COLLECTION AND RECOVERY(Y V S T Sai, IRS)

Joint Director of Income Tax (Hqrs)NADT, Nagpur

(Restricted Circulation. For Departmental Use Only)1. A NOTE ON THE READING MATERIAL PROVIDED IN THIS MODULE:This module contains reading material which is suitable for a reader interested in acquiring basic knowledge on the topic as well as a reader who wishes to make an in depth study. Basic readers can skip sections 2 and 3 of this module. They can also skip the footnotes and the additional reading material available at various sub-sections of the module. The author also wishes to make adisclaimer that the reading material reflects only the personal understanding of the author and cannot be presumed as the official view of Income Tax Department.2. SECTIONS COVERED IN THIS CHAPTER AND SCOPE OF THE SECTIONS:Part ‘D’ of XVII of the Income Tax Act deals with the provisions of collection and recovery. In this part, sections 220 to 232 are covered. Schedule II and Schedule III of the I.T Act deal with the procedure for recovery of taxes. This chapter deals with subjects like “interest to be charged on default of payments”, “circumstances under which an assessee can be deemed to be in default”, “penalty for non-payment of tax”, “drawl of tax recovery certificate (TRC)”, “modes of recovery”, “procedure for effecting recovery” and “steps to prevent persons with tax arrears to leave India”.3. LEGISLATIVE HISTORY:Section 220 corresponds to provisions of section 45 of the Income Tax Act, 1922. Initially, the period for payment of tax upon service of demand notice was 35 days. Through Direct Tax Laws (Amendment) Act, 1987, this period was reduced to 30 days w.e.f 01-04-1989 by amending subsection (1) of section 220. Also rate of interest charged for delayed payment of tax, which is at present prescribed @ 1% per month or part of month has undergone various changes from 4% per annum to 15% per annum and 1.5 % per month or part of the month to the present rate.First proviso to subsection (2) of section 220 was inserted by Finance Act, 1963 with retrospective effect from 01-04-1962. This proviso covers situations where interest gets reduced upon rectification, appeal effect, revision and settlement. Second proviso dealing with charging of interest for periods from pre 01-04-89 to post 01-04-89 was inserted w.e.f 01-04-89. Powers were granted to CIT u/s 220(2A) to waive/reduce the interest by insertion of section 220(2A) from 01-10-84. In 1986, a retrospective amendment was w.e.f 01-10-84 to extend section 220(2A) even to those cases where tax is already paid. When section 221 was incorporated in the original Act, the authority empowered to levy the penalty was not specified and no discretion was given to the AO. To remove these anomalies, a new section was substituted w.e.f 01-04-71 empowered the AO to levy penalty and also use discretion to not to levy penalty when he issatisfied that the default was for good and sufficient reasons.Explanation to section 221(1) was inserted w.e.f 01-10-75 to enable levy of penalty even in cases where tax has been paid before levy of penalty.Section 222 (1) and 222(2) were substituted with new sections from 01-04-89 bestowing powers on the TRO to directly draw TRC and take action instead of the AO drawing TRC and referring the case to the TRO. Explanation to secton

222(1) was inserted w.e.f 01-10-75 to extend recovery action to those properties which are transferred by an assessee on or after 01-06-73 to certain relatives otherwise than for adequate consideration.Section 223 to 225 were also substituted from 01-04-89 to bestow powers to TROs to take direct action in certified cases. In order to enable simultaneous action for recovery by the TRO having jurisdiction on a place where defaulter has property along with the TRO where the defaulter is assessed to tax, section 223(2) was substituted from 01-10-75. Section 226 was also amended from 01-04-89 to enable TRO to take action u/s 226 when TRC is drawn. Section 228 enabling recovery of Indian Tax in Pakistan and vice versa being redundant was omitted w.e.f 01-04-89. Section 228A enabling recovery of tax in pursuance of agreements with foreign countries was inserted w.e.f 01-04-72. Section 228A(2) was substituted from 01-04-89 to take into account the powersbestowed on TRO as described above.As per section 230 as it existed up to 01-04-89, a person who was not domiciled in India or a person domiciled in India but in the opinion of the IT Authority is leaving India with an intention to not to return, was required to obtain tax clearance certificate before leaving India. This position broadly continued even after 01-04-89 till 31-05-2003 except for the fact the category of persons domiciled in India was modified to cover persons intending to leave India as emigrants, or on a work permit with the object of taking up employment or other occupation abroad and in whose cases special circumstances existed. However, the position is liberalized after 01-05-2003 by making the clearance certificate compulsory only in cases where special circumstances exist. In other cases, declaration by the person is enough.Section 230A, which put restrictions on registration of transfer of immovable property without a clearance certificate has been omitted for good w.e.f 01-06-2001. Similarly, section 231 which prohibited initiation of recovery proceedings after expiry of three years from the last day of the financial year in which demand was raised has been omitted w.e.f 01-04-89. Apart from the above,amendments are made from time to time in the provisions wherever necessary to incorporate change in designations of the authorities.4. INTRODUCTION:If one has to state the single most important objective of a Tax Administrator, one would immediately state that it is “tax collection”. The revised figures of direct tax collection for the F.Y 2005-06 is Rs 1,67,073 Crores and the budget estimate of direct tax collection for the F.Y 2006-07 is pegged at Rs 2,06,419 Crores. This shows that there is an ever increasing demand on Income Taxauthorities to collect more and more taxes. If one looks at the figures of income tax collection of our country, one would find that nearly 45% of the collection is made through Advance Tax and 35% is from TDS. That is, 80% of the tax is collected through voluntary payments. Yet, it cannot be ignored that a substantial amount is collected due to untiring efforts of the Tax Administrators. Still, a whopping amount of Rs. 63,000 Cr (Rs 630 billion = $14.4 billion) islocked up as arrears of income tax due to litigation in various courts as stated by Hon’ble Law and Justice Minister H.R. Bhardwaj in the Rajya Sabha on 15-05-2006. The arrears pending collection as on 01-04-2005 stood at Rs 99,320 Cr. With the enactment of Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act), Government has a bounden duty to reduce the fiscal deficit in a phased manner. Steps like collection of tax arrears can boost the efforts of Government to get more revenue and meet the targets under the FRBM Act. Therefore, collection of the mounting arrears requires well-planned strategy.

Year after year, CBDT follows a clear-cut strategy for collection of taxes, which is communicated well in advance to the field formations. The strategy is comprehensive and includes steps for recovery of arrears like:Measures to ensure early disposal of high demand appeals pending at various levels like CIT(A), ITAT, HC or SC and also applications pending before Settlement Commission andFormation of task force for recovery of arrearsLaying of stiff targets in the area of collection of arrears.Recently through Finance Act 2006, this strategy has been supplemented by legislative measure like fixing the time barring dates for assessment at 31st

December instead of the earlier date of 31st March. This reduction in time period for assessment helps in collection of the demand in the same financial year in which it is raised. To ensure speedy disposal of tax litigations, Governmentalso established the National Tax Tribunal (NTT) in January 2006 but the same could not become functional due to stays granted by various High Courts. A well-planned assessment does not cause much pain during the collection process. Realizing this fact, CBDT through its instruction nos. 1937/2006 as well as 8/2004 emphasized the need to gather information about the assets of theassessee during the assessment process itself. Interest of the revenue can be protected by the AO during the pre-assessment stage itself by taking steps like:issue of notice u/s 210(3) in case of likely default of payment of Advance taxprovisional attachment u/s 281B (say to tackle situations where there is leakage u/s 143(1) but assessment is picked up for scrutiny or reopened)declaration of transfer as void u/s 281 in appropriate cases andquick assessment of persons leaving India (u/s 174) Despite all these precautions, in a large number of cases, it becomes necessary to collect the tax only after assessment is made. The present reading material covers the provisions that enable the Department to collect/recover the tax in such situations.It can broadly be stated that a person who has not paid tax even after a demand is made, may be visited with the following consequences:Pecuniary consequences (in the form of interest and penalty)Attachment and sale of movable and immovable propertyAppointment of receiver to manage property/businessArrest and detention for prison up to six monthsInstitution of civil suit in a Court of lawRecovery through State Government (when ever the job is assigned to the State Government)Recovery from assets, if any in a foreign country throughDTAAProsecution in case of employment of fraudulent means to prevent recoveryIn the subsequent sections, we will examine in detail these aspects of collection/recovery. However, before discussing the above points, it is obligatory on our part to understand that when tax is payable.5. WHEN IS TAX PAYABLE ?Leaving apart the provisions of Advance Tax, TDS and selfassessment tax, tax is payable by any assessee before the expiry of due date (30 days) from the date of service of demand notice u/s 156 of the I.T Act, 1961. One point that is mandatory for remembrance is that when there is no service of demand notice,there is no tax liability. Therefore, the essential condition for a tax demand is the service of demand notice. The due date is prescribed in section 220(1) of the I.T Act, 1961 and can be shortened by the AO if he is of the opinion thatgranting of 30 days time is detrimental to the interests of revenue. However, as per the proviso to section 220(1), such action should be taken only after

obtaining approval of the Joint/Addl Commissioner of Income Tax. However, this power needs to be exercised with caution. As stated by the Andhra Pradesh High Court in the case of Subbshree Trading Enterprises Pvt Ltd Vs ACIT [111STC 144], the decision to shorten the due date cannot be taken in an overzealous and hasty manner.6. ASSESSEE IN DEFAULT:If an assessee does not make the payment of the demanded tax within the due date, he shall be deemed as an “assessee deemed in default” u/s 220(4) of the I.T Act, 1961. The other situations in which an assessee shall be treated as an assessee in default/deemed to be in default are when there is default in;i. deduction or deposit of TDS (u/s 201(1))ii. advance tax payment (u/s 218)iii. payment of self-assessment tax (u/s 140A(3)) andiv. payment of installments granted (u/s 220(5))

A third party to whom notice u/s 226(3) (garnishee notice) is issued shall also be treated as an “assessee deemed to be in default” u/s 226(3)(x), in case of non-compliance of the notice. To avoid the tag of being in default, an assessee can file an application before the AO under section 220(3) before the expiry ofthe due date, seeking installments or extension of time for payment of the demand. In such a case, the AO has discretion to grant installments or extension of time subject to conditions as he may think fit to impose in the circumstances of the case. But, eithergrant of installments or extension of time does not entitle the assessee to for non-levy of interest. An assessee in default, is akin to a debtor of the Government of India and will be visited with pecuniary and non-pecuniary consequences.7. LEVY OF INTEREST U/S 220(2):Levy of interest is an automatic consequence that falls on any assessee in default. The rate of interest underwent through lot of changes since the inception of the Act and the present rate of interest stands at 1% per month or part of the month. Interest charged u/s 220(2) is compensatory in nature and the levy is automatic. There is no need to give opportunity to the assesseebefore levy of interest u/s 220(2). No appeal lies against levy of interest1.i. MANNER OF COMPUTATION AND ADJUSTMENT OF INTEREST:Rule 119A of the I.T Rules prescribed the method for computation of interest u/s 220(2). Till 31-03-1989, interest was calculated on annual basis. In such a case, part of the month shall be ignored. From 01-04-1989, interest is calculated on monthly basis. In such a case, part of the month shall be treated as full month. If a period spans from a date prior to 01-04-1989 to a date after, then interest for the part prior to 01-04-1989 shall be calculated on annual basis and on monthly basis for the post 01-04-1989 period. Tax (including penalty or any other sum) on which interest is computed shall be rounded off to the nearest hundred and any fraction of hundred shall be ignored while rounding off. As per instruction no. 1936 dated 21-03-1996, whenever anamount is collected towards pending demand, credit shall first be1 An interested reader can read the judgment of Madras High Court in the case of Suresh Gokuldas [229 ITR 721]. given to the tax and then to the interest. In other words, the amount shall first be adjusted towards tax and only when the tax demand is fully met, adjustment towards interest is to be made. ii. COMPUTATION OF INTEREST ON VARIATION OF DEMAND:It is not uncommon to see that in most of the cases, demand which is initially created undergoes changes. This can happen due to reduction or enhancement in appeal, set aside, cancellation, revision, rectification or reassessment.

Circular no. 334 deals with some of the situations. Following are some of the examples:a. If there is reduction of demand in appeal, interest is payable on the final demand from the due date mentioned in original demand notice served on the assessee i.e interest is payable from the due date immediately arising out of the assessment order (may be referred as original due date)b. If there is enhancement in demand (either in appeal or in revision or upon rectification), new demand notice shall be issued only for the new demand and interest on the new demand shall be paid from the new due date. However, interest on demand which is already pending shall be from the originaldue datec. If the assessment is set aside in one appeal but restored back in further appeal, interest shall be paid from the original due dated. In case of reassessment also, interest is leviable on the old demand from the original due date2

e. Care should be taken while giving effect to appellate orders in light of the judgment of Supreme Court in the case of Killick Nixon Ltd Vs CIT [258 ITR 627]32

Nb Mir Barkat Ali Khan Vs ITO [172 ITR 13] (AP)3

In this case, CIT(A) granted relief on certain issues and set aside the matter on certain issues. The AO, while passing the modification order, computed the revised income after considering relief granted by the CIT(A) but on the set aside issues kept the matter pending for verification. Meanwhile, the assessee utilized the KVSS scheme to settle his case on the basis of the modification order. Thereafter, the AO issues a notice for verification of the issues set aside by the CIT(A). Assessee replied that no further verification can be made as his case is covered under KVSS. On appeal, the Apex Court held that once the AO has passed the modification order, all the issues are treated as considered by him and therefore, it cannot be stated that there is scope for issue of further notice for verification. In light of this order, it is better to pass a single modification order considering all the issues decided in appeal.iii. WAIVER/REDUCTION OF INTEREST U/S 220(2A):Interest levied or to be levied u/s 22)(2) can be waived off or reduced by the CCIT/CIT, upon application by the assessee, whenthe CCIT/CIT is satisfied that;1. genuine hard ship would be caused to the assessee and2. non-payment of tax was due to circumstances beyond the control of the assessee and3. the assessee has cooperated in the enquiries for assessment and recoveryThe CCIT/CIT can waive/reduce the interest only when the above three conditions are cumulatively fulfilled.iv. ADDITIONAL READING MATERIAL ON VARIATION OF INTEREST:In case full tax is paid by the assessee upon demand but refund was issued due to order of CIT(A), there is no need for the assessee to pay interest on original demand even after ITAT restores the order of AO as per the judgment of Kerala High Court in the case of A V Thomas & Co [160 ITR 818]. In a case where assessment is fully set aside, the demand goes into abeyance. In equal breadth, the assessee is also not entitled for any refund before fresh assessment is made. Nothing is due to revenue nor to the assessee till fresh assessment is made as held by the Apex Court in the case of CIT Vs Chittor Electric SupplyCorporation [212 ITR 404].v. ADDITIONAL READING MATERIAL ON WAIVER/REDUCTION OF INTEREST:Courts cannot interfere with the discretionary power of the CCIT/CIT u/s 220(2A) as held by the Kerala High Court in the case of GTN Textiles Ltd Vs CIT [217 ITR 653].Similarly, once the application of the assessee is rejected, second application by the assessee is not maintainable. Settlement Commission does not have unrestricted powers to waive the interest paid/payable u/s 220(2) as held by the Apex Court in the case of CIT Vs Damani Brothers [259 ITR 475]. But,

Settlement Commission can consider the circumstances mentioned in section 220(2A) in the manner in which CCIT/CIT considers them.8. POWER TO TREAT AN ASSESSEE AS NOT IN DEFAULT U/S 220(6):When an assessee preferred appeal before the CIT(A) u/s 246 or 246A, he can file a petition seeking stay of demand before the AO. The Act bestows discretion4 on the AO to consider such cases for treating the assessee as not in default till the time appeal is disposed off but subject to imposition of conditions that are fit. As propounded by the Kerala High Court in the case of PradeepRatanshi Vs ACIT & another [221 ITR 502], this discretion lies only with the AO. It goes without saying that whenever a petition seeking stay is filed, opportunity of hearing is a must before disposal of the petition. Apart from the AO, the CIT(A) also enjoys the power to grant to stay which is implicit in his jurisdiction as heldby the Apex Court in the case of ITO Vs M K Mohammad Kunhi [71ITR 815].i. GUIDE LINES ISSUED BY CBDT THROUGH INSTRUCTION NO. 1914:CBDT has issued comprehensive guidelines on the power to treat an assessee not to be in default (termed as stay in common parlance) through Instruction no. 1914. Circular nos. 530 and 589 also cover the issue of stay. The following are the guidelines thatemerge from the instruction as well as the circulars:Any demand should be recovered as soon as it is duePrimary responsibility of collection of demand lies with the AO and when TRC is drawn with the TROMere issue of show cause notice to the assessee does not amount to efforts made by the AO for collectionMere filing of appeal does not entitle the assessee for automatic stay of collection of demandStay can be considered in cases where the AO adopted an interpretation of law which is different that pronounced by various High Courts or the jurisdictional High Court when the judgment is not accepted.Stay can also be considered with respect to additions where the assessee already won the case for earlier years.Only demand related to the disputed additions needs to be considered for stay.4

Supreme Court in a land mark judgment in the case of S G Jaisinghani Vs Unionof India [65 ITR 34] held that discretion should be within defined limits and to beguided by law. Discretion should be predictable and based on known principles oflaw. It should not be vague, arbitrary or fanciful. It should be governed by rule oflaw and not humour. The Apex Court also held that whenever discretion wasabsolute, man has suffered.Assessee has to cooperate for early finalization of appealIn case of reversal of judgment relied upon by the assessee, stay stands vacated.Present financial capacity of the assessee is also one of the considerations for grant of stayAny petition for stay should be disposed off within two weeks of filing by passing a speaking orderOrdinarily, the power to grant stay should be exercised only by the AO or his immediate superior. Higher authorities should intervene only in exceptional circumstances.While granting stay, AO can impose suitable conditions like grant of installments, insistence for lump sum payment or seek securityAO may reserve the right to review the order after a reasonable period of timeAO also has the right to adjust refunds, if anyLiberal installments up to 18 months can be granted in suitable cases

The expression “stay of demand” should not be used in the order on the petition for stay. Instead, the words “not treated as assessee in default for the time being” as mentioned in section 220(6) shall be used.ii. ADDITIONAL MATERIAL ON GRANT OF STAY:In the case of Hindusthan Rubber Works Ltd Vs ITO [81 ITR 397], the Kolkata High Court held that grant of stay for limited period is not proper. Similarly, in the case of Gajanan Agencies Vs ITO [210 ITR 865], the Kerala High Court held that section 220(6) does not contemplate installments. It is felt by the author that these cases have little relevance in light of Instruction no. 1914, which clearly permits grant of stay for limited period and also grant of scheme of installments. As per section 220(7), when an assessee has been assessed on income arising from a foreign country, whose regulations do not permit transfer of money, the AO shall not treat the assessee as a defaulter in respect of tax related to such income till the time restrictions on the transfer of money are lifted except in cases where the money was utilized or could have been utilized for meeting expenditure in that country.9. STAY OF DEMAND DURING SECOND APPEAL BEFORE ITAT:The Act does not bestow any powers to the Income Tax authorities to grant stay of collection of demand after the first appeal is disposed off and second appeal is filed by the assessee before ITAT. The statutory power in such cases is vested with ITAT. As per first proviso to section 254(2A), in cases where stay of collection of demand is granted by ITAT, the appeal shall be decided within 180 days of the order granting stay. If not, as per second proviso to the same section, the order granting stay shall stand automaticallyvacated. However, in practical situation, even in cases where appeal is pending before ITAT, assessees file petitions for stay before IT authorities and the same are considered by them. This is because of the reason that before considering any stay petition, normally ITAT demands the assessee to state whether his petition for stay of demand is rejected by IT authorities or not. Another reason is that there is possibility of collection of at least part of the demand by way of grant of installments etc by I.T authorities themselves so that litigation on this issue is avoided and precious time is saved by both the sides. However, the practice is purely administrative in nature and guided by conventions rather any specific procedure laid down for this purpose.10. PENALTY U/S 221:Penalty is not a mode of recovery. In case of an assessee deemed to be in default, penalty u/s 221 can be levied for nonpayment of taxes within due date. This power is specific to AO only. This penalty can also be levied from time to time but the total amount of the penalty cannot exceed the total amount of taxdemanded. Levy of penalty is discretionary where as levy of interest u/s 220(2) is automatic. If the assessment goes in appeal, penalty u/s 221 also goes. Penalty u/s 221 can be levied in case of TDS default as well as default in payment of advance tax. However, penalty on penalty cannot be imposed. Also, as per section 229, recovery of penalty is to be done in the same manner in which tax is recovered. Pendency of appeal is no bar for levy of penalty. There is no time limit for levy of penalty. However, the period should be reasonable. As per explanation to section 221(1) and also Circular no. 262, even if an assessee paid all the taxes after the due date but before levy, penalty can be levied.11. TAX RECOVERY CERTIFICATE U/S 222:When an assessee is deemed to be in default, TRO can draw a tax recovery certificate u/s 2225 and initiate the recovery proceedings by following the procedure laid down in schedule II to the I.T Act. This is the most important provision from which the TRO derives jurisdiction. (TRC is drawn in form no. 57

under rule 117B of I.T Rules). Upon drawl of TRC , the TRO can attach and sell the movable and immovable properties of the assessee, he can appoint 5

Prior to 01-04-89, the AO had to draw a TRC and forward it to the TRO for initiation of recovery action. From 01-04-1989, TRO has to draw the certificate on his own. The setup of Tax Recovery Commissionrates which used to exist in some of the metros was also abolished and at present each range has one TRO. a receiver to manage the business of the assessee or he can arrest the assessee and send him for detention up to six months. Circular no. 551 describes the functions of the TRO in detailed manner. Once TRO is drawn, both AO and TRO exercise jurisdiction over the case. Of course, the powers of the TRO are restricted only to recovery action. As stated in section 224 of the I.T Act, it is not open to the assessee to question the correctness or validity of the TRC. But, it shall be open to the TRO to cancel or amend the certificate, if he thinks so. He can also correct the clerical or arithmetical mistakes, if any in the certificate. TRO also has the powers to grant installments or to grant stay and he derives this power from section 225 of the I.T Act, 1961. This power runs parallel to the power of the AO. He shall also amend the TRC, whenever there is variation in demand due to decisions in appeal etc.More than one certificate can be drawn by a TRO in a single case, if it is necessary. As provided in section 223, more than one TRO can initiate recovery proceedings in the same case. This is because both the TRO in whose jurisdiction the assessee carries on business or profession or the principal place of business is situated as well as the TRO in whose jurisdiction the assessee resides or any movable or immovable property of the assessee is located exercise jurisdiction over the case. In all such cases, if the TRO who has drawn the TRC is unable to effect recovery, and if he is of the opinion that it is necessary to transfer the TRC to the other TRO, he has to forward the copy of the TRC to the other TRO. Thereafter, the other TRO shall proceed as if he drew the TRC.i. ADMINISTRATIVE PROCEDURE FOR POST ASSESSMENT COLLECTION:Post assessment collection procedure is described in Chapter 10 of the Manual of Office Procedure 2003. Details of Demand & Collection Register (D&CR), where the current entries are recorded, and Arrear Demand and Collection Register (AD&CR), to which the arrears are transferred are available in this Chapter. Both these registers are very important and must be kept update without fail. Each quarter, the AO is bound to send dossier reports in all caseswith arrear demand of Rs 10 lakhs and above pending for collection. In cases with demand of Rs 100 lakhs and above, monthly dossiers are also sent in some of the charges. Monthly CAP-I report also reflects the correct position. Important details regarding collection can also be mentioned by the AO in his monthly DO letter.With the advent of computerization, D&CR and AD&CR are automatically generated by the ITD applications because processing u/s 143(1) is done in the AST package and details of scrutiny, rectification, modification etc., are also entered through AST package. Chapter 10 of the Manual of Office Procedure describes the system of Individual Ledger Accounting System (IRLA) of ITD application package where in arrear and collection details of each assessee are maintained on line. Detailed discussion on the ITD application package is subject matter of another module of the elearning material.ii. ADMINISTRATIVE PROCEDURE FOR DRAWAL OF TRC:Administrative procedure for drawl of TRC is described in Chapter 12 of the Manual of Office Procedure 2003. Details of the procedure are as follows:AO has to ensure that all possible steps for collection are taken by him before referring the case to TRO. In fact, he has to certify that all possible measures for recovery u/s 226 (which will be described in the section below) as well as proceedings u/s 221 are taken.

AO should also verify the correctness of the arrears, prepare all the statements including Form No. 57, details of assets, addresses of debtors etc., and pass on to the TRO for drawl of TRCTRC should be drawn only after the approval of the JCIT/Addl CIT is obtained. Before granting approval the Range head should be satisfied that all actions are taken by the AOAs per F No 401/2/2002-ITCC of CBDT, TRC has to be drawn by TRO in all cases where demand is more than one year old. This means within one year of creation of the demand, AO has to take all possible measuresAs per Instruction no. 1893, TRO should promptly intimate the AO when a TRC is drawn so that the AO will not initiate any action under 226. When a TRC is drawn, AO should make an entry in D&CR about the fact and also report the same in dossier reports.AO must update the TRO of any variation of demand and also about pendency of appeal effects, actions u/s 154, revision proceedings etc, if anyIf any collection is made by the AO, the same should be promptly intimated to the TRO and vice versaBoth AO and TRO shall intimate each other about pendency of petitions for stay or grant of stay/installments, if anyiii. ADDITIONAL MATERIAL – PROCEDURE LAID DOWN IN SCHEDULE II OF THE IT ACT, 1961 FOR RECOVERY PROCEEDINGS:Statutory procedure to be followed in case of recovery proceedings initiated by the TRO is laid down in Schedule II of the I.T Act, 1961. The procedure laid down in Schedule II is also referred as Income Tax Certificate Proceedings (ITCP). The procedure is similar to that prescribed that in CPC for recovery in case of judgment debtors. Salient features of Schedule II are described below:Upon drawl of TRC, the TRO shall serve a notice on the defaulter granting him time of 15 days from the date of service to pay the arrearsInterest u/s 220(2) and cost incurred in recovery of arrears shall also be recovered from the assesseeProceeds received on sale of assets or otherwise by TRO shall first be adjusted against arrears mentioned in the TRC including costs incurred during recovery and interest. Thereafter, if any amounts are payable as on the date of receipt of the proceeds, the same have to be adjusted. If any balance is left out, the amount should be paid to the assessee within three months from the date ofdelivery or possession of the property. If there is any delay, then simple interest @ 6% per annum should be paid to the assessee.In case of claims and objections, TRO can conduct investigations to ascertain the facts.There is general bar on jurisdiction of civil courts on the proceedings of the TRO save where fraud is allegedWhenever a property is attached, a warrant of attachment shall be issued to the assessee by the TROAttachment shall not be excessiveSeizure of property has to be between sunrise and sunset and the officer authorized by the TRO can break open doors etc., if necessary to gain entry to the propertySale has to be through public auction after 15 days of the sale proclamation in case of movable property (except in case of perishable goods) and 30 days in case of immovable property. In case of negotiable instruments and shares, the sale can be through a brokerAuction cannot be held on holidays.

In case of attachment of currency notes and coins, TRO may direct that such coins or currency notes may be deposited with the AO for adjustment of tax arrears.Procedural irregularity cannot vitiate the sale.If within 30 days of the sale of the immovable property, the assessee or any other person whose interests are affected by the sale deposits money towards tax arrears along with interest and penalty of 5% of the purchase money to the purchaser and file an application before the TRO requesting him to set-aside the sale.When there is no application to set-aside the sale and the sale has become absolute, the TRO issues a sale certificate.No sale of immovable property can be made after a lapse of three years from the date on which all appellate proceedings or settlement proceedings are finalized in a case.As per Rule 69 of the Second Schedule to the IT Act, TRO can attach business/property of a defaulter and appoint a receiver to manage the business/propertyTRO also has the power to issue arrest warrant against a person after serving a show cause notice on a defaulter as to why he can not be committed to the civil prison for not paying the taxes when he is satisfied that the defaulter dishonestly concealed or transferred any property with the object of obstructing recovery proceedings or even if he has adequate means, refuses or neglects to pay tax. The reasons should be recorded in writing by the TRO before issue of show cause notice. But, when the defaulter is likelyto abscond, warrant of arrest can be issued without show cause noticeIf the defaulter does not appear in response to the show cause notice, TRO can issue a warrant of arrest. This work can be entrusted to the Inspector of Income Tax or Police. Once, a person is arrested, he has to be produced within 24 hours before the TRO, who may hear him and pending hearing send the defaulter to custody.Upon conclusion of the enquiry, TRO can pass order of detention in case of the defaulter and send him to prison for up to six months in case of TRC drawn for arrear of more than Rs 250/-. For lesser arrear, the sentence is restricted to a period of six weeks. During the period of imprisonment, subsistence allowance shall be borne by the TROWomen, minor children and persons of unsound mind cannot be arrested or sentencedIf a defaulter dies during recovery proceedings, the proceedings will be continued against the legal representatives of the deceased. In case, the assessee dies before drawl of TRC, TRC has to be drawn against the legal representatives of the deceased.Appeal from the original order of the TRO lies with the CCIT/CIT and shall be filed within 30 days of the date of the order. If the appellate authority directs, the recovery proceedings can be stayed pending disposal of the appeal.Review of the order can also be done by the CCIT/CIT after giving notice to all interested parties to correct mistakes if any.12. OTHER MODES OF RECOVERY PRESCRIBED U/S 226:Apart from the modes of recovery prescribed in section 222, department can also employ other modes, which are prescribed in sections 226 to 228A and 232. In this section the modes prescribed u/s 226 are described. It is worthwhile to mention here that as provided in section 226(1), recourse to section 226 can be taken by the AO only when TRC is not drawn. Once, TRC is drawn, only TRO can take action u/s 226.i. ATTACHMENT OF SALARY U/S 226(2):

If the assessee has any income chargeable under the head “salaries”, the AO/TRO can send a notice of attachment to the payer of the salary and require him to deposit the salary towards tax arrears of the assessee subject to the exemptions from attachment laid down in section 60 of CPC.ii. GARNISHEE PROCEEDINGS U/S 226(3):Section 226(3) is widely used by AOs and TROs in the Department. Under this section, AO/TRO can attach any sum due or likely to be due from a third party to the assessee and require the third party to deposit the sum towards tax arrears of the assessee. Such proceedings are described as garnishee proceedings in common parlance and details are described below:Garnishee notice can be issued from time to time by the AO/TRO to a third party to realize arrears pending against an assesseeSingle notice can be issued for arrears of various years or separate notices can be issuedA copy of the notice shall be marked to the assessee for informationThe notice can be issued to realize amounts which are already due or that or likely to be due. This does not mean that amounts from unascertained future obligations, which are non-existent at present, can be attached.AO/TRO can revoke or amend the notice, if necessaryIf any garnishee declares that no such sum is due to the assessee from him, the declaration has to be made in the form of a statement on oathAO/TRO shall issue a receipt to the garnishee for the amounts received from himThe liability of the garnishee is personal in nature and in case of non-compliance to the notice, the garnishee will be deemed to be an assessee in defaultGarnishee like a Bank or Post Office or Insurance Company cannot insist for production of pass book or deposit receipt or policy or any other document for the purpose of entry or endorsement or for any other purpose before making the payment even if such procedure is prescribed before payment of money in the normal course of businessFixed deposits can be realized even before maturity as held by the Karnataka High Court in the case of Vysya Bank Ltd, Global Trust Bank Ltd Vs JCIT [241 ITR 178].iii. APPLICATION BEFORE COURT U/S 226(4):In cases where money belonging to a defaulter-assessee is lying in the custody of a Court, the AO/TRO can apply to the Court of Law seeking release of the money towards tax arrears and the court can release the same. In this regard, it is worth while to mention here that the Court has no power to look into the extent of the liability but has the power to determine that how much amount can be released as held by the Supreme Court in the case of Harshad Shantilal Mehta Vs Custodian [231 ITR 871].iv. ATTACHMENT AND SALE OF MOVABLE PROPERTY U/S 226(5):This sub-section enables the AO/TRO to recover arrears by distraint and sale of movable property as per the procedure laid down in Schedule III of the I.T Act, 1961 when empowered by the CCIT/CIT through a general or special order. Schedule III of the I.T Act states that the procedure for attachment and sale is in the same manner as the procedure laid down in Schedule II of the I.T Act.13. SOME OTHER MODES OF RECOVERY:TRO can also put forward his claim before BIFR/DRT. TRO can also forward his claim to liquidator of a company, wherever applicable. In the case of BIFR and liquidator of a company, they on their won will give notice to the I.T Department seeking details of claims pending. In case of a liquidator, if he fails to seek the claims and settles the property without accounting for the claims of the

Department, he shall be held personally liable. DIT(Recovery) is the nodal agency in case of applications pending before BIFR. In case of Private Ltd companies, arrears can be realized from the personal assets of the Directors by seeking recourse to section 179 of the I.T Act, 1961. In case of a firm, arrears can be realized from the personal assets of the partners. Representative assessees or agents are also liable to pay the arrears of the persons whom they represent in the assessment proceedings. As per the provisions of section 227, recovery can be effected through State Government whenever collection from a particular area is assigned to the State Government. Tax in such case is to be collected by the State Government in like manner employed for collection of municipal tax. Tax arrears can also be realized from the foreign assets of the assessee, if any, through agreements with foreign countries as provided in section 228A of the I.T Act. However, the matter has to be referred to CBDT for recovery. Similarly, upon receipt of reference from other countries by CBDT, tax arrears of defaulters of a foreign country have to recovered and remitted to the tax authorities of that country. Lastly, as per the saving clause in section 232, tax arrears can also be realized through institution of civil suit.14. PROSECUTION U/S 276:Whenever any person fraudulently removes, conceals, transfers or delivers to any other person; any property or interest therein; intending thereby to prevent execution of recovery proceedings under Schedule II of the I.T Act, 1961, such person shall be punishable with rigorous imprisonment up to 2 years and also shall also be liable to fine.15. WRITE OFF/SCALING DOWN OF ARREARS:Write off/scaling down is a mechanism to reduce the arrears in the books of the Department, wherever there is no chance for recovery. This is purely an internal affair of the Department and the assessee is not involved at all. In fact, there is no need to inform the assessee that the amounts are written off or scaled down. The procedure is also only administrative in nature and there is no statutory write off or scaling down. Chapter 13 of the Manual of Office Procedure 2003 contains detailed procedure on write off/ scaling down. Instruction nos. 7/2004, 14/2003, 16/2003 and 1740/1986 lay down the revised monetary limits and powers of various departmental committees constituted for write off. There are three methods of write off viz., regular, adhoc and summary. In terms of sanctioning powers, committees are constituted at local level, sub-zonal or regional level and zonal level.i. SUMMARY PROCEDURE FOR WRITE OFF:Small demands not exceeding Rs 1000/- in each case can be summarily written off by the AO without any further enquiry when the amount is outstanding for more than 5 years and the amount does not relate to any live case;upon write off, in the AD&CR it should be written as “ignored, as obviously irrecoverable”.ii. ADHOC PROCEDURE FOR WRITE OFF:Demand up to Rs 5000/- can be written off by the AO under this procedure when records and address of the assessee are not available for more than five years immediately preceding the financial year in which write off is proposed. In all such cases, the following procedure should be followed before write off.AO should certify that records are not traceable;Attempt to be made to fix responsibility for loss of records;JCIT/Addl CIT should certify that no responsibility can be fixed for non-availability of records;

Irrecoverability certificate must be obtained from the TRO for demands above Rs 2000/- (TRO should certify that no TRC was pending with him or he could not recover anything in last 5 years) andDetails like Name, Address, present whereabouts, amount of demand, amount recovered by TRO, balance to be recovered should be noted Instruction No. 14/2003 describes the revised monetary limits in case of adhoc write off.iii. REGULAR PROCEDURE FOR WRITE OFF:Regular write off procedure applies to any demand irrespective of the quantum. The following conditions should be fulfilled before a case becomes eligible for regular write off.the demand should be more than three years old;the arrear must be clearly irrecoverable;assessee died/became insolvent/ is not traceable/ left India; orcompany is under liquidation; orfirm is dissolved and business is discontinued;assessee has no attachable assets;all modes of recovery prescribed in Second Schedule to the I.T Act, 1961 including detention in prison failed;

In cases falling under the above category, the following steps must be taken before write off.it should be examined that whether adequate and timely steps for recovery were taken or not;a self explanatory note is to be prepared;irrecoverability certificate needs to be obtained from the TRO andif the power to sanction write off lies with authorities other than the AO, Form B (Annexure I) (whose proforma is available in Chapter 13 of Manual of Office Procedure 2003) should be prepared and proposal for write off should be submitted to the JCIT/Addl CIT The table given below enlists the powers of various authorities for sanctioning write off of Income Tax arrears (as per Instruction no. 14/2003).

SNo

Authority tosanctionwrite off

Constitutionofcommittee, ifany

Monetary limits forwrite off (in Rs)

Order ofWrite offto bepassed by

1 LocalCommittee

Three AddlCsIT

0 - 5000 ITO/TRO

2 LocalCommittee

Three AddlCsIT

5001 - 25000 ACIT/DCIT

3 LocalCommittee

Three AddlCsIT

25001 - 100000

JCIT/Addl.CIT

4 CIT ---- 0 - 10000 CIT5 Regional

CommitteeThree CsIT 100001 –

1000000CIT withreport tonextauthority

6 ZonalCommittee

Three CCsIT 1000001 - 2500000

CCIT withreport tonextauthority

7 ZonalCommittee

Three CCsIT 2500001 - 5000000

CCIT withapproval

of fullboard

8 ZonalCommittee

Three CCsIT Above 5000000

CCIT withapprovalof fullboard andF.M

If the Addl CIT/JCIT of the concerned range is not a permanent member of the local committee then he shall also be coopted when cases of his range are considered. Similarly, CIT of the charge whose cases are under consideration should be co-opted as member of the regional Committee, if he is not a permanent member of the regional committee. The committees shall meet atleast once a month and not only discuss the cases before them but also any other cases that are under process for write off. Proposals to CBDT and FM should be routed through the DIT (Recovery). As per Instruction nos. 1740 and 1394, every proposal for write-off the total amount of tax arrears should be worked out after including interest chargeable for late payment of tax up to theend of the month preceding the month in which the proposal is considered. This also includes interest charged/chargeable by the TRO u/s 220(2). Instruction no. 7/2004 specified corresponding limits for write-off for other direct taxes. As per this instruction, regional committee can write off other tax arrears up to Rs 5 lakhs and Zonal committee can write off other tax arrears up to Rs 10 lakhs. After order for write off is passed by the authorities mentioned above, AO should ensure that arrear is actually struck off from AD&CR. He should also intimate the TRO about the action. No communication is to be sent to the assessee. In the order it shouldbe written that “the above write off will not lead to release or waiver by Government of its claim but will be written off in the Departmental books. The Government will have the right, at any time, during the next 30 years from the date of the claim to recover the amount if it appears to the Government that the defaulter has the assets or means to pay”.16. STEPS TO PREVENT PERSONS WITH TAX ARREARS TO LEAVE INDIA:Lastly, it is worthwhile to mention about the provisions of section 230 of the Act which enable the IT Authorities to prevent persons with tax arrears from leaving India. A person who is not domiciled in India, who has come to India in connection with business, profession or employment and who has income derived from any source in India has to furnish an undertaking in Form 30A from his employer/person through whom he is in receipt of income to the effect that tax payable by the person not domiciled in India shall be paid by the employer/person through income is received. Rule 42 of the I.T Rules, 1962 prescribes the CCITY/DGIT as the authority to deal with the declarations. Upon receipt of the declaration, the prescribed authority shall be issue a no objection certificate (NOC) in form no. 30B. CCIT/DGIT can also authorize other authorities to issue such certificate. However, foreign tourists who visit India need not obtain NOC when the purpose of his visit is as a tourist or any purposeother than employment/business/profession. Firstly, whenever a person domiciled in India wants to leave India, he has to furnish a declaration in Form 30C intimating his PAN number/declaration of not having PAN number, purpose of visit outside India and estimated duration of stay outside India. Rule 42 of the I.T Rules, 1962 prescribes the CCITY/DGIT as the authority to deal with the declarations. Rule 43 of the I.T rules gives details of the forms. In certain cases in respect of whom circumstances exist, which in the opinion of the Income Tax

authority (who after recording reasons, takes prior written approval of CCIT) render it necessary for the person to obtain a clearance certificate. In all cases of persons domiciled in India, the application/declaration has to be made by the person to the jurisdictional AO. The application shall be filed in form no. 31 and the clearance certificate shall be issued in form no. 33. As per Rule 44 of the I.T Rules, any person leaving India shall produce the clearance certificate before Customs Authority upon request. If any owners/charterer of ship or aircraft allows a person without valid clearance certificate to leave India, he shall be personally liable for the tax default of the person who left India. Notification SRO 961 dated 25-05-1953 grants exemption to certain persons in furnishing particulars. Lastly, it may be stated that during the earlier years, contractors and other assessees used to apply for Income Tax Clearance Certificates for the purpose of production before Bank or Tendering Authority etc. Through Circular No. 2/2004, CBDT has directed to discontinue this practice w.e.f 01-01-2003 and instructed the AOs that there is no need to issue ITCC. It is also stated that contractors and other assessees can quote their PAN number in tenders etc.

*************Compiled by Shankar Bose

Inspector of Income-taxMSTU, Puri