Facts of the Case

The petitioners were subjected to search and seizure proceedings under the Income Tax Act, 1961, wherein substantial cash amounts were seized by the Income Tax Department.

In the case of Latika Datt Abbott, cash amounting to Rs. 1.18 Crores was seized, whereas in the case of Charu Datt Bhatia, cash amounting to Rs. 96.50 Lakhs was seized. Both petitioners disclosed additional income for Assessment Year 2012–13 and immediately requested the Department, through written communications dated 13 December 2011, to adjust the seized cash against their advance tax liabilities.

Despite such requests, while processing their returns and completing assessments under Section 143(3), the Department did not grant credit of the seized cash as advance tax. Instead, the Department later adjusted the seized cash against assessed tax demand, resulting in levy of substantial interest under Sections 234A, 234B, and 234C.

Aggrieved by denial of adjustment against advance tax liability, the petitioners approached the Delhi High Court.

Issues Involved

  1. Whether seized cash under search proceedings can be adjusted towards advance tax liability under Section 132B of the Income Tax Act?
  2. Whether the Department was justified in denying such adjustment despite written request by the assessees?
  3. Whether Explanation 2 to Section 132B inserted w.e.f. 01.06.2013 would apply retrospectively or prospectively?
  4. Whether interest under Sections 234A, 234B and 234C could be levied when seized cash was available with the Department?

Petitioner’s Arguments

  • The petitioners contended that immediately after seizure, they had specifically requested the Department to treat the seized cash as payment towards advance tax liability.
  • Since the Department was already in possession of the funds, there was no justification for non-adjustment and consequent levy of interest.
  • Reliance was placed on CBDT Circular No. 20/2017, which clarified that Explanation 2 to Section 132B has prospective operation and would not affect earlier claims.
  • It was argued that denial of adjustment was arbitrary and contrary to the legislative intent.

 Respondent’s Arguments

  • The Income Tax Department argued that adjustment was ultimately made against the assessed tax liability under Section 143(1) and not advance tax liability.
  • It was contended that once the assessees accepted such adjustment, they could not later seek modification.
  • The Department submitted that CBDT Circular No. 20/2017 would apply only in pending disputes where adjustment against advance tax had been specifically litigated.

 Court Findings / Observations

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

  • CBDT Circular No. 20/2017 clearly recognized that Explanation 2 to Section 132B has only prospective application.
  • Therefore, for cases prior to 01.06.2013, seized cash could be adjusted against advance tax liability if requested by the assessee.
  • The Court found no legal basis for discriminating between assessees who obtained such benefit through litigation and those whose requests were pending or denied.
  • Since the Department had the money in its possession, interest liability for non-payment of advance tax could not be imposed unfairly.

 Court Order / Final Decision

The Delhi High Court allowed both writ petitions and directed the Income Tax Department to grant the benefit of adjustment of seized cash towards advance tax liability from the date of the first request, i.e., 13 December 2011.

Consequently, the petitioners became entitled to recomputation of interest liability by treating the seized cash as advance tax payment from that date.

 Important Clarification

This judgment clarifies that:

  • Explanation 2 to Section 132B is prospective and not retrospective.
  • In cases prior to 01.06.2013, assessees can seek adjustment of seized cash against advance tax.
  • CBDT Circular No. 20/2017 binds the Department.
  • Interest under Sections 234A, 234B and 234C must be recomputed where such adjustment is granted.

 Sections Involved

  • Section 132B – Application of seized assets
  • Section 132 – Search and seizure
  • Section 143(1) – Processing of return
  • Section 143(3) – 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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