IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 1818 of 1999 For Approval and Signature: Hon'ble MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- SHAILY ENGINEERING PLASTICS LTD Versus DESIGNATED AUTHORITY UNDER KARVIVAD SAMADHAN SCHEME -------------------------------------------------------------- Appearance: MR SN SOPARKAR for Petitioner MR MANISH R BHATT for Respondent No. 1, 2 -------------------------------------------------------------- CORAM : MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE Date of decision: 16/04/99 ORAL JUDGEMENT #. This petition is relating to dispute which arises out of the special scheme enacted by the Finance Act of 1998 to settle the disputes under the direct tax as well as indirect taxes known as Kar Vivad Samadhan Scheme (hereinafter referred to as `KVSS'). #. The facts giving rise to this petition are that the petitioner which is a company has filed its return of income for assessment year 1996-97 on 29.11.1996 declaring a total income of Rs.1,19,69,413/- on which Rs.55,05,930/- was the amount of tax payable. The said amount was not paid by the assessee. On 18.11.1997, the second respondent assessing officer intimated to the petitioner under Section 143(1)(a) about making a prima facie adjustment to the income returned by the assessee by making additions of sums of Rs.1,12,12,567/- bringing the total taxable income at Rs.2,32,01,977/correspondingly specifying the increased tax liability of Rs.1,65,32,082/-. The assessee disputed the adjustment made under Section 143(1)(a) by filing appeal on 26.12.1997. However, the said appeal was not liable to be admitted for want of compliance with the requirement of subsection (4) of Section 249, namely, non payment of tax payable as per the return of the income. However, no order rejecting the appeal had been made. The assessee before filing appeal had moved an application for rectification also on 22.12.97 under Section 154 of the Income Tax Act, before the assessing officer. The assessing officer vide his order dated 27.7.98 partially accepted the application and reduced the adjusted income under Section 143(1)(a) to Rs.1,33,77,190/-. Corresponding thereto tax payable as specified in intimation was reduced to Rs.57,09,640/-. Thus as on 31.3.1998, under Income Tax Act the tax stood determined at Rs.57,09,640/-, under Section 143(1)(a) of the Act. The assessee had preferred a revision under Section 214 against the order dated 27.7.98 which was pending. #. Under the Finance Act (2 of 1998) of 1998 which came into force with effect from 1.4.1998 a scheme known as Kar Vivad Samadhan Scheme was introduced which was contained in Chapter IV of the Finance Act of 1998 which comprised of Sections 86 to 98. The KVSS provided that where any person makes on or after the first September 1998 but on or before 31st day of December 1998 (the later date was extended by subsequent notification to 31st day of January 1999) a declaration to the designated authority in accordance with the provisions of Section 89 in respect of tax arrears, then notwithstanding anything contained in any direct tax enactments or indirect tax enactments or any other provision of any law for the time being in force, the amount payable under the scheme by the declarant is to be determined at the specified rates provided under Section 88, and on determination of such amount payable under Section 90(1) the declarant is required to make payment within 30 days and intimate the same to designated authority with proof of such payment. On actual payment of the amount so determined by the person filing declaration would require a certificate to be issued under Section 90(2) which will result in concluding the matters covered by the order and immunity in respect of such matters from being reopened in any other proceedings under the relevant direct tax enactment or indirect tax enactment or under any other law for the time being in force. #. For the present purposes, it further need be noticed that under Section 95 areas where no declaration was permissible to be filed were pointed out. One of the area where no provision under the scheme would operate was a case where no appeal or reference or writ petition is admitted and pending before the appellate authority or High Court or Supreme Court on the date of filing of declaration or no application for revision is pending before the Commissioner on the date of filing declaration in respect of tax arrear under any direct tax enactment. After the scheme became effective petitioner filed a revision before the Commissioner of Income Tax under Section 264 which was within limitation on 30.12.98. Thus fulfilling all the conditions, namely, tax was determined under Section 143(1)(a) prior to 31.3.98 and part of the tax payable as per such determination was unpaid, and a revision filed by the assessee petitioner disputing his liability filed within limitation was also pending before the CIT, when the petitioner filed declaration on 31.12.1998. Assessee's eligibility as declarant as on 31.12.98 is not in dispute. #. Under Section 90(1) of KVSS the Designated Authority was to make an order determining the amount payable by the declarant within 60 days from the date of receipt of declaration. The order is required to set forth the particulars of tax arrear and sum payable towards full and final settlement of tax arrears. Within 30 days of the making of such order under Section 90(2) the declarant is required to pay the sum so determined by the designated authority He has also to intimate the fact of payment to the Designated Authority along with the proof thereof, on receipt of which the Designated Authority is to issue the certificate to the declarant. #. After furnishing declaration on 31.12.1998, the next thing which assessee petitioner came to know was impugned order dated 26.2.99 passed by the Designated Authority recording that the Assessing Officer has informed the Designated Authority that in exercise of his power under Section 154 on 26.2.1999 the Assessing Officer has deleted the entire adjustment made under Section 143(1)(a). Taking note of the order of Assessing Officer dated 26.2.1999, the Designated Authority who was also the authority before whom revision filed by the assessee, was pending, further held that in view of the fact that the Assessing Officer has deleted all the adjustments made to the returned income by rectifying his order under Section 143(1)(a) and has accepted the income returned by the assessee, no dispute as mentioned in revision petition under Section 264 dated 30.12.98 survives, and therefore, case cannot be referred under the scheme and accordingly declaration was dismissed as having become infructuous. The Designated Authority also referred to the fact that the petitioner had filed an appeal against prima facie adjustment made under Section 143(1)(a) which was yet to be disposed of but taking note of the fact that assessee had not deposited the amount of tax on the returned income as required under Section 249(4)(a), no valid appeal can also be said to be pending before the CIT (Appeals). #. Many fold grounds have been raised challenging this order dated 26.2.99 rejecting the declaration and refusing to determine the amount payable under Section 88 read with Section 90 of the Finance Act (No. 2) of 1998 by the Designated Authority as a consequence of rectification order made under Section 154 by the Assessing Officer on 26.2.1999. #. The first contention that has been raised before us is as to the validity of the order passed by the assessing officer under Section 154 on 26.2.1999, which according to the respondents had the effect of taking the case of the petitioner outside the purview of the scheme. The contentions are two fold. Firstly, that the order under Section 154, assuming it has potentiality to affect the assessee's eligibility to lose the benefit under the scheme, was certainly an order affecting the assessee adversely made without giving the assessee any opportunity of being heard. The order is not only violative of general principles of natural justice, but is in clear breach of the mandate of subsection (3) of Section 154. The second contention is that the order dated 26.2.1999 apparently suffers from malice in law. In the chain of events noticed above, it was urged that the assessing officer having already exercised his power under Section 154 on an application being made in that regard by the petitioner, has concluded the matter as to the prima facie adjustments to be made under Section 143(1)(a). As far as he was concerned, by application of mind as early as on 27th July 1998 he had concluded the questions and no application for rectification was pending before him. His belief as to the chargeability of the amount in question to tax, which was not included by the assessee in his returned income, was still persisting. That is manifest from the fact that in regular assessment under Section 143(3) which has come into existence on 30.3.99, barely a month after the passing of the order under Section 154, again shows the very same additions in the returned income, by the very same assessing officer which has been deleted in purported suo motu exercise of jurisdiction under Section 154 without giving notice to the assessee, and the fact that proceedings for regular assessment had already been initiated by issuing notice under Section 143(2) much prior to having recourse to exercise of jurisdiction under Section 154. All these clearly suggest that exercise of jurisdiction under Section 154 on 26.2.1999 on his own by the Assessing Officer was not as a matter of any belief held by him as to there being any mistake apparent on the face of record in determining adjustment under Section 143(1)(a) but was purely with a view to infructuate the declaration filed by the assessee under Section 89 of the Finance Act of 1998 to receive benefits of KVSS. #. Coming to the first contention it would be appropriate to reproduce the relevant clause of section 154: "154.(1) With a view to rectifying any mistake apparent from the record an income-tax authority referred to in section 116 may, - (a) xxxxxxxxx (b) amend any intimation sent by it under subsection (1) of Section 143, or enhance or reduce the amount of refund granted by it under that subsection. 1A. xxxxxx (2) Subject to the other provisions of this section, the authority concerned - (a) may make an amendment under subsection (1) of its own motion, and (b) shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee, and where the authority concerned is the Commissioner (Appeals), by the assessing officer also. (3) An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this section unless the authority concerned has given notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard. (4) xxxxxxxxx (5) Subject to the provisions of Section 24, where any such amendment has the effect of reducing the assessment, the assessing officer shall make any refund which may be due to such assessee. (6) xxxxxxxx (7) xxxxxxxx ##. The three expressions used in subsection (3) mandating a pre decisional hearing before order of rectifications can be made are `enhancing the assessment', `reducing the refund' or `increasing the liability of the assessee', All are in the context relatable to the determination of taxable income, reduction of refund as a result of enhancing the liability of tax, and otherwise, resulting in adverse effect on the assessee's liability arising under the Income Tax Act, which is its wider connotations includes not only the tax at specified rates on the taxable income, but also the interest and penalties payable in respect thereof. Such adverse orders may also be relating to determining the status of person as assessee though may not affect computations of income inasmuch as determination of status may affect rate of income tax applicable to a person depends on his status as well, attracting other provisions which in the end result in enhancing the liability of the assessee under the Act. It cannot be referrable to liabilities and obligations or rights beyond the precincts of the Income Tax Act. In this connection it would also be apposite to notice that the KVSS does not affect the liability of the assessee to any tax in any sense. In fact it does not adjudicate as to the liability of the assessee to assessment of income under the Income Tax Act or liabilities to tax under the different Acts mentioned in the schedule to scheme. KVSS only concerns the liability already determined and existing and remain outstanding because the assessee has failed to discharge such obligation. No part of the scheme determines the liability of the assessee that arise under the Income Tax Act or other different Acts. It only concerns itself with recovery of the unpaid tax as on the date of declaration, and to compute the amount payable in relation to such unpaid tax for giving an opportunity to the defaulter to make payment of amount so determined to gain immunity offered under the provisions of the scheme. It is misconception to consider that the operation of the scheme is to decrease or increase in the liability of the assessee, which exist independent of the scheme, and is to be determined in accordance with the enactment under which the arrears are due. This is clear from the definition of `tax arrears' itself which postulates that the amount of tax penalty or interest must be determined on or before 31st day of March 1998, under the enactment in respect of an assessment year as modified in consequence of giving an effect to appellate order. Therefore, the existence of liability on account of tax penalty or interest is directly referrable to the determination under the enactment under which it is to be determined. Viewed in that light, by deleting the adjustment made under Section 143(1)(a) the assessing officer was neither enhancing the assessment nor it was an exercise which would result in reducing the refund or claim to refund, if any, nor deletion of such additions would result in enhancing of assessee's liability under the Income Tax Act in any manner. As a matter of fact deleting the additions made accorded with the claim made by the assessee since the date the adjustments under Section 143(1)(a) were made by the assessing officer and the assessee has challenged the same to be erroneous, promptly by filing an application under Section 154 on 22.12.1997 which was allowed only partly against which also the assessee had preferred a revision under Section 264. Making an order in favour of the assessee for which he has been litigating since beginning cannot be said to be an order enhancing the liability of the assessee otherwise within the meaning of Section 154(3) nor prejudicial to assessee under the enactment governing the tax in question, which would call for giving an opportunity of hearing before the order was made. ##. Considering the second contention we find there is substance in it. The chain of events noticed above leave no room of doubt that the purported exercise of power under Section 154 was clearly not referrable to any satisfaction on the part of the assessing officer as to the mistake committed by him in making adjustment under Section 143(1)(a), but was directed to infructuate the declaration made on 31.12.98 under the scheme which followed filing revision on 30.12.98 against the order dated 27.7.98. The assessing officer had made certain additions in the first instance on being satisfied prima facie about their apparent exigibility to tax in addition to returned income, on 18.11.1997. The assessee had filed an appeal against the intimation under Section 143(1)(a) on 26.12.97. However, before appeal was filed, which require as a condition to be admitted, payment of tax as per the returned income, the petitioner had preferred a rectification application also before the assessing officer. The assessing officer had considered that application, accepted partly the claim of the assessee as to the debatability or nontaxability of additions made by the assessing officer to a large extent, but not fully. Notice under section 143(2) had also been issued for regular assessment during which the issue as to disputed additions could be agitated and brought back to assessment. Thus the proceedings had already reached at a stage where 143(1)(a) order as per the assessing officer had become final and was subject to Assessment order to be made under Section 143(3) for which steps were already taken by the Assessing Officer by issuing notice of hearing. The assessee had already availed of remedy against order under Section 154 by filing a revision under Section 264 within limitation. That by itself would not have prompted ordinarily the assessing officer to have recourse to Section 154 at that stage. The only thing that happened during this period appears to be the coming into existence of the scheme under which an assessee having tax arrears could avail benefit under certain conditions which requires, apart from existence of `tax arrear' as on the date of declaration pendency of appeal, reference or writ or a revision in relation to `tax arrear' before appropriate authority. ##. Before us it is not in dispute that intimation under Section 143(1)(a) making adjustments amounted to determination of tax under the Income Tax Act, the assessee has not paid the tax as per amount specified in intimation under section 143(1)(a) of the Act and the revision filed on 30.12.98, was within limitation hence could be said to be pending as on 31.12.1998 when declaration was filed. Remedy of appeal under the provision of the Income Tax Act could be available only if the assessee deposits a part of the amount of tax payable as per return. Assessee having not paid even the tax payable as per return was not entitled to maintain appeal. The Central Government in its guidelines issued on 1.9.98 in the form of question and answer had stated the scheme is available to entire demand of an assessment year. The only reason in the circumstances that prompted the assessing officer to make an order under Section 154 on 26.2.99, communicated to Designated Authority, who is also revisional authority, and can legitimately be inferred, is that as the assessee has entered the eligibility zone of KVSS scheme on the last date of making declaration on 31.12.98 by filing a revision on 30.12.98 and giving effect to that may result in reduction of tax recovery even below the admitted tax liability under the return, the device of 154 was adopted, notwithstanding having no belief in non taxability of the items of addition already made. In proceeding under Section 143(3), which could be made on hearing, he had no intention to delete the addition and allow the tax reduction as per intimation under section 143(1)(a), which is apparent from the fact that having reduced the tax payable under Section 143(1)(a) on 26.2.99, by treating the additions to be a mistake apparent from order, an order which was not intimated to assessee, the officer hastened to make an order under Section 143(3) subjecting the assessment to same additions raising the liability to a level which would sustain the assessee to a person with `tax arrear' again. Viewed in this background the chain of events declaration was filed by the petitioner fulfilling all the contentions prescribed therein for availing whatever benefits the legislation offered under the scheme. Thereafter the order on the declaration is to be made within 60 days by the designated authority for determining the amount payable under the scheme by the declarant. That were to expire on 1st of March. On 26.2.99, the order is made under Section 154 in purported exercise of powers under Section 154 reducing the assessment to returned income. Same is communicated to the designated authority who dismisses the declaration and revision both by holding them to be infructuous, making a reference to the fact of appeal under Section 246 which had hitherto had not been disposed of making it doubly sure that the petitioner may not still be found entitled to operation of the scheme because of the pendency of appeal. The assessee is informed of the order under 154 through rejection of declaration, and before the close of assessment year the same demand is again created by making assessment order under Section 143(3). These chain of events clearly disclose that the assessing officer, right from the date of making adjustments under Section 143(1)(a) until the date of making the order under Section 143(3) had firmly believed that additions, finally sustained after partially allowing first application moved by the assessee under Section 154 were taxable income. There was no occasion for him to have revised intimation under Section 143(1)(a) suo motu at that stage unless it was directly concerned that giving a foothold for making declaration under the scheme infructuous. ##. Duty to act fairly is the backbone of the fundamental right of the citizens to be governed under the Constitution. This duty to act fairly inhers into it that the power which is vested in an authority for a particular purpose had to be exercised for that purpose alone and not for extraneous consideration for a purpose different for which such power has been conferred. That would be abuse of authority. If such a case is made out, the action cannot be sustained. ##. Accepting the contention of respondent will be opening the gates of defeating legislative will. The legislature willed to provide a scheme to collect revenue from litigating assessee with outstanding arrears. The class to which this scheme was extended was an assessee with tax arrear in respect of which a dispute is pending on date of declaration. If the contention of respondent is accepted it will create a situation where notwithstanding on date of declaration an assessee fulfil the criterian under KVSS the department can before the date of determination by exercise of various powers under the relevant enactment reduce the liability to nil, deny the provision of scheme to assessee on the ground that no tax arrear is dispute exist and next day after rejecting the declaratiion redetermine the liability which will resurrect tax arrear as well as litigation, as has happened in this case demonstrably. ##. One cannot fail no notice that within sixty days of of declaration Designated Authority has to make an order under Section 90(1) determining the sum payable by the assessee towards full and final settlement of `tax arrears' and on payment of such sum within a period of 30 days from passing order under section 90(1) the assessee gets the consequential reliefs which include under Section 90(3) that every order passed under Section 90(1) determining the sum payable under the scheme shall be conclusive as to matters stated therein and no matter covered by such order shall be reopened in any other proceeding not only under the concerned tax enactment but also under any other law for the time being in force, and results in withdrawal of litigation pending at assessee's behest under Section 90(4). Thus by prohibiting reopening the matter pertaining to tax determination in respect of which tax was in arrear and directly withdrawal of pending litigation the legislature made it clear that dispute which is being litigated in respect of tax arrear as on the declaration must come to a conclusive end and not survive the recovery. By acting in a matter so that no recovery is made and dispute remain alive the authority only acts at cross purpose with the legislative will. In slightly different