The Hindu Business Line : Furore over attachment of assets

Courts stand between the executive and the subject, alert to see that discretionary power is not exceeded or misused. It is similar vigilance that has prompted a recent CBDT circular, laying down guidelines for officers who plan to exercise their powers of making provisional attachment of the assets of assesses from whom the recovery of tax is difficult, says H. P. Ranina, describing the basis for the circular.

A RECENT press note urging tax officers to exercise their powers of making provisional attachment has generated considerable heat and dust. Section 281-B of the Income-Tax Act, 1961, which confers this power, was introduced almost 30 years ago by the Taxation Laws (Amendment) Act, 1975 with effect from October 1, 1975.

However, safeguards were introduced with effect from October 1, 1996 to make it mandatory for the Assessing Officer who proposes to exercise his power to obtain in writing the approval of the Chief Commissioner of Income-tax, Commissioner, Director-General or Director.

In other words, the provisional attachment of property cannot be done at the whim of the Assessing Officer unless either of the four senior authorities give their written consent. Such provisional attachment would cease six months from the date of the order.

Beyond this period, the attachment order can be extended only by obtaining the written permission of the aforesaid four superior authorities. However, the aggregate period of extension cannot exceed two years.

This power of provisional attachment has been tested in various Courts, which have laid down further safeguards.

In Gaurav Goel v C.I.T. (245 I.T.R. 168), the Calcutta High Court held that under section 281-B of the Income-Tax Act, where, during the pendency of any proceeding for the assessment of any income or for the assessment or reassessment of any income which has escaped assessment, the Assessing Officer is of the opinion that for the purpose of protecting the interests of the Revenue it is necessary so to do, he may attach provisionally any property belonging to the assessee in the manner provided in the Second Schedule.

Under sub-section (2), every such provisional attachment would cease to have effect after the expiry of a period of six months from the date of the order made under sub-section (1). Such period may be extended for reasons to be recorded in writing.

According to the Court, if the order is passed by the concerned Assessing Officer in a mechanical manner, without giving any reasons in the order itself and without any indication as to the prior approval of the higher authority, the order would not be valid and would be liable to be quashed.

In Seshasayee Paper and Boards Ltd. v C.I.T. (261 I.T.R. 63), the Madras High Court held that the proviso to section 281-B(2) makes it clear that an order for extension of attachment under section 281-B(1) can be made only for reasons to be recorded in writing and the Deputy Commissioner is not the person authorised under that section.

The Madras High Court further held that even assuming that the endorsement in the file granting approval for extension of attachment under section 281-B was an order passed by the Commissioner, the fact remained that no reasons had been recorded. In the absence of reasons being recorded by the Commissioner, such an order would be taken to be illegal and without jurisdiction.

In Om Prakash v I.T.O., Ward 1, Gwalior (251 I.T.R. 714), the petitioners were carrying on wholesale business in foodgrains. The Assessing Officer made all efforts to serve notice on the petitioners, but the petitioners were avoiding the same.

Since the authority apprehended that there was likelihood of evasion of tax and that tax liability of various family members of the petitioners group might be more than Rs 1 crore, the assessment proceedings were initiated. The bank accounts of the petitioners were frozen and the stocks lying in the mandi were attached under the provisions of section 281-B of the Income-Tax Act, 1961.

The Madhya Pradesh High Court held that since the assessment proceedings were pending, it would be appropriate for the assessing authority to pass orders for releasing the property from attachment on taking a bank guarantee from the petitioners for the sum that may become due from the petitioners when the assessment was made.

In Stock Exchange, Ahmedabad, v C.I.T. (248 I.T.R. 209), the appellant was a stock exchange recognised under the Securities Contracts (Regulation) Act, 1956, and its rules, regulations and by-laws were approved by the Government of India under that Act. Under rule 5 of the rules of the stock exchange, membership of the stock exchange constituted a personal permission to exercise the rights and privileges attached thereto, under Rule 6 the right was inalienable, and under Rule 7 the right of nomination was personal and inalienable.

The Supreme Court held that the right of membership of the stock exchange was not a private asset. It was merely a personal privilege granted to a member. It was non-transferable and incapable of alienation by the member or his legal representatives, except to the limited extent provided in the rules and subject to fulfilment of conditions. The nomination, wherever provided, was not automatic; it was hedged by rules.

On the right of nomination vesting in the stock exchange under the rules, that right belonged to the stock exchange absolutely. In the case of death or default of a member, his right of nomination ceased and vested in the stock exchange. The membership right or membership card of R was not the property of R and, therefore, it could not be attached under section 281-B.

In Sushil Kumar & Co. v C.I.T. (246 I.T.R. 293), it was held that law permits issuance of high prerogative writs in extraordinary circumstances when there is no adequate alternative remedy left to the person, who has all along acted in a bona fide manner.

The Calcutta High Court held that it had been contended that the writ petitioner was willing to furnish a bank guarantee for the disputed amount of about Rs 8 lakh but that nonetheless an attachment order had been passed under Section 281-B, and consequently Section 230-A clearance had been refused.

There was nothing in the correspondence to show that any offer of bank guarantee was made to the Department. It had been made for the first time to the writ Court.

The Section 281-B order recorded that no arrangement by way of bank guarantee was made. There was no impeachment of that sentence in the writ petition as being incorrect or mala fide. Furthermore, in regard to the outstandings of the two assessment years, appeals were possible, and stay pending such appeal could also be applied for and there was no reason to approach the writ Court.

In VLS Finance Ltd. v C.I.T. (246 I.T.R. 707), the Delhi High Court held that "discretion" must be a sound one governed by law and guided by rule, not by humour. There is nothing like unfettered discretion immune from judicial reviewability.

Courts stand between the executive and the subject, alert to see that discretionary power is not exceeded or misused. Discretion is a science of understanding to discern between right or wrong, between shadow and substance, between equity and colourable glosses and pretence and not to do according to one's will and private affections.

"Opinion" means something more than mere retailing of gossip or hearsay; it means judgment or belief, that is, a belief or a conviction resulting from what one thinks on a particular question. It means: judgment or belief based on grounds short of proof. If a man is to form an opinion and his opinion is to govern, he must form it himself on such reasons and grounds as seem good to him.

For the applicability of section 281-B, two factors are necessary to be noted. First, the existence of opinion of the Assessing Officer that for the purpose of protecting the interests of the Revenue, it is necessary to provisionally attach any property belonging to the assessee in the manner provided in the Second Schedule to the Income-tax Act, 1961, and, second, the previous approval of the Chief Commissioner or the Commissioner, as the case may be, by an order in writing.

The High Court held that the question as to which of the assets of the assessee could have been attached depended on the subjective satisfaction of the assessing authority. It was for the Assessing Officer to decide which of the assets could be liquidated without difficulty for realisation of tax assessed.

The assessee could not compel the Assessing Officer to attach any particular property. The assets seized were those realisable without much difficulty and, therefore, the orders of attachment were passed in respect of those assets. Since the matter lay within the subjective view of the Assessing Officer, no exception could be taken to the exercise of such power. Hence, the orders of attachment did not suffer from any infirmity to warrant judicial review.

In conclusion, it is necessary to mention that by a revised circular dated November 5, 2004, the Central Board of Direct Taxes has directed that the provisions of section 281-B would be resorted to only in cases where there is a likelihood of the recovery of tax becoming difficult on account of inadequacy of assets. Consequently, where the assessee is in possession of adequate value of assets to cover the tax dues, the powers under section 281-B to attach assets would not be exercised by the tax authorities.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)

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