2024 (4) TMI 1305 - HC - Income Tax

Stay granted on penalty notice; executive memo cannot override statutory pre-deposit, exemption warranted due to prejudice and delay

HC granted a stay on the operation of the penalty notice and set aside the impugned order, finding that mandatory pre-deposit imposed by an executive ... Stay of operation of the Notice for Penalty - requirement of pre-deposit - HELD THAT:- In “Sant Raj & Anr vs O.P. Singla & Anr.” [1985 (4) TMI 2 - SUPREME COURT] the Hon’ble Supreme Court indicated that discretion has to be exercised according to the rules of reason and justice and not according to private opinion. This is an admitted position that under the Income Tax Act, 1961 there is no statutory requirement of pre-deposit but by virtue of Office Memorandum dated 29th February 2016 issued by Central Board of Direct Taxes such a requirement has been made mandatory. A writ Court shall not generally entertain a writ petition intended to avoid the rigors of statutory pre-deposit such as section 19 of the Micro, Small and Medium Enterprises Development (MSMED) Act. This is also quite a well settled proposition in law that by Executive Instruction(s) a statutory provision can be supplemented or the gap can be filled in but no requirement contrary to the statutory law can be made. The petitioner-society has laid specific challenge to the assessment order dated 3rd March 2023 on the ground that the cash deposits in different bank accounts have been duly explained by it. This we have in our mind that the writ Court should not pass such interim orders which may amount to passing of the final order but in a situation like this where serious prejudice may be caused to the petitioner-society exemption from pre-deposit should have been granted by the Income Tax Officer. This is also bearing in our mind that the Income Tax department itself has treated this case as non-priority case and fixed a date for a final decision, which is about 6 months away. Therefore, the order is set aside and the operation of the Notice for Penalty is stayed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer's refusal to grant stay of recovery/penalty proceedings under the Income Tax Act, 1961, for Assessment Year 2015-2016, solely because the assessee had not made the pre-deposit prescribed in CBDT Office Memoranda (revised standard 20%), was legally sustainable. 2. Whether a writ Court may, in the exercise of its discretionary jurisdiction, grant interim relief (stay of operation of penalty/recovery) that would effectively relax or avoid pre-deposit requirements embodied in executive instructions (CBDT OMs/Instructions), in circumstances of serious prejudice and pending statutory appeal. 3. Whether a declaratory challenge that a notice/order is void ab initio can be adjudicated by the writ Court while a statutory appeal under section 246A is pending. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of AO's refusal to grant stay absent payment of CBDT-prescribed pre-deposit Legal framework: The Income Tax Act contains no statutory pre-deposit requirement for stay; however, executive instruments (Instruction No. 1914 and subsequent CBDT OMs, including OM dated 29-02-2016 and OM dated 31-07-2017) prescribe guidelines recommending pre-deposit (standardized at 20% of disputed demand) as a condition for stay at first appeal stage. The assessment and penalty notices impugned were issued under provisions including sections 147/148 and penalty provisions referenced (sections 274 read with 271F), with a statutory appeal filed under section 246A. Precedent treatment: The Court relied upon the principle from Sant Raj (discretion must be exercised according to rules of reason and justice), applying it to administrative discretion exercised under tax proceedings; no precedent was overruled. Interpretation and reasoning: The Court recognized that executive instructions can supplement statutory law but cannot impose requirements contrary to statute. While the CBDT OMs set administrative standards for field authorities, a writ Court retains power to examine the exercise of discretion where adherence to an Office Memorandum would produce unjust or prejudicial results. The AO's refusal to grant stay was predicated on adherence to the OM's 20% pre-deposit standard and Instruction No. 1914's insistence that mere filing of an appeal is not sufficient ground for stay. The Court observed that the writ forum ordinarily should not be used to circumvent pre-deposit regimes; nevertheless, when the factual matrix demonstrates serious prejudice, liquidity considerations, and administrative delay (here the Department itself proposed disposal of the appeal within a finite future period), equitable relief may be warranted. Ratio vs. Obiter: Ratio - The Court held that where refusal to grant interim relief based on administrative instructions would cause serious prejudice and the statutory appeal is being treated as non-priority with an imminent decision date, the writ Court may stay operation of a penalty/ recovery notwithstanding the OM's pre-deposit prescription. Obiter - Observations on the general scope and propriety of Office Memoranda in varying factual matrices beyond the present facts. Conclusion: The AO's order declining stay was set aside and the operation of the penalty notice dated 03.03.2023 was stayed. The Court exercised its discretionary jurisdiction to grant interim protection despite the CBDT OM's pre-deposit guidance, on the facts indicating no genuine hardship from such stay to the department and potential serious prejudice to the assessee. Issue 2: Scope of writ Court relief vis-à-vis executive instructions requiring pre-deposit Legal framework: Writ jurisdiction (constitutional supervisory jurisdiction) empowers courts to grant relief against administrative action, subject to principles of not ordinarily enabling evasion of statutory pre-conditions and respecting separation between statutory requirements and administrative guidance. Precedent treatment: The Court invoked established principle that executive instructions may fill gaps but cannot contravene statutory law; it also applied the broadly accepted rule that writ relief should not be used to avoid strict statutory pre-deposit regimes except in exceptional circumstances. Interpretation and reasoning: The Court balanced the presumption favoring adherence to CBDT guidelines against the equitable jurisdiction of the writ Court. It emphasized the rule of reason and justice guiding discretionary exercise and stressed that in exceptional cases - where serious prejudice may result and where the Revenue itself proposes a near-term final adjudication of the appeal - the writ Court may grant interim relief (stay) even if the assessee has not complied with the administrative pre-deposit norm. The Court noted the absence in the petition of claims of undue hardship or insufficient funds, and yet found that treating the matter as a non-priority with a near-term disposal date militated in favor of interim protection to prevent irreparable injury pending appeal. Ratio vs. Obiter: Ratio - A writ Court may, in appropriate cases of serious prejudice and on the particular facts, grant interim relief overriding administrative pre-deposit requirements without thereby generally nullifying the applicability of such OMs. Obiter - General guidance on when writ relief to avoid pre-deposit will be permissible beyond the facts of the present case. Conclusion: The Court exercised its equitable discretion to stay the operation of the penalty notice; it reaffirmed that executive instructions cannot be applied in a manner producing injustice and that writ relief is available in exceptional factual situations to prevent prejudice pending statutory appeal. Issue 3: Justiciability of declaration that notice is void ab initio while statutory appeal is pending Legal framework: Jurisdictional limits on writ adjudication where efficacious statutory remedies (statutory appeal) exist; principles barring premature determination of matters subsumed within an existing appellate remedy. Precedent treatment: The Court adhered to the established principle that when a statutory appeal is pending, certain declaratory challenges to the underlying order may be premature and not amenable to determination in writ jurisdiction. Interpretation and reasoning: The Court observed that the petitioner's alternative prayers seeking a declaration of voidness of the notice could not be adjudicated because the statutory appeal under section 246A was pending and the appellate forum remains the competent platform to decide contested factual and legal issues arising from the assessment and penalty order. The Court therefore confined its intervention to interim relief (stay) and declined to pronounce on the substantive challenge to the validity of the notice. Ratio vs. Obiter: Ratio - A writ Court should decline to adjudicate declarations of voidness of assessment/penalty orders where a statutory appeal is pending and is the appropriate forum for final adjudication. Obiter - Remarks on the interplay between writ jurisdiction and appellate remedies in tax matters. Conclusion: The declaration that the notice dated 03.03.2023 was void ab initio was not adjudicated; the pending statutory appeal precluded such determination, and the Court limited relief to an interim stay of operation of the notice. Ancillary conclusions and disposition The order of the Assessing Officer dated 11.12.2023 declining the stay petition was set aside insofar as it refused stay; the operation of the penalty/recovery notice dated 03.03.2023 is stayed pending the disposal of the statutory appeal (or as otherwise adjudicated). The writ petition was allowed to that limited extent; other substantive challenges to the assessment/notice were left for disposal in the pending statutory appeal.