The Hindu Business Line : A parody of errors

T. C. A. Ramanujam on a case where the Gujarat High Court quashed attempts by the department to garner revenue by taking advantage of taxpayer ignorance

DOES the Income-Tax Act compel tax officials to raise demand and collect taxes irrespective of fair play and justice?

This can never be the position. In fact, the law enjoins that if the taxpayer is not aware of certain exemptions and deductions due to him under the law, it is the duty of the assessing officer (AO) to bring the correct legal position to the notice of the assessee and grant relief unilaterally.

Aberrations have become all too common. Ignorance of law is no excuse. This maxim is often hurled at the taxpayer whenever there is default. But this maxim should also apply in the reverse, by which no income-tax officer can take advantage of taxpayer ignorance.

Recently, the Gujarat High Court admonished the Commissioner of Income-Tax (CIT) who decided to make the most of such ignorance in order to garner revenues.

The case

S. R. Koshti was working as Assistant Manager with the Industrial Finance Corporation of India Ltd. He opted for voluntary retirement and received a compensation of Rs 7.5 lakh.

He filed a return of income for the assessment year 2001-02 and included the Rs 7.5-lakh as assessable income.

The employer had deducted tax at source on the entire amount, treating the same as salary. The total income declared in the return on the basis of TDS certificate was Rs 9.98 lakh.

According to the ITO, the return was processed under Section 143(1) of the I-T Act and a refund was ordered. Koshti woke up to the fact that he had committed a mistake in not claiming exemption of Rs 5 lakh available for VRS compensation under Section 10(10C) of the Act. He filed a revised return making this claim.

The AO rectified his earlier order under Section 154 and granted credit for prepaid taxes to the tune of Rs 3.18 lakh. He also ordered interest under Section 244A.

The Administrative Commissioner of Income Tax did not like this rectification order. He considered it erroneous and prejudicial to the interests of the revenue, and, acting under Section 263, he cancelled the order and restored status quo.

In the meantime, Koshti applied to the very same Commissioner seeking relief on the basis of the revised return. The Commissioner rejected this petition under Section 264, pointing out that the revised return filed by Koshti was not valid.

Koshti then approached the Gujarat High Court, which pointed out that once the petitioner was convinced about over-assessment, the Commissioner was bound to give relief, even if such over-assessment was due to a mistake detected by the assessee after completion of assessments or otherwise.

Once it was found that there was a mistake in making the assessment, the Commissioner had the power to correct it under Section 264:

"If the CIT refuses to give relief to the assessee, in such circumstances, he would be acting de hors the powers under the Act and the provisions of the Act and therefore, is duty-bound to give relief to an assessee where due, in accordance with the provisions of the Act."

The High Court pointed out that the Commissioner nowhere stated that Koshti was entitled to the relief under Section 10(10C). This position is undisputed.

The AO had himself passed an order under Section 154 granting such relief. The order passed by the Commissioner under Section 264 cannot therefore be sustained.

The court observed:

"A word of caution. The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected."

The court quashed the Commissioner's order passed under Sections 263 and 264 and restored the order under Section 154 made by the AO. The sting of the judgment comes in the end:

"The respondent shall pay the costs quantified at Rs 5,000. The Revenue shall, in the first instance, pay the costs along with the refund to the petitioner, and recover the same from the respondent-CIT, who shall bear the same out of pocket."

This is an unusual case where the court showed its indignation at attempts by the Revenue to collect taxes by any means, fair or foul. If the department adopts fairness as its credo, substantial part of disputed taxes and arrears will get wiped out.

The Gujarat judgment in S. R. Koshti vs CIT (193 CTR 518) was delivered on December 28, 2004. It is necessary that the observations of the court should receive wide publicity in the interest of justice and fair play.

(The author is a former Chief Commissioner of Income-Tax.)

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