Read judgment: Mahendra Corporation vs. The Principal Commissioner of Income Tax & Ors.

Pankaj Bajpai

Mumbai, July 28, 2021: While remanding a matter, the Bombay High Court has ruled that when Form 3 under the Direct Tax Vivad Se Vishwas (DTVSV) Act, 2020 had been issued on the declarations and undertaking filed by the assessee, then any action on the same entailing adverse consequences ought to have been afforded with a fair and reasonable opportunity to the taxpayer to explain its case. 

The assessee firm in the present case had filed its return declaring nil income and the same was processed u/s 143(1) of the Income Tax Act. Later, a search and seizure action was conducted at the premises of partners of the assessee firm, leading to issuance of reopening notice u/s 148 of the Income Tax Act

In response, the assessee had filed return declaring an income of Rs. 59,49,370/- claiming that the compensation of Rs. 135 crores was not taxable as the same was received to withdraw the suit i.e. against the assessee’s right to sue. 

In the meanwhile, the assessee filed an application with the Designated Authority being declaration in Form 1 and undertaking in Form 2 computing 100% of disputed tax. The Designated Authority, however, issued Form 3. Thereafter, the assessee received an email to show cause as to why its case should not be treated as a Search Case and to explain the applicability of Section 9 of the DTVSV Act purportedly stating that the disputed tax purportedly exceeded Rs. 5 crores. 

Soon thereafter, the assessee’s application came to be rejected.

A Division Bench of Justices Sunil P Deshmukh and Abhay Ahuja observed that the Revenue Department cannot withdraw the benefit granted to the assessee under the DTVSV scheme entailing adverse consequences, without affording assessee sufficient opportunity of hearing. 

The High Court found that what stares stark in the face is the brazen betrayal of the principles of natural justice that appears to have taken place in this case. 

“An email by Revenue to explain applicability of Section 9 of the DTVSV Act on the ground of information regarding search conducted on assessee gave three days to respond. The period of three days would end on 26th March 2021. But without even waiting for the day of 26th of March to end, the application of assessee is shown to be rejected, treating assessee’s case as a Search Case and assessee ineligible to opt for DTVSV, as disputed tax is more than 5 crores,” noted the Bench. 

The Division Bench observed that the Revenue Department had sought to withdraw the benefit granted to assessee under the DTVSV Scheme entailing adverse consequences, and all this was done without affording the assessee sufficient opportunity of hearing or making submissions. 

In the considered opinion of the High Court, considering that Form 3 had already been issued on the declarations and undertaking filed by assessee, any action on the same entailing adverse consequences ought to have been afforded with a fair and reasonable opportunity to explain its case, which the Revenue has ex-facie failed to offer. 

Such an action is liable to be set aside because it strikes to the root of the matter, added the High Court. 

Therefore, the matter is remanded back to the Designated Authority to take decision in the matter after giving a fair and reasonable opportunity of hearing to the assessee. 

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