[Opinion] Outstanding Income Tax Demand(s)

Prabhakar K S – [2023] 157 taxmann.com 378 (Article)

Can raise tax demand for any year – Sri Nitin Gupta, Chairman, CBDT

With the arrival of the new calendar, the Income Tax Department, as a matter of routine exercise, stepped up its enforcement efforts to recover arrears of current and previous years tax demands (in certain cases dating back to Assessment Years 2003-04 and 2004-05). Tax arrears mean demands rose against the assessee in the past but not paid/old pending cases before courts but decided recently. Reasons for piling up tax arrears could be, taxes though paid not entered into the system backend, no assets or inadequate assets for recovery, pending litigations at various legal forums, stayed by the courts, non-traceable of assessees, TDS/Prepaid taxes mismatch, cases under BIFR/liquidation and among others. Taxpayers may be aware of the actual meaning of the term ‘Theirs’ but not the twisted ones that will emerge when splitting as ‘THE’ and ‘IRS’ (Indian Revenue Service Cadre)! and serving demand notices is an integral part of the Income Tax law.

Received Surprise Demand Notice

The term ‘Notice’ is derived from the Latin word ‘Notitia’ means ‘being known’. In general, it is ‘Knowledge of a Fact’ or ‘Intimation’ to the party concerned. Notice is the first limb of the ‘Audi Alteram Partem’, wherein one of the Principles of Natural Justice provides a chance of being heard or letting the other side be heard as well. When any tax, interest, fine, or any other sum is payable under the Income Tax law, the Assessing officer (AO) shall issue a Notice under Section 156 upon the assessee specifying the sum so payable. As per Section 220(1), the amount specified therein should be remitted within 30 days of the service of the notice. However, AO can curtail 30 days with a valid reason in writing. The Supreme Court in Mohan Wahi v. CIT [2001] 116 Taxman 63/248 ITR 799 held that service of the notice of demand is the foundation and mandatory before initiating recovery proceedings. If an assessee does not pay the amount demanded therein, then he will be treated as ‘assessee-deemed-to-be-in-default’ and recovery proceedings can be initiated against him.

In addition, AO can adjust that already available refund or a part of the refund against the tax demand by issuing a prior Notice-cum-Intimation under section 245 of the Income-tax Act, 1961, which is mandatory and only thereafter ‘AO’ will have a jurisdiction to proceed further. Any set-off of refund without prior intimation was a violation of law and illegal as the Delhi High Court held in Genpact India v. Asstt. CIT [2012] 17 taxmann.com 145/205 Taxman 51 (Mag.). Thus, the onus lies on the Revenue to follow the due process prescribed therein.

The same procedure applies to the ‘CPC – Bengaluru’ in case of refund adjustment as Delhi High Court held in Court on Its Own Motion v. CIT [2013] 31 taxmann.com 31/214 Taxman 335/352 ITR 273 (SC). Consequently, the amount of refund claimed in an assessee’s ‘Return of Income’ will be adjusted against outstanding arrears, if any. In one such recent case, the Delhi High Court has directed the Income Tax Department to review Travelport International Operations Limited United Kingdom’s tax refund adjustment within four weeks. Wherein, the contention was the Department’s decision to adjust its due refund sum of about Rs. 6.27 crore against a tax demand for Assessment Year 2019-20.

Recent Spur in Issuance of Notices

As per recent media reports, taxpayers are spooked by demand notices to settle very old tax demands/adjusting refunds against old dues that goes back to Assessment Year 2003-04 and 2004-05. It is largely believed that it is a result of system errors/outdated records. Interestingly, many taxpayers who had already remitted the due taxes long back or had their demands adjusted against tax refunds subsequently claimed unpaid dues. In such cases, taxpayers may submit the requisite supporting documentary evidence for such payments/adjustments to the tax authorities through tax-portal after logging in, which will enable them to correct the records from their ends. In case of genuine unpaid demands, taxpayers have no other options left other than remitting the demands with applicable interest/penalty to avoid further complications and future litigations.

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