ZINZUWADIA AND SONS vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3), AHMEDABAD

Facts

The petitioner, Zinzuvadia and Sons, a partnership firm trading in gold and silver bullion, filed its return of income for Assessment Year 2017-18. A search action at the partners' residences and a survey at the firm's premises occurred on January 24, 2017. The Assessing Officer (AO) framed an assessment under Section 143(3) read with Section 153A of the Income Tax Act, 1961, raising a demand of Rs. 9,42,82,954/-. This demand was based on alleged bogus sales through backdated entries (Rs. 7,88,85,082/-) under Section 68 and alleged excess stock (Rs. 1,27,58,762/-) under Section 69B. The petitioner's applications to keep the demand in abeyance pending appeal before the Commissioner of Income-tax (Appeals) were rejected by the AO and the Principal Commissioner of Income-tax (PCIT). Subsequently, the AO issued a notice under Section 226(3) attaching the petitioner's bank accounts. The petitioner filed a Special Civil Application challenging these orders and the recovery proceedings.

Held

The High Court held that the orders passed by the AO and PCIT rejecting the stay applications were not passed with due application of mind. The AO merely referred to the CBDT circular and directed payment of 20% of the demand without considering the merits. The PCIT rejected the application on grounds that the pleas were not covered by CBDT guidelines and the assessee could raise funds, brushing aside other submissions. The court found that the PCIT did not apply his mind to the contention that the assessment was unreasonably high-pitched and would cause genuine hardship. While the court found merit in the submissions regarding the additions and noted the assessment appeared unreasonably high-pitched, it did not find a case for unconditional stay. The court also noted the petitioner's admission of Rs. 91,50,156/- as out of books sales. Considering the high-pitched assessment, the court decided to grant a partial stay. The impugned orders and the notice under Section 226(3) were quashed and set aside. Further recovery of the demand was stayed subject to the petitioner making payment of 10% of the demand of Rs. 8,57,91,420/-. The court clarified that its view was prima facie for deciding the stay application and the CIT (Appeals) would decide the appeal independently.

Key Issues

1. Whether the impugned orders passed by the Deputy Commissioner of Income Tax (AO) and the Principal Commissioner of Income Tax (PCIT) rejecting the petitioner's application for stay of demand under Section 220(6) of the Income Tax Act, 1961, are legally sustainable? Assessee's Contention: The petitioner argued that the impugned orders were bad and illegal. They contended that the assessment itself was bad as Section 153A could not be invoked without a search at the petitioner's premises, citing the Bombay High Court decision in Bansilal B. Raisoni & Sons v. Assistant Commissioner of Income Tax. They also argued that additions were bad, and the demand should not arise, especially since no additions were made for previous years or for the partners. The petitioner claimed that the Rs. 7,88,85,082/- was offered for sales, making the addition under Section 68 a double taxation, referencing this court's decision in CIT-IV v. Vishal Exports Overseas Limited. The excess stock addition was also challenged as unsustainable. The petitioner asserted a strong prima facie case and balance of convenience, warranting unconditional stay. Revenue's Contention: The judgment does not explicitly record the revenue's specific arguments against the petitioner's contentions on the merits of the additions or the invocation of Section 153A. However, the PCIT's order, as noted by the court, rejected the stay application stating that the pleas were not covered by CBDT guidelines and that the assessee had the ability to raise funds, brushing aside other submissions.