Patna H.C : Whether the petitioner is a debtor of the Mines and Geology Department after surrender of lease on 14.10.2017 and its acceptance by the Department on 20.10.2017?

High Court Of Patna

Sainik Food (P) Ltd. vs. Principal Chief Commissioner Of Incometax & Ors.

Section 226(3)

Rajendra Menon, CJ & Anil Kumar Upadhyay, J.

Civil Writ Jurisdiction Case No.16778 of 2017

8th February, 2018

Counsel Appeared:

Gautam Kumar Kejriwal, Adv for the Petitioner. : Naresh Dikshit, Adv for the Mines Department & Archana Sinha, Adv for the IT Department.

ANIL KUMAR UPADHYAY, J:

Heard learned counsel for the parties.

The innocent taxpayer has filed the present writ application for a direction to the respondent particularly, Income Tax Officer (TDS), Bhagalpur to refund the sum of Rs. 73,75,559/deducted from the bank account of the petitioner under Section 226 (3) of the Income Tax Act 1961 being the liability of the District Mining Officer, Bhagalpur. The petitioner has prayed for payment of interest at the bank rate in the peculiar facts and circumstance that the liability was of the District Mining Officer, Department of Mines and Geology, Government of Bihar yet the respondent-Income Tax Authorities have arbitrarily deducted the said amount from the bank account of the petitioner in purported exercise of power under Section 226 (3) of the Income Tax Act 1961.

The facts relevant for adjudication of the present writ application lies in a narrow compass. Petitioner M/s. Sainik Food Private Limited, a registered company, participated in the tender process pursuant to the notice inviting tender for settlement of Sand Ghats located in different districts in the State of Bihar for the period of 2015 – 2019 including Sand Ghats located in Bhagalpur district. The petitioner participated in the tender process and being the highest financial bidder he was declared successful and awarded settlement for the purpose of mining for a period of five years. As per the notice inviting tender the petitioner was required to pay settlement amount in three instalments with simultaneous payment of the required amount of tax to the Sales Tax Department of the State, Income Tax Department and other statutory charges. The petitioner deposited the entire settlement amount for the year 2015 and likewise for the year 2016 in terms of the notice inviting tender.

The petitioner was required to deposit third and last instalment of settlement amount with the Department of Mines and Geology in the month of September 2017 in terms of the notice inviting tender. In the meanwhile, the petitioner received notice bearing reference number 372 dated 26.07.2017 issued by the ITO in purported exercise of power under Section 226(3) of the Income Tax Act and the petitioner was called upon to deposit a sum of 73,75,573 being the income tax liability of the of the respondent District Mining Office, Bhagalpur (TANPTND01610A). In the said notice it was indicated that the ITO proposes realization of the aforesaid tax dues by means of recovery of arrears of tax from the petitioner being a notice in default. The petitioner also received a notice dated 26.7.2017 whereby in addition to the aforesaid demand the ITO informed the petitioner about the attachment of the account of the respondent District Mining Officer, Bhagalpur till payment of the demanded amount. On 9.8.2017 the representative of the petitioner represented the ITO and assured the ITO that he shall be paying all the tax liability out of any instalment of settlement amount made to the District Mining Officer, Bhagalpur. This was due to innocence and ignorance of the representative of the petitioner. The representative of the petitioner approached the District Mining Officer to ensure that TDS of the income tax as paid by the petitioner along with the instalment be reflected in the account of the petitioner.

After obtaining legal opinion in the matter as to the notice under Section 226 (3) (x) issued by the ITO, the petitioner realise that it happened due to garnishee proceeding initiated against the petitioner on account of income tax dues not of the petitioner but of the respondent District Mining Officer. The petitioner learnt that the District Mining Officer, Bhagalpur owed a sum of Rs. 73,75,559/- as tax liability including interest to the Income Tax Department and since the Income Tax Department was not paid the said amount by the District Mining Officer, the Income Tax Officer initiated the proceeding under Section 226 (3) as alternative to recover the tax dues of the Department payable by the District Mining Officer, Bhagalpur. After understanding the background of the notice under Section 226(3) of the Income Tax Act, the petitioner requested the Collector of Bhagalpur and the District Mining Officer, Bhagalpur to issue necessary guidelines as the ITO is demanding payment of a huge some on account of income tax which is not his liability but the liability of the mining office. Under immense pressure and coercion the representative of the petitioner submitted that petitioner may be granted sometimes so that third instalment amount is paid to the Income Tax Department instead of District Mining Officer.

Mr Gautam Kumar Kejariwal, learned counsel appearing on behalf of the petitioner submitted that the instant case is telling tale of arbitrary exercise of the jurisdiction by the statutory authority. The tax liabilities are of the District Mining Officer, Bhagalpur and for the default of District Mining Officer, the Income Tax Department in most arbitrary manner has seized the bank account of the petitioner and recovered a sum of Rs. 73,75,559/-. Thus, the action of the action of the Income Tax Department, on the face of it, is arbitrary and capricious.

Mr Kejariwal submitted that the tax liability in the instant case is of the District Mining Officer, Bhagalpur who failed to deposit TDS deducted from various persons and not only the present petitioner yet the respondents Income Tax Department has deducted the said amount from the account of the petitioner in purported exercise of jurisdiction under section 226 (3) (x) of the Income Tax Act. Such action is without jurisdiction and most arbitrary exercise of power.

Mr. Kejariwal referring to the change in the policy with regard to settlement of Sand Ghagts submitted that having regard to the Bihar Minor Mineral Rules, 2017 the petitioner has chosen to surrender his mining lease of sand mines at Bhagalpur vide letter dated 14.10.2017 and thereafter the State Government directed the Collector Bhagalpur to determine the liability of the petitioner on surrender of lease vide letter dated 20.10.2017 which means acceptance of surrender of lease. The petitioner thereafter paid the 3rd and last instalment to the District Mining Officer and then surrendered the mining lease and on calculation it was found that the petitioner has paid excess amount which is lying with the Mines and Geology Department.

Mr. Kejariwal submitted that the petitioner has filed representation to the Collector, Bhagalpur to arrange refund of the amount recovered by the Income Tax Department along with interest as the petitioner was not liable for payment of such amount.

This writ application was heard on different dates on 20th of November 2017 noticing the peculiar facts and circumstances of this case, this court issued notice to the Chief Commissioner, Income Tax and the Principal Chief Secretary, Mining Department wherein it was indicated that the Chief Commissioner, Income Tax and the Principal Secretary Mining Department have to adopt corrective measures as the attending facts of this case their action appears to be arbitrary and illegal and considering the peculiar facts of the case, this court was of the view that the respondent Department has acted in violation of article 14 and 21 of the Constitution of India. The Court directed that affidavits to be sworn personally by the Principal Secretary of the Department of Mines and Geology and the Chief Commissioner, Income Tax.

On 19.12.2017 the Court took notice of the fact that Rs. 73,75,559/-was deducted from the bank account of the petitioner by Income Tax Department treating him to be an assessee under Section 226(3) (x) of the Income Tax Act and dues payable by the District Mining Officer, Bhagalpur on account of default in deducting TCS from various settlee, Brick kiln owners. The petitioner was fastened with liability as debtor of Mining Department. The court also noticed the fact that for the default of others including the Mines and Geology Department, action of the Income Tax Department was not justified. The Court has also noted in the order dated 19.12.2017 the stand of the Mining Department that the three Mining Officers were responsible for the lapse in not collecting TCS who should have initiated steps to recover the said TCS from all previous settlees and for their default Income Tax Department has recovered the said dues of TDS/ TCS from the existing settlee, namely the petitioner M/s. Sainik Food Private Limited.

In the counter affidavit filed by the Department of Mines, the Principal Secretary of the Department has stated that the Department has conducted enquiry and passed an order on 2.12.2017 and directed that notice be issued to all the Mining Officers at Bhagalpur who were posted from 2007 till date and who were responsible for having not collected the TCS from the settlees. The said counter affidavit is acknowledgment of the fact that the lapse was on account of the Mining Officer of the Department and for the lapse of the Mining Department the Income Tax Department recovered the dues of Mining Department from the petitioner’s account. In the counter affidavit it was also indicated that the department wants to steer clear of the entire issue by contending that it is the Income Tax Department which has collected the amount from the petitioner and therefore the petitioner seeks refund from the Income Tax Department.

On behalf of the Income Tax Department stand was taken that on 5.10.2012, notices were issued, demands were made under Section 201/201(1A) and thereafter proceedings were initiated under Section 226 (3) and it was after conducting all the formalities, action was taken against the present settlee, the petitioner, from whom the Mines Department, according to the Income Tax Department, has not collected the TCS. However, the Income Tax Department refers to an order dated 19.9.2017, Annexure-10 wherein it was indicated that certain amount has been collected from the petitioner and was to be deposited with the Income Tax Department. Since nothing was deposited in pursuance to Annexure-10, the Income Tax Department resorted to attaching the bank account and recovery of the tax liability of the Mines Department in exercise of jurisdiction under Section 226(3)(x) of the Income Tax Act, 1961.

Noticing the peculiar facts of the case the court directed the Principal Secretary to file his counter affidavit. This Court cautioned him that in case the Court find that there are lapses on the part of Department and the matter is not the property dealt with and correct facts are not indicated, the court will hold the Principal Secretary personally responsible for any error or dereliction. On 19.2.2018 the Court granted one week’s time to rectify the mistake because the court was of the considered view that the error and the mistake in question has resulted in suffering the consequence of recovery of 73,00,000/-from his bank account in illegal manner. The Court indicated that Mining Department at first instance should refund the entire amount to the petitioner with interest and thereafter take up the issue with Income Tax Department and settle the inter se dispute between the Mining Department and the Income Tax Department as the petitioner cannot be made to suffer for the lapses of either the Income Tax Department or the Mining Department.

Counsel appearing on behalf of the Mines Department has not disputed the fact that the petitioner was not liable to pay even a single farthing towards the tax liability pursuant to the settlement of Sand Ghat under the Income Tax Act.

Mr.Naresh Dikshit, counsel for the Mines Department submitted that certain recovery have been made from the erstwhile settlee, however, he has not been able to explain whether the entire liability of TCS have been discharged by the Mines Department. He has not submitted that the Department is ready to make good the loss to the petitioner on account of lapse of the District Mining Officer, Bhagalpur in not depositing the TCS collected from the settlees of the Sand Ghats.

Mrs. Archana Sinha, learned counsel appearing on behalf of the Income Tax Department has submitted that the action of the Income Tax Department is not illegal or arbitrary. She refers to Section 226 (3) (x) to justify the action of the Department. For ready reference, Section 226(3) (x) is quoted below for ready reference.

226(3)(x). If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrears of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his powers under Section 222.”

18. Mrs. Sinha submitted that primarily it was the responsibility of the Mining Department to deposit the TCS collected from the settlees of Sand Ghats and others settlee and licencee. Since the Mines and Geology Department failed to deposit the said amount, the Income Tax Department was justified in attaching the account of the petitioner being the debtor of the Mines and Geology Department. She submitted that from the account of Mines and Geology Department the tax liability was not satisfied and as such the Department has to resort to attaching the bank account of the petitioner and after due notice and opportunity the bank account of the petitioner was attached and the amount was recovered. She submitted that under the provisions of the Income Tax Act, the taxes are liable to be collected by the Mines Department from the settlees of the Sand Ghats and since the tax was not deposited by the Mines and Geology Department, the Department of Income Tax was justified in attaching the bank account of the petitioner who was the settlee of the Sand Ghat and as such debtor of the Mines & Geology Department. She submitted that if the Department failed to deposit the tax liability, the debtor is obliged to pay the tax liability and in the instant case since the Mines Department failed, the petitioner being the debtor of the tax liabilities, his account was seized and the Income Tax Department recovered the said amount from the account of the petitioner as the petitioner at the relevant time was required to pay the last instalment of settlement amount to the Mines Department in connection with settlement of Sand Ghats in the District of Bhagalpur.

19. We have given our anxious consideration to the submission advanced by the parties. It is not in dispute that today not a single farthing is due to be paid by the petitioner either in connection with the settlement of Sand Ghat or in the matter of payment of income tax liability. It is also admitted fact that primarily, the Mines And Geology Department was liable for payment of the tax collected at source (TCS/TDS). It is not also in dispute that the petitioner was fastened with the liability of the other settlee despite withdrawal of settlement on 14.10.2017 and its acceptance on 20.10.2017. Even if we accept the contention of the Income Tax Department that debtor is liable to pay the tax liability, we do not find any justification for saddling the petitioner for liability of Mining Department. The Income Tax Department has not conducted any enquiry whether other settlees of Mines and Geology Department have to pay settlement amount or not and whether the other settlees are debtor and liable to pay Income Tax liability under Section 226(3) (x) of the Income Tax Act. The order passed by this court in the present proceedings on various dates are indicative of the fact that from day one this court has made it clear that the petitioner is not liable to pay any amount and as such the Mines and Geology Department and the Income Tax Department were directed to workout mechanism to refund the amount illegally and arbitrary deducted from the bank account of the petitioner. This Court has already indicated in the previous order that the petitioner has to be refunded the amount deducted from his bank account with interest. But neither the Income Tax Department nor the Mines Department came out with any corrective measures to refund the amount deducted arbitrarily from the bank account of the petitioner.

20. During the course of argument, we have enquired from the counsel appearing on behalf of the Income Tax Department whether an inquiry was conducted to determine the liability of the petitioner as debtor, Mrs. Sinha submitted that under the Income Tax Act particularly Section 226(3)(x) opportunity was provided to the petitioner and thereafter the bank account was seized and amount was recovered.

21. From the pleading of this case and submissions of the parties following admitted facts emerges:

(i) petitioner has in fact paid all its liability in connection with settlement of Sand Ghat.

(ii) Tax liability of TCS was of the Mining Department as the Mining Department failed to deposit TCS.

(iii) ITO (TDS) attached the Bank account of Mining Department, Bhagalpur on 4.2.2016 and released the same vide letter dated 18.3.2016.

(iv) No action was taken by Income Tax Department against Mining Department for failure to deposit TCS under Section
276B and 276BB.

(v) petitioner surrendered lease on 14.10.2017.

(vi) State Government accepted surrender of lease vide letter dated 20.10.2017.

(vii) ITO (TDS) passed order of recovery under Section 226(3)(x) only on 23.10.2017.

22. For deciding the present case, we have to examine the following factual and legal aspects;

(i) whether the petitioner is a debtor of the Mines and Geology Department after surrender of lease on 14.10.2017 and its acceptance by the Department on 20.10.2017?

(ii) whether in the facts of this case the action of the Income Tax Department releasing the Bank account of the Mining Department and thereafter attaching the Bank Account of the petitioner and recovery of tax liability of the Mining Department from the Bank account of the petitioner is justified?

(iii) whether the inaction on the part of Income Tax officials in not taking action against Mining Department under Section
276B and Section 276BB and attaching the Bank account of petitioner and recovering from the account of petitioner is arbitrary exercise of power?

23. We are also required to decide whether for the lapse of the Mines And Geology Department in not collecting the tax liability under the settlement or failure of the Mines Department in depositing the amount collected and the remedy available to the Income Tax Officer under Sections 276B and 276BB yet the petitioner has been sandwiched in the dispute between Mines & Geology Department and Income Tax Department on failure of the Mines & Geology Department in paying the tax liability the Income Tax Department recovering the same from the Bank account of the petitioner is lawful and justified or not?

24. Neither contextual nor dictionary meaning of the debtor permits innocent taxpayer to be declared debtor of the Mines And Geology Department after surrender of lease and since the respondent Income Tax Department has not carried out any factual enquiry to examine whether there was any liability to be paid by the petitioner in connection with the settlement of Sand Ghat or not and in the absence of factual enquiry, proceeding against the petitioner treating him as debtor is not justified. We cannot approve the action of the Incomes Tax Department in treating the petitioner as debtor and attaching his bank account and recovering the tax liability of the Mines And Geology Department by recovering that amount from the bank account of the petitioner in view of the fact that the decision contained in Annexure-12 was taken on 23.10.2017 without noticing the development of surrender of lease on 14.10.2017 and its acceptance by State Government on 20.10.2017.

25. In the peculiar facts of the case when we noticed that there is failure on the part of the Mines and Geology Department in not collecting the TCS/TDS and failure to deposit the collected amount to the Income Tax Department whether for the failure of the Mines Department, the law-abiding innocent taxpayer can be fastened with any accountability by Income Tax by Income Tax Department as well as Mines Department. It is useful to refer to paras 9 to 11 of the Counter Affidavit of Mines Department which is acknowledgment of the lapse of the officers of Mining Department. Paras 9 to 11 of the Counter affidavit of Mining Department is quoted below for ready reference.

“9. That it is humbly submitted that the matter essentially relates to non-payment of tax collected at Source (TCS) on the royalty paid by the settlees. Prima facie, it appears that the three Mining Officers were responsible for this lapses, who should have initiated steps to recover the said TCS from all the previous settlee and moreover the Income Tax authorities who have recovered the said dues (TCS) from the existing settlee (M/s. Sainik Food Pvt. Ltd.), the petitioner, who had nothing to do with this matter.

That the deponent after considering the show cause with lame excuse of the Mining Officers and hearing them, reached to the conclusion that they did not deduct the TCS as required under law and further directed to issue show cause to these erring officers for the lapses, so committed by them. That the show cause has been asked to these three mining officers who are found to be prima facie responsible for such negligence. A photo copy of show cause dated 02.12.2017 is being annexed herewith and marked as Annexure-R-3/B of the counter affidavit.

That in fact of the case as submitted hereinabove and in compliance of the order dated 20.11.2017, passed by this Hon’ble Court, an enquiry was conducted and action has been initiated to bring the officers to task who are responsible for such negligence. In facts of the circumstances, the order of this Hon’ble Court has been complied with and the action initiated against these officers will lead to its logical end in accordance with law.”

26. We are reminded with the principle laid down by the Chief Justice M.C Chagla in the case of All India Groundnut Syndicate Ltd. Vs. Commissioner of Income Tax, Bombay City: AIR 1954 Bom. 232 the relevant part of the said judgment is quoted hereinbelow:

“But the most surprising contention is put forward by the Department that because their own officer failed to discharge his statutory duty, the assessee is deprived of his right which the law has given to him under Sub-section (2) of Section 24. In other words, the Department wants to benefit from and wants to take advantage of its own default. It is an elementary principle of law that no person–we take it that the Income Tax Department is included in that definition–can put forward his own default in defence to a right asserted by the other party. A person cannot say that the party claiming the right is deprived of that right because “I have committed a default and the right is lost because of that default.”

We are of the considered view that for the lapse of the respondents, petitioner cannot be fastened with any liability particularly when there is no factual enquiry determining the exclusive liability of the petitioner as debtor we are of the considered view that if no tax is due to be payable by the petitioner against any head to the Mines Department in the absence of exclusive determination that settlement amount to the Mines Department was only due against the petitioner how the petitioner can be declared exclusive debtor as in the entire counter affidavit there is no statement that settlement amount or tax liability was exclusively due against the petitioner and not other settlees as we have noticed the fact that the petitioner kept on requesting the authorities in the matter of payment of tax under Section 226(3)(x) of the Income Tax Act, the Mining Department has not issued any guideline rather insisted upon payment of the 3rd instalment of settlement amount and coerced the petitioner as petitioner cannot run the business of excavation of Sand.

We have also gone through the statutory provision under the Income Tax Act particularly, Section 226(3)(x) and we do not find that the said provision confer such arbitrary power to the Income Tax Department to recover the amount from the innocent petitioner after surrender of settlement. The tax was the liability of the Mines and Geology Department and instead of taking coercive action and adopting means available under the provisions of the Income Tax Act i.e. Section 276(B) and Section 276(B)(B) recovery of the liability of Mines and Geology Department the action of Income Tax Department by attaching the bank account and directing the same to be recovered from the account of the petitioner is most unreasonable, particularly in view of letter of ITO (TDS) dated 18.3.2016 contained in letter No. 2193 (Part of Ann. III of the counter affidavit). The aforesaid letter is reproduced hereinafter which will speak for itself.

“GOVERNMENT OF INDIA

OFFICE OF THE INCOME TAX OFFICER (TDS), BHAGALPUR, 3rd FLOOR, R.N. PLAZA, NEAR KUTCHERY CHOWK, RBSSS ROAD, BHAGALPUR & Fax 0641 -2409923, F.No. IT0/TDS/BGP/2015-16/2193 Dated: 18.03.2016 To, The Treasury Officer, Treasury Bhagalpyur Bhagalpur Sir,

Sub: Attachment notice u/s 226(3) of the Income Tax Act, 1961-reg.

Ref: This office letter No. 1384 dated 04.02.2016 Kind attention is brought to the above. The above mentioned letter, which is a statutory Notice u/s 226(3) of the Income Tax Act, 1961, with respect to The District Mining Officer-cum-Drawing and Disbursing Officer (DDO), District Mining Office, Bhagalpur, Bhagalpur, holding TANPTND01610A was sent to you for the kind needful w.r.t. the said DDO. Now, the above said person has made necessary correction and promised to pay the rst amount.

Consequent upon this, the attachment u/s 226(3) relating to the District Mining Officer -cum-Drawing and Disbursing Officer (DDO), District Mining Officer, Bhagalpur, Bhagalpur, holding TAN-PTND01610A stands revoked. Now, the assessee may be permitted to make transactions freely.

Further, I convey my sincere thanks for all your cooperation in this regard. Yours faithfully (Vikas Kumar) INCOME TAX OFFICER (TDS) Bhagalpur”

We are of the considered view that the ITO (TDS) Bhagalpur cannot act arbitrarily and extend favour to the Mining Department and release their Bank account and decide to attach the Bank account of the petitioner and recover the tax liability from the Bank account of the petitioner.

We have also noticed the fact that after exchange of pleading it has emerged in this case (a) there was no amount recoverable from the petitioner, (b) on 14.10.2017 the petitioner has surrendered the settlement of Mining lease and the State Government vide letter dated 20.10.2017 directed calculation of outstanding and as such on 23.10.2017 while passing order declaring assessee in default under Section 226(3)(x) the aforesaid development was not considered. Accordingly, the order contained in Annexure-12 dated 23.10.2017 is hereby set aside.

After closure scrutiny of the entire facts and circumstances of the case, we notice that neither the Income Tax Department nor the Mines Department has come out with any corrective measures to refund the excess amount or the amount deducted from the bank account of the petitioner and as such we hereby direct the Income Tax Department to forthwith return the amount recovered from the bank account of the petitioner as we are of the considered view that the action of the Department is illegal, arbitrary and totally unauthorized in the peculiar facts and circumstances, since amount was recovered by the respondent Income Tax Department therefore the Department is liable to pay the said amount with interest at the rate applied by the Income Tax Department while calculating the dues from the date of recovery from petitioner’s Bank account till the date of refund. In the event of failure to refund the said amount within a period of three months from today, they are liable to pay the cost of Rs. 1 lakh also which shall be recovered from the pocket of the ITO of the Income Tax Department at the same time we notice the lapses on the part of the Mines and Geology Department as for whose lapse the petitioner has to suffer not only uncalled for litigation but has to face the ordeal of the litigation and as such we direct for payment of the cost of the one lakh by the Mines and Geology Department within a period of three months. We direct that after refund of the amount recovered from the bank account of the petitioner, the Income Tax Department may pursue the matter for recovery in accordance with law against the Mines and Geology Department and take all legal recourse which is admissible under the law including under Section
276B and 276BB.

Under the aforesaid circumstances, we allow the writ application in the manner indicated hereinabove.

[Citation : 406 ITR 596]