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This Article is written by Shruti Kulshreshtha pursuing B.B.A.LLB from Symbiosis Law School, Hyderabad. She has explained the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

Introduction

The Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (Hereinafter referred to as ‘The Act’, for the sake of brevity) is an Act that provides for the continuation and validation of proceedings in relation with Government dues and any matters connected therewith. The Act was enacted by the Parliament on 12th May 1964. This Act is an extension to Section 220 of Income Tax Act, 1961, which deals with the tax payable when the assessee is deemed to be in default. This section specifically states that the amount specified in the notice of demand shall be paid within 30 days of service of notice. However, in cases where an appeal or any proceeding is filed or initiated for the amount mentioned in the notice of demand, then such demand shall be deemed to be valid until the disposal of proceedings by the last appellate authority and shall have the effect as mentioned in the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

The objective of the Act

The paramount objective of this Act is to cover up the loopholes of the collection and recovery system under the Income Tax Act, 1961. Earlier to the implementation of this Act, the assessee could get away or delay the payment for Government dues stating the reason for the multiplicity of orders with regards to the same amount. For instance, in the case of Income Tax Officer, Kolar and Another vs. Seghu Buchiah Setty, the Income Tax Officer levied a demand for the payment of dues on the assessee, which was varied by another order given by appellate authority with respect to the same amount due. As a result, the original order of the Income Tax Officer merged into the order given by the appellate authority, thereby nullifying the original order. The steps taken for recovery of the demand went to waste and become null and void. The Supreme Court observed that it is the duty of the Income Tax Officer to issue a fresh notice of demand and serve it to the assessee, laying the new conditions of recovery.

This judgment was in reference to the Income Tax Act, 1922 which was later repealed, but its interpretation helped the Parliament to improve the system of the imposition of direct taxes. As per the order given by the Court, a fresh demand notice was required to be served upon the assessees allowing them a further period of time to pay the amount due. Recovery of this amount commenced only when this period expired. Consequently, such assessees got sufficient time to alienate their property and or withdraw their funds in order to defeat the claim of recovery. This whole system would hamper the recovery procedure and result in huge losses. 

An alteration was a must for the Income Tax regime. Hence, this Act proposes to eliminate the difficulties faced by the Income Tax Act of 1922. Under this Act, the Income Tax Offices are not required to issue fresh notices to the assessees, except in the case of enhancement of assessment, where a fresh notice shall be served, stating the enhanced amount of dues. This Act is a stepping stone towards making a sound tax collection and recovery procedure and giving no opportunity to the assessees to evade tax.

Continuation and Validation of Proceedings

Section 3 of the Act deals with the essence of the Act which is the provision for the continuation and validation of proceedings or appeals. The Income Tax Act, 1961 provides for the payment of the amount due, as specified in the notice of demand within 30 days of the serving of the notice, in the manner specified therein. Section 220 (1A) was added to the Act whereby, if any proceedings or appeals are filed against the amount specified in the notice of demand, then such amount shall not be payable within 30 days. The notice of demand will be deemed to be valid till the disposal of the appeal or proceedings. The particulars and effect of such extended demand are broadly explained under Section 3 of the present Act.

Section 3 provides for three cases that can arise in the recovery of dues:

Enhancement of Dues: 

When the effect of the order or proceedings instituted is the enhancement of the government dues, then the Taxing Authority is required to serve a fresh notice of demand, mentioning only the amount by which the government due is enhanced and not the total amount due. If any notice of demand has been served by the Taxing authority before the disposal of the appeal or proceedings with respect of the amount due, then such appeal or proceedings will continue from where it stood, without serving any fresh notice of demand to the assessee. 

Reduction of Dues:

If the government dues are reduced by the orders of the appeal or proceedings instituted regarding the amount due, then the Taxing Authority is not required to serve a fresh notice of demand to the assessee. However, it is mandatory for the Taxing Authority to give an intimation about the reduced amount of dues to be paid by him. In case, a certificate has been issued to the Tax Recovery Officer for the recovery of dues, then the Taxing Authority shall intimate about the reduced amount of dues to be collected from the assessee to the Tax Recovery Officer as well. If an appeal or proceedings is initiated on account of the notice of demand served before the order of reduction of dues, then the appeal or proceedings shall continue based on the amount so reduced and not the original amount that was due earlier. 

No variation: 

In the cases where even after the disposal of the appeal or proceedings with respect to the amount due, there is no variation in the original due and new dues, then the Taxing Authority is not obliged to issue a fresh notice of demand to the assessee.

This section clarifies that even if no fresh notice of demand is served upon the assessee after such dues are enhanced or reduced in an appeal or proceedings, the proceedings in relation to such government dues shall not become invalid. If the final order of an appeal or proceedings reduces the amount due but imposes a penalty that exceeds the original amount due, then such excess amount shall not be recovered from the assessee. In case the excess amount has been already recovered by the Taxing Authority, then the assessee is entitled to get a refund upon application.

In addition, if the penalty imposed on annuity deposits exceed one-half of the total amount of the annuity deposit to be paid due to the orders of the present appeal or proceedings, then the assessee is not required to pay the excess amount. If the excess amount is already paid by him, then he is entitled to receive a refund of the excess amount by submitting an application to the Taxing Authority. 

The refund of the excess amount recovered by the Taxing Authority is governed by the rules made under this Act. 

The Taxing Laws (Refund of Excess Penalty) Rules, 1964

Section 7 of the Act empowers the Central Government to make rules for the successful execution of the provision under the Act. Hence, The Taxing Laws (Refund of Excess Penalty) Rules, 1964 (Hereinafter referred to as ‘Rules’) were enacted on 28th October 1964. These rules were formed for enabling the smooth exercise of the refund of amount due as mentioned under Section 3 of the Act. These rules provide the form in which an assessee, who has been charged with the excess amount by the Taxing Authority, can get a refund of such excess amount.

Rule 3 deals with the application for a refund of excess penalty. It states that an application form for the refund of the excess penalty collected on Government dues by the Taxing Authority shall be made by the assessee in Form I, appended to the rules. This application is required to be made within 6 months of the date of the final order which reduced the Government due on the assessee. However, this does not apply to annuity deposits.

In case of annuity deposits, an application for the refund of the excess penalty shall be made in Form 2 by the assessee to the Taxing Authority within 6 months of the date of the final order received for the reduction of annuity deposit. 

Powers under the Act

The Act provides various powers to the Central Government. Following are the powers given by the Act:

  1. Power to amend the Schedule: Section 4 empowers the Central Government to amend the schedule. This can be done by way of a notification, where the Central Government can add any central Act dealing with the imposition of tax or levy of any duty. Such an Act will be deemed to be a part of the schedule.
  2. Power to remove difficulties: In order to effectuate the smooth functioning of this Act, the Central Government may make such provisions that are essential for removing the difficulties under Section 6 of the Act. However, such provisions cannot be inconsistent with the purpose of the Act itself.
  3. Power to make rules: The Central Government is empowered to make rules for the proper functioning of the provisions of this Act. The rules made by the Central Government shall be laid before each House of the Parliament for a period of 30 days. Each house should agree to the modifications or alterations made, as the case may be, to give effect to the rules. The Taxation Laws (Refund of Excess Penalty) Rules, 1964 are made by the Central Government by virtue of the powers given under this Section. 

Landmark Judgments

Beharilal Baldeo Prasad vs. CIT 

In the case of Beharilal Bladeo Prasad vs. CIT (1967) 63 ITR 555, the court held that section 3(1)(c) of the Act safeguards the recovery proceedings from any kind of invalidity by the reason of reduction in government dues or no-issuance of fresh notice of demand or fresh recovery certificate. However, this section does not validate the non-compliance of intimating the assessee and Tax Recovery Officer (TRO) about the reduction. 

Chennai Central Co-operative Bank Ltd. vs. Asst. CIT

In the case of Chennai Central Co-operative Bank Ltd vs. Asst.CIT the court observed that it is not mandatory to issue a fresh notice of demand every time after the disposal of an appeal, or proceedings concerning the amount due if there is no change in the original amount due and the amount stated in the final order. The original notice of demand will be deemed to be valid throughout the proceedings.

Vikrant Tyres Ltd. vs. First Income Tax Officer 

In the case of Vikrant Tyres Ltd. vs. First Income Tax Officer (2001) 247 ITR 821 the Court held that Section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act cannot be applied to recover interest under Section 220 of the Income Tax Act, 1961. Section 3 can only be applied only when the assessee never adhered to the demand notice which subsequently got quashed due to an order of any forum. However, it cannot be applied when the demand notice is satisfied and only the interest amount is due. 

Conclusion

This Act has proved to be crucial in building a modern tax regime. The provisions preserve the sanctity of the taxation system and aid in the successful collection and recovery of tax due, to any assessee. It has made the system foolproof and is used in many cases of delay in recovery or even in the cases of attempting to avoid tax. This Act has helped the Tax Authorities to keep away with any kind of error in dealing with the recovery of the tax amount due, thereby facilitating economic growth and keeping the government funds intact. 

References

  1. Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 
  2. The Taxing Laws (Refund of Excess Penalty) Rules, 1964
  3. Income Tax Act, 1961

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