Seized Cash From Other Person Can’t Be Adjusted Against Tax Liability of Assessee Till Date of Framing of Assessment | HC

INCOME TAX | CASE LAW

Summary: The High Court of Punjab & Haryana held that cash seized from one person could not be adjusted against the tax liability of another person until the assessments for both parties were completed. Therefore, the Revenue acted correctly in charging interest for delayed payment of tax under Section 234B.

Decision Outcome: In favor of revenue.

Court: High Court of Punjab and Haryana

Case Law: Kamla Mehta v. Commissioner of Income-tax

Facts:

• On July 17, 2007, a search was conducted at the premises of the assessees, Kamla Mehta and Shelly Mehta, as well as at the premises of one Sarup Chand. During the search, cash was found in two savings accounts of Sarup Chand.
• Sunil Mehta, a relative of the assessees, stated under Section 132(4) that the money in Sarup Chand's accounts belonged to his family and was from the sale proceeds of a house owned by Kamla Mehta and Shelly Mehta.
• The Revenue Department seized the money from Sarup Chand's accounts and later transferred it into their own account. Both Sarup Chand and the assessees claimed the seized money belonged to the family of Sunil Mehta.
• On February 18, 2008, the assessees filed their income tax returns for the assessment year 2007-08, disclosing an undisclosed income of ?77,25,000, which included the amount seized from Sarup Chand's account.
• On April 28, 2009, the Assessing Officer determined that the money in Sarup Chand's account was part of the capital gains from the sale of the house and confirmed no tax liability against Sarup Chand. Consequently, the Commissioner approved adjusting the seized funds against the tax liabilities of the assessees in June 2009.
• However, the Assessing Officer charged interest under Section 234B of the Income Tax Act for delayed payment of tax. The assessees argued that the seized money should have been immediately adjusted against their tax liabilities to avoid interest charges.

Held:

• Section 132B (Adjustment of Seized Assets): The Court stated that under Section 132B, assets seized by the Revenue can only be adjusted against the tax liability of the person from whom the assets were seized. In this case, the cash was seized from Sarup Chand’s account, and until the completion of assessments for both Sarup Chand and the assessees, the seized money could not be treated as belonging to the assessees.
• Interest Charges Under Section 234B: The Court explained that Section 234B charges interest for delayed payment of advance tax. Since the seized money was treated as belonging to Sarup Chand until the completion of assessments, it could not be immediately adjusted against the tax liabilities of the assessees. Hence, the interest charged was justified.
• Explanation 2 to Section 132B: The Court emphasized that under Explanation 2 (inserted w.e.f. 01.06.2013), existing liabilities do not include advance tax. Even though this provision was inserted after the relevant assessment year (2007-08), it clarified that advance tax liabilities could not be adjusted using assets seized from another person.
• Conclusion: The High Court held that the appellants' claim that cash seized from Sarup Chand should be treated as advance tax paid by them was incorrect. The Revenue correctly adjusted the seized cash against the tax liabilities of the assessees only after the assessments were completed, and the interest for delayed tax payment was properly charged under Section 234B.

Key Paragraphs:

• Para 13: The Revenue had no authority to treat the seized cash from one person as belonging to another until the assessments were finalized. The cash was in possession of Sarup Chand and could not be treated as the assessees' funds until the assessment concluded.
• Para 14: Sub-section (3) of Section 132B entitles only the person from whom the assets are seized to have them adjusted against tax liability. The appellants’ contention that the seized cash should be treated as advance tax was misconceived.
• Para 17: The Court concluded that the Revenue acted correctly in adjusting the seized cash only after the assessments were completed and that charging interest under Section 234B for delayed payment was appropriate.