The Hindu Business Line : In the `interest' of justice

IN THE process of administering the Income-Tax Act, 1961, one is used to proceeding against assessees for various acts of omission or commission, including delay in payment of tax or filing of return of income. There have been sporadic instances of assessees proceeding against income-tax officers (ITOs) for several acts, particularly when they overstretch their limits.

Often, the confrontations become unpleasant to both parties, forcing them to move the court. No legislation can guarantee a system that ensures that two minds think on the same lines at all times.

Recently, the Karnataka High Court had to deal with a case of damages claimed by an assessee for the acts of an ITO in M. V. Gnanendra Nath vs Union of India and Others (2003 266 ITR 250).

Facts, issues

The appellant, Mr Nath, inherited an insurance amount of Rs 1,04,000 in 1973. Of this, he invested Rs 48,000 in a five-year fixed deposit of Canara Bank carrying an interest of 10 per cent per annum, Rs 58,000 as a four-year deposit with Tamil Nadu Transport Development Financial Corporation (TTDFCL) carrying an interest of 13 per cent per annum, and Rs 2,000 in Karnataka Bank as a savings bank account.

The ITO conducted a raid and found some sale deeds and other documents and issued orders to the banks and TTDFCL not to pay the amount to the plaintiff, and initiated an enquiry to find out whether the amounts in deposit were the escaped income not assessed to tax.

The enquiry dragged on for over three years and eight months. Canara Bank paid interest on the fixed deposit regularly till the date of maturity but refused to pay the fixed deposit amount after the maturity owing to the prohibitory order. TTDFCL, on the other hand, withheld not only the payment of interest but also the fixed deposit amount. And Karnataka Bank withheld the payment of Rs 2,000 and did not permit Mr Nath to operate the savings bank account.

Mr Nath filed a writ petition before the Karnataka High Court alleging arbitrary and illegal freezing of the amounts with oblique motive and sought a direction for release of the amounts and the interest accrued thereon. The income-tax authorities in the writ petition submitted that the prohibitory order had been revoked and there was no objection from their end for payment of the deposits amounts to the plaintiff.

Accordingly, the banks paid the amount with interest up to the maturity after deducting tax at source and did not pay interest from the date of maturity till actual payment.

For loss of interest and the inconvenience caused, the plaintiff claimed damages of Rs 50,000 from the ITOs and held them personally responsible for the damage caused.

The defendants resisted the suit. The trial court allowed the suit and directed the ITOs to pay the suit claim of Rs 50,000 and further allowed interest at the rate of 6 per cent per annum from the date of maturity of the fixed deposits pertaining to Canara Bank and TTDFCL till payment. The first appellate court set aside the judgment and decree and dismissed the suit. The matter consequently reached the High Court.

Court decision

The High Court, while directing the banks to pay interest from the date of maturity of the deposit to the actual payment at the appropriate rate of interest, also held that the ITOs cannot be held liable to pay damages for initiating inquiry into the source of deposit which was within the purview of the Act.

The court reasoned that "the income-tax officers have acted within their jurisdictional powers to find out the source of the fixed deposits and to know whether it was an escaped income assessable to tax.

The income-tax authorities do have jurisdiction under the Act to enquire into the matter and they are also empowered to issue orders of attachment and prohibitory orders to keep the property intact subject to the result of the proceedings.

It is not a case that the authorities acted without any exercisable jurisdiction. The court accordingly held that the banks were duty bound in law to pay interest on the fixed deposits at the contract rate subject to fluctuations in the rates, but the question of claiming damages from the ITOs did not arise.

The resort to prohibitory orders by the Department naturally resulted in friction between the tax officers and the assessee. No doubt such steps which are extreme in nature have to be used judiciously and selectively.

In the case under consideration, the appellant took umbrage from the fact that there was inordinate delay in the disposal of the proceedings initiated by the Department and, therefore, he sought damages from the `erring' officers.

The court made a telling observation that "mere delay in disposal of proceedings does not confer any right for the respondent to proceed against the State or State authorities."

One will have to contend that time in today's context is money and unreasonable delay in any proceeding can affect the assessee concerned.

The decision on whether damages should lie or not is an independent issue, but then we need to have some time limit placed on disposal of proceedings to meet the ends of justice.