By TIOL News Service

CHANDIGARH, SEPT 30, 2016: THE issue is whether if Department officers are bound by the CBDT circular, they are also bound by modified circulars, which gets amended by virtue of Office Memorandum. Yes is the Verdict.

Facts of the case

The assessee company had challenged an order of Principal CIT rejecting its application to stay the recovery of demand of about Rs.277 crores till the disposal of its appeal before the CIT(A). By a further order the Principal CIT rejected the assessee’s application for clarification/modification. Assessee sought a stay of the recovery of the demand of about Rs. 277 crores till the disposal of its appeal before the CIT(A). In the alternative and based on instructions issued by the CBDT dated 29.02.2016 the assessee sought a stay of the demand upon its paying a reasonable part of the demand not exceeding 15% of the total demand. By the main order assessee was granted a stay subject to it depositing Rs.41.64 crores which constituted 15% of the total demand. The order further permitted AO to adjust any refund which may arise in favour of the assessee company in any AY. The assessee contended that this right to adjust the refund was limited to the amount of Rs.41.64 crores directed to be deposited as a condition of stay. The authorities, however, interpreted the order to authorize them to adjust any refund against the total tax demand of about Rs.277 crores. The assessee, therefore, sought a clarification of the order dated 14.06.2016. By an order dated 26.08.2016, CIT while rejecting the application did not interpret the order dated 26.08.2016 but instead relying upon the instructions dated 02.02.1993 issued by CBDT held that AO/Department may reserve the right to adjust the refund against demand. We have held that in any event the same would be contrary to the instructions issued by CBDT dated 29.02.2016 which modified the circular dated 02.02.1993.

The original assessment order was dated 27.12.2010. The total tax due was computed at Rs. 230.57 crores. The total tax paid was about Rs. 181.24 crores. AO initiated proceedings of penalty u/s 271(1)(C). During assessment, assessee's claim regarding section 80IA & 80IB were restricted. Assessee's appeal against the assessment order was disposed of by the order of the CIT(A) dated 11.07.2011. Thereafter the revisionary jurisdiction u/s 263 was invoked on issues other than under section 80IA and 80IB. Mr. Vohra relied upon the proceedings u/s 263 to indicate that the petitioner’s record had been examined more than once. He relied upon the order of the CIT(A) to contend that as the assessment order had merged into the order of the CIT(A) and that, therefore, the reassessment proceedings were barred. By a letter dated 24.03.2015, AO informed the petitioner that he had reason to believe that its income for the assessment year 2008-09 had escaped assessment within the meaning of section 147. The assessee was directed to file a return within 30 days. Under cover of a letter dated 23.07.2015 the AO forwarded to the assessee the reasons recorded for reopening the assessment. The assessee’s objections were invited by 27.07.2015. The main reason was that the assessee had not maintained separate books of account. It was also noted that the assessee had not explained how the value of coal mines, rejected coal, cost of steam, direct and overhead expenses had been computed and that there were no details and bills/vouchers (with costing) in respect of the coal and iron-ore purchases and unitwise use thereof. The ACIT also mentioned that there was no record to show that various aspects had been examined before AO made the original assessment order. It had stated that he had reason to believe that on account of the assessee having failed to disclose fully and truly all material facts necessary for its assessment the income had escaped assessment for the AY 2008-09.

Assessee contended that the claim for deduction u/s 80IA and 80IB had been verified during the original assessment proceedings as also in respect of the previous AYs commencing from 2000-01; that there was no failure to disclose the material facts; that the reassessment was based only on change of opinion; that the reassessment was barred under the third proviso to section 147 in view of the order of CIT(A) dated 11.07.2011 and that the reassessment was barred u/s 149 as the reasons alongwith the notice u/s 148 and sanction u/s 151 were not communicated. AO dismissed the objections, thereafter AO passed the reassessment order disallowing the entire claim for deduction u/s 80IA and 80IB of an aggregate amount of about 492 crores.

Held that,

++ we mentioned earlier that one of the main reasons for rejecting the assessee’s application for deduction under sections 80IA and 80IB was that it did not maintain separate books of account. We had by an order and judgment dated 02.09.2016 in CIT, Panchkula v. M/s Micro Instruments Company in ITA No. 958 of 2008 and other 2016-TIOL-2017-HC-P&H-IT connected matters held that it was not mandatory for an assessee to maintain separate books of account in order to maintain a claim of deduction under sections 80IA and 80IB. The petitioner has, therefore, made out a prima-facie case on merits. Added to this is the fact that the petitioner is undergoing a liquidity crunch. The audit result indicates a loss of about Rs. 1759 crores. Certain agencies have downgraded the petitioner’s rating to the default category. These aspect would in our opinion justify a partial stay but not a stay of the entire demand. Firstly, the petitioner’s financial difficulties indicate a need to secure the Revenues outstanding claims. More important, prima-facie at least even assuming that our judgment is applicable to the petitioner’s case, it is possible that the appellate authorities may remand the matter to enable the AO to consider the application for deduction afresh based on the material available. It cannot, therefore, be stated at this stage that there is no possibility of any part of the claim for deduction being disallowed. We are, therefore, not inclined to grant a stay of the entire demand. The Pr.CIT rightly did not grant a complete stay but considered the petitioner’s application in the alternative for a stay subject to its paying 15% of the outstanding demand in terms of the Office Memorandum dated 29.02.2016. Considering the facts of the case, the financial position of the petitioner and having regard to the said guidelines dated 29.02.2016, the Pr.CIT granted the petitioner a stay of the demand till the disposal of the appeal before the CIT(A) subject to the petitioner paying 15% of the outstanding demand, namely, Rs. 41.64 crores in the installments stipulated. In paragraph-5, the petitioner’s request for adjusting a refund of Rs. 15.14 crores in respect of the AY 2008-09 was accepted. The assessee was accordingly directed to pay the balance amount of Rs. 26.18 crores in varying installments between 20th June, 2016 and 20th March, 2017. It is clear that the stay was granted subject to the assessee paying the said amounts which constituted 15% of the total demand and nothing more. There is, however, a dispute regarding the last sentence in paragraph-5. It entitles the AO "to adjust any refund which may arise in favour of the assessee company in any assessment year". The petitioner contends that this liberty to adjust is only in respect and to the extent of the balance of the said 15%, namely, Rs. 26.18 crores which was to be paid in the said installments and on the other it could be to the extent of the entire demand. AO, however, interpreted the order to mean that he was entitled to adjust the refund that the petitioner may be entitled to against the entire demand. This compelled the petitioner to seek a clarification before the Pr.CIT. The Pr.CIT by the said order dated 26.08.2016 referred to the guidelines and to the previous order. In particular a reference was made to Clause-C of the original instructions dated 02.02.1993;

++ the order dated 26.08.2016 does not clarify the order dated 14.06.2016. It does not state that the order dated 14.06.2016 entitled AO to adjust the refunds against the entire demand. The order merely states that in view of Clause-C of the original instructions dated 02.02.1993 the Department has a right to do so. This was not a clarification. We will assume that the Department’s interpretation of the orders is correct. In any event the order dated 26.08.2016 does not construe the further Office Memorandum dated 29.02.2016. The Office Memorandum forms a part of the original instruction No. 1914 dated 02.02.1993. This is clear from paragraphs-1 and 4 thereof. Paragraph-4 expressly states that the modified guidelines contained in the Office Memorandum were being issued "in partial modification of the instruction No.1914". Instruction No. 1914 dated 02.02.1993 as clarified by instruction No.1914 dated 21.03.1996 must, therefore, be read together with the Office memorandum dated 29.02.2016. It is necessary now to interpret the Office Memorandum dated 29.02.2016. Under clause-4A where the outstanding demand is disputed before the CIT(A), the AO"shall" grant a stay of the demand on payment of 15% of the disputed demand unless the case falls in para-B of Clause-4. In the case before us, the demand is disputed before the CIT(A). The present case does not fall under para(B) either. Clause-4(B)(a) provides that in a situation where the AO is of the view that the nature of the addition resulting in the disputed demand is such that payment of a lump sum amount higher than 15% is warranted, AO shall refer the matter to the Administrative Pr.CIT/CIT who after considering all the relevant facts shall decide the quantum/proportion of demand to be paid by the assessee as lump-sum payment for granting a stay of the balance demand. Admittedly, a reference under clause 4(B)(a) was not made by the AO to the Pr.CIT. In that event, Clause-4(A) alone would operate. As we mentioned earlier, clause 4(A) provides that where the outstanding amount is disputed before the CIT(A), the AO "shall" grant stay of demand till disposal of the first appeal on payment of 15% of the disputed demand. In other words, the AO is bound to grant a stay of the entire demand on payment of 15% of the disputed demand unless the case falls under category-B of clause-4. AO is not entitled to insist upon the assessee depositing a higher amount;

++ the AO in the order dated 26.08.2016 referred to guidelines-C(ii)(e) which we set out earlier. It provides that in granting a stay AO may impose such conditions as he may think fit and that he may reserve a right to adjust the refund arising, if any, against the demand. However, this guideline stands modified by the Office Memorandum dated 29.02.1996 which entitles the Assessing Officer to reserve the right to adjust the refund arising "to the extent of the amount required for granting stay………." . Clause-4 of the Office Memorandum expressly stated that the guidelines therein were issued in partial modification of the instruction No. 1914. Thus guideline-C(e) of the original instructions dated 02.02.1993 stood modified by para-4(e)(iii) of the Office Memorandum. As we observed earlier in the present case by the impugned order dated 14.06.2016 the petitioner was required to deposit 15% of the outstanding demand, namely, Rs. 41.64 crores. This figure attained finality. At the cost of repetition, the AO did not refer the matter to the Administrative Pr.CIT for an amount higher than 15% of the amount to be deposited as a condition for stay. This infact indicates that the last sentence in paragraph 5 of the order dated 14.06.2016 granted AO the right to adjust any refund which may arise in favour of the assessee in respect and to the extent of the said 15% of the demand only. In any event, even if it entitles the AO to adjust any refund against the entire tax demand, it would be contrary to the instructions of the CBDT contained in the Office Memorandum dated 29.02.2016. Lastly, Mr. Putney submitted that the AO has unbridled powers u/s 220(6). However, in view of the circular dated 02.02.1993 as clarified by the circular dated 21.03.1996 and modified by the Office Memorandum dated 29.02.2016 the AO’s powers have been circumscribed to the extent provided therein. We quite see the force in Mr. Putney’s contention that the department must safeguard its interest and that its interest may be jeoparadized if the petitioner is entitled to avail of the refund and at the same time enjoy the benefit of the stay. However, the Department is bound by the circular as modified by the Office Memorandum. Had the circulars/Office Memorandum not been in force, it may have been a different matter altogether. In the circumstances, the writ petition is disposed of by holding that the petitioner shall be entitled to a stay of the demand subject to its depositing the installments as required by the order dated 14.06.2016 and that the future refunds can be adjusted only to the extent of the balance amount directed to be paid as a condition for the stay. The respondents shall, however, be entitled to withhold the refund(s) upto and including 31.10.2016 to enable them to challenge this order.

(See 2016-TIOL-2305-HC-P&H-IT)