TAX AUTHORITIES SHOULD FACILITATE BUSINESS AND

NOT ACT SOLELY AS EXTORTIONISTS

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Sita Pandey Vs State of Bihar (Patna High Court)

Detailed Analysis:

1. Overreach of Tax Executives: The Patna High Court prominently emphasized the role of tax authorities,
cautioning them against prioritizing their past roles as tax collectors over their judicial responsibilities. The court
underscored the potential repercussions of deviating from established norms and the impact of mala fides on
administrative power.

2. Premature Recovery: The crux of this case revolves around the hasty recovery of assessed tax, which occurred
merely a day after dismissing an appeal. This action took place despite the availability of further appeal options
and the absence of a constituted Tribunal for handling such appeals. The court found this rapid action to be
unwarranted and troubling.

3. The Taxpayer’s Business: The petitioner in this case, Sita Pandey, operates in the field of manpower supply,
including security and cleaning services to various establishments, including government polytechnic
institutions. The central issue revolved around whether these services qualified for an exemption related to
educational institutions.

4. Arbitrary Recovery: The legal counsel representing the petitioner argued that the recovery of taxes was
arbitrary, especially considering that the Appellate Tribunal had not yet been constituted. Furthermore,
notifications had extended the limitation period until the Tribunal’s formation. Despite these circumstances, the
recovery was executed without providing proper notice, thereby jeopardizing the petitioner’s business.

5. Legal Provisions: The court meticulously analyzed relevant sections of the Bihar Goods and Services Tax
Act, with particular emphasis on Section 112(8). This section mandates the payment of tax, interest, fine, fee,
and penalty as prerequisites for maintaining an appeal. Furthermore, the court highlighted the statutory embargo
on recovery once an appeal is instituted with the requisite payments.

6. Proviso to Section 78: The court delved into the proviso to Section 78, which permits expedient recovery
within a specified period, less than three months, based on reasons recorded in writing. The court found that the
reasons provided in this specific case were insufficient to justify such expedited recovery.
7. Lack of Notice: A critical point raised by the court was the importance of providing notice to the assessee
before initiating recovery. The court strongly criticized the lack of prior notice in this particular case.

8. Guidelines for Future Recoveries: In light of the issues highlighted in this case, the Patna High Court took the
proactive step of issuing comprehensive guidelines for future tax recoveries. These guidelines include refraining
from recovery during the appeal period and ensuring proper notice is given to taxpayers, among other important
considerations.

Conclusion:

The Patna High Court’s judgment in Sita Pandey vs. State of Bihar underscores the critical role of tax authorities
in facilitating business operations rather than acting solely as extortionists. It brings to the forefront the necessity
for equitable and transparent tax collection practices, ensuring that taxpayers’ rights are upheld while
safeguarding the interests of revenue. This case serves as a poignant reminder of the indispensable role of the
judiciary in maintaining a harmonious balance between taxation and the protection of taxpayers’ rights.

FULL TEXT OF THE JUDGMENT/ORDER OF PATNA HIGH COURT

1. “There is a tendency for valiant tax executives clothed with judicial powers to remember their former capacity
at the expense of the latter. In a welfare state and in appreciation of the nature of the judicial process, such an
attitude, motivated by various reasons, cannot be commended. The penalty for deviance from these norms is the
peril to the order passed. The effect of mala fides on exercise of administrative power is well-established.” [R.S.
Joshi, Sales Tax Officer, Gujarat and Others v. Ajit Mills Limited and Another;(1977) 4 SCC 98]

2. This is a classic case of a valorous overreach by a tax executive; recovering the assessed tax due, just after a
day of dismissal of the appeal; when there was a further appeal provided and the Tribunal before which such an
appeal is to be filed was not constituted.

3. On facts, suffice it to notice that the assessee carries on the business of manpower supply including security
and cleaning services to different establishments; in which is included Government Polytechnic Institutions. The
issue arose as to whether the services provided to Government Polytechnic Institutes would fall under the
exemption stipulated in Entry No. 66(b)(iii) of Notification No. 12/2017 dated 28.06.2017 clarifying it to be
services provided by or to Educational Institutions up to Higher Secondary School or equivalent. Reliance was
also placed on the memo issued by the Department of Education, Government of Bihar which considered
Polytechnics to be equivalent to Intermediate i.e. Senior Secondary.

4. We would not dwell upon the legal issue raised as to exemption since the assessee has an appellate remedy
which has not been exhausted and the forum where such appeal is to be instituted has not yet been constituted.
We are only concerned with the recovery made, peremptorily and surreptitiously from the bank accounts of the
assessee, on the very next day of the rejection of the appeal.

5. Learned counsel for the petitioner Shri Saket Tiwary asserts that the recovery was done in a most arbitrary
manner, especially when there was no Appellate Tribunal constituted and there were notifications issued, both
by the Central Government and the State Government providing for and extending the period of limitation to
commence only from the date of constitution of such Tribunals. It is also pointed out that this Court in such
matters have been consistently directing payment of 20 per cent, as provided for in Section 112(8) of the Bihar
Goods and Services Tax Act, 2017 (hereinafter referred to as “BGST Act”) and staying recovery till the Tribunal
is constituted and the limitation of three months from that date is crossed. In the present case, ignoring the
statutory provisions and the notifications issued, the recovery was made arbitrarily and without any notice. Thus,
frustrating the appellate remedy of the petitioner assesee and putting the very business of the assessee into
jeopardy. The petitioner prays for refund of the amounts recovered and stay of the assessment order confirmed in
appeal till the Appellate Tribunal is constituted under Section 109 of the BGST Act. The learned counsel Shri
Saket Tiwary also prays for interest on the amounts recovered and exceptional costs for the prejudice caused to
the business of the petitioner, by the high-handed act of the tax authority.

6. Learned Government Advocate Shri Vivek Prasad, on the other hand, relies on Section 78 of the BGST Act
and its proviso which enables recovery even within the period of three months, if the proper officer considers it
expedient in the interest of Revenue. In the present case, there are reasons recorded in writing by the Recovery
Officer and hence, the recovery has been made well within the contours of the statute. The decision with respect
to stay of recovery on payment of 20 per cent of the tax liability came later to the recovery in the present case.
There are absolutely no mala fides in the recovery effected and the same was done only considering the
expediency which arose because of the close of the financial year. The learned Government Advocate would
seek for dismissal of the writ petition.

7. The assessee was issued with an assessment order dated 14.12.2022 produced as Annexure-2. The tax dues
under the BGST and CGST Act were Rs. 18,91,609.00 each. There was also a further liability of interest of Rs.
16,02,552.00 each and a penalty of Rs. 1,89,161.00 each under the two enactments. The total liability came to
Rs. 73,66,644.00 which was directed to be paid on or before 14.03.2023 as per Annexure-2. The assessee filed
an appeal which did not find favour with the Appellate Authority, who rejected it on 27.03.2023, as is evident
from Annexure-1. Immediately on the next day, the Assessing Officer issued Annexure-3 notice to the Branch
Managers of the four banks in which the assessee maintained accounts. A total amount of Rs. 69,88,322.00 was
sought to be recovered which included the equal liabilities under the CGST and SGST enactments. The 10 per
cent deposited under each of the enactments being Rs. 1,89,161.00 at the appellate stage was deducted when the
recovery notice was issued. The recovery notice at Annexure-3 is dated 28.03.2023 and the entire amounts have
been recovered which resulted in the present challenge before this Court.

8. The CGST Act provides for constitution of Appellate Tribunal for hearing appeals against the orders passed
by the Appellate Authority or the Revisional Authority and Section 109 of the BGST Act provides for the said
Appellate Tribunal constituted under the CGST Act to also hear the appeals under the BGST Act. Section 112
enables any person aggrieved by an order passed against him under Section 107 or Section 108 of the BGST Act
or the CGST Act to appeal to the Appellate Tribunal against such order within three months from the date on
which the order sought to be appealed against is communicated to the person preferring the appeal. Sub-section
(8) of Section 112 makes it mandatory for an appeal to be instituted; that the appellant pays in full the amount of
tax, interest, fine, fee and penalty arising from the impugned order as admitted by him and a sum equal to twenty
per cent of the remaining amount of tax in dispute, in addition to the amount paid under Section 107(6). Hence,
the admitted amount of tax and other dues have to be satisfied along with twenty per cent of the tax in dispute; in
addition to the ten per cent paid under Section 107 (6). On such payment being made, not only is the instituted
appeal maintainable; under sub-section (9) of Section 112, there is a deemed stay of the recovery proceedings for
the balance amount till the disposal of the appeal. Hence, when a proper appeal is instituted before the Appellate
Tribunal, with the payments as required for maintaining the appeal, then there is a statutory embargo from
making any recovery based on the assessment order or the first appellate order.

9. It is in this context that the proviso to Section 78 has to be looked at. Section 78 has the nominal heading
“Initiation of recovery proceedings” and requires a taxable person to satisfy an order passed under the BGST Act
by paying up the amounts due within a period of three months from the date of service of such order. The
proviso enables the proper officer in expedient situations, in the interest of revenue, for reasons recorded in
writing, to require the taxable person to make such payment within such period, less than a period of three
months, as may be specified by him. In the present case, admittedly there is no notice issued specifying the time
within three months, within which time the assessee was supposed to pay the amounts as per the order.
10. The contention of the learned Government Advocate is also that there is no requirement for a notice and
reasons alone are to be recorded, which is available in the files, an extract of which is produced as Annexure-D
along with the supplementary counter affidavit dated 10.05.2023 filed on behalf of Respondent Nos. 2 and 3.
The reasons stated, as evident from the extract of the file which is also dated 27.03.2023 is that the financial year
2022-23 is coming to an end and there are bank holidays on the immediate days following. We cannot but
express our deep anguish and dissatisfaction in the reasons recorded by the officer. The imminent bank holidays
of 2 or 3 days and the close of the financial year, we are afraid, cannot be termed valid reasons to justify an
expedient recovery under the proviso to Section 78 and it is not clear as to how the interest of the revenue would
suffer, if the recovery is kept in abeyance for three months or at least a notice is issued to the assessee before the
recovery is effectuated from the banks, behind the back of the assessee. The counter affidavit does not speak of
any notice having been given to the assessee before recovery. Notices were issued to the banks of the assessee
and the amounts remaining in the various accounts forcefully forfeited and paid over to the Tax Department.

11. As far as the statutory provision not requiring a notice to the assessee, we need only refer to the Constitution
Bench decision of the Hon’ble Supreme Court in Mohinder Singh Gill and another v. The Chief Election
Commissioner, New Delhi and others; AIR 1978 Supreme Court 851 from which we extract hereunder
Paragraphs 75 and 76:-

“75. Fair hearing is thus a postulate of decision-making cancelling a poll, although fair abridgement of
that process is permissible. It can be fair without the rules of evidence or forms of trial. It cannot be fair if
apprising the affected and appraising the representations is absent. The philosophy behind natural justice
is, in one sense, participatory justice in the process of democratic rule of law.

76. We have been told that wherever the Parliament has intended a hearing it has said so in the Act and
the rules and inferentially where it has not specificated it is otiose. There is no such sequatur. The silence
of a statute has no exclusionary effect except where it flows from necessary implication. Article 324 vests a
wide power and where some direct consequence on candidates emanates from its exercise we must read
this functional obligation.”

[underlining by us for emphasis]

12. The aforesaid declaration of law made with respect to a decision cancelling a poll, applies across the board to
every judicial and quasi-judicial order and action taken. The principles of natural justice stand embedded in
every coercive action taken by a statutory authority, even within the four corners of the law; when it could, in the
normal circumstances cause prejudice to the person against whom such proceedings are levelled. The recording
of reasons as coming forth in the provision to Section 78 are not to be recorded surreptitiously and kept in the
files, but to be informed to the assessee and a time specified within three months for the payment to be made. In
fact, on a reading of the proviso we are of the definite opinion that there is a requirement of notice, if not prior to
the recording of reasons; at least intimation of the reasons which motivates the proper officer to recover the
amounts due, considering such recovery to be expedient in the interest of revenue with clear specification of the
period; less than a period of three months, within which the amounts are to be paid.

13. Section 78 provides that a person against whom an order is passed shall satisfy the amounts payable within a
period of three months and the proviso empowers the Assessing Officer to seek satisfaction of such dues even
during a period lesser than three months. The provision is worded so:-

“78. Initiation of recovery proceedings.– Any amount payable by a taxable person in pursuance of an
order passed under this Act shall be paid by such person within a period of three months from the date of
service of such order failing which recovery proceedings shall be initiated:
 Provided that where the proper officer considers it expedient in the interest of revenue, he may, for
reasons to be recorded in writing, require the said taxable person to make such payment within such
period less than a period of three months as may be specified by him.”

[underlining by us for emphasis]

Hence, when reasons are recorded in writing, there is a duty on the Assessing Officer to specify the time within
which the amounts are to be paid which intimation has to go to the assessee.

14. In this context, we also have to notice that the Appellate Tribunal under Section 109 of the CGST Act has
not yet been constituted. We would not rely at all on the equitable directions issued by this Court in various
petitions staying recovery on payment of twenty per cent of the balance tax due as provided under Section
112(8). However, it is very evident that even the Central Government and the State Government was conscious
of the fact of the Tribunal having not yet been constituted. Two notifications, one of the Central Government and
the other of the State Government, are produced as Annexure 8 and 9 along with the writ petition. Both these
notifications invoke the power conferred respectively under Section 172 of the CGST and BGST Act. For
removal of difficulties, presumably for reason of the non-constitution of the Tribunal, the three months limitation
period stipulated under sub-section (1) of Section 112 of both the enactments are extended to the latter of the
following dates; (i) of communication of order or (ii) the date on which the President or the State President, as
the case may be, of the Appellate Tribunal after its constitution under Section 109, enters office. It is also
stipulated that the six month period provided under Section 112(3) shall also stand extended by the very same
period from the aforesaid dates; whichever date falls later. Hence, there could not have been a recovery
surreptitiously, by issuing notices to the banks and coercing them to pay the amounts, that too the entire due
amounts, including the tax, interest and penalty.

15. The Legislature had, in the event of an appeal filed to the Tribunal, only intended twenty percent of the tax
dues alone to be paid; on which payment the entire demand was liable to be stayed till the disposal of the appeal.
However, admitted tax; interest, fine and penalty also have to be satisfied. Hence even if coercive action could
have been taken the tax officer should have confined it to the twenty percent of the total amounts assessed, in
addition to the ten percent paid at the first appellate stage and any admitted tax, if remaining unpaid. The tax
officer had definitely erred, that too egregiously, to the extent of his action being termed high-handed, in
surreptitiously making the recovery of the entire amounts due as tax, interest and penalty, even contrary to the
legislative mandate. As we found, the reasons stated are unconvincing and clearly untenable and the approaching
closure of the financial year end can only be a motivation to enhance the individual targets assigned by the
higher authorities.

16. Following the dictum laid down in UTI Mutual Fund v. Income-Tax Officer and Others; [2012] 345 ITR
71 (Bom), we issue the following guidelines in so far as the recoveries are concerned:-

(1). There shall be no recovery of tax within the time limit for filing an appeal and when a stay application
is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate
Authority;

(2) Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a
reasonable period so as to enable the assessee to move a higher forum;

(3) However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the
demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78,
there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and
specifies the lesser time within which the assessee is directed to satisfy the dues;
 (4) Though a bank account could be attached; before withdrawing the amount, reasonable prior notice
should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a
remedy in law;

(5) We also remind the Tax Authorities, as was done in the UTI Mutual Fund (supra) that the ‘authorities
under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested
with the public duty of protecting the interest of the Revenue while at the same time balancing the need to
mitigate the hardship to the assessee’ (sic-UTI Mutual Fund).

17. We cannot but find a definite overreach by the tax authority, the officer who issued Annexure-3 order, to
surreptitiously recover the amounts due as per the assessment order passed, from the bank accounts of the
assessee, without proper intimation being given to the assessee or a time specified for the assessee to satisfy the
demands; even if the action was motivated by expediency and in the interest of the Revenue, which we have
found is not discernible from the reasons recorded in the instant case. The reasons stated by the officer were kept
hidden within the folds of the files; at the risk of repetition, were also not convincing. The close of the
assessment year and one or two days of bank holidays, we are not convinced are sufficient reasons to forfeit the
amounts kept in the account of a running business. The State and its revenues would not collapse if the said
amounts were not recovered but there is every chance of a business folding up without liquid funds being
available to it, especially a running concern with liabilities to its employees, its other creditors and so on and so
forth.

18. The actions of the Tax Authorities, under the taxing statute should be tempered with good conscience and
judicious reasoning, which in the instant case was in complete derogation of the established principles of rule of
law; reigning supreme even when there is a compulsory extraction of money for the larger good and welfare,
which a levy of tax always is. The tax authority should also act as a facilitator of business and economy and not
merely as an extortionist, always looking to have the pound of flesh, to satisfy his hierarchical superiors to push
his/her personal agendas. We have no doubt that the action complained of, was high handed and arbitrary.

19. As we observed, the Assessing Authority in the scheme of the enactment could not have made recovery of
the entire amount. Section 112 provides for twenty per cent of the tax amount due, in addition to the ten per cent
amount paid at the first appellate stage, for maintaining a second appeal before the Appellate Tribunal. On such
payment being made under Section 112(8), there is also a requirement that the further recovery proceedings
would be stayed. Hence, when an Appellate Authority was not constituted even when the Assessing Officer
acted under the proviso to Section 78 what could have been recovered is only twenty per cent of the tax amount
due in addition to that paid up to institute a first appeal. We see from Annexure-3 order that under both the
BGST and CGST Act, the tax amounts due are Rs. 18,91,609.00 and the demand made of Rs. 34,94,161.00 each
under CGST and BGST Act is after including the interest and penalty. We also notice that Rs. 1,89,161.00 has
been reduced from the total demand raised under Annexure-2 order, presumably, the ten per cent payment made
by the assessee at the first appellate stage.

20. Hence, what was required to be paid by the assessee, for maintaining an appeal before the Appellate
Tribunal, if constituted, was Rs. 7,56,644.00 being the twenty per cent of the tax dues under the BGST and
CGST Act. Hence, the balance amounts from the total sums forfeited of Rs. 69,88,322.00 recovered shall be paid
over to the assessee within a period of two weeks from today, failing which interest shall run at the rate of 12 per
cent per annum. If the amounts are satisfied within two weeks, as directed hereinabove, it is made clear that if
eventually the demand is confirmed against the assessee, there shall not be any interest claimed under the statute
between the date on which the amounts were credited by the banks as per Annexure-3 order and the date of
refund as directed hereinabove; since the State had the benefit of the amounts in its coffers. If the liability is set
aside then for the periods the assessee was deprived of the amounts recovered, she shall be entitled to claim
interest from the department.

21. We are also of the opinion that the officer who issued Annexure-3 order, who acted in complete derogation
of the statutory provisions and established principles of law, should pay an amount of Rs. 5,000/- (five thousand)
as cost to the assessee; a receipt of which shall be filed within two weeks in the instant writ petition.

22. The writ petition is allowed with the above directions and the guidelines as laid down by us hereinabove.