In a recent judgment[1], the Patna High Court has castigated a tax officer for effecting a tax recovery and ignoring the legislative mandate. Section 78, CGST Act, 2017 allows for recovery of tax from taxpayers within 3 months of passing of an order. The Proviso to Section 78, CGST Act, 2017 allows a proper officer to initiate recovery before 3 months if he ‘considers it expedient in the interest of revenue’. In the impugned case, the proper officer had no cogent reason except for the fact that financial year would have ended if recovery was delayed, nor was any reasonable explanation offered as to why the taxpayer was not informed through a prior notice.
Facts
One day after the appellant’s/taxpayer’s appeal was dismissed, the tax was recovered from the bank accounts of the taxpayer. However, the taxpayer’s appellate remedy was not exhausted; yet, at the same time the appellate tribunal had not been constituted. In view of the non-constitution of appellate tribunals, Courts have typically directed that the taxpayer should deposit 20 per cent of the amount – required as a deposit for filing an appeal before the appellate tribunal – and stayed recovery till the appellate tribunal is constituted. The 20 per cent is as per the statutory provisions, which in the impugned case was Section 112(8), Bihar Goods and Services Tax Act, 2017.
In the impugned case, the taxpayer’s appeal was rejected on 27.03.2023, and immediately on the next the tax officer in question sent a notice to bank managers of the banks where the taxpayer had bank accounts. The entire amount was recovered by the tax officer without sending a notice to the taxpayer which led to a petition before the Patna High Court. The Revenue’s reason for effecting such a quick recovery without informing the taxpayer beforehand was that there was that bank holidays were approaching and thereafter the financial year would have ended. The Patna High Court expressed ‘deep anguish and dissatisfaction’ in the reasons recorded by the tax officer. (para 10)
The Patna High Court stressed on the need for adhering to principles of natural justice especially when quasi-judicial powers of officers led to prejudicial result for the taxpayer. While Proviso to Section 78, CGST Act, 2017 does not expressly lay down the requirement for a notice to the taxpayer, the High Court read into the provision the said requirement and hled that:
In fact, on a reading of the proviso we are of the definite opinion that there is a requirement of notice, if not prior to the recording of reasons; at least intimation of the reasons which motivates the proper officer to recover the amounts due, considering such recovery to be expedient in the interest of revenue with clear specification of the period; less than a period of three months, within which the amounts are to be paid. (para 12)
Thus, the tax officer has to inform the taxpayer as to why the payment should be made before 3 months and specify exactly the period of payment. And while the Patna High Court did not approve of the actions of the tax officer per se, it did note that if recovery had to be initiated it should have been limited to 20 per cent of the amount due and any admitted tax, etc. The High Court observed that the action taken by the tax officer constituted an egregious error, high handed and contrary to legislative mandate.
Guidelines for Recovery
The Patna High Court thereafter, laid down certain guidelines for effectuating recovery under Section 78 which I will reproduce in full:
- There shall be no recovery of tax within the time limit for filing an appeal and when a stay application is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate Authority;
- Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a reasonable period so as to enable the assessee to move a higher forum;
- However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78, there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and specifies the lesser time within which the assessee is directed to satisfy the dues;
- Though a bank account could be attached; before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law;
- We also remind the Tax Authorities, as was done in the UTI Mutual Fund case[2] that the ‘authorities under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate the hardship to the assessee.’ (para 16)
Courts have issued various guidelines in different contexts – tax and otherwise, only for them to be ignored or be adhered in form rather than substance. It remains to be seen if mere enunciation of certain guidelines would prevent tax officers from contravening the statutory mandate especially if they are chasing targets set by superior officials. (para 15)
Conclusion
The Patna High Court elaborated one the final guideline to state that even though tax is a compulsory extraction, it is meant for the larger good. And that tax authorities should act as facilitators of business and economy instead of looking to extract their pound of flesh for personal reasons or to please the higher authorities. (para 18) And fined the tax officer concerned Rs 5,000/- for the high-handed action. (para 21) Again, the views of the High Court about the role of a tax officer and tax authorities in general are hard to find fault with; but, if and to what extent they are adhered to will be the bigger test. For now, there is solace in the fact that Courts endorse the need for balance between revenue extraction and protection of rights of businesspersons whose business can be paralyzed if such huge amounts are recovered without giving them prior notice. (para 17)
[1] Sita Pandey v The State of Bihar (2023), available at https://www.livelaw.in/pdf_upload/sita-pandey-490868.pdf
[2] UTI Mutual Fund v Income Tax Officer and Others [2012] 345 ITR 71 (Bom).