1. COLLECTION AND RECOVERY (Y V S T Sai, IRS) Joint Director of Income Tax (Hqrs) NADT, Nagpur (Restricted Circulation. For Departmental Use Only)1. A NOTE ON THE READING MATERIAL PROVIDED IN THISMODULE:This module contains reading material which is suitable for a reader interestedin acquiring basic knowledge on the topic as well as a reader who wishes tomake an in depth study. Basic readers can skip sections 2 and 3 of this module.They can also skip the footnotes and the additional reading material available atvarious sub-sections of the module. The author also wishes to make adisclaimer that the reading material reflects only the personal understanding ofthe author and cannot be presumed as the official view of Income TaxDepartment.2. SECTIONS COVERED IN THIS CHAPTER AND SCOPE OF THESECTIONS:Part „D‟ of XVII of the Income Tax Act deals with the provisions of collection andrecovery. In this part, sections 220 to 232 are covered. Schedule II andSchedule III of the I.T Act deal with the procedure for recovery of taxes. Thischapter deals with subjects like “interest to be charged on default of payments”,“circumstances under which an assessee can be deemed to be in default”,“penalty for non-payment of tax”, “drawl of tax recovery certificate (TRC)”,“modes of recovery”, “procedure for effecting recovery” and “steps to preventpersons with tax arrears to leave India”.3. LEGISLATIVE HISTORY:Section 220 corresponds to provisions of section 45 of the Income Tax Act,1922. Initially, the period for payment of tax upon service of demand notice was35 days. Through Direct Tax Laws (Amendment) Act, 1987, this period wasreduced to 30 days w.e.f 01-04-1989 by amending subsection (1) of section220. Also rate of interest charged for delayed payment of tax, which is atpresent prescribed @ 1% per month or part of month has undergone variouschanges from 4% per annum to 15% per annum and 1.5 % per month or partof the month to the present rate.First proviso to subsection (2) of section 220 was inserted by Finance Act, 1963with retrospective effect from 01-04-1962. This proviso covers situations whereinterest gets reduced upon rectification, appeal effect, revision and settlement.Second proviso dealing with charging of interest for periods from pre 01-04-89to post 01-04-89 was inserted w.e.f 01-04-89. Powers were granted to CIT u/s220(2A) to waive/reduce the interest by insertion of section 220(2A) from 01-10-84. In 1986, a retrospective amendment was w.e.f 01-10-84 to extendsection 220(2A) even to those cases where tax is already paid. When section221 was incorporated in the original Act, the authority empowered to levy thepenalty was not specified and no discretion was given to the AO. To removethese anomalies, a new section was substituted w.e.f 01-04-71 empowered theAO to levy penalty and also use discretion to not to levy penalty when he issatisfied that the default was for good and sufficient reasons.Explanation to section 221(1) was inserted w.e.f 01-10-75 to enable levy ofpenalty even in cases where tax has been paid before levy of penalty.
2. Section 222 (1) and 222(2) were substituted with new sections from 01-04-89bestowing powers on the TRO to directly draw TRC and take action instead ofthe AO drawing TRC and referring the case to the TRO. Explanation to secton222(1) was inserted w.e.f 01-10-75 to extend recovery action to thoseproperties which are transferred by an assessee on or after 01-06-73 to certainrelatives otherwise than for adequate consideration.Section 223 to 225 were also substituted from 01-04-89 to bestow powers toTROs to take direct action in certified cases. In order to enable simultaneousaction for recovery by the TRO having jurisdiction on a place where defaulterhas property along with the TRO where the defaulter is assessed to tax, section223(2) was substituted from 01-10-75. Section 226 was also amended from 01-04-89 to enable TRO to take action u/s 226 when TRC is drawn. Section 228enabling recovery of Indian Tax in Pakistan and vice versa being redundant wasomitted w.e.f 01-04-89. Section 228A enabling recovery of tax in pursuance ofagreements with foreign countries was inserted w.e.f 01-04-72. Section228A(2) was substituted from 01-04-89 to take into account the powersbestowed on TRO as described above.As per section 230 as it existed up to 01-04-89, a person who was notdomiciled in India or a person domiciled in India but in the opinion of the ITAuthority is leaving India with an intention to not to return, was required toobtain tax clearance certificate before leaving India. This position broadlycontinued even after 01-04-89 till 31-05-2003 except for the fact the categoryof persons domiciled in India was modified to cover persons intending to leaveIndia as emigrants, or on a work permit with the object of taking upemployment or other occupation abroad and in whose cases specialcircumstances existed. However, the position is liberalized after 01-05-2003 bymaking the clearance certificate compulsory only in cases where specialcircumstances exist. In other cases, declaration by the person is enough.Section 230A, which put restrictions on registration of transfer of immovableproperty without a clearance certificate has been omitted for good w.e.f 01-06-2001. Similarly, section 231 which prohibited initiation of recovery proceedingsafter expiry of three years from the last day of the financial year in whichdemand was raised has been omitted w.e.f 01-04-89. Apart from the above,amendments are made from time to time in the provisions wherever necessaryto incorporate change in designations of the authorities.4. INTRODUCTION:If one has to state the single most important objective of a Tax Administrator,one would immediately state that it is “tax collection”. The revised figures ofdirect tax collection for the F.Y 2005-06 is Rs 1,67,073 Crores and the budgetestimate of direct tax collection for the F.Y 2006-07 is pegged at Rs 2,06,419Crores. This shows that there is an ever increasing demand on Income Taxauthorities to collect more and more taxes. If one looks at the figures of incometax collection of our country, one would find that nearly 45% of the collection ismade through Advance Tax and 35% is from TDS. That is, 80% of the tax iscollected through voluntary payments. Yet, it cannot be ignored that asubstantial amount is collected due to untiring efforts of the Tax Administrators.Still, a whopping amount of Rs. 63,000 Cr (Rs 630 billion = $14.4 billion) islocked up as arrears of income tax due to litigation in various courts as statedby Hon‟ble Law and Justice Minister H.R. Bhardwaj in the Rajya Sabha on 15-05-2006. The arrears pending collection as on 01-04-2005 stood at Rs 99,320Cr. With the enactment of Fiscal Responsibility and Budget Management Act,2003 (FRBM Act), Government has a bounden duty to reduce the fiscal deficit in
3. a phased manner. Steps like collection of tax arrears can boost the efforts ofGovernment to get more revenue and meet the targets under the FRBM Act.Therefore, collection of the mounting arrears requires well-planned strategy.Year after year, CBDT follows a clear-cut strategy for collection of taxes, whichis communicated well in advance to the field formations. The strategy iscomprehensive and includes steps for recovery of arrears like: Measures to ensure early disposal of high demand appeals pending at variouslevels like CIT(A), ITAT, HC or SC and also applications pending beforeSettlement Commission and Formation of task force for recovery of arrears Laying of stiff targets in the area of collection of arrears.Recently through Finance Act 2006, this strategy has been supplemented bylegislative measure like fixing the time barring dates for assessment at 31stDecember instead of the earlier date of 31st March. This reduction in time periodfor assessment helps in collection of the demand in the same financial year inwhich it is raised. To ensure speedy disposal of tax litigations, Governmentalso established the National Tax Tribunal (NTT) in January 2006 but the samecould not become functional due to stays granted by various High Courts. Awell-planned assessment does not cause much pain during the collectionprocess. Realizing this fact, CBDT through its instruction nos. 1937/2006 as wellas 8/2004 emphasized the need to gather information about the assets of theassessee during the assessment process itself. Interest of the revenue can beprotected by the AO during the pre-assessment stage itself by taking steps like: issue of notice u/s 210(3) in case of likely default of payment of Advance tax provisional attachment u/s 281B (say to tackle situations where there isleakage u/s 143(1) but assessment is picked up for scrutiny or reopened) declaration of transfer as void u/s 281 in appropriate cases and quick assessment of persons leaving India (u/s 174) Despite all theseprecautions, in a large number of cases, it becomes necessary to collect the taxonly after assessment is made. The present reading material covers theprovisions that enable the Department to collect/recover the tax in suchsituations.It can broadly be stated that a person who has not paid tax even after ademand is made, may be visited with the following consequences: Pecuniary consequences (in the form of interest and penalty) Attachment and sale of movable and immovable property Appointment of receiver to manage property/business Arrest and detention for prison up to six months Institution of civil suit in a Court of law Recovery through State Government (when ever the job is assigned to theState Government) Recovery from assets, if any in a foreign country throughDTAA Prosecution in case of employment of fraudulent means to prevent recoveryIn the subsequent sections, we will examine in detail these aspects ofcollection/recovery. However, before discussing the above points, it is obligatoryon our part to understand that when tax is payable.5. WHEN IS TAX PAYABLE ?Leaving apart the provisions of Advance Tax, TDS and selfassessment tax, taxis payable by any assessee before the expiry of due date (30 days) from thedate of service of demand notice u/s 156 of the I.T Act, 1961. One point that ismandatory for remembrance is that when there is no service of demand notice,
4. there is no tax liability. Therefore, the essential condition for a tax demand isthe service of demand notice. The due date is prescribed in section 220(1) ofthe I.T Act, 1961 and can be shortened by the AO if he is of the opinion thatgranting of 30 days time is detrimental to the interests of revenue. However, asper the proviso to section 220(1), such action should be taken only afterobtaining approval of the Joint/Addl Commissioner of Income Tax. However, thispower needs to be exercised with caution. As stated by the Andhra PradeshHigh Court in the case of Subbshree Trading Enterprises Pvt Ltd Vs ACIT [111STC 144], the decision to shorten the due date cannot be taken in anoverzealous and hasty manner.6. ASSESSEE IN DEFAULT:If an assessee does not make the payment of the demanded tax within the duedate, he shall be deemed as an “assessee deemed in default” u/s 220(4) of theI.T Act, 1961. The other situations in which an assessee shall be treated as anassessee in default/deemed to be in default are when there is default in;i. deduction or deposit of TDS (u/s 201(1))ii. advance tax payment (u/s 218)iii. payment of self-assessment tax (u/s 140A(3)) andiv. payment of installments granted (u/s 220(5))A third party to whom notice u/s 226(3) (garnishee notice) is issued shall alsobe treated as an “assessee deemed to be in default” u/s 226(3)(x), in case ofnon-compliance of the notice. To avoid the tag of being in default, an assesseecan file an application before the AO under section 220(3) before the expiry ofthe due date, seeking installments or extension of time for payment of thedemand. In such a case, the AO has discretion to grant installments orextension of time subject to conditions as he may think fit to impose in thecircumstances of the case. But, eithergrant of installments or extension of timedoes not entitle the assessee to for non-levy of interest. An assessee in default,is akin to a debtor of the Government of India and will be visited with pecuniaryand non-pecuniary consequences.7. LEVY OF INTEREST U/S 220(2):Levy of interest is an automatic consequence that falls on any assessee indefault. The rate of interest underwent through lot of changes since theinception of the Act and the present rate of interest stands at 1% per month orpart of the month. Interest charged u/s 220(2) is compensatory in nature andthe levy is automatic. There is no need to give opportunity to the assesseebefore levy of interest u/s 220(2). No appeal lies against levy of interest1.i. MANNER OF COMPUTATION AND ADJUSTMENT OF INTEREST:Rule 119A of the I.T Rules prescribed the method for computation of interestu/s 220(2). Till 31-03-1989, interest was calculated on annual basis. In such acase, part of the month shall be ignored. From 01-04-1989, interest iscalculated on monthly basis. In such a case, part of the month shall be treatedas full month. If a period spans from a date prior to 01-04-1989 to a date after,then interest for the part prior to 01-04-1989 shall be calculated on annualbasis and on monthly basis for the post 01-04-1989 period. Tax (includingpenalty or any other sum) on which interest is computed shall be rounded off tothe nearest hundred and any fraction of hundred shall be ignored whilerounding off. As per instruction no. 1936 dated 21-03-1996, whenever anamount is collected towards pending demand, credit shall first be1 An interestedreader can read the judgment of Madras High Court in the case of Suresh Gokuldas [229 ITR721]. given to the tax and then to the interest. In other words, the amount shall
5. first be adjusted towards tax and only when the tax demand is fully met,adjustment towards interest is to be made.ii. COMPUTATION OF INTEREST ON VARIATION OF DEMAND:It is not uncommon to see that in most of the cases, demand which is initiallycreated undergoes changes. This can happen due to reduction or enhancementin appeal, set aside, cancellation, revision, rectification or reassessment.Circular no. 334 deals with some of the situations. Following are some of theexamples:a. If there is reduction of demand in appeal, interest is payable on the finaldemand from the due date mentioned in original demand notice served on theassessee i.e interest is payable from the due date immediately arising out of theassessment order (may be referred as original due date)b. If there is enhancement in demand (either in appeal or in revision or uponrectification), new demand notice shall be issued only for the new demand andinterest on the new demand shall be paid from the new due date. However,interest on demand which is already pending shall be from the originaldue datec. If the assessment is set aside in one appeal but restored back in furtherappeal, interest shall be paid from the original due dated. In case of reassessment also, interest is leviable on the old demand from theoriginal due date2e. Care should be taken while giving effect to appellate orders in light of thejudgment of Supreme Court in the case of Killick Nixon Ltd Vs CIT [258 ITR627]32Nb Mir Barkat Ali Khan Vs ITO [172 ITR 13] (AP)3In this case, CIT(A) granted relief on certain issues and set aside the matter on certain issues.The AO, while passing the modification order, computed the revised income after consideringrelief granted by the CIT(A) but on the set aside issues kept the matter pending for verification.Meanwhile, the assessee utilized the KVSS scheme to settle his case on the basis of themodification order. Thereafter, the AO issues a notice for verification of the issues set aside bythe CIT(A). Assessee replied that no further verification can be made as his case is coveredunder KVSS. On appeal, the Apex Court held that once the AO has passed the modification order,all the issues are treated as considered by him and therefore, it cannot be stated that there isscope for issue of further notice for verification. In light of this order, it is better to pass a singlemodification order considering all the issues decided in appeal.iii. WAIVER/REDUCTION OF INTEREST U/S 220(2A):Interest levied or to be levied u/s 22)(2) can be waived off or reduced by theCCIT/CIT, upon application by the assessee, whenthe CCIT/CIT is satisfied that;1. genuine hard ship would be caused to the assessee and2. non-payment of tax was due to circumstances beyond the control of theassessee and3. the assessee has cooperated in the enquiries for assessment and recoveryThe CCIT/CIT can waive/reduce the interest only when the above threeconditions are cumulatively fulfilled.iv. ADDITIONAL READING MATERIAL ON VARIATION OF INTEREST:In case full tax is paid by the assessee upon demand but refund was issued dueto order of CIT(A), there is no need for the assessee to pay interest on originaldemand even after ITAT restores the order of AO as per the judgment of KeralaHigh Court in the case of A V Thomas & Co [160 ITR 818]. In a case whereassessment is fully set aside, the demand goes into abeyance. In equal breadth,the assessee is also not entitled for any refund before fresh assessment ismade. Nothing is due to revenue nor to the assessee till fresh assessment ismade as held by the Apex Court in the case of CIT Vs Chittor Electric Supply
6. Corporation [212 ITR 404].v. ADDITIONAL READING MATERIAL ON WAIVER/REDUCTION OF INTEREST:Courts cannot interfere with the discretionary power of the CCIT/CIT u/s220(2A) as held by the Kerala High Court in the case of GTN Textiles Ltd Vs CIT[217 ITR 653].Similarly, once the application of the assessee is rejected, second application bythe assessee is not maintainable. Settlement Commission does not haveunrestricted powers to waive the interest paid/payable u/s 220(2) as held bythe Apex Court in the case of CIT Vs Damani Brothers [259 ITR 475]. But,Settlement Commission can consider the circumstances mentioned in section220(2A) in the manner in which CCIT/CIT considers them.8. POWER TO TREAT AN ASSESSEE AS NOT IN DEFAULT U/S220(6):When an assessee preferred appeal before the CIT(A) u/s 246 or 246A, he canfile a petition seeking stay of demand before the AO. The Act bestowsdiscretion4 on the AO to consider such cases for treating the assessee as not indefault till the time appeal is disposed off but subject to imposition of conditionsthat are fit. As propounded by the Kerala High Court in the case of PradeepRatanshi Vs ACIT & another [221 ITR 502], this discretion lies only with the AO.It goes without saying that whenever a petition seeking stay is filed,opportunity of hearing is a must before disposal of the petition. Apart from theAO, the CIT(A) also enjoys the power to grant to stay which is implicit in hisjurisdiction as heldby the Apex Court in the case of ITO Vs M K MohammadKunhi [71ITR 815].i. GUIDE LINES ISSUED BY CBDT THROUGH INSTRUCTION NO. 1914:CBDT has issued comprehensive guidelines on the power to treat an assesseenot to be in default (termed as stay in common parlance) through Instructionno. 1914. Circular nos. 530 and 589 also cover the issue of stay. The followingare the guidelines thatemerge from the instruction as well as the circulars:Any demand should be recovered as soon as it is duePrimary responsibility of collection of demand lies with the AO and whenTRC is drawn with the TROMere issue of show cause notice to the assessee does not amount to effortsmade by the AO for collectionMere filing of appeal does not entitle the assessee for automatic stay ofcollection of demandStay can be considered in cases where the AO adopted an interpretation oflaw which is different that pronounced by various High Courts or thejurisdictional High Court when the judgment is not accepted.Stay can also be considered with respect to additions where the assesseealready won the case for earlier years.Only demand related to the disputed additions needs to be considered forstay.4Supreme Court in a land mark judgment in the case of S G Jaisinghani Vs Unionof India [65 ITR34] held that discretion should be within defined limits and to beguided by law. Discretion shouldbe predictable and based on known principles oflaw. It should not be vague, arbitrary or fanciful.It should be governed by rule oflaw and not humour. The Apex Court also held that wheneverdiscretion wasabsolute, man has suffered.Assessee has to cooperate for early finalization of appealIn case of reversal of judgment relied upon by the assessee, stay standsvacated.
7. Present financial capacity of the assessee is also one of the considerationsfor grant of stayAny petition for stay should be disposed off within two weeks of filing bypassing a speaking orderOrdinarily, the power to grant stay should be exercised only by the AO orhis immediate superior. Higher authorities should intervene only in exceptionalcircumstances.While granting stay, AO can impose suitable conditions like grant ofinstallments, insistence for lump sum payment or seek securityAO may reserve the right to review the order after a reasonable period oftimeAO also has the right to adjust refunds, if anyLiberal installments up to 18 months can be granted in suitable casesThe expression “stay of demand” should not be used in the order on thepetition for stay. Instead, the words “not treated as assessee in default for thetime being” as mentioned in section 220(6) shall be used.ii. ADDITIONAL MATERIAL ON GRANT OF STAY:In the case of Hindusthan Rubber Works Ltd Vs ITO [81 ITR 397], the Kolkata High Courtheld that grant of stay for limited period is not proper. Similarly, in the case of GajananAgencies Vs ITO [210 ITR 865], the Kerala High Court held that section 220(6) does notcontemplate installments. It is felt by the author that these cases have little relevance inlight of Instruction no. 1914, which clearly permits grant of stay for limited period and alsogrant of scheme of installments. As per section 220(7), when an assessee has beenassessed on income arising from a foreign country, whose regulations do not permittransfer of money, the AO shall not treat the assessee as a defaulter in respect of taxrelated to such income till the time restrictions on the transfer of money are lifted except incases where the money was utilized or could have been utilized for meeting expenditure inthat country.9. STAY OF DEMAND DURING SECOND APPEAL BEFORE ITAT:The Act does not bestow any powers to the Income Tax authorities to grant stay ofcollection of demand after the first appeal is disposed off and second appeal is filed by theassessee before ITAT. The statutory power in such cases is vested with ITAT. As per firstproviso to section 254(2A), in cases where stay of collection of demand is granted by ITAT,the appeal shall be decided within 180 days of the order granting stay. If not, as persecond proviso to the same section, the order granting stay shall stand automaticallyvacated. However, in practical situation, even in cases where appeal is pending beforeITAT, assessees file petitions for stay before IT authorities and the same are considered bythem. This is because of the reason that before considering any stay petition, normallyITAT demands the assessee to state whether his petition for stay of demand is rejected byIT authorities or not. Another reason is that there is possibility of collection of at least partof the demand by way of grant of installments etc by I.T authorities themselves so thatlitigation on this issue is avoided and precious time is saved by both the sides. However,the practice is purely administrative in nature and guided by conventions rather any specificprocedure laid down for this purpose.10. PENALTY U/S 221:Penalty is not a mode of recovery. In case of an assessee deemed to be indefault, penalty u/s 221 can be levied for nonpayment of taxes within due date.This power is specific to AO only. This penalty can also be levied from time totime but the total amount of the penalty cannot exceed the total amount of taxdemanded. Levy of penalty is discretionary where as levy of interest u/s 220(2)is automatic. If the assessment goes in appeal, penalty u/s 221 also goes.Penalty u/s 221 can be levied in case of TDS default as well as default in
8. payment of advance tax. However, penalty on penalty cannot be imposed. Also,as per section 229, recovery of penalty is to be done in the same manner inwhich tax is recovered. Pendency of appeal is no bar for levy of penalty. Thereis no time limit for levy of penalty. However, the period should be reasonable.As per explanation to section 221(1) and also Circular no. 262, even if anassessee paid all the taxes after the due date but before levy, penalty can belevied.11. TAX RECOVERY CERTIFICATE U/S 222:When an assessee is deemed to be in default, TRO can draw a tax recoverycertificate u/s 2225 and initiate the recovery proceedings by following theprocedure laid down in schedule II to the I.T Act. This is the most importantprovision from which the TRO derives jurisdiction. (TRC is drawn in form no. 57under rule 117B of I.T Rules). Upon drawl of TRC , the TRO can attach and sellthe movable and immovable properties of the assessee, he can appoint 5Prior to 01-04-89, the AO had to draw a TRC and forward it to the TRO for initiation of recoveryaction. From 01-04-1989, TRO has to draw the certificate on his own. The setup of Tax RecoveryCommissionrates which used to exist in some of the metros was also abolished and at presenteach range has one TRO. a receiver to manage the business of the assessee or hecan arrest the assessee and send him for detention up to six months. Circularno. 551 describes the functions of the TRO in detailed manner. Once TRO isdrawn, both AO and TRO exercise jurisdiction over the case. Of course, thepowers of the TRO are restricted only to recovery action. As stated in section224 of the I.T Act, it is not open to the assessee to question the correctness orvalidity of the TRC. But, it shall be open to the TRO to cancel or amend thecertificate, if he thinks so. He can also correct the clerical or arithmeticalmistakes, if any in the certificate. TRO also has the powers to grant installmentsor to grant stay and he derives this power from section 225 of the I.T Act,1961. This power runs parallel to the power of the AO. He shall also amend theTRC, whenever there is variation in demand due to decisions in appeal etc.More than one certificate can be drawn by a TRO in a single case, if it isnecessary. As provided in section 223, more than one TRO can initiate recoveryproceedings in the same case. This is because both the TRO in whosejurisdiction the assessee carries on business or profession or the principal placeof business is situated as well as the TRO in whose jurisdiction the assesseeresides or any movable or immovable property of the assessee is locatedexercise jurisdiction over the case. In all such cases, if the TRO who has drawnthe TRC is unable to effect recovery, and if he is of the opinion that it isnecessary to transfer the TRC to the other TRO, he has to forward the copy ofthe TRC to the other TRO. Thereafter, the other TRO shall proceed as if he drewthe TRC.i. ADMINISTRATIVE PROCEDURE FOR POST ASSESSMENT COLLECTION:Post assessment collection procedure is described in Chapter 10 of the Manualof Office Procedure 2003. Details of Demand & Collection Register (D&CR),where the current entries are recorded, and Arrear Demand and CollectionRegister (AD&CR), to which the arrears are transferred are available in thisChapter. Both these registers are very important and must be kept updatewithout fail. Each quarter, the AO is bound to send dossier reports in all caseswith arrear demand of Rs 10 lakhs and above pending for collection. In caseswith demand of Rs 100 lakhs and above, monthly dossiers are also sent in someof the charges. Monthly CAP-I report also reflects the correct position.Important details regarding collection can also be mentioned by the AO in hismonthly DO letter.
9. With the advent of computerization, D&CR and AD&CR are automaticallygenerated by the ITD applications because processing u/s 143(1) is done in theAST package and details of scrutiny, rectification, modification etc., are alsoentered through AST package. Chapter 10 of the Manual of Office Proceduredescribes the system of Individual Ledger Accounting System (IRLA) of ITDapplication package where in arrear and collection details of each assessee aremaintained on line. Detailed discussion on the ITD application package issubject matter of another module of the elearning material.ii. ADMINISTRATIVE PROCEDURE FOR DRAWAL OF TRC:Administrative procedure for drawl of TRC is described in Chapter 12 of theManual of Office Procedure 2003. Details of the procedure are as follows:AO has to ensure that all possible steps for collection are taken by himbefore referring the case to TRO. In fact, he has to certify that all possiblemeasures for recovery u/s 226 (which will be described in the section below) aswell as proceedings u/s 221 are taken.AO should also verify the correctness of the arrears, prepare all thestatements including Form No. 57, details of assets, addresses of debtors etc.,and pass on to the TRO for drawl of TRCTRC should be drawn only after the approval of the JCIT/Addl CIT isobtained. Before granting approval the Range head should be satisfied that allactions are taken by the AOAs per F No 401/2/2002-ITCC of CBDT, TRC has to be drawn by TRO in allcases where demand is more than one year old. This means within one year ofcreation of the demand, AO has to take all possible measuresAs per Instruction no. 1893, TRO should promptly intimate the AO when aTRC is drawn so that the AO will not initiate any action under 226. When a TRCis drawn, AO should make an entry in D&CR about the fact and also report thesame in dossier reports.AO must update the TRO of any variation of demand and also aboutpendency of appeal effects, actions u/s 154, revision proceedings etc, if anyIf any collection is made by the AO, the same should be promptly intimatedto the TRO and vice versaBoth AO and TRO shall intimate each other about pendency of petitions forstay or grant of stay/installments, if anyiii. ADDITIONAL MATERIAL – PROCEDURE LAID DOWN IN SCHEDULE II OF THEIT ACT, 1961 FOR RECOVERY PROCEEDINGS:Statutory procedure to be followed in case of recovery proceedings initiated bythe TRO is laid down in Schedule II of the I.T Act, 1961. The procedure laiddown in Schedule II is also referred as Income Tax Certificate Proceedings(ITCP). The procedure is similar to that prescribed that in CPC for recovery incase of judgment debtors. Salient features of Schedule II are described below:Upon drawl of TRC, the TRO shall serve a notice on the defaulter grantinghim time of 15 days from the date of service to pay the arrearsInterest u/s 220(2) and cost incurred in recovery of arrears shall also berecovered from the assesseeProceeds received on sale of assets or otherwise by TRO shall first beadjusted against arrears mentioned in the TRC including costs incurred duringrecovery and interest. Thereafter, if any amounts are payable as on the date ofreceipt of the proceeds, the same have to be adjusted. If any balance is left out,the amount should be paid to the assessee within three months from the date ofdelivery or possession of the property. If there is any delay, then simple interest@ 6% per annum should be paid to the assessee.
10. In case of claims and objections, TRO can conduct investigations toascertain the facts.There is general bar on jurisdiction of civil courts on the proceedings of theTRO save where fraud is allegedWhenever a property is attached, a warrant of attachment shall be issued tothe assessee by the TROAttachment shall not be excessiveSeizure of property has to be between sunrise and sunset and the officerauthorized by the TRO can break open doors etc., if necessary to gain entry tothe propertySale has to be through public auction after 15 days of the sale proclamationin case of movable property (except in case of perishable goods) and 30 days incase of immovable property. In case of negotiable instruments and shares, thesale can be through a brokerAuction cannot be held on holidays.In case of attachment of currency notes and coins, TRO may direct thatsuch coins or currency notes may be deposited with the AO for adjustment oftax arrears.Procedural irregularity cannot vitiate the sale.If within 30 days of the sale of the immovable property, the assessee or anyother person whose interests are affected by the sale deposits money towardstax arrears along with interest and penalty of 5% of the purchase money to thepurchaser and file an application before the TRO requesting him to set-aside thesale.When there is no application to set-aside the sale and the sale has becomeabsolute, the TRO issues a sale certificate.No sale of immovable property can be made after a lapse of three yearsfrom the date on which all appellate proceedings or settlement proceedings arefinalized in a case.As per Rule 69 of the Second Schedule to the IT Act, TRO can attachbusiness/property of a defaulter and appoint a receiver to manage thebusiness/propertyTRO also has the power to issue arrest warrant against a person afterserving a show cause notice on a defaulter as to why he can not be committedto the civil prison for not paying the taxes when he is satisfied that the defaulterdishonestly concealed or transferred any property with the object of obstructingrecovery proceedings or even if he has adequate means, refuses or neglects topay tax. The reasons should be recorded in writing by the TRO before issue ofshow cause notice. But, when the defaulter is likelyto abscond, warrant of arrestcan be issued without show cause noticeIf the defaulter does not appear in response to the show cause notice, TROcan issue a warrant of arrest. This work can be entrusted to the Inspector ofIncome Tax or Police. Once, a person is arrested, he has to be produced within24 hours before the TRO, who may hear him and pending hearing send thedefaulter to custody.Upon conclusion of the enquiry, TRO can pass order of detention in case ofthe defaulter and send him to prison for up to six months in case of TRC drawnfor arrear of more than Rs 250/-. For lesser arrear, the sentence is restricted toa period of six weeks. During the period of imprisonment, subsistence allowanceshall be borne by the TROWomen, minor children and persons of unsound mind cannot be arrested orsentenced
11. If a defaulter dies during recovery proceedings, the proceedings will becontinued against the legal representatives of the deceased. In case, theassessee dies before drawl of TRC, TRC has to be drawn against the legalrepresentatives of the deceased.Appeal from the original order of the TRO lies with the CCIT/CIT and shallbe filed within 30 days of the date of the order. If the appellate authoritydirects, the recovery proceedings can be stayed pending disposal of the appeal.Review of the order can also be done by the CCIT/CIT after giving notice toall interested parties to correct mistakes if any.12. OTHER MODES OF RECOVERY PRESCRIBED U/S 226:Apart from the modes of recovery prescribed in section 222, department can also employother modes, which are prescribed in sections 226 to 228A and 232. In this section themodes prescribed u/s 226 are described. It is worthwhile to mention here that as providedin section 226(1), recourse to section 226 can be taken by the AO only when TRC is notdrawn. Once, TRC is drawn, only TRO can take action u/s 226.i. ATTACHMENT OF SALARY U/S 226(2):If the assessee has any income chargeable under the head “salaries”, theAO/TRO can send a notice of attachment to the payer of the salary and requirehim to deposit the salary towards tax arrears of the assessee subject to theexemptions from attachment laid down in section 60 of CPC.ii. GARNISHEE PROCEEDINGS U/S 226(3):Section 226(3) is widely used by AOs and TROs in the Department. Under thissection, AO/TRO can attach any sum due or likely to be due from a third partyto the assessee and require the third party to deposit the sum towards taxarrears of the assessee. Such proceedings are described as garnisheeproceedings in common parlance and details are described below:Garnishee notice can be issued from time to time by the AO/TRO to a thirdparty to realize arrears pending against an assesseeSingle notice can be issued for arrears of various years or separate noticescan be issuedA copy of the notice shall be marked to the assessee for informationThe notice can be issued to realize amounts which are already due or thator likely to be due. This does not mean that amounts from unascertained futureobligations, which are non-existent at present, can be attached.AO/TRO can revoke or amend the notice, if necessaryIf any garnishee declares that no such sum is due to the assessee from him,the declaration has to be made in the form of a statement on oathAO/TRO shall issue a receipt to the garnishee for the amounts received fromhimThe liability of the garnishee is personal in nature and in case of non-compliance to the notice, the garnishee will be deemed to be an assessee indefaultGarnishee like a Bank or Post Office or Insurance Company cannot insist forproduction of pass book or deposit receipt or policy or any other document forthe purpose of entry or endorsement or for any other purpose before makingthe payment even if such procedure is prescribed before payment of money inthe normal course of businessFixed deposits can be realized even before maturity as held by theKarnataka High Court in the case of Vysya Bank Ltd, Global Trust Bank Ltd VsJCIT [241 ITR 178].iii. APPLICATION BEFORE COURT U/S 226(4):
12. In cases where money belonging to a defaulter-assessee is lying in the custodyof a Court, the AO/TRO can apply to the Court of Law seeking release of themoney towards tax arrears and the court can release the same. In this regard,it is worth while to mention here that the Court has no power to look into theextent of the liability but has the power to determine that how much amountcan be released as held by the Supreme Court in the case of Harshad ShantilalMehta Vs Custodian [231 ITR 871].iv. ATTACHMENT AND SALE OF MOVABLE PROPERTY U/S 226(5):This sub-section enables the AO/TRO to recover arrears by distraint and sale ofmovable property as per the procedure laid down in Schedule III of the I.T Act,1961 when empowered by the CCIT/CIT through a general or special order.Schedule III of the I.T Act states that the procedure for attachment and sale isin the same manner as the procedure laid down in Schedule II of the I.T Act.13. SOME OTHER MODES OF RECOVERY:TRO can also put forward his claim before BIFR/DRT. TRO can also forward hisclaim to liquidator of a company, wherever applicable. In the case of BIFR andliquidator of a company, they on their won will give notice to the I.TDepartment seeking details of claims pending. In case of a liquidator, if he failsto seek the claims and settles the property without accounting for the claims ofthe Department, he shall be held personally liable. DIT(Recovery) is the nodalagency in case of applications pending before BIFR. In case of Private Ltdcompanies, arrears can be realized from the personal assets of the Directors byseeking recourse to section 179 of the I.T Act, 1961. In case of a firm, arrearscan be realized from the personal assets of the partners. Representativeassessees or agents are also liable to pay the arrears of the persons whom theyrepresent in the assessment proceedings. As per the provisions of section 227,recovery can be effected through State Government whenever collection from aparticular area is assigned to the State Government. Tax in such case is to becollected by the State Government in like manner employed for collection ofmunicipal tax. Tax arrears can also be realized from the foreign assets of theassessee, if any, through agreements with foreign countries as provided insection 228A of the I.T Act. However, the matter has to be referred to CBDT forrecovery. Similarly, upon receipt of reference from other countries by CBDT, taxarrears of defaulters of a foreign country have to recovered and remitted to thetax authorities of that country. Lastly, as per the saving clause in section 232,tax arrears can also be realized through institution of civil suit.14. PROSECUTION U/S 276:Whenever any person fraudulently removes, conceals, transfers or delivers toany other person; any property or interest therein; intending thereby to preventexecution of recovery proceedings under Schedule II of the I.T Act, 1961, suchperson shall be punishable with rigorous imprisonment up to 2 years and alsoshall also be liable to fine.15. WRITE OFF/SCALING DOWN OF ARREARS:Write off/scaling down is a mechanism to reduce the arrears in the books of theDepartment, wherever there is no chance for recovery. This is purely an internalaffair of the Department and the assessee is not involved at all. In fact, there isno need to inform the assessee that the amounts are written off or scaled down.The procedure is also only administrative in nature and there is no statutorywrite off or scaling down. Chapter 13 of the Manual of Office Procedure 2003contains detailed procedure on write off/ scaling down. Instruction nos. 7/2004,14/2003, 16/2003 and 1740/1986 lay down the revised monetary limits andpowers of various departmental committees constituted for write off. There are
13. three methods of write off viz., regular, adhoc and summary. In terms ofsanctioning powers, committees are constituted at local level, sub-zonal orregional level and zonal level.i. SUMMARY PROCEDURE FOR WRITE OFF:Small demands not exceeding Rs 1000/- in each case can be summarily writtenoff by the AO without any further enquiry when the amount is outstandingfor more than 5 years andthe amount does not relate to any live case;upon write off, in the AD&CR it should be written as “ignored, as obviouslyirrecoverable”.ii. ADHOC PROCEDURE FOR WRITE OFF:Demand up to Rs 5000/- can be written off by the AO under this procedurewhen records and address of the assessee are not available for more than fiveyears immediately preceding the financial year in which write off is proposed. Inall such cases, the following procedure should be followed before write off.AO should certify that records are not traceable;Attempt to be made to fix responsibility for loss of records;JCIT/Addl CIT should certify that no responsibility can be fixed for non-availability of records;Irrecoverability certificate must be obtained from the TRO for demandsabove Rs 2000/- (TRO should certify that no TRC was pending with him or hecould not recover anything in last 5 years) andDetails like Name, Address, present whereabouts, amount of demand,amount recovered by TRO, balance to be recovered should be noted InstructionNo. 14/2003 describes the revised monetary limits in case of adhoc write off.iii. REGULAR PROCEDURE FOR WRITE OFF:Regular write off procedure applies to any demand irrespective of the quantum.The following conditions should be fulfilled before a case becomes eligible forregular write off.the demand should be more than three years old;the arrear must be clearly irrecoverable;assessee died/became insolvent/ is not traceable/ left India; orcompany is under liquidation; orfirm is dissolved and business is discontinued;assessee has no attachable assets;all modes of recovery prescribed in Second Schedule to the I.T Act, 1961including detention in prison failed;In cases falling under the above category, the following steps must be takenbefore write off.it should be examined that whether adequate and timely steps for recoverywere taken or not;a self explanatory note is to be prepared;irrecoverability certificate needs to be obtained from the TRO andif the power to sanction write off lies with authorities other than the AO,Form B (Annexure I) (whose proforma is available in Chapter 13 of Manual ofOffice Procedure 2003) should be prepared and proposal for write off should besubmitted to the JCIT/Addl CIT The table given below enlists the powers ofvarious authorities for sanctioning write off of Income Tax arrears (as perInstruction no. 14/2003).
14. S Authority to Constitution Monetary Order ofNo sanction of limits for Write off write off committee, if write off (in to be any Rs) passed by1 Local Three Addl 0 - 5000 ITO/TRO Committee CsIT2 Local Three Addl 5001 - 25000 ACIT/DCIT Committee CsIT3 Local Three Addl 25001 - JCIT/Addl. Committee CsIT 100000 CIT4 CIT ---- 0 - 10000 CIT5 Regional Three CsIT 100001 – CIT with Committee 1000000 report to next authority6 Zonal Three CCsIT 1000001 - CCIT with Committee 2500000 report to next authority7 Zonal Three CCsIT 2500001 - CCIT with Committee 5000000 approval of full board8 Zonal Three CCsIT Above CCIT with Committee 5000000 approval of full board and F.MIf the Addl CIT/JCIT of the concerned range is not a permanent member of thelocal committee then he shall also be coopted when cases of his range areconsidered. Similarly, CIT of the charge whose cases are under considerationshould be co-opted as member of the regional Committee, if he is not apermanent member of the regional committee. The committees shall meetatleast once a month and not only discuss the cases before them but also anyother cases that are under process for write off. Proposals to CBDT and FMshould be routed through the DIT (Recovery). As per Instruction nos. 1740 and1394, every proposal for write-off the total amount of tax arrears should beworked out after including interest chargeable for late payment of tax up to theend of the month preceding the month in which the proposal is considered. Thisalso includes interest charged/chargeable by the TRO u/s 220(2). Instructionno. 7/2004 specified corresponding limits for write-off for other direct taxes. Asper this instruction, regional committee can write off other tax arrears up to Rs5 lakhs and Zonal committee can write off other tax arrears up to Rs 10 lakhs.After order for write off is passed by the authorities mentioned above, AOshould ensure that arrear is actually struck off from AD&CR. He should alsointimate the TRO about the action. No communication is to be sent to theassessee. In the order it shouldbe written that “the above write off will not leadto release or waiver by Government of its claim but will be written off in theDepartmental books. The Government will have the right, at any time, during
15. the next 30 years from the date of the claim to recover the amount if it appearsto the Government that the defaulter has the assets or means to pay”.16. STEPS TO PREVENT PERSONS WITH TAX ARREARS TOLEAVE INDIA:Lastly, it is worthwhile to mention about the provisions of section 230 of the Actwhich enable the IT Authorities to prevent persons with tax arrears from leavingIndia. A person who is not domiciled in India, who has come to India inconnection with business, profession or employment and who has incomederived from any source in India has to furnish an undertaking in Form 30Afrom his employer/person through whom he is in receipt of income to the effectthat tax payable by the person not domiciled in India shall be paid by theemployer/person through income is received. Rule 42 of the I.T Rules, 1962prescribes the CCITY/DGIT as the authority to deal with the declarations. Uponreceipt of the declaration, the prescribed authority shall be issue a no objectioncertificate (NOC) in form no. 30B. CCIT/DGIT can also authorize otherauthorities to issue such certificate. However, foreign tourists who visit Indianeed not obtain NOC when the purpose of his visit is as a tourist or any purposeother than employment/business/profession. Firstly, whenever a persondomiciled in India wants to leave India, he has to furnish a declaration in Form30C intimating his PAN number/declaration of not having PAN number, purposeof visit outside India and estimated duration of stay outside India. Rule 42 ofthe I.T Rules, 1962 prescribes the CCITY/DGIT as the authority to deal with thedeclarations. Rule 43 of the I.T rules gives details of the forms. In certain casesin respect of whom circumstances exist, which in the opinion of the Income Taxauthority (who after recording reasons, takes prior written approval of CCIT)render it necessary for the person to obtain a clearance certificate. In all casesof persons domiciled in India, the application/declaration has to be made by theperson to the jurisdictional AO. The application shall be filed in form no. 31 andthe clearance certificate shall be issued in form no. 33. As per Rule 44 of the I.TRules, any person leaving India shall produce the clearance certificate beforeCustoms Authority upon request. If any owners/charterer of ship or aircraftallows a person without valid clearance certificate to leave India, he shall bepersonally liable for the tax default of the person who left India. NotificationSRO 961 dated 25-05-1953 grants exemption to certain persons in furnishingparticulars. Lastly, it may be stated that during the earlier years, contractorsand other assessees used to apply for Income Tax Clearance Certificates for thepurpose of production before Bank or Tendering Authority etc. Through CircularNo. 2/2004, CBDT has directed to discontinue this practice w.e.f 01-01-2003and instructed the AOs that there is no need to issue ITCC. It is also stated thatcontractors and other assessees can quote their PAN number in tenders etc. ************* Compiled by Shankar Bose Inspector of Income-tax MSTU, Puri