2004 (2) TMI 38 - HC - Income Tax

High Court grants relief to sick industrial company against Income-tax Act notice

The High Court of Gujarat granted interim relief to a petitioner, a sick industrial company, against enforcement of a notice under section 226(3) of the ... Protection under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 - coercive recovery and requirement of BIFR consent - enforcement of notice under section 226(3) of the Income-tax Act, 1961 - distinction between recovery of taxes collected on behalf of Revenue and recovery of the assessee's propertyProtection under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 - coercive recovery and requirement of BIFR consent - enforcement of notice under section 226(3) of the Income-tax Act, 1961 - Whether a company registered as a sick industrial company is entitled to protection under section 22 of the SICA against enforcement of notices under section 226(3) of the Income-tax Act without prior consent of the BIFR, and whether such enforcement would amount to coercive recovery. - HELD THAT: - The Court, without expressing any final view on the wider interpretation of section 226(3) of the Income-tax Act, proceeded on the admitted fact that the petitioner was registered as a sick industrial company on November 27, 2003. It observed that enforcement of a notice under section 226(3) to effect recovery of arrears of income-tax would prima facie amount to coercive recovery. Drawing on the settled position in Gram Panchayat v. Shree Vallabh Glass Works Ltd. and Tata Davy Ltd., the Court held that arrears of taxes and similar dues from a sick industrial company which satisfy the conditions of section 22(1) of SICA cannot be recovered by coercive process unless the BIFR gives its consent. The Court distinguished recoveries which are collections on behalf of the Revenue (such as sales tax collected from purchasers) - which cannot be retained by the sick company - from the purchase price or receipts from sale of goods, which are not collected on behalf of the income-tax authorities and hence fall within the ambit of protection afforded by section 22 of SICA insofar as past arrears are concerned. The respondents retain the procedural remedy of seeking the BIFR's consent for recovery.Interim restraint granted: respondents are restrained from acting upon or enforcing the impugned notice dated October 20, 2000 and from enforcing any notice under section 226(3) of the Income-tax Act, 1961, without first obtaining the consent of the BIFR as required by section 22(1) of the SICA.Final Conclusion: Petitioner, being registered as a sick industrial company, is prima facie entitled to protection under section 22 of the SICA against coercive recovery of income-tax arrears; respondents are restrained from enforcing notices under section 226(3) without BIFR consent, and may seek recovery only after obtaining such consent. Issues: Interpretation of section 226(3) of the Income-tax Act, 1961; Protection under section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985In the judgment delivered by the High Court of Gujarat, the petitioner sought interim relief against the respondent authorities from enforcing a notice under section 226(3) of the Income-tax Act, 1961. The petitioner argued that the notice issued by the authorities had expired, and as a sick industrial company registered under the Sick Industrial Companies (Special Provisions) Act, 1985, they were entitled to protection under section 22 of the SICA. The petitioner emphasized that any purchase price received would be considered their property and protected under SICA. Additionally, reliance was placed on the Supreme Court's decision in Tata Davy Ltd. v. State of Orissa [1998] 93 Comp Cas 1; AIR 1998 SC 2928. On the other hand, the respondent authorities contended that the notice under section 226(3) of the Act would remain valid until all income-tax dues were settled to prevent repeated notices. They argued against the petitioner's unqualified protection claim under SICA, citing the Supreme Court's decision in Deputy CTO v. Corromandal Pharmaceuticals [1997] 89 Comp Cas 1; AIR 1997 SC 2027. The court refrained from expressing an opinion on the interpretation of section 226(3) but held that as a sick industrial company, the petitioner was entitled to protection under section 22 of SICA, preventing coercive recovery through the enforcement of the notice. The court distinguished the case of Corromandal Pharmaceuticals, stating that the protection under SICA applied to dues included in a sanctioned scheme. The court clarified that income tax liability on future income from the sale of goods would not arise until taxable income was earned, and the recovery sought was for past arrears. The court relied on previous Supreme Court decisions in Gram Panchayat v. Shree Vallabh Glass Works Limited, AIR 1990 SC 1017; [1991] 73 Comp Cas 169 and Tata Davy Ltd. [1998] 93 Comp Cas 1 (SC) to emphasize that recovery from sick industrial companies required consent from the BIFR. Consequently, the court granted interim relief, restraining the respondent authorities from enforcing the notice without obtaining consent from the BIFR as per section 22(1) of the SICA.