Stay Applications are not a “Meaningless Formality”. No recovery during pendency of a stay application. S. 226(3) notice must ordinarily be pre-served on assessee

The assessee, an age-old charitable trust, amended its objects. Because of this change, the AO passed an order u/s 143(3) denying exemption u/s 11 and raised a demand of Rs. 11 crores. The assessee filed a stay application and requested a hearing. During the pendency of the stay application, the AO issued a notice u/s 226(3) and attached the assessee’s bank accounts. The notice specifically stated that the bank should not contact the assessee till payment was made. A copy of the said notice was not served on the assessee. The assessee filed a Writ Petition to challenge the recovery action undertaken by the department. HELD by the High Court allowing the Petition:

(i) The action of attaching the assessee’s bank account u/s 226(3) during the pendency of a stay application and without giving it notice was arbitrary and high handed. The whole object of serving a notice on the assessee is to enable the assessee to have some recourse. While in a given case, it may not be feasible to serve a prior notice on the assessee if there is an apprehension that the monies would be spirited away, this was not a case of that type. In a situation such as the present where appeals filed by the assessee are pending before the CIT (A) and the assessee had sought an opportunity of being heard and filed applications for stay, there was no justification whatsoever to proceed hastily with the enforcement of the recovery of the demand without disposing of the application for stay;

(ii) Applications for stay cannot be treated by the AOs & appellate authorities as meaningless formalities. Quasi judicial authorities have to apply their mind in an objective and dispassionate manner to the merits of each application for stay. While the interests of the Revenue has to be protected, it is necessary for AOs to realize that fairness to the assessee is an intrinsic element of the quasi judicial function conferred upon them by law. Applications for stay must be disposed of at an early date. Such applications cannot be kept pending to obviate compliance with the need to evaluate the contentions of the assessee until after monies are recovered using the coercive arm of the law. Appellate authorities must set down time schedules for disposal of stay applications with reasonable expedition. The manner in which recourse has been made to the coercive process of law, leaves much to be desired and the action which was pursued was completely high handed and arbitrary. There could have been absolutely no apprehension that the assessee in the present case was likely to spirit out the monies which were invested in Fixed Deposits. A part of the money has to be refunded to the assessee to carry out its day-to-day activities.