2005 (3) TMI 706 - AT - Income Tax

Illegal Tax Recovery Halted: Authorities Ordered to Refund Rs. 7.05 Crore and Suspend Demand During Appeal Period

Glaxo SmithKline Asia (P.) Ltd. Versus Additional Commissioner of Income-tax

Glaxo SmithKline Asia (P.) Ltd. Versus Additional Commissioner of Income-tax - [2005] 2 SOT 457 (DELHI) 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this matter are:Whether the recovery of the outstanding tax demand by the revenue authorities prior to the expiry of the period allowed for filing further appeal and stay application was lawful and proper.Whether the assessee was entitled to a stay on the recovery of the outstanding demand pending disposal of the appeal before the Tribunal.Whether the revenue authorities acted in accordance with the principles of natural justice and the Doctrine of Reasonable Expectation by attaching the assessee's bank accounts and recovering the entire demand immediately after the appellate order.Whether the amount illegally recovered by the revenue should be refunded to the assessee.Whether the Tribunal has inherent power to grant stay in appropriate cases and how such power should be exercised in the facts and circumstances of this case.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality of Recovery Prior to Expiry of Appeal Period and Stay ApplicationRelevant legal framework and precedents: The Tribunal referred to established principles that the revenue authorities should not proceed with recovery of dues until the time-limit for filing further appeal has expired. This is supported by precedents including the Tribunal's decision in RPG Enterprises Ltd. v. Dy. CIT and the Bombay High Court ruling in Mahindra & Mahindra Ltd. v. Union of India, which emphasize that premature recovery frustrates the assessee's right of appeal.Court's interpretation and reasoning: The Tribunal observed that the revenue authorities' act of attaching bank accounts and recovering the entire outstanding demand immediately after the CIT(Appeals) order, and before the assessee could file an appeal or apply for stay, was improper. The Tribunal held that such action effectively destroys the assessee's right to appeal and to seek a stay, thereby undermining the rule of law.Key evidence and findings: The assessee received the CIT(Appeals) order on 16-2-2005, but the bank accounts were attached and the amount recovered on 17-2-2005. The assessee filed the appeal on 18-2-2005. The Tribunal noted the shortened payment period of 15 days instead of the customary 30 days, and the absence of pressing reasons for such reduction.Application of law to facts: Applying the principle that recovery should not precede the expiry of the appeal period, the Tribunal found that the revenue's recovery was premature and violated the assessee's rights. The Doctrine of Reasonable Expectation was invoked to underscore the assessee's right to expect that recovery would not be enforced before the opportunity to appeal and seek stay.Treatment of competing arguments: The revenue contended that facts in the current year differed from earlier years and thus stay should not be granted. However, the Tribunal emphasized procedural fairness and the need to safeguard the assessee's rights irrespective of the factual differences.Conclusion: The Tribunal concluded that the recovery was illegal and that the amount recovered should be refunded to the assessee.Issue 2: Entitlement to Stay on Recovery Pending AppealRelevant legal framework and precedents: The Tribunal reiterated its inherent power to grant stay in appropriate cases pending appeal, a power recognized under the Income-tax Act and judicial precedents.Court's interpretation and reasoning: The Tribunal considered three factors: prima facie case in favour of the assessee, potential undue hardship if stay is denied, and balance of convenience. It found the facts warranted grant of stay, especially given the premature recovery and the hardship caused.Key evidence and findings: The Tribunal noted the large outstanding demand (over Rs. 7 crores), the prior favourable orders in earlier years on similar issues, and the fact that the assessee had cooperated by depositing Rs. 3 crores voluntarily.Application of law to facts: The Tribunal applied the principle that stay should be granted where there is a prima facie case and to prevent irreparable harm. The premature recovery and the frustration of appeal rights weighed heavily in favour of granting stay.Treatment of competing arguments: The revenue's argument that facts differed was acknowledged but found insufficient to deny stay given the procedural impropriety and hardship.Conclusion: The Tribunal granted stay on recovery for 180 days or until disposal of the appeal, whichever was earlier.Issue 3: Refund of Amount Recovered IllegallyRelevant legal framework and precedents: The Tribunal relied on the Doctrine of Reasonable Expectation and prior rulings such as Maharashtra State Electricity Board v. Jt. CIT, where premature recovery led to directions for refund.Court's interpretation and reasoning: The Tribunal emphasized that recovery before the assessee had a reasonable opportunity to appeal and seek stay was a violation of natural justice. To restore the status quo and enable the Tribunal to exercise its powers effectively, refund of the illegally recovered amount was necessary.Key evidence and findings: The timing of recovery immediately after receipt of the appellate order and before filing of appeal was critical. The Tribunal also noted the assessee's cooperation and partial voluntary payment.Application of law to facts: The Tribunal ordered refund of the entire recovered amount within two weeks, to enable the assessee to pursue the appeal effectively.Treatment of competing arguments: The revenue did not dispute the refund but sought time to obtain further inputs. The Tribunal directed prompt compliance.Conclusion: Refund of Rs. 7,05,04,101 was directed to be made within two weeks.Issue 4: Exercise of Tribunal's Inherent Power to Grant StayRelevant legal framework and precedents: The Tribunal's inherent power to grant stay is well established and is exercised after considering prima facie case, balance of convenience, and potential hardship.Court's interpretation and reasoning: The Tribunal expressed concern over the frustration of its power by premature recovery by revenue authorities. It underscored the importance of protecting the right to appeal and stay as fundamental to the rule of law.Key evidence and findings: The Tribunal examined the facts of the case, including prior orders in favour of the assessee, the procedural irregularities in recovery, and the hardship caused.Application of law to facts: The Tribunal found that the balance of convenience and hardship favoured the assessee and that a prima facie case existed, justifying the grant of stay.Treatment of competing arguments: The Tribunal rejected revenue's contention that factual differences warranted denial of stay, emphasizing procedural fairness.Conclusion: The Tribunal granted stay and directed early hearing of the appeal with strict directions against adjournments.3. SIGNIFICANT HOLDINGS'If the rights of the citizens are allowed to be crushed in this manner which is akin to the Tsunami wave, then the day is not far when we shall be driven into utter anarchy where people will tend to forget what 'Rule of Law' is.''When the assessee is aware of its right of further appeal, he also has a right to reasonably expect that the revenue authorities will not pounce upon him and destroy his right to appeal and ask for a stay. This proposition is enshrined in the Doctrine of Reasonable Expectation.''The Tribunal before whom the appeal is pending, has an inherent power to grant stay in appropriate cases.''Considering the circumstances under which the amount was recovered by the department from the assessee, we are of the view that the amount so recovered should be refunded to the assessee. Only then, the Tribunal will be able to grant stay to the assessee which it deserves in this case.'Core principles established include:The revenue authorities should not recover outstanding demands before the expiry of the period allowed for filing further appeal and stay application.The Doctrine of Reasonable Expectation protects the assessee's right to expect procedural fairness in recovery proceedings.The Tribunal possesses inherent power to grant stay to protect the assessee's rights pending appeal.Premature recovery frustrates the right of appeal and natural justice and may warrant refund of amounts recovered.Stay applications should be decided considering prima facie case, balance of convenience, and potential hardship.Final determinations:The recovery of Rs. 7,05,04,010 was illegal and the amount was ordered to be refunded within two weeks.A stay on recovery was granted for 180 days or until disposal of the appeal, whichever was earlier.The appeal was directed to be listed for hearing on a specified date with strict instructions against adjournments.