Case Background
The case arose from an income tax assessment for Assessment Year 2015-16. The assessee, a private limited company, had sold 90 lakh shares of face value Rs.10 each to its own holding company.
An assessment order (Annexure-1) was first passed by the Assessing Officer under Section 143 of the Income Tax Act, 1961. Later, the Principal Commissioner of Income Tax exercised his suo motu revisional powers under Section 263 of the Income Tax Act.
By the Section 263 order (Annexure-2), the Principal Commissioner held that the valuation of the shares had not been carried out in accordance with law. He cancelled and set aside the earlier assessment order and directed the Assessing Officer to frame the assessment afresh.
The Principal Commissioner required the Assessing Officer to make fresh inquiries and verification regarding the accuracy or completeness of the information provided by the company’s management for valuation of shares under the Discounted Cash Flow (DCF) method and to finalize the assessment in accordance with law.
The assessee challenged the Section 263 revision order before the Income Tax Appellate Tribunal (ITAT). During this period, the Assessing Officer passed another assessment order dated 29.03.2022 (Annexure-3) on remand.
The Tribunal, by order dated 18.05.2023 (Annexure-4), gave directions to the Assessing Officer. It directed that inquiries be made as required by the Principal Commissioner, including verification of the correctness of the accountant’s valuation report and, if necessary, obtaining an independent expert report to confront the assessee. A fresh speaking order was to be passed thereafter.
The assessee then approached the Patna High Court under its civil writ jurisdiction, complaining that the assessment order passed after remand did not follow these directions. By the time of hearing before the High Court, the assessee had already filed an appeal before the National Faceless Appeal Centre against the assessment, and part of the tax demand had been recovered from the assessee’s cash credit account.
What the Court Examined and Decided
The Patna High Court focused on two main aspects: first, the status of the pending statutory appeal against the assessment; and second, the Department’s recovery steps taken on the basis of that disputed assessment.
On the factual side, the Court briefly recorded the chain of events. For Assessment Year 2015-16, the assessee had undertaken a related-party transaction by selling 90 lakh shares of Rs.10 face value each to its own holding company. The original assessment order under Section 143 was interfered with by the Principal Commissioner using Section 263.
The Principal Commissioner’s core objection was that the share valuation had not been done properly as per law. He cancelled the assessment and ordered a fresh assessment. This was to be done after making fresh inquiries and verification of information given by the company’s management, specifically keeping in view the DCF method of valuation.
The assessee challenged this in appeal before the Tribunal. However, even before the Tribunal finally decided, the Assessing Officer passed an assessment order dated 29.03.2022 (Annexure-3) as a remand assessment.
The Tribunal later delivered its order dated 18.05.2023 (Annexure-4). The Tribunal directed that inquiries must be carried out in accordance with what the Principal Commissioner had said. It further stated that the Assessing Officer should examine the correctness of the accountant’s valuation report, and if necessary, obtain an independent report from an expert. This report was to be used to confront the assessee, and thereafter a speaking order had to be passed in accordance with law.
In the writ petition, the assessee’s central grievance was that the assessment order passed on remand (Annexure-3) did not follow either the Principal Commissioner’s directions under Section 263 or the Tribunal’s directions in the order dated 18.05.2023. The assessee also objected to the tax recovery made from its cash credit account, stating that this created a heavy interest burden since the account would run with debit interest.
On behalf of the Income Tax Department, the learned Senior Standing Counsel informed the Court that an appeal had already been filed by the assessee before the National Faceless Appeal Centre (NFAC). The appeal was stated to be numbered as No. NFAC/2014-15/10145369.
The Department submitted that, in such an appeal, the Appellate Authority normally obtains a report from the Assessing Officer, especially when Tribunal directions are involved. The Tribunal’s order, once produced in the appeal, would be forwarded to the Assessing Officer. The Assessing Officer would then furnish a report, which would be supplied to the assessee. The assessee would be allowed to file objections to that report, and only thereafter would the appellate authority finally decide the appeal after hearing the assessee.
In this background, the Court considered what interim protection, if any, should be granted. The Court noted that the recovery being carried out by the Department was based on the assessment order which had been passed prior to the Tribunal’s order. The Court also recorded the submission that 20% of the demanded amount had already been recovered from the assessee.
Considering that the statutory appeal was pending, the Bench held that recovery should await the disposal of the appeal. It took note of the Department’s position that, as 20% of the amount had already been recovered, there would be no further recovery based on the assessment order at Annexure-3 until the appeal was decided.
The assessee, however, requested that the amount already recovered from its cash credit account should be refunded, arguing that the debit in a cash credit account entails continuous interest burden. To support this prayer, the assessee relied on another Division Bench judgment of the Patna High Court (Annexure-9).
The Court carefully examined Annexure-9. That was a batch of three writ petitions concerning attachment of bank accounts of assessees under the Value Added Tax Act. There, assessment orders had been challenged in appeal after the assessees had deposited 20% of the disputed tax. The attachment orders under challenge were in respect of cash credit accounts.
In Annexure-9, the Division Bench had made an important factual distinction between a cash credit account and a current account. A cash credit account is a credit facility extended by the bank up to a sanctioned limit. Even if it is not overdrawn up to the limit, the amount in such an account is essentially the bank’s money, not the assessee’s own money, unlike a credit balance in a current account.
In that earlier case, the tax demand itself was not yet satisfied, which influenced the Court’s decision regarding attachment. In the present case, however, the Patna High Court noted that the situation was different. Here, the demand to the extent of 20% had already been recovered. Because the demand was already met to that extent, the Court held that this distinction prevented it from directing an immediate refund of the recovered amount.
At the same time, the Court was conscious of the financial impact on the assessee and linked the question of refund to the outcome of the pending appeal. The Bench clearly stated that if the assessment is ultimately set aside in appeal, the assessee would be entitled to a refund of the recovered amount.
Importantly, the Court added that such refund would carry interest. The interest payable would either be the statutory interest under the Income Tax Act or the actual interest borne by the assessee on the cash credit account, whichever is higher. This was a protective observation made in favour of the assessee.
Conversely, if the assessment is not set aside, the assessee would still benefit from the Court’s order to the extent that it would be saved from paying interest on the amount already recovered during the intervening period until the appeal is decided.
The Court therefore concluded that there was no need to direct a refund of the 20% recovered amount at this stage. However, it made an express direction that no further recovery would be carried out based on the impugned assessment until the appeal before the National Faceless Appeal Centre is disposed of.
Finally, the writ petition was disposed of with these observations, and the Court clarified that it was not expressing any opinion on the merits of the assessment made against the assessee.
Why This Judgment Matters
This judgment is important for taxpayers who are facing tax recovery while their appeals are still pending.
First, it shows that the Patna High Court expects the Department to pause further recovery when a statutory appeal is already filed, especially where the disputed assessment is linked to directions from higher authorities or tribunals.
Second, the Court balanced the interests of revenue and the assessee. It did not order an immediate refund of the 20% already recovered, but clearly protected the assessee by linking refund and higher-rate interest to the outcome of the appeal.
Third, the judgment clarifies that where an assessment is under challenge, and recovery has already been made from a cash credit account, the taxpayer can still get compensation later in the form of refund with appropriate interest if the assessment is set aside.
For assessees across Bihar and beyond, this decision signals that the Patna High Court is willing to intervene to prevent aggressive recovery during the pendency of appeals, without pre-judging the merits of the tax dispute.
Legal Issues and Answers
- Issue: Should the Income Tax Department be allowed to continue recovery based on an assessment order that is under appeal, especially when the assessment may not have followed Tribunal and Section 263 directions?
Answer: No. The Court held that, since an appeal is pending and 20% of the demand has already been recovered, no further recovery should be made until the appeal is decided. - Issue: Is the assessee entitled to immediate refund of the tax amount already recovered from its cash credit account while the appeal is pending?
Answer: No. The Court declined to order an immediate refund but clarified that if the assessment is set aside in appeal, the assessee will be entitled to refund with interest, calculated at the higher of statutory interest or interest actually paid on the cash credit account. - Issue: Does attachment or recovery from a cash credit account stand on the same footing as attachment of a current account balance?
Answer: The Court reiterated the earlier Division Bench view that a cash credit account is a credit facility and not necessarily money belonging to the assessee, but distinguished the earlier case on facts because, in the present case, the demand had already been met to the extent recovered.
Cases Cited by the Court
- The Court referred to a previous Division Bench judgment of the Patna High Court (Annexure-9) dealing with attachment of cash credit accounts under the Value Added Tax Act, in a batch of three writ petitions. Full citation details are not provided in the text.
Case Details
Case Number: Civil Writ Jurisdiction Case No. 17472 of 2023
Case Title: SIS Prosegur Holding Pvt. Ltd. v. Principal Commissioner of Income Tax 1 & Ors.
Citation: 2024 (2) PLJR 519
Court: High Court of Judicature at Patna
Coram: Hon’ble the Chief Justice K. Vinod Chandran and Hon’ble Mr. Justice Harish Kumar
Date of Judgment: 22-03-2024
Advocates:
- For the Petitioner: Mr. D.V. Pathy, Advocate
- For the Respondents: Mrs. Archana Sinha, Senior Standing Counsel, Income Tax
Respondents: Principal Commissioner of Income Tax 1; National Faceless Assessment Centre; National Faceless Appeal Centre; Income Tax Officer, Ward 2(1), Patna
Nature of the Case: Writ petition under civil writ jurisdiction challenging income tax assessment order and related recovery, in the context of directions under Section 263 of the Income Tax Act and a subsequent Tribunal order.
Link to Full Judgment: Patna High Court Judgment
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