Tax Default by Kingfisher Airlines Case Study Part I

Kingfisher Airlines (KFA) was the dream Airlines, India had seen. It started operations in
2005 and shut down its op erations in 2012. During this period, the company suffered a
total Net Loss of over Rs.6000 Crores. The company has borrowed over Rs.8000
Crores from various banks, led by State Bank of India (SBI)
Income Tax defaultThe Company has deducted tax (TDS) from employees and
vendors (suppliers, contractors and professionals) but failed to remit the amount to the
government account to the tune of over Rs.400 Crores.
What Income Tax department can do in case of non remittance TDS amount by the
companies?
Interest The TDS defaulter is liable to pay simple interest at 1.5% for every month
from the date of deduction till the actual date of payment to the Government. In case of
Kingfisher, the TDS dues are from 2010 and the company has to pay interest till the day
they pay the amount to the Government. [Section 201(1A)]
Penalty Penalty is equal to the amount of tax not paid to the Government. In case of
Kingfisher, it is around 400 Crores, in addition to the TDS dues. [Section 271C]
Imprisonment The person shall be punishable with rigorous imprisonment for a term
which shall be between 3 months and 7 years, apart from fine!
Recovery of Tax If the TDS defaulter fails to pay after serving the notice by the
department, they can initiate the recovery of tax proceedings.
What income tax department did in case of KFA?
Stage One Recovery Proceedings
Summary of Facts As per the provision of Income Tax Act, the department with an
intention to protect the interests of the government revenue, empowers the AO for
provisional attachment of any property belonging to the defaulter. Based on this, all the
assets (including Kingfisher House located at Western Express Highway near the
Mumbai domestic airport) of Kingfisher Airlines are attached by the Income Tax
department.
Flow of events For those of you who are interested in knowing the brief flow of events
which unfolded in this case, the facts are given below -

Income Tax department conducted a survey on the premises of the company and
ascertained the total TDS done but failed to remit was to the tune of Rs.400 Crores

The Assessing Officer (read AO) passed an order in December, 2011 treating the
company as an assessee in default, levied interest and raised a demand.

The company appealed against the Order of AO before the Commissioner

(Appeals). The commissioner dismissed the appeal and confirmed the Order of AO

The company then appealed to Tribunal (read as ITAT) and the tribunal set aside
the order of commissioner and remanded the matter back to the AO

But Income Tax department being aggrieved approached High Court for a stay
on the ITAT remand order. High Court granted the stay on ITAT Order

In view of the stay order granted by the High Court, the AO issued demand notice
to the Company. Instead of paying the amount, the company approached the High
Court challenging the demand notice issued by AO

The High Court issued an interim order asking the company to deposit 50% of
the TDS dues.

Tax Default by Kingfisher Airlines case study Part II

KFA failed to deposit 50% of TDS dues as directed by High Court. So, the department
initiated Criminal Proceedings against KFA and its CEO.
Stage Two Criminal Proceedings
Summary of Facts The department initiated criminal proceedings against the company
and its CEO and the matter is pending with Special Court (Economic Offences)
Bangalore. Against the interim order of the special court, the company appealed at High
Court. High Court dismissed the appeal and then company went to Supreme Court
seeking Special leave Petition. Supreme Court dismissed the petition of the company.
Flow of events For those of you who are interested in knowing the brief flow of events
which unfolded in this case, the facts are given below

When the case stood as above, as a separate move, the Income tax department
filed 3 complaints against the company and its CEO at Special Court (Economic

Offences) Bangalore. The Court registered the cases and issued summons to the
company and its CEO.

The company aggrieved by the entire proceedings, appealed to High Court

seeking quashing of the orders of Special court. The company also said that the
Chairman (Mr. Mallya) is not involved in the day-to-day operations of the company
and hence he has to be spared from this legal process.

What High court said?

The criminal proceedings are independent of recovery proceedings. Both can be

done simultaneously. Nonpayment of TDS attracts criminal prosecution and
Nonpayment of TDS can be recovered through attachments!

The annual report of company specifies Mr. Mallya as the Chairman and Chief
Executive Offer (CEO) of the company. So, the CEO is held responsible as he was
a Principal Officer of the company.

The High court dismissed the petition filed by the Company on 18 th January, 2014

The company filed a Special Leave Petition against the high court directive to
pay 50% of TDS dues (What is special leave petition read an article written by
Co-panelist Mr. Ranganath, advocate) before the Supreme Court; and the same
was dismissed by the Apex Court.

So what is next?

The CEO has sought exemption from personal appearance before the Special
Court and his lawyers assured that he will be present in court when the case is
heard. (sometime now)

The case at Special Court regarding Criminal Proceedings and the case at High
Court regarding the recovery proceedings will be heard in due course and upon
the judgment we will know the next course of action.

Special Leave Petition

Article 136 of the Constitution of India gives power to the Supreme Court of India to
grant Special Leave of appeal against the orders of High Courts, Tribunals and other
Courts in the territory of India.
In terms of Article 136 of the Constitution of India:
(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion,
grant special leave to appeal from any judgment, decree, determination, sentence or
order in any cause or matter passed or made by any court or tribunal in the territory of
India.
(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or order
passed or made by any court or tribunal constituted by or under any law relating to the
Armed forces.
A Special Leave Petition may be filed against the orders of High Courts, Tribunals and
other Courts, at the discretion of Supreme Court of India, if there are any legal or
constitutional issues which arise due to orders of High Courts, Tribunals and other
Courts in India, which need consideration by the Supreme Court of India.
A Special Leave to appeal is granted at the discretion of Supreme Court of India. There
are no rules laid as to the circumstances under which Supreme Court of India may
exercise its discretion. The discretion is usually exercised by the Supreme Court of India
only in special and extra-ordinary situations where legal issues require its immediate
attention or where a question of law on general public importance arises.
In MahendraSaree Emporium II vs. G.V. Srinivasa Murthy (2005) 1 SCC 481, it was
stated that finality of a decision by a Court as per any law doesnt prevent Supreme
Court of India from exercising its jurisdiction under Article 136 of the Constitution of
India. A party may approach the Supreme Court of India for a Special Leave for appeal
even if there are appealable provisions in the concerned act or Constitution of India.

There are instances when the Supreme Court of India refused to entertain Special
Leave Petition and directed the litigants to exhaust provisions pertaining to appeal and
other remedies available under the law.
In Preetam Singh Vs. the State (1950), the Supreme Court of India observed that it will
exercise its jurisdiction on Special Leave to appeal only when exceptional and special
circumstances exist and substantial and grave injustice has been done by lower
Courts/Tribunals.
In Smt. TejKumari Vs. Commissioner of Income Tax (2001), in an important judgment,
the Division Bench of Patna High Court stated that if it is a case where Special Leave
Petition was summarily dismissed under Article 136 of the Indian Constitution, such
dismissal doesnt lay any law rather it should be construed as the Supreme Court has
held that the case is not fit enough for granting Special Leave Petition.
However, if the Supreme Court dismissesa civil appeal after hearing the parties holding
that the appeal has no merit, then such order becomes a law declared by the Supreme
Court binding all the courts within the territory of India under Article 141 of the
Constitution of India. As per Article 141, the law declared by the Supreme Court of India
shall bebinding on all courts within the territory of India.
Conclusion
In light of above precedents, it may be noted that Special Leave for appeal may be filed
with the Supreme Court of India under Article 136 of the Constitution of India against the
order of High Courts or Tribunals or other Courts within the jurisdiction of India, even if
appealable provisions are available to such petitioner.
The Supreme Court of India grants Special Leave Petition judicially, only when orders of
High Courts or Tribunals or other lower courts lead to incorrect interpretation of any law
or the Constitution of India.

There are no wide principles laid for granting of Special Leave to appeal either by the
Constitution of India or by the Supreme Court of India, except under Article 136 of the
Constitution of India. The only rule laid down by Supreme Court is that it will grant
Special Leave to appeal only in exceptional and special circumstances when substantial
and grave injustice is done by the order of the High Courts, Tribunals or other Courts in
the territory of India.