In a significant ruling, the Punjab & Haryana High Court held that an amount seized from a third party cannot be treated as advance tax for the tax liabilities of another party. The Division Bench, comprising Justice Sanjeev Prakash Sharma and Justice Jagmohan Bansal, delivered the verdict in Kamla Mehta vs. CIT, where the appellant sought to adjust funds seized from Sarup Chand's bank account against their tax liability. The court found this contention legally flawed and confirmed that seized assets could only be applied towards the tax liability of the person from whose custody they were taken, as per Section 132B(3) of the Income Tax Act.
Case Background
The controversy arose when authorities searched the premises of the appellants, Kamla Mehta and Shelly Mehta, and a third person, Sarup Chand. During the search, officials found approximately Rs. 43.78 lakh in Sarup Chand's bank accounts. Sunil Mehta, a representative of the appellants, admitted that these funds were related to a property sale in Amritsar. Based on this admission, the Income Tax Officer (AO) seized the amount from Chand’s accounts.
Subsequently, the appellants disclosed undisclosed income, including short-term capital gains from the sale of a residential property, as part of their return filed under Section 153A of the Income Tax Act. They requested the adjustment of the seized funds against their advance tax liability. However, the AO imposed interest under Section 234B for delayed advance tax payments.
Arguments and Appeal
The appellants argued that the seized funds should be considered as advance tax and that interest under Section 234B was unjustified. The appeal before the CIT(A) was rejected, prompting the appellants to approach the High Court. They claimed that since the amount seized from Chand’s account belonged to them, it should be adjusted against their self-assessed tax due under Section 140A.
Court’s Findings
The High Court concluded that the appellants' contention was without merit. The Bench emphasized that Section 132B(3) specifically limits the adjustment of seized assets to the tax liability of the person from whose custody the assets were seized. In this case, since the funds were seized from a third party, they could not be applied toward the appellants' tax liability as advance tax.
The court further noted that the appellants had not paid advance tax, and attempting to treat the seized amount as advance tax was incorrect. The AO was right to levy interest under Section 234B for delayed tax payments. The court dismissed the appeal, affirming the lower authority’s decision.
Legal Analysis
The ruling clarifies the application of Sections 132B, 140A, and 234B in the context of seized assets and tax liability. Under Section 132B, only the person from whose possession the assets are seized is entitled to an adjustment against their tax liabilities. The ruling also reinforces that advance tax must be paid by the taxpayer, and third-party funds cannot be used to fulfill this obligation.
Interest under Section 234B applies in cases where advance tax is not paid, reinforcing the requirement for timely tax payments to avoid penalties. This decision provides clarity on tax treatment concerning seized funds and the limitations on adjusting third-party assets for tax liabilities.
Conclusion
The Punjab & Haryana High Court’s decision sets a precedent for similar tax disputes, establishing that third-party seized assets cannot be used to offset another person’s tax obligations. It underlines the taxpayer’s duty to fulfill advance tax requirements independently and the inapplicability of third-party assets for such purposes under the current legal framework.
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