Facts of the Case

The petitioners were subjected to a search and seizure operation conducted by the Income Tax Department under the provisions of the Income Tax Act, 1961. During the course of the search, substantial cash was seized from both petitioners.

In the case of Latika Datt Abbott, cash amounting to Rs. 1.18 Crores was seized, and in the case of Charu Datt Bhatia, cash amounting to Rs. 96.50 Lakhs was seized.

Subsequently, both petitioners disclosed additional income for Assessment Year 2012–13 and formally requested the Department to adjust the seized cash against their advance tax liability. Despite such requests, the Department did not grant credit of the seized cash towards advance tax while processing their returns.

Instead, the Department adjusted the seized amount against the tax demand raised after assessment under Section 143, resulting in levy of substantial interest under Sections 234A, 234B, and 234C.

The petitioners challenged this action and sought judicial intervention for granting adjustment of seized cash against advance tax liability from the date of their original request.

 Issues Involved

  1. Whether cash seized during a search operation can be adjusted against advance tax liability under Section 132B of the Income Tax Act?
  2. Whether Explanation 2 inserted in Section 132B (effective from 01.06.2013) excluding advance tax from “existing liability” applies retrospectively or prospectively?
  3. Whether the Department was justified in levying interest under Sections 234A, 234B, and 234C despite having custody of the seized cash?

 Petitioners’ Arguments

The petitioners contended that:

  • The seized cash was already in possession of the Department and should have been appropriated towards advance tax liability upon their written request.
  • Since such requests were made immediately after seizure, there was no justification for treating them as defaulters in payment of advance tax.
  • CBDT Circular No. 20/2017 clearly clarified that Explanation 2 to Section 132B has prospective effect and therefore would not affect cases where requests were made before 01.06.2013.
  • Charging interest under Sections 234A, 234B, and 234C in such circumstances was arbitrary and unjustified.

 Respondent’s Arguments

The Income Tax Department argued that:

  • The adjustment had already been made against the determined tax liability pursuant to the assessment orders.
  • Once the adjustment was made against assessed tax liability, the petitioners could not seek retrospective adjustment against advance tax liability.
  • CBDT Circular No. 20/2017 should apply only to those cases where assessees actively contested non-adjustment of seized cash, and not where adjustment had already been made against assessed dues.

 Court Findings / Observations

The Delhi High Court rejected the Department’s stand and held that:

  • CBDT Circular No. 20/2017 clearly recognizes that Explanation 2 to Section 132B operates prospectively.
  • Therefore, in cases prior to 01.06.2013, seized cash could be adjusted against advance tax liability.
  • The Department could not discriminate between assessees merely because, in some cases, seized cash had already been adjusted against assessed tax demand.
  • Once the Department itself accepted the principle through the Circular, denying the same benefit to the petitioners would be legally unsustainable.

The Court emphasized that fairness and uniformity in tax administration require equal treatment of similarly placed assessees.

 Court Order / Final Decision

The Delhi High Court allowed both writ petitions and directed the Income Tax Department to extend the benefit of CBDT Circular No. 20/2017 to both petitioners.

The Court held that the seized cash must be treated as adjusted against advance tax liability with effect from the date of the first request made by the petitioners, i.e., 13 December 2011.

As a result, consequential interest liability under Sections 234A, 234B, and 234C was required to be recomputed accordingly.

 Important Clarification

This judgment clarifies that:

  • Explanation 2 to Section 132B is prospective in operation.
  • For periods prior to 01.06.2013, assessees can seek adjustment of seized cash against advance tax liability.
  • The Department cannot deny such adjustment merely because assessment proceedings were completed later.
  • Interest liability under Sections 234A, 234B, and 234C must be recomputed after such adjustment.

Sections Involved

  • Section 132B, Income Tax Act, 1961 – Application of seized assets
  • Section 132, Income Tax Act, 1961 – Search and seizure
  • Section 143(1), Income Tax Act, 1961 – Processing of return
  • Section 143(3), Income Tax Act, 1961 – Scrutiny assessment
  • Section 234A – Interest for delay in filing return
  • Section 234B – Interest for default in payment of advance tax
  • Section 234C – Interest for deferment of advance tax
  • CBDT Circular No. 20/2017 dated 12.06.2017


    Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8461-DB/SMD22082017CW64912016_152751.pdf

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