I-t Dept. Not Obliged To Grant Concessions To Sick Companies, In Contravention To I-t Act, 1961

While hearing a matter involving issue as to whether the Income Tax Department was liable to provide additional concessions to an entity which had taken benefit under the Rehabilitation Scheme (the Scheme) offered by the Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Corporations Act (SICA) 1985, High Court of Delhi emphatically answered this question in the negative.

The High Court observed that – “…the obligation to extend further concessions could not be imposed on the Central Government (Income Tax Department) without its consent. The Income Tax Department had not consented for extending any further concession. And therefore, the order dated 26.02.2013 requiring the department to consider the grant of the further concessions, cannot be interpreted as making it obligatory on the department to grant such concessions…”.  (Para 50)

A Division Bench of Justice Vibhu Bakhru and Justice Amit Mahajan held that another reason for not extending further concessions was that any amendments made to the Scheme did not prejudice the Income Tax Department since it retained the discretion as to whether to grant any further concessions or not. (para 50)

The Petitioner-Department was represented by Advocate Shlok Chandra, whereas the Respondent-Assessee was represented by Advocate Anunaya Mehta. 

The Principal Director General of Income Tax (Admn. & TPS) (DGIT) filed the present petition to challenge an order dated 01.07.2016 passed by the Board in respect of the Respondent-company, which directed the Petitioner-Department  to comply with an earlier order dated 26.02.2013 passed by the BIFR.

In such order dated 26.02.2013, the BIFR had modified the Rehabilitation Scheme, to the limited extent of including additional exemptions from payment of income tax under the Income Tax Act, 1961.

The Petitioner canvassed that further concessions as envisaged in the order dated 26.02.2013 could not be granted since the Rehabilitation Scheme had come to an end with the repeal of the SICA.

The Petitioner further claimed that the Scheme was modified to the effect of requiring the Income Tax Department to consider whether or not to grant further concessions, and that the Department found there to be no need for granting further concessions.

On hearing the arguments of both sides, the Bench observed – “…question to be examined is whether the BIFR’s order dated 26.02.2013, whereby the Scheme was modified, necessarily required the Income Tax Department to grant further additional concessions. Plainly, the answer to this question is in the negative. This is for two reasons. First, that the obligation to extend further concessions could not be imposed on the Central Government (Income Tax Department) without its consent. The Income Tax Department had not consented for extending any further concession. And therefore, the order dated 26.02.2013 requiring the department to consider the grant of the further concessions, cannot be interpreted as making it obligatory on the department to grant such concessions. Second, it was the Company’s stand before the BIFR that the modifications of the Scheme as proposed did not prejudice the Income Tax Department as it retained the discretion whether to grant such concessions…”. (Para 50)

The Bench also sought to examine the nature of the concessions being sought, and found that the Respondent sought to avail further concessions in order to avoid paying capital gains tax on sale of certain shares held by it. In this regard, the Bench noted – “…it is also relevant to examine the additional tax concessions as sought by the Company. In terms of the Scheme, the promoters of the Company were required to make good any shortfall in the projections under the Scheme. It is stated that the promoters of the Company as a part of their contribution, gifted shares of some other companies to the Company. The sale of the said shares would result in capital gains and the Company sought to avoid payment of tax on such gains….”. (Para 52)

Moreover, the Bench noted that the Scheme did not envisage the Respondent-company’s promoters’ contributing shares or other assets to make good the shortfall in the projections. The promoters were required to make the shortfall in liquid funds. Thus, the promoters had not complied with the Scheme, yet sought to make it binding on other parties. (Para 53)

With these observations, the Bench held that the Income Tax Department was not required to grant any further concessions contrary to the Income Tax Act, to the Respondent-company.

Cause Title: Pr Director General of Income Tax (Admn & TPS) Vs. M/s The Indian Plywood Mfg. Co. Pvt. Ltd. & Anr. [W.P.(C) 4876/2017 / 2023-Enterslice-5-HC-Del-IT]

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