RECOVERY OF TAX THROUGH CERTIFCIATE PROCEEDING

                                                                                                                                                                             Paras Kochar, Advocate

Introduction:- Certificate proceeding for recovery of outstanding Tax is very painful. The Tax Recovery Officer has vast powers for recovery of Taxes including arrest of the assessee. But it has been seen that Tax Recovery Officers are hardly seen in exercising their powers for realization of outstanding dues. Simultaneously, the assessee also does not show much importance to certificate proceedings they are either not aware of the impact of the certificate proceedings or do not know about powers of the Tax Recovery Officer in this connection.

Commencement of certificate proceeding:-When any amount otherwise specified them by way of advance tax specified as payable in notice of demand u/s 156 of the Income Tax Act, 1961, is not paid by the assessee either within 30 days or within the time specified in the said notice of demand from the date of service of such notice of demand, an assessee shall deemed to be assessee in default by provision of Sec. 220 (1) of the Income Tax Act, 1961.

When an assessee is deemed to be in default, the assessing officer takes various steps for recovery of his outstanding amount. But when he fails to recover the same either partly or fully, he may refer the matter to the Tax Recovery Officer  for recovery of outstanding dues of the assessee and after receiving the information from the assessing officer, the Tax Recovery Officer may draw up under his signature a statement in form 57 specifying the amount of arrears due from the assessee (hereinafter  referred to as “Certificate” as per provisions of Sec. 222(1) and also in accordance with rules laid down in Schedule –II.

Jurisdiction of TRO:- A Tax Recovery Officer can issue certificate on an assessee, only if

(i)         The assessee carries on his business under jurisdiction of the Tax Recovery Officer.

(ii)        The Principal place of business or profession of the assessee is situated within the jurisdiction of the Tax Recovery Officer.

(iii)       The assessee resides within the jurisdiction of the Tax Recovery Officer.

(v)        The immovable property of the assessee is situated within the jurisdiction of the   Tax Recovery Officer.

Therefore, for execution of Certificate proceeding, a Tax Recovery Officer may send the certificate or a copy of the certificate certified in the prescribed manner and thereupon, that Tax Recovery Officer shall act accordingly.

Notice:- When a certificate has been drawn up by a Tax Recovery Officer, he shall serve upon a notice on the assessee requiring him to pay amount specified in the certificate within 15 days of service of such notice and no step in execution of a certificate shall be taken until the period of 15 days has elapsed since the date of service of said notice.

The Tax Recovery Officer may grant reasonable time to the assessee for payment of his arrear.

 He may also allow installments payments.

Other modes of Recovery by TRO:- When the Tax Recovery Officer finds that even after issue of notice, the demand has not been paid he may recover the tax by one or more of the following modes as per provisions of Sec. 226 :-

1) If the defaulter is an employee drawing salary, the Tax Recovery Officer may require the employer to make payment of salary to the credit of Central Government in place of payment to be made to said employee.

2)         The Tax Recovery Officer can issue notice on any debtor including bank who holds money on account of the assessee.

Principal modes of recovery by TRO:-Tax Recovery Officer may also take the following measures simultaneously: -

Attachment and sale of assessee’s movable property:-  The attachment and sale of movable and immovable property can be made by such officer as the Tax Recovery Officer may direct. When any movable property is to be attached such officer shall be furnished by the Tax Recovery Officer a warrant in writing and after service of such warrant, the said officer shall proceed to attach  the immovable property of the defaulter. If the property to be attached  is in the possession of the defaulter, the same shall be seized by Tax Recovery Officer and shall be kept in safe custody till it is sold or arrear is realised.  However, such seizure can be made only after sun rise and before sun set and not otherwise. The officer may break open any door or window of the building for seizure of movable property if he has reasonable belief that such building contains the movable property of the defaulter. After seizure of movable property, the same shall be sold for realization of arrear amount as per procedure contained in rule 8 of Schedule –II. 

                        Attachment and sale of immovable property:-For recovery of arrear, attachment of the immovable property can be made by an order prohibiting the defaulter from transferring or charge of the property in any way. The attachment shall relate back to and shall take effect from the date on which the notice to pay arrear issued by TRO was served upon the defaults. After the attachment proceedings, the Tax Recovery Officer may proceed for sale of immovable properties as per proceedings mentioned in second Schedule through public audition. However, such order of sale can be postponed if there is a reason to believe by a Tax Recovery Officer on an application made by the defaulter that arrear amount can be realised by lease, mortgage or Private sale of such property. The sale of attached immovable property can not be made after the expertly of three years from the end of the financial year in which the order giving rise to a demand has become conclusive or final as per provision of Sec. 245 I and provision of Chapter XX.

Appointment of Receiver: - The Tax Recovery Officer may appoint a receiver to manage the business or immovable property of the defaulter after attaching the same. The receiver will have all the powers to realize the profits or rent and appropriate the same towards tax arrears. Part IV of the second schedule of I T Act draws inspiration from order XL of the code of civil procedure 1908 that relates to appointment of receiver by courts in civil disputes. The court can confer on the receiver powers such as management protection, preservation and improvement of property, collection of rent and profit there of and the application and disposal of such rent and profits. Imagine a situation where the managing director of a company is asked to vacate his seat and the TRO comes in as receiver in his place to manage the business. Therefore the appointment of receiver is considered one of the hardest steps taken for recovery of taxes. However, this special provision in the Income Tax Act is seldom used.     

Arrest and detention of the defaulter: - Most painful modes of recovery are detention of the defaulter. The tax Recovery Officer before making order for the arrest and detention in civil prison of a defaulter shall issue and serve a show cause notice upon the defaulter for his personal appearance. If the defaulter does not appear before the Tax Recovery Officer, he may issue warrant for the arrest of the defaulter. A warrant of arrest issued by a Tax Recovery Officer can also be executed by any other Tax Recovery Officer within whose jurisdiction the defaulter may be found. The person arrested in pursuance of a Warrant of arrest under this rule shall be brought before the Tax Recovery officer within twenty four hours exclusive of the time required for the journey. However, if the defaulter pays the amount entered in the warrant of arrest and cost of the arrest to the officer arresting him, such officer shall at once release him. However, before making order of detention, the tax Recovery officer may detain him under the custody of any officer for a specified period not exceeding 15 days or release him on his furnishing security to the satisfaction of the Tax Recovery Officer for his appearance at the expiry of specified period of 15 days. No order of detention shall be passed by the Tax Recovery Officer before making any enquiry in this connection.

                        The person may be detained in the civil person in execution of a Certificate for a period of six months if the demand in the certificate is exceeding Rs. 250/= and in any other case, for a period of six weeks. In this present age, amount of Rs. 250/= is very very negligible and the legislature should increase this limit at least up to Rs. 50,000/= if not more. After release from detention after six months or six weeks as the case may be, the defaulter shall not be discharged from his liability but he shall not be re arrested.

                         No Officer shall enter in the dwelling house of the defaulter after sun set and before sun rise for the purpose of making of arrest as per Schedule II. The Tax Recovery Officer shall not order arrest and detention of woman, minor or a person of unsound mind in civil prison.

                        Appeal:-An appeal from any order which is not final passed by a Tax Recovery Officer under Schedule –II shall be filed before Commissioner or Chief Commissioner and every such appeal should be presented within 30 days of the order appealed against.

                        Judicial Decisions :- It has been held by apex court in Income Tax Officer VS Seghu Buchiabh Sethy (1964) 52 ITR 536 (SC) that where tax payable was reduced in appeal, recovery proceeding on the basis of original demand without issuing a fresh notice was invalid.

                        It has been held in Kapur Chand Shrimal Vs Tax Recovery Officer & Ors (1969) 72 ITR 623 (SC) that for default of the HUF, in payment of tax, the Karta can not be arrested and detained in prison.

                        Conclusion: - The Act has enough provisions for recovery of outstanding taxes through attachment and sale of movable and immovable property, appointment of receiver and even arrest and detention. The TRO should hardly exercise the power of appointing a receiver. He should mainly emphasis on attachment and sale of movable and immovable properties. He should also not use the powers of detention or arrest frequently.