No Adjustments of Advance Tax Liability from Seized Assets

1. Amendment of section 132B:

A. Existing provisions of section 132B(1):

“132B. (1) The assets seized under section 132 or requisitioned under section 132A may be dealt with in the following manner, namely:—

 (i)  the amount of any existing liability under this Act, the Wealth-tax Act, 1957 (27 of 1957), the Expenditure-tax Act, 1987 (35 of 1987), the Gift-tax Act, 1958 (18 of 1958) and the Interest-tax Act, 1974 (45 of 1974), and the amount of the liability determined on completion of the assessment under section 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period, as the case may be (including any penalty levied or interest payable in connection with such assessment) and in respect of which such person is in default or is deemed to be in default, may be recovered out of such assets.”

B. Insertion of Explanation 2 in section 132B(1)

The Finance Bill, 2013 proposed to insert Explanation 2 in section 132B of Income Tax Act, 1961, as follows:

Explanation 2.––For the removal of doubts, it is hereby declared that the “existing liability” does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.’.

2. Impact of amendment:

(a) Memorandum explaining proposed amendment: The existing provisions contained in section 132B of the Income-tax Act, inter alia, provide that seized assets may be adjusted against any existing liability under the Income-tax Act, Wealth-tax Act, the Expenditure-tax Act, the Gift-tax Act and the Interest-tax Act and the amount of liability determined on completion of assessments pursuant to search, including penalty levied or interest payable and in respect of which such person is in default or deemed to be in default.

Various courts have taken a view that the term “existing liability” includes advance tax liability of the assessee, which is not in consonance with the intention of the legislature. The legislative intent behind this provision is to ensure the recovery of outstanding tax/interest/penalty and also to provide for recovery of taxes/interest/penalty, which may arise subsequent to the assessment pursuant to search.

Accordingly, it is proposed to amend the aforesaid section so as to clarify that the existing liability does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII of the Act.

This amendment will take effect from 1st June, 2013.

(b) Impact of amendment:

An assessee from whose possession, cash has been seized will not be able to claim adjustment of such retained/seized cash against his liability for advance tax and he would be liable to pay interest due under sections 234A, 234B and 234C of the Income Tax Act, 1961.

3. Judicial precedents overruled by proposed amendment:

In the following cases, it was ruled that amount of cash seized from assessee in search proceedings under section 132 can be adjusted against his advance tax liability:

(a)  Nikka Mal Babu Ram v. Asstt. CIT [2010] 41 SOT 407 (CHD.)

(b)  Ram S. Sarda v. DCIT [2012] 25 taxmann.com 455 (Rajkot)

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