2022 (12) TMI 1022 - HC - Income Tax

Court partially allows petition challenging provisional attachment order under Income Tax Act, sets aside order, imposes conditions.

The court partially allowed the petition challenging the provisional attachment order under Section 281B of the Income Tax Act. The impugned order was set ... Provisional attachment to protect revenue in certain cases u/s 281B - Orders provisionally attaching the subject fixed deposits of the petitioner for a period of six months - allegation was made by FEMA authorities against the petitioner in the proceedings - HELD THAT:- A perusal of the impugned order will indicate that except for stating that there is likely addition of the amount mentioned in the order, no reasons, much less valid or cogent reasons are assigned by the 1st respondent as to how and why he has formed an opinion that it was necessary to provisionally attach the fixed deposits of the petitioner for the purpose of protecting the interest of the revenue. The requirements and parameters preceding passing of a provisional attachment order came up for consideration before the Apex Court in the case of Radha Krishan Industries’ case [2021 (4) TMI 837 - SUPREME COURT] In the light of existence of a legal mandatory pre-requirement and precondition of recording of formation of opinion which is in pari materia with “reasons to believe” in Section 281B of the I.T.Act, it was incumbent upon the 1st respondent to arrive at his own satisfaction and not borrowed satisfaction by proper application of mind and consequently, the impugned order which is bald, vague, cryptic, laconic, unreasoned and non-speaking order deserves to be set aside, particularly having regard the undisputed fact that except for stating that he was of the opinion that it was necessary to attach the fixed deposits for the purpose of protecting the interest of the revenue, no other reasons have been assigned by the 1st respondent in the impugned order. A perusal of the impugned order will also indicate that there is no finding recorded as to why a provisional order of attachment had to be passed against the petitioner; it is significant to note that there is no finding recorded by the 1st respondent that the petitioner was a ‘fly by night operator’ from whom it was not possible to recover the likely demand. The impugned order also does not state that the petitioner was either a habitual defaulter nor that he was not doing any business at all or that the petitioner did not have sufficient funds to satisfy the demand. In other words, in the absence of any reasons as to why and how the demand would be defeated by the petitioner, mere apprehension that huge tax demands are likely to be raised on completion of assessment was not sufficient to constitute formation of opinion and existence of proximate and live link for the purpose and necessity of provisional attachment which implicate the doctrine of proportionality. Under these circumstances also, the impugned order deserves to be quashed. A perusal of the approval also indicates that the same is silent on the aspect of necessity and does not satisfy the jurisdictional precondition / requirement for passing a provisional attachment order. It is trite law that grant of approval should not be a mechanical act and should reflect independent application of mind and this important safeguard of taking prior approval of the Commissioner under Section 281B of I.T.Act is not a mere empty formality and cannot be taken lightly. As stated supra, the approval granted by the 3rd respondent also reflects complete non-application of mind and is a non-speaking and unreasoned approval which is contrary to law and consequently, the impugned order based on the said approval deserves to be quashed. The contention of the respondents that in addition to the reasons contained in the impugned order, the other material on record comprising of email correspondence, investigation reports, statements recorded during the course of investigation, etc., are sufficient to satisfy the requirements contemplated in law cannot be accepted in view of the well settled legal position as held in Mohinder Singh Gills’ case [1977 (12) TMI 138 - SUPREME COURT] wherein the Constitution Bench held that when the respondent passed the impugned order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in a shape of an Affidavit or otherwise. Orders are not like old wine becoming better as they grow older. Under these circumstances, the said contention of the respondents cannot be accepted. Thus the impugned order passed by the 1st respondent is illegal, arbitrary and contrary to law and the same deserves to be quashed. In the interest of justice, it would be just and appropriate to direct the petitioner not to make payment in the form of royalty or any other form to any entities outside India till conclusion of assessment proceedings by the respondents. However, interest of justice would also be met if the petitioner is reserved liberty to take / obtain overdrafts on the subject fixed deposits and make payments from such overdrafts from the respective banks to foreign entities in accordance with law. During the pendency of the present petition, the 1st respondent passed a draft assessment order under Section 144C(1) of the I.T. Act after concluding the proceedings. It is needless to state that the petitioner would be entitled to contest the said draft assessment order and proceedings pursuant thereto before the respondents. Issues Involved:1. Validity of the provisional attachment order under Section 281B of the Income Tax Act, 1961.2. Compliance with the legal requirements and preconditions for passing the provisional attachment order.3. Application of the doctrine of proportionality in the provisional attachment order.4. Validity of the approval granted by the Principal Commissioner of Income Tax.5. Admissibility of additional reasons provided by the respondents in support of the provisional attachment order.Detailed Analysis:1. Validity of the Provisional Attachment Order under Section 281B of the Income Tax Act, 1961:The petitioner sought the quashing of the impugned order dated 11.08.2022, passed by the Deputy Commissioner of Income Tax, provisionally attaching the petitioner's fixed deposits worth INR 3,700 crores. The court scrutinized whether the order met the statutory requirements under Section 281B of the Income Tax Act.2. Compliance with Legal Requirements and Preconditions:The court emphasized that the provisional attachment order must be preceded by the formation of an opinion that it is necessary to protect the interest of the revenue, based on tangible material. The court referenced the Apex Court's judgment in Radha Krishan Industries vs. State of Himachal Pradesh, which outlines the mandatory requirements for such orders, including the necessity of a proximate and live link between the need for attachment and the purpose it is intended to secure. The court found that the impugned order lacked valid or cogent reasons and failed to establish the necessity for attachment, thus not complying with the statutory preconditions.3. Application of the Doctrine of Proportionality:The doctrine of proportionality requires that the attachment must be necessary to protect the revenue and that there must be a balance between the nature and extent of the attachment and its purpose. The court found that the impugned order did not meet this requirement, as it was based on borrowed satisfaction from the findings of the Investigation Wing and TPO, without independent opinion formation by the Assessing Officer.4. Validity of the Approval by the Principal Commissioner of Income Tax:The approval granted by the Principal Commissioner of Income Tax was found to be non-speaking and unreasoned, reflecting complete non-application of mind. The court reiterated that such approvals should not be mechanical and must reflect independent application of mind, as held in the case of Chhugamal Rajpal vs. S.P. Chaliha & Others. Consequently, the approval did not satisfy the jurisdictional precondition for passing a provisional attachment order.5. Admissibility of Additional Reasons:The court rejected the respondents' attempt to supplement the impugned order with additional reasons, citing the Apex Court's ruling in Mohinder Singh Gill vs. Chief Election Commissioner, which states that the validity of an order must be judged by the reasons mentioned in the order itself and cannot be supplemented by fresh reasons later.Conclusion:The court concluded that the impugned order was arbitrary, lacked necessary reasons, and did not comply with the legal requirements and preconditions. The order was set aside with specific conditions:- The petitioner is prohibited from making payments from the fixed deposits in the form of royalty or any other form to entities outside India.- The petitioner is allowed to take overdrafts from the fixed deposits and make payments to foreign entities from such overdrafts.- The respondents are directed to complete the draft assessment proceedings for the Assessment Years 2019-20, 2020-21, and 2021-22 by 31.03.2023.Order:1. Petition partly allowed.2. Provisional attachment order dated 11.08.2022 set aside with conditions on payment and overdrafts.3. Respondents to complete draft assessment proceedings by 31.03.2023.