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K.T. Kunjumon Vs. Commissioner of Income-tax and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberWrit Petition Nos. 1424 and 1425 of 1999
Judge
Reported in[1999]239ITR782(Mad)
ActsIncome Tax Act, 1961 - Sections 132 and 158BC
AppellantK.T. Kunjumon
RespondentCommissioner of Income-tax and ors.
Appellant AdvocateV. Balachandran, Adv.
Respondent AdvocateS.V. Subramaniam, Adv. for ;S. Sundaresan, Adv.
Excerpt:
direct taxation - block assessment - sections 132 and 158bc of income tax act, 1961 - chapter 14b would override all other provisions of act - in case assets are seized they have to be dealt with only in manner and mode prescribed in section 158bc - block assessment to be made under section 158bc - tax liability for entire block period to be determined - liability so determined to be adjusted against cash or other assets seized in course of search conducted by income-tax department - in case surplus after adjustment it would be open to assessing officer to adjust balance amount against existing tax liability of assessee - assessing officer not entitled to tilt order of priority and adjust amount of case or assets seized against existing liability first and then adjust balance amount.....n.v. balasubramanian, j.1. the writ petition in w. p. no. 1425 of 1999 is filed against the order passed by the commissioner of income-tax, central-1, chennai 34, dated november 18, 1998, and the prayer in the writ petition is to quash the said order and to direct the commissioner of income-tax to redeposit a sum of rs. 24,25,810 in the p. d. account of the respondent to the credit of the petitioner for the assessment year 1994-95.2. the writ petition in w. p. no. 1424 of 1999 is filed against the order of the commissioner of income-tax, central-1, chennai 54, dated january 12, 1999 in c. no. act no. 0022/kvss/c.1, and the prayer in the writ petition is to quash the said order and to direct the commissioner of income-tax to admit and accept the declaration filed by the petitioner under.....
Judgment:

N.V. Balasubramanian, J.

1. The writ petition in W. P. No. 1425 of 1999 is filed against the order passed by the Commissioner of Income-tax, Central-1, Chennai 34, dated November 18, 1998, and the prayer in the writ petition is to quash the said order and to direct the Commissioner of Income-tax to redeposit a sum of Rs. 24,25,810 in the P. D. Account of the respondent to the credit of the petitioner for the assessment year 1994-95.

2. The writ petition in W. P. No. 1424 of 1999 is filed against the order of the Commissioner of Income-tax, Central-1, Chennai 54, dated January 12, 1999 in C. No. Act No. 0022/KVSS/C.1, and the prayer in the writ petition is to quash the said order and to direct the Commissioner of Income-tax to admit and accept the declaration filed by the petitioner under the Kar Vivad Samadhan Scheme, 1998.

3. The result of W. P. No. 1424 of 1999 would depend upon the result of W. P. No. 1425 of 1999. The facts leading to the filing of the writ petitions are as under :

The assessment of the petitioner for the assessment year 1994-95 was completed by the Assessing Officer, viz., the Income-tax Officer Film Ward II, Chennai, by his order dated March 29, 1996, as the said officer was having jurisdiction over the petitioner at that time, The order of assessment made on the petitioner resulted in a tax liability of Rs. 29,21,282 and consequential interest. The petitioner preferred an appeal challenging the order of assessment before the Commissioner of Income-tax (Appeals) and the Commissioner (Appeals) by order dated December 20, 1996, dismissed the appeal preferred by the petitioner. After the dismissal of appeal by the Commissioner (Appeals), the petitioner filed an application dated January 29, 1997, before the Commissioner of Income-tax, Tamil Nadu IV, who was having jurisdiction over the petitioner on that date for stay of collection of tax and that petition was rejected by the Commissioner of Income-tax, Tamil Nadu IV, on February 6, 1997. The Commissioner of Income-tax, Tamil Nadu IV, while dismissing the stay petition on February 6, 1997, observed that the appeal preferred by the petitioner before the Commissioner (Appeals) was dismissed and the petitioner was directed to clear the arrears of tax for the assessment year 1994-95 immediately. The Commissioner also directed the petitioner to obtain the necessary challan from the Assessing Officer for the payment of the tax. Thereafter, the petitioner filed an appeal against the order of the Commissioner of Income-tax (Appeals) and also filed a petition for stay of collection of tax before the Income-tax Appellate Tribunal, Chennai (hereinafter to be referred to as 'the Appellate Tribunal'), on April 11, 1997, and the said petition for stay came up for hearing before the Appellate Tribunal on May 9, 1997, and the Departmental representative opposed the stay petition and on hearing both the sides, the Appellate Tribunal dismissed the petition for stay on May 9, 1997.

4. In the meanwhile, there was a search conducted in the office and residential premises of the petitioner at Chennai and Ernakulam on January 20, 1997, and according to the respondents, cash, jewellery and other documents were seized and the cash seized in the residential and business premises of the petitioner at Chennai was deposited in the P. D. Account of the Commissioner of Income-tax, Tamil Nadu IV, Chennai, while the cash seized in the residential and business premises of the petitioner at Ernakulam was originally deposited in the P. D. Account of the concerned Commissioner of Income-tax and later transferred to the P. D. Account of the Commissioner of Income-tax, Tamil Nadu IV, Chennai. The cash seized was considerably in excess of the arrears of tax due, for the assessment years 1993-94 and 1994-95. According to the respondents, a sum of Rs. 24,25,700 being the amount required for clearing the arrears for the two assessment years 1993-94 and 1994-95 was realised on February 17, 1997, from the amount of Rs. 47,66,335 seized and deposited in the P. D. Account of the Commissioner of Income-tax, Tamil Nadu IV, Chennai and the same was adjusted towards the arrears for the said two assessment years on February 20, 1997. According to the respondents, after the said adjustment made on February 20, 1997, there was no arrears of tax due for the two assessment years 1993-94 and 1994-95.

5. The petitioner before any such adjustment could be made sent a letter on February 29, 1997, to the Deputy Director of Income-tax, Investigation, Chennai, with a request that a sum of Rs. 60 lakhs lying in his bank account may be appropriated towards ad hoc payment of tax liability that may arise out of the action under Section 132 of the Income-tax Act, 1961 (hereinafter to be referred to as 'the Act'), both at Chennai and Ernakulam. The petitioner also sought for a direction to lift the order of attachment. As already stated, the Commissioner of Income-tax, the authorised representative of the Department, the Appellate Tribunal and also the petitioner proceeded on the basis that there were arrears of tax for the assessment year 1994-95.

6. The petitioner filed a declaration under the Kar Vivad Samadhan Scheme, 1998, for the assessment year 1994-95, and his petition was rejected on the ground that there were no arrears of tax for the assessment year 1994-95. The first respondent, the Commissioner of Income-tax, Central-1, issued a letter stating that his petition dated October 21, 1998, seeking adjustment of a part of the seized cash towards the tax payable for the block assessment has no merits in view of the fact that a sum of Rs. 24,25,810 had already been adjusted towards the arrears of tax for the assessment years 1993-94 and 1994-95 by the then Assessing Officer and the appropriation had taken place in February, 1997, before the petitioner's case was notified to the Central Circle. On November 19, 1997, the petitioner was directed to file his return for the block assessment period under Section 158BC of the Act. Accordingly, the petitioner filed a return on January 5, 1998, and the Assistant Commissioner of Income-tax, Central Circle I(5), Chennai, by letter dated July 20, 1998, informed the petitioner that the tax payable on the disclosed income was not paid. He also gave the details of the balance of the tax payable on the income admitted after adjustment of the seized cash and the amount realised by invoking bank guarantee. Along with the said letter, the Assistant Commissioner of Income-tax has also enclosed challans indicating adjustment of P. D. Account cheque for a sum of Rs. 23,40,525.03 (adjustment of the seized cash) and a sum of Rs. 9,50,000 (amount realised by invoking bank guarantee).

7. After the said letter issued by the Assistant Commissioner of Income-tax, Central Circle I (5), Chennai, the petitioner preferred an application before the Commissioner of Income-tax Central-I, Chennai, stating that there are arrears of tax for the assessment years 1993-94 and 1994-95 and the petitioner intends to avail of the Kar Vivad Samadhan Scheme, 1998, pending disposal of the appeal for the assessment year 1994-95. The petitioner, in the said application also stated that he has already requested that the cash seized and the amount appropriated from various banks to the tune of Rs. 60 lakhs may be appropriated towards ad hoc payment of tax liability that may arise out of the proceedings under Section 132 of the Act. The petitioner has also requested the Commissioner to issue suitable directions to give credit to the tax paid by him for the block assessment and the same should be treated as tax paid for the block assessment only and not for any other tax arrears. That petition was rejected and that is the subject-matter of the writ petition W. P. No. 1425 of 1999.

8. The petitioner filed a declaration under the Kar Vivad Samadhan Scheme on November 16, 1998, and when the Commissioner of Income-tax, Central-I, found that there were no arrears of tax for the assessment year 1994-95, he rejected the declaration and the order of the Commissioner of Income-tax, Central-1, is the subject-matter of the writ petition, W. P. No. 1424 of 1999.

9. The grounds raised in the writ petition are that it is not open to the Commissioner of Income-tax to adjust a sum of Rs. 24,25,810 against the tax arrears for the assessment year 1994-95 as the cash seized has to be adjusted towards the tax liability that may arise out of the block assessment under Chapter XIV-B of the Act which is a special provision for assessment of search cases. It is also stated that the adjustment has been made without giving any prior opportunity or notice to the petitioner and hence the adjustment is illegal. It is also stated that the petitioner, Commissioner of Income-tax, the Department personnel and the Appellate Tribunal have proceeded on the basis that the amounts have not been adjusted which is clear from the orders passed by the Commissioner of Income-tax as well as the Appellate Tribunal and the stand taken by the petitioner as well as by the Department before the authorities. It is therefore stated that the adjustment of a sum of Rs. 24,25,810 towards arrears of tax for the assessment year 1994-95 is illegal, It is also stated that once the adjustment is held to be illegal, the order rejecting the declaration filed by the petitioner under the Kar Vivad Samadhan Scheme is also liable to be set aside.

10. A common counter affidavit has been filed by the respondents stating that the adjustment of the seized amount against arrears of tax is valid and justified under the provisions of Section 158BC(b) read with Section 132B(1) of the Act which specifically permits adjustment of the cash seized towards existing tax liability. It is therefore stated that the adjustment of a part of the seized cash towards tax arrears for the assessment year 1994-95 is valid and justified since the adjustment was made on February 20, 1997. There were no tax arrears for the assessment year 1994-95 on the date of filing of the declaration and, hence, since one of the conditions for invoking the Kar Vivad Samadhan Scheme was not satisfied, it is stated that the order of rejection of the declaration under the Kar Vivad Samadhan Scheme is perfectly justified and it cannot be regarded as in any way wrong or illegal. The order challenged in the other writ petition W. P. No. 1424 of 1999 is sought to be supported on the ground that there were no arrears of tax for the assessment year 1994-95 in view of the adjustment made long before the case of the petitioner was transferred to the jurisdiction of the respondents and the averments of mala fides raised in the writ petition are suitably denied.

11. Mr. V. Balachandran, learned counsel for the petitioner, submitted that the appropriation of a sum of Rs. 25,24,810 towards arrears of tax for the assessment year 1994-95 made in the year 1997 without the consent of the petitioner is in violation of the provisions of the Act and, it is not open to the respondents to unilaterally adjust the said sum kept in P. D. Account towards the arrears of tax for the assessment year 1994-95. Learned counsel submitted that under the provisions of Section 158BC of the Act, the respondents have the power to adjust the cash seized only towards the liability of tax that may arise out of block assessment and the adjustment made by the respondents against the tax liability for the assessment year 1994-95 without the knowledge and consent of the petitioner is illegal. He further submitted that the block assessment proceedings initiated were pending on the date of filing of the declaration and the assessment came to be completed only in January, 1999, and it is not open to the respondents to adjust the seized cash towards the arrears of tax for the assessment year 1994-95. Learned counsel further submitted that once the court holds that the adjustment is not permissible under the provisions of the Act, the order rejecting the declaration filed by the petitioner under the Kar Vivad Samadhan Scheme is also liable to be set aside. Learned counsel submitted that the various orders passed by the Commissioner of Income-tax as well as the Appellate Tribunal on the petitions for stay filed by the petitioner and the stand taken by the Department show that they were of the opinion that the seized cash was not adjusted towards the tax arrears for the assessment year 1994-95. Learned counsel submitted that though there was a letter by the Assistant Commissioner of Income-tax, dated July 20, 1998, he did not inform that the adjustment of the seized cash of a sum for Rs. 23,40,525 was made towards the tax arrears for the assessment year 1994-95 and as soon as the petitioner became aware of the said illegal adjustment, he approached the Commissioner of Income-tax, Central-I, by filing a petition dated October 21, 1998. He also submitted that the procedure prescribed for adjustment of any amount from P. D. Account by issuing a challan after informing the petitioner was not followed in adjusting the seized cash towards the arrears of tax for the assessment year 1994-95 and without any notice or without the knowledge of the petitioner, the seized amount was adjusted towards the tax liability for the assessment year 1994-95. He submitted that the said adjustment is illegal in view of the provisions contained in Chapter XIV-B of the Act.

12. Mr. S.V. Subramaniam, learned senior counsel for the Department, submitted that the adjustment was made in accordance with the provisions of Section 158BC read with Section 132B of the Act and the adjustment is valid and proper. Learned senior counsel submitted that the amount seized can be adjusted towards the existing liability and since there was a valid and legal adjustment under the provisions of Section 132B read with Section 158BC of the Act, it is not open to the petitioner to make a complaint and contend that the adjustment was illegal. Learned senior counsel submitted that no prior opportunity need be given to the petitioner regarding the adjustment of the seized cash as the petitioner had not taken any action after he was informed by the Assistant Commissioner of Income-tax about the adjustment of a sum of Rs. 23,40,525. Learned senior counsel further submitted that it is only when the declaration filed by the petitioner under the Kar Vivad Samadhan Scheme was rejected by the Commissioner of Income-tax, the petitioner has approached this court and learned senior counsel also submitted that on the basis of the provisions under Section 132B read with Section 158BC of the Act, the adjustment of the seized amount can be made against existing liability and it is not necessary that block assessment should be made before the adjustment towards existing liability can be made. Learned senior counsel submitted that the intention of the Legislature is clear that the amount seized can be adjusted towards the existing liability under the provisions of Section 132B of the Act and the adjustment is not in any way illegal or incorrect on the date when the adjustment was made.

13. I have carefully considered the submissions of learned counsel for the parties. I am of the view that any decision to be rendered in W. P, No. 1425 of 1999, would govern the other writ petition W. P. No. 1424 of 1999. The facts are not in dispute that the order of assessment for the assessment year 1994-95 was made on March 29, 1996, and the petitioner was liable to pay a sum of Rs. 29,21,282 towards the balance of tax payable and interest also. An appeal against the order of assessment was filed by the petitioner before the Commissioner (Appeals) which went against him and the further appeal preferred by him before the Appellate Tribunal was pending on the date when the Kar Vivad Samadhan Scheme came into force. There is also no dispute that certain amount of cash and other assets were seized during the search operation conducted in the residence and business premises of the petitioner and at the request of the petitioner some amounts were paid by the banker of the petitioner to the Income-tax Department by way of bankers' pay order on January 31, 1997. The petitioner also issued a letter on January 29, 1997, stating that the amount transferred from the Indian Bank, Rangarajapuram Branch, Chennai, may be adjusted towards ad hoc payment of tax liability that may arise on the action under Section 132 of the Act both at Madras and Ernakulam. It is not disputed that a sum of Rs. 24,25,700 was adjusted towards arrears of tax for the assessment years 1993-94 and 1994-95 without giving any prior opportunity to the petitioner or without even informing him.

14. The question that arises is whether the action of the Department is valid and legal. In considering the question, it is necessary to notice relevant provisions of the Act. Chapter XIV-B of the Act is a special provision for assessment of search cases. The above Chapter was introduced by the Finance Act, 1995, with effect from July 1, 1995, with an avowed object to make the procedure of assessment of search cases cost effective, efficient and meaningful and under the new scheme introduced by the said Chapter, the assessment of undisclosed income determined as a result of search under Section 132 or requisition under Section 132A of the Act shall be made separately as the income of a block of years. The salient features of the scheme are that undisclosed income of a person shall be assessed as the income of a block period consisting of a period of ten previous years prior to the previous year in which the search was conducted and also the period of the current previous year up to the date of the search and the income shall be taxed at a flat rate of 60 per cent. and the order of assessment for block period shall be made within the period prescribed and the order shall be passed with the prior approval of the Commissioner of Income-tax. It is significant to notice that proceedings under Section 132(5) or 132(7) of the Act are no longer necessary for searches initiated and conducted after July 1, 1995, and the undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed in accordance with Chapter IV and certain suitable adjustments are required to be made as indicated in Section 158BB of the Income-tax Act. Under Section 158BC of the Act, the Assessing Officer is required to determine the undisclosed income of the block period in accordance with the provisions contained in Section 158BB of the Act and the Assessing Officer is also required to determine the undisclosed income of the block period in accordance with Chapter IV and he shall pass an order of assessment and determine the tax payable by the assessee on the basis of such assessment. Section 158BC(d) of the Act also provides that assets seized under Section 132 or requisition under Section 132A of the Act shall be retained to the extent necessary and the provisions of Section 132B of the Act shall apply subject to certain modifications which are necessary. It is relevant to notice that under Section 158BA of the Act, the provisions of Chapter XIV-B of the Act would override all other provisions contained in the Act. In other words, the provisions of Chapter XIV-B will have overriding effect and would operate notwithstanding anything contained in all other provisions of the Act.

15. In the context of making block assessment in search cases, the question whether the adjustment of a sum of Rs. 24,25,700 seized during the search against the existing tax liability for the assessment year 1994-95 by the Assessing Officer having jurisdiction over the assessee's case at that time is justified or not has to be considered. In my view, the adjustment made by the Assessing Officer of a sum of Rs. 24,25,700, in so far as it relates to the tax arrears for the assessment year 1994-95, is not justified or valid in the eye of law. As already held by me, the provisions of Chapter XIVB of the Act would override all other provisions of the Act and if assets are seized, they have to be dealt with only in the manner and the mode prescribed under Section 158BC of the Act. In other words, the block assessment has to be made under Section 158BC of the Act and tax liability for the entire block period has to be determined and the liability so determined in the said manner has to be adjusted against the cash or other assets seized in the course of search conducted by the Income-tax Department and if any surplus remains after such adjustment, it would be perfectly open to the Assessing Officer to adjust the balance of the amount against the existing tax liability of the assessee. I hold that it is not open to the Assessing Officer to tilt the order of priority and adjust the amount of cash or assets seized against the existing liability first and then adjust the balance amount against the liability that may arise on the completion of block assessment. Chapter XIVB is a special provision for assessment of search case, and it is relevant to notice that the assessment under this Chapter is a block assessment and the block assessment is in addition to the regular assessment. In other words, block assessment and regular assessment run in two different tracks and it is impermissible for the Assessing Officer to adjust the amount seized first against the existing tax liability of the asses-see and then adjust the balance against the liability that may arise out of block assessment.

16. The scheme relating to making assessment consequent to search and seizure underwent some changes in the year 1995 and prior to the year 1995, under Section 132(5) of the Act, the Assessing Officer was required to make a summary assessment and during the summary assessment, he was required to arrive at the undisclosed income of the assessee in a summary manner on the basis of the available materials and then calculate the tax payable as if the said summary assessment was the regular assessment. In the summary assessment, the Assessing Officer was required to specify the amount that might be required to satisfy the existing liability and the Assessing Officer was empowered to retain in his custody the assets seized that would be sufficient to satisfy the aggregate amount, viz., tax and interest, and if there exists any tax liability after adjustment, he was also empowered to realise the same from the person from whom the assets were seized, Under Section 132B of the Act, after making a regular assessment, the Assessing Officer is empowered to adjust the amount seized against the tax liability that may arise on the basis of assessment or reassessment for all the assessment years relevant to the previous years to which the undisclosed income relates. Under the provisions of the Act then existing, the priority prescribed in Section 132(5) of the Act is that the Assessing Officer was required to first adjust the amount seized against the tax liability determined in a summary manner and then adjust the balance if any against the existing tax liability that may arise on the basis of regular assessment. Since the Assessing Officer had already adjusted the amount seized against the existing liability after the completion of the assessment, he would not be required to make further adjustment towards existing liability as the liability had already been adjusted. Under Section 132B of the Act, the Assessing Officer after making regular assessment or reassessment was required to determine the tax liability either in the assessment or in the reassessment, as the case may be, and adjust the amount seized against the liability so determined. But the scheme underwent a radical change in the year 1995 and once block assessment proceedings are on under Chapter XIV-B the Assessing Officer is required to determine the tax liability that may arise in the course of the block assessment and adjust the said tax liability against the amount seized and if there is any surplus available, it would be open to him to adjust the said surplus against the existing tax liability. The Assessing Officer, in the instant case, had made adjustment in a topsy-turvy manner and unilaterally adjusted the cash seized first against the existing tax liability and then tried to adjust the balance of the seized amount available against the liability that arose in the block assessment. In my view, once the block assessment proceedings are on, it is not possible or permissible for the Income-tax Officer to adjust the cash seized in the search against the existing tax liability. As the existing liability is a known figure for any previous assessment year, it is always open to the Assessing Officer to recover the same by resorting to recovery proceedings to recover the existing liability. Block assessment proceedings, as already held by me, have an overriding effect and the cash or assets seized have to be adjusted first against the block assessment liability.

17. In the view I have taken it is not necessary to express any opinion on the question whether any prior opportunity should be given before making the adjustment of cash seized against the existing liability for the assessment year 1994-95 by the Assessing Officer. However, it is significant to notice that on the facts of the case, the petitioner in his letter dated January 29, 1997, has expressed his intention for the transfer of some amounts from his banker to the P. D. Account of the Department and he has also stated that the amount should be appropriated towards the tax liability that would arise under the block assessment. In the face of the letter given by the petitioner dated January 29, 1997, in my view it was not permissible for the Assessing Officer to go against that letter and adjust the amount seized against the existing tax liability. Though there is no dispute that the cash seized and kept in P. D. Account of the Commissioner is the money belonging to the petitioner and when the tax liability is adjusted, it would in effect, reduce the ultimate tax liability of the petitioner the question that arises is whether it is possible to alter the priority. It is not a case of set off of refunds under Section 245 of the Act against the tax remaining payable under the Act and under Section 245 of the Act, an intimation in writing should be given of the proposed action. Though the provisions of Section 245 of the Act do not in terms apply to the proceedings under Section 132B of the Act, and Section 132B of the Act does not expressly provide for an intimation to be given to the assesses of the proposed action to set off the cash seized against the existing liability, on the facts of the case, it is seen, no intimation was given by the Assessing Officer after adjustment of a part of cash against the existing liability for 1994-95 as was done by the Assistant Commissioner of Income-tax, Central Circle I(5), Chennai, on July 20, 1998, enclosing challans and the mode of adjustment of P. D. account.

18. Though the Assistant Commissioner of Income-tax by his letter dated July 20, 1998, informed that the amount adjusted out of the seized cash was only Rs. 23,40,525, the Assistant Commissioner of Income-tax has neither intimated, nor informed the petitioner that a sum of Rs. 24,25,700 was adjusted towards the existing liability for the assessment years 1993-94 and 1994-95. Further, as soon as the petitioner became aware that the said amount was adjusted contrary to his request, the petitioner made an application, on October 21, 1998, to the Commissioner of Income-tax, Central-I. In my view, the priority of adjustment of cash seized against the block liability was not strictly adhered to by the Assessing Officer on the facts and circumstances of the case. I am unable to accept the submission of learned senior counsel that the adjustment in the instant case was done in a valid and legal manner. I am of the view, though the petitioner was in arrears of tax for the assessment years 1993-94 and 1994-95, the adjustment of seized cash made first against the existing tax liability can neither be regarded as valid, nor justified in the context of block assessment proceedings pending under Chapter XIV-B of the Act. The submission of learned senior counsel for the Revenue that the provisions of Section 132B of the Act have to be read in conjunction with Section 158BC of the Act and under Section 132B of the Act, it is open to the Assessing Officer to adjust the seized assets against the existing tax liability and, therefore, the adjustment made was legal and justified is not well-founded as Section 158BC of the Act cannot be read de hors the scheme of block assessment. The block assessment, as already held by me, is a special provision which overrides all other provisions of the Act. The intention of Parliament is that block assessment under Chapter XIV-B should proceed in a different channel and once it proceeds in a different track, the liability arising out of the said Chapter has first to be determined and adjusted against the seized assets under Section 132B of the Act. No doubt, the Assessing Officer is empowered to recover existing liability from the assets seized, but however, the Assessing Officer would be empowered to adjust existing tax liability against the seized assets only if there is any surplus amount remaining after adjustment of block assessment liability against the seized assets and retained by the Assessing Officer. The priority under the scheme, in my view, is that the Assessing Officer has to first determine the tax liability under block assessment and adjust the tax liability against the assets retained and if there is any surplus, the existing liability can be adjusted against such surplus. The Assessing Officer, in the instant case, has not adhered to the priority contemplated under the scheme of the Act and any interpretation de hors the scheme of block assessment, in my view, is not warranted. Therefore, I am of the view, Section 158BC cannot be construed independent of the scheme of the Act, and it must be construed in the light of the scheme of block assessment. Therefore, the adjustment of sum of Rs. 24,25,700 made by the Assessing Officer against the existing liability for the assessment year 1994-95 is not valid and justified in law. Though the Assistant Commissioner of Income-tax by letter dated July 20, 1998, merely informed the petitioner that adjustment of seized cash was made, since the adjustment was not made in accordance with the provisions of the Act, the adjustment has to be set aside.

19. It is also relevant to notice that the petitioner was under the impression that adjustment had not been made towards the tax liability for the assessment year 1994-95, that is the reason for the petitioner to approach the Commissioner with a petition for stay of collection of tax before the Commissioner. It is also significant to notice that the Commissioner of Income-tax also proceeded on the basis that there was no adjustment, and this is the reason for him to reject the petition for stay and he also directed the petitioner to pay entire tax arrears for the assessment year 1994-95. When the matter came up before the Appellate Tribunal, the Departmental representative opposed the petition for stay on the basis that the existing tax liability was pending and the order were passed after the alleged adjustment that was made on February 20, 1997. Further, it is also relevant to notice that the procedure contemplated for adjustment against seized cash was not followed by the Assessing Officer. In the letter dated July 20, 1998, the Assistant Commissioner of Income-tax informed how adjustment of seized cash for a sum of Rs. 23,40,525 was made. He also informed as to how the amount was realised by invoking the bank guarantee of Rs. 9,50,000 and along with the said letter, he has also enclosed copies of necessary challans. It is clear that when the adjustment was made towards the existing liability for the assessment years 1993-94 and 1994-95, the said procedure was not followed by the Assessing Officer. Consequently, I hold that the adjustment made by the Assessing Officer to adjust the sum of Rs. 24,25,700 against the tax liability for the assessment year 1994-95 of the petitioner was not validly done and not justified on the facts of the case as well. Accordingly, the impugned order dated November 18, 1998, is set aside.

20. Once this court finds that the adjustment towards existing tax liability for a sum of Rs. 24,25,700 was not made in accordance with law, the result would be that there was no adjustment of the seized cash against the existing liability for the assessment year 1994-95 and it must be held that as on March 31, 1998, the petitioner was in arrears of income-tax for the assessment year 1994-95. Therefore, the rejection of the declaration filed by the petitioner on the ground that there was no arrears of tax as on March 31, 1998, is also not justified, and accordingly, the impugned order in W.P. No 1424 of 1999 is also quashed. The result is that the designated authority under the Kar Vivad Samadhan Scheme should proceed in accordance with the scheme and determine the liability of the petitioner for the assessment year 1994-95 under the Kar Vivad Samadhan Scheme. As I have already held, the assets seized are to be adjusted towards the assessment that may arise out of the block assessment and if any surplus remains after the adjustment of tax liability arising out of the block assessment, it is needless to say that the Assessing Officer is empowered to adjust the same towards the existing tax liability for any other assessment years.

21. In the result, both the writ petitions are allowed. Rule nisi made absolute. However, in the circumstances, there will be no order as to costs.


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