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September 4, 2020

Withholding of Income Tax refund mere due to issue of Scrutiny is not valid – Delhi HC

Withholding of Income Tax refund mere due to issue of Scrutiny is not valid – Delhi HC

Income tax refund is a process by which the Income Tax Department returns any excess tax paid by a taxpayer during a particular financial year (FY). This happens when the amount of tax paid by a taxpayer is more than his/her actual tax liability for that particular FY.

The excess tax can be claimed as an income tax refund under Section 237 of the Income Tax Act, 1961. The amount of income tax refund claimed by a taxpayer by filing ITR is subject to verification by the Income Tax Department.

However such refund can be withheld by the Department in certain cases. These provisions are covered under Section 241A of the Income-tax Act. According to Section 241A, where refund of any amount becomes due to the assessee under the provisions of section 143(1) and the Assessing Officer is of the opinion, having regard to the fact that a notice has been issued under section 143(2) in respect of such return, that the grant of the refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, as the case may be, withhold the refund up to the date on which the assessment is made.

Let us refer to the case of Conner Institute of Health Care And Research Centre Pvt. Ltd. Vs ITO (Delhi High Court) where the issue under consideration was whether the withholding of Income Tax refund mere due to issue of Scrutiny is valid or not?

Facts of the Case

  • Petitioner, a company providing hospital services to the general public, filed its return of income claiming refund on account of excess deduction of tax at source.
  • Revenue selected the case of the petitioner for limited scrutiny under Section 143(2). Subsequently, the ‘Centralised Processing Centre’ processed the return of income under Section 143(1) of the Act which resulted in a lower refund.
  • However, since the said refund was not granted, petitioner submitted various representations in this respect.
  • Thereafter, in a personal hearing granted to the petitioner, it was informed that the refund had been withheld under Section 241A of the Act.
  • Neither the copy of the order nor the reasons for withholding the refund was provided to the petitioner. Accordingly, the present petition was filed seeking directions in this regard.
  • During the course of hearing, the reasons for withholding the refund were provided to the petitioner and consequently, the petition was amended whereby the refund has been withheld.

Submissions by the Petitioner

  • Petitioner argued that the action of the respondent was contrary to Section 241A.
  • He argued that the Income-Tax Officer, with the approval of the PCIT, withheld the refund merely on the ground that the case of the petitioner has been selected for limited scrutiny and cited the same reason for which the scrutiny has been ordered to be undertaken.
  • He submitted that the aforesaid reasoning was thus inherently flawed and an invalid ground to withhold the refund.
  • In support of his submission, learned counsel for the petitioner relied upon the judgments of this Court in Maple Logistics Private Limited v Principal Commissioner of Income Tax and Ericsson India Private Limited v Assistant Commissioner of Income Tax.

Submissions by Revenue

  • Revenue on the other hand sought to distinguish the cases relied upon by the petitioner on facts.
  • Revenue argued that in the instant case, there were fact genuine reasons for withholding the refund and therefore, the AO had rightly exercised the jurisdiction under Section 241A.
  • The case of the petitioner had been selected for limited scrutiny and therefore till the finalization of the assessment, the refund has been rightly withheld under Section 241A of the Act.

Reference to Maple Logistics Private Limited v Principal Commissioner of Income Tax case by High Court (HC)

In the case of Maple Logistics,the HC had specifically stated that:

  • The AO completely lost sight of the words in the provision to the effect that, “the grant of the refund is likely to adversely affect the revenue”.
  • The reasons that were relied upon by the Revenue to justify the withholding of the refund, lacked in reasoning. Except for reproducing the wordings of Section 241A, they did not state anything more.
  • The entire purpose of Section 241A would be negated and it would be unjust for the AO to withhold the refund, by citing the reason that the scrutiny notice was issued.
  • Such an interpretation of the provision would be completely contrary to the intent of the legislature. The AO was affected by the fact that since the case of the assessee was selected for scrutiny assessment, he was justified to withhold the refund of tax.
  • The power of the AO was outlined and defined in terms of the Section 241A and he should have proceeded giving due regard to the fact that the refund was determined.
  • The fact that notice under section 143(2) was issued, would obviously be a relevant factor, but that could not be used to deny refunds.
  • The AO was required to apply its mind and evaluate all the relevant factors before deciding the request for refund of tax.
  • The relevant factors would be the prima facie view on the grounds for the issuance of notice under section 143(2), the amount of tax liability that the scrutiny assessment may eventually result in vis-a-vis the amount of tax refund due to the assessee, the creditworthiness or financial standing of the assessee and all factors which address the concern of recovery of revenue in doubtful cases.
  • Merely because a notice has been issued under section 143(2), it is not a sufficient ground to withhold refund under section 241A

Reference to Ericsson India Private Limited v Assistant Commissioner of Income Tax case by High Court (HC)

In the case of Ericsson (Supra), the views were reiterated by the HC by stating that:-

  • The refund of amounts claimed – where they appear justified, by itself cannot be said to be adverse to the interest of the revenue.
  • The interest of revenue lies in collecting revenue in a legal and justified manner.
  • It does not lie in retaining the collected taxes in excess of what is justified, since the excess collection cannot even be properly termed as “revenue”.
  • The excess collection of tax is a liability of the State and it lies in the interest of the revenue of the State to discharge its interest bearing liability without any delay.
  • Any lapse in this regard tarnishes the image and credibility of the sovereign.
  • It certainly cannot act like any unscrupulous businessman, who is seen to dodge his liabilities by resort to frivolous excuses and devious ways.

Conclusion by HC in the present case

  • It was apparent to the HC that the only ground for withholding refund was that since case of the petitioner was selected for scrutiny, under Section 143(2), the assessment was yet not complete and therefore genuineness of the refund claimed by the assessee was yet to be verified.
  • The exercise of withholding of refund under section 241A of the Act, pursuant to notice u/s 143(2) of the Act, without recording justifiable reasons, was not in agreement with the legislative intent and mandate of the aforesaid provision.
  • The reasons cited did not support the finding that refund would adversely affect the Revenue.
  • Therefore, HC held that the reasoning given by the Income-Tax Officer was contrary to Section 241A.
  • Accordingly, HC set aside the impugned communication/ order.
  • HC granted 3 weeks time to the respondents to re-consider the aspect whether the amount found due to be refunded, or any part thereof, was liable to be withheld under Section 241A in line with the decisions of the court as noted above.
  • HC directed that the entire consideration, with the approval of the Principal Commissioner of Income Tax to the withholding of the refund amount, should be completed within 3 weeks, failing which, without awaiting any further orders, the respondents shall transmit the amount of refund determined under section 143 (1) of the Act along with interest to the petitioner.
  • In the eventuality of the respondents recording any reasons for withholding a part thereof, or the entire amount due for refund to the petitioner under Section 143(1), the reasons thereof as approved by the Principal Commissioner of Income Tax shall be provided to the petitioner forthwith.
  • It shall be open to the petitioner to take remedial steps in respect of any orders for withholding of refund that may be passed.
  • Also the reasons recorded for withholding of refund under section 241A would only amount to a tentative view and would not come in the way of the AO to frame the assessment under section 143(3) of the Act.

Therefore denying of refund merely because the case is selected for scrutiny will be considered as invalid.

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