By TIOL News Service

NEW DELHI, JULY 18, 2017: THE issue before the Bench is - Whether when the AO has served a notice of demand u/s 156 and the assessee has failed to pay taxes within 30 days as per Ss 220(4) & 221(1), no fault can be found with the notice issued u/s 226(3)(i) to attach its bank account. YES is the verdict.

Facts of the case

The assessee is a wholly-owned subsidiary of the GE Group. 99.5% of the shares in the assessee-company are held by GECAS Services Ltd., Ireland and the remainder is held by GE Capital Aviation Funding, Ireland. The assessee is engaged in the business of providing marketing support, liaising and administrative services in connection with leasing of aircrafts in India to its parent company. In its return, the assessee declared an income of Rs Rs. 21,37,610. The return of income was picked up for scrutiny and an addition of Rs. 2,14,78,118.90 was made to the Assessee's income thereby raising a tax demand of Rs. 94,51,390. On receiving the copy of the assessment order on December 24, 2016, the assessee electronically filed an appeal before the Commissioner of Income Tax (Appeals) and the AO was electronically intimated about the filing of the appeal.

On March 25, 2017, the Assessee received a notice issued under Section 226 (3) (i) of the Act addressed to the HSBC bank attaching the Assessee's bank account held there and any other amount held in recurring deposit/fixed account and current account held with the said bank towards the recovery of the entire tax demand of Rs. 94,51,390. The assessee also alleges that the AO had recovered the entire demand even before the notice dated February 27, 2017 was served.

6. The Assessee states that it was shocked to learn that the AO had already recovered the entire demand of Rs. 94,51,390 on 9th March, 2017 much before the dispatch of notice dated 27th February, 2017 to the Assessee. A copy of the transaction statement of the debit entry in the Assessee's bank account has been enclosed with the petition.

In this background, the assessee opted for the writ route to claim refund of the sum in excess of 15% of the entire demand.

Having heard the parties, the HC held that,

++ under Section 156 of the Act, it is incumbent on the AO to serve upon the Assessee a notice of demand of tax, interest, penalty, fine or any other sum specifying the same to be payable. In the present case, it is not in dispute that such a notice was in fact issued to the Assessee by the AO on 19th December, 2016 and was served on the Assessee on 24th December, 2016.

++ under Section 221 (1) read with Section 220 (4) of the Act, the Assessee is deemed to be an Assessee in default if it fails to make the payment of the demand within 30 days of the service of notice under Section 156 of the Act. In the present case, the Assessee acknowledges that it was served with a notice of demand under Section 156 of the Act on 24th December, 2016. Therefore, the Assessee was aware that under Section 221 (1) read with Section 220 (4) of the Act, it would be deemed to be an Assessee in default upon its failure to pay tax within 30 days. The Assessee is unable to explain why it did not file an application for stay of recovery of demand along with its appeal filed on 23rd January, 2017 before the CIT(A). In fact, it has not filed any such stay application till date;

++ with the Assessee not having paid the amount within 30 days of the service of notice under Section 156 of the Act, the Department was justified in proceeding to treat it as an Assessee in default and in proceeding to take the necessary action to recover the demanded amount;

++ at this juncture, it requires to be noticed that Para 2B of Instruction No. 1914 of the CBDT dated 2nd December, 1993 on the subject of recovery of demands is titled 'Stay Petitions'. Para 2C gives 'Guidelines for Staying Demand' wherein the AO "may impose such conditions as he may think fit." The above Instruction No. 1914 was further modified by the OM dated 29th February, 2016. In para 4 of the OM, it is stated that the guidelines were being modified in order to streamline the process of grant of stay;

++ Instruction No. 1914 dated 2nd December, 1993 and the OM dated 29th February, 2016 are in the context of the AO considering a stay application filed by the Assessee. The Instruction or the OM will have no application where there is no application for stay filed by the Assessee. Consequently, this Court is unable to accept the contention of the Assessee that the decision of the Allahabad High Court in Farrukhabad Gramin Bank v. Additional Commissioner of Income Tax on the question of the mandatory nature of the requirement of prior service of notice upon the Assessee under Section 226 (3) (iii) of the Act reflects the correct position in law;

++ in the present case there was no illegality committed by the Department in not issuing to the Assessee a notice under Section 226 (3) (iii) of the Act simultaneously with or prior to the notice issued to its bank under Section 226 (3) (i) of the Act for recovery of the tax demand from its account. The Court accepts the submission of the Revenue that requirement under Section 226 (3) (iii) is only that a copy of the notice should be "forwarded to the assessee" and not that a copy should be served on the Assessee in advance or simultaneously.

(See 2017-TIOL-1324-HC-DEL-IT)