.R.Sathiamoorthy, learned Standing Counsel for the respondents. 3. The petitioner was a partnership firm. It had 3 partners by name Nagamani, Gnanamani and Thavamani. The firm was dissolved on 9.2.1989. On the dissolution of the firm, the properties of the firm were divided and the partners were allotted their shares. 4. The transfer of assets of partnership firms was made subject to payment of capital gains tax, by an amendment to the Income Tax Act, under the Finance Act, 1987 with effect from 1.4.1988. By the said amendment, sub-section (4) was inserted under Section 45. The purpose of introduction of Section 45 (4) was to curtail the creation and dissolution of partnerships for the purpose of avoiding capital gains. https://hcservices.ecourts.gov.in/hcservices/ 2 5. But the petitioner filed a return of income as usual for the assessment year 1989-1990, admitting a total income of Rs.92,670/- till the date of dissolution. The Assessing Officer also accepted the return of income under Section 143(1)(a). 6. However, the Assessing Officer later issued a notice under Section 148 of the Income Tax Act, 1961, on 6.1.1995 proposing to reopen the assessment on the ground that the income arising out of capital gains escaped assessment. The assessment was redone on 31.3.1997. But the Commissioner (Appeals), by his order dated 31.3.1998 remanded the matter back to the Assessing Officer. The Assessing Officer again passed an order of assessment on 30.3.2000. 7. However, the order of assessment dated 30.3.2000 was modified by the Commissioner of Income Tax (Appeals) by an order dated 21.7.2003. The said order was challenged both by the petitioner and the revenue, before the Income Tax Appellate Tribunal. By an order dated 24.3.2005, the Tribunal dismissed the appeal filed by the petitioner and allowed the appeal filed by the Department. 8. The petitioner filed a petition before the Tribunal for recalling its order dated 24.3.2005 and to rehear the appeal. The Tribunal recalled its earlier order, reheard the matter and again dismissed the petitioner's appeal on 14.7.2006. 9. The petitioner filed 3 writ petitions in W.P.Nos.3764 to 3766 of 2010, challenging the orders of the Income Tax Appellate Tribunal. But these writ petitions were dismissed for non-prosecution on 9.12.2010. 10. Thereafter, the petitioner made an application before the Commissioner of Income Tax (Appeal) for the waiver of interest under Section 220(2-A). But the same was rejected by the Commissioner by an order dated 19.4.2011. The petitioner sought a review of the said order, but the same was also dismissed by the order dated 27.7.2011, forcing the petitioner to come up with the above writ petition. 11. The fact that there was actually no sale of any immovable property by the petitioner or its partners, is not in dispute. The occasion for charging capital gains had arisen in the case on hand, only due to the introduction of Section 45(4). The misfortune for of the petitioner is that Section 45(4) came into effect on 1.4.1988 and the partnership firm was dissolved on 9.2.1989. The properties distributed between the partners, consequent upon the dissolution and the evaluation of each of those properties is presented in a tabular form in paragraph 10 of the affidavit in support of the writ petition. The same would be relevant for deciding whether the ingredients of Section 220(2-A) are satisfied or not. Therefore, the tabular column is re-produced as follows:- https://hcservices.ecourts.gov.in/hcservices/ 3 S.No. Name of the Building (Super Structure alone) Written down value As per Books as per order dated 31.3.1997 Rs. Value arrived at by Commissione r (Appeals) at one stage as per his order in ITA 73/ 2000-01 dated 21.7.2003 Rs. Value adopted for assessment as per order dated 30.3.2000 Rs. 1. Meenambigai Motor and Work Shop 29,483/- 4,50,000/ - 4,77,090/- 2. Meenambigai Mansion Lodge 1,48,964/- 3,27,000/ - 10,32,017/- 3. Theatre Amirtharaj 2,47,601/- 2,04,000/ - 18,72,925/- 12. There is no dispute about the above fact. The value adopted in assessment as per the order dated 30.3.2000, totals to around Rs.34 lakhs approximately in respect of all the properties divided on the dissolution of partnership. 13. Keeping in mind, the value adopted by the Assessing Officer for the purpose of arriving at the capital gains, if we now look at the tax demanded, the following figures emerge:- Rs. (i)Tax component of the demand - 7,62,298.00 (ii) Interest component for belated payment of advance tax - 19,60,371.00 (iii) Interest component under Section 220(2) of the Act - 21,00,000.00(approx.) 14. Out of the above amounts, the petitioner has admittedly paid the tax component of Rs.7,62,298/-. The petitioner has also made payment of the entire interest component of Rs.19,60,371/-, on the belated payment of advance tax. 15. But out of the total demand for interest under Section 220(2), amounting to just less than Rs.21 lakhs, the petitioner had paid nearly Rs.5 lakhs. Today the amount outstanding is Rs.14,94,316/-. This balance amount represents the interest under Section 220(2). https://hcservices.ecourts.gov.in/hcservices/ 4 16. In other words, the entire tax component of the demand has been paid. The entire interest component on the belated payment of advance tax has also been paid. Out of the third component relating to interest under Section 220(2), nearly 25% has been paid. The waiver sought by the petitioner is only in respect of the balance 75% of the interest under Section 220(2). 17. The contingencies under which waiver of interest can be ordered are clearly spelt out in Section 220(2-A). The Section reads as follows:- “2-A. 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.” 18. The case of the petitioner falls under Clause (i). In other words, the claim of the petitioner is that the payment of interest has caused genuine hardship to her. But unfortunately, the first respondent, in his orders dated 19.4.2011 and 27.7.2011, has not even touched upon the question of hardship. The case on hand is one where the hardship caused to the petitioner is borne out by records. The factors which have contributed to the hardship of the petitioner are:- (i)The claim for capital gains had arisen merely on the dissolution of partnership. (ii)The adjudication of insolvency of one of the partners resulted in the entire liability falling upon the petitioner. (iii) The total value of all the properties, even as per the assessment order dated 30.3.2000, was less than Rs.34 lakhs. But the (a) tax component paid in entirety (b) the interest component for belated payment of advance tax paid in entirety and (c) the interest component under Section 220 (2) paid in part by the petitioner, totals to Rs.33 lakhs. Though the payment of Rs.33 lakhs has happened over a period of time, the total payment made is more than 90% of the value of the property itself. Therefore, if this case would not fall under the category of hardship to the Assessee, I do not know which other case would fall. https://hcservices.ecourts.gov.in/hcservices/ 5 19. Unfortunately, the first respondent has not examined the case of the petitioner from the above perspective. Therefore, the impugned order is liable to be set aside. Accordingly, the writ petition is allowed, the impugned order is set aside and the matter remitted back to the respondent. The first respondent shall pass fresh orders, within a period of 4 weeks from the date of receipt of a copy of this order, taking into account the above observations. No costs. Consequently connected miscellaneous petition is closed. Sd/- Assistant Registrar (RTI) /True Copy/ Sub Assistant Registrar To 1.Commissioner of Income Tax-II, Madurai. 2.Tax Recovery Officer, Virudhunagar. +1cc to Mr.R.Srinivasan, Advocate, Sr.NO.42551 svn GH : 13.12.2011 :5p/4c W.P.(MD)No.13221 of 2011 02.12.2011 https://hcservices.ecourts.gov.in/hcservices/