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The Income Tax department Tuesday froze the bank accounts of Mahindra Satyam after the software firm failed to pay a tax demand of Rs.616 crore ($136 million).

Mahindra Satyam, the new brand identity of the fraud-hit Satyam Computer Services Limited, has moved the Andhra Pradesh High Court challenging the demand notice and seeking a stay on the proceedings.

The department’s decision comes after the Central Board of Direct Taxes (CBDT) dismissed the company’s plea challenging the notice served last year.

“We have moved the high court seeking an injunction order. The case is yet to come up for hearing,” Mahindra Satyam Chairman Vineet Nayyar told reporters.

The ministry of finance has also not responded to an application by the company to review the IT claim, Nayyar said.

The Mahindra Group company said that it was surprising that the Central Bureau of Investigation (CBI) and other government agencies were prosecuting former Satyam chief B. Ramalinga Raju for showing fictitious income, but the CBDT made the same fictitious income a basis for demanding taxes.

Nayyar argued that there cannot be any income tax on non-existing income. “Income tax will be paid only when there is income. In this case, it has been established that there was no income. Hence, there can’t be any tax on that,” he said.

The development could hamper the recovery of the fraud-hit company, which was once the country’s fourth largest software firm.

Earlier, the company, in a stock exchange filing, said the IT department issued notice to pay Rs.616.53 crore in taxes.

The demand notice was issued on the basis of the income declared by the company during the time of Ramalinga Raju. The department refused to buy the line that Satyam had fictitious income and insisted it was real income.

The CBDT under Section 119 of the Income Tax Act, 1961 rejected various petitions filed by the company, seeking relief in reopening of past assessments for the assessment years 2003-04 to 2008-09; determining the actual income based on the findings of investigating agencies and granting a stay on recovery proceedings for the said assessment years.

“Notice under Section 226(3) has been issued by the additional commissioner of Income Tax, Hyderabad, for recovery of Rs.616.53 crore. The company filed a writ petition before the high court challenging the said impugned order and seeking stay of further proceedings,” the company said.

Satyam was hit by India’s biggest corporate fraud in January 2009 when its founder and then chairman Ramalinga Raju confessed to overstating profits for the past several years.

The government took over the firm. Later, Tech Mahindra bought Satyam in an auction in April 2009 and rebranded it as Mahindra Satyam.

After conducting an extensive forensic audit of the company’s accounts for previous years, Mahindra Satyam announced the audited financial results for years ended March 2009 and March 2010 Sep 29 last year.

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