More frequently than not, we come across writ petitions challenging withholding of tax refund by the Revenue after processing of return. The issue is crucial given the mandate for revenue collection and on the other hand, the need for running the businesses smoothly. The legal battles against withholding of refund by the Revenue evolved differently with the insertion of Section 241A to put a check on Revenue's powers to withhold refund.

Mr. K. Senguttuvan (Partner, SAPAA Law Firm), Ms. S. Keerthana (Lead Associate) and Ms. S. Akarshana (Trainee Associate) discuss the development of the legal framework on withholding of refund - from the rigorous Section 143(1D) to a reasonable Section 241A. They analyse various rulings from different High Courts expounding on the necessity and significance of reasons to be recorded for withholding the refund and insufficiency in mere notice without proper reasons. They bring out the peculiarity of Delhi High Court judgment in Cooner Institute and remark that in the absence of compliance as per Section 241A, any blocking of refund would be bad in law and encouraging such practice would defeat the intention of law makers.

Catching Missed Bus for Withholding Refund by Equity - Justifiable?

The concept of withholding refund appears to have been settled after the introduction of Section 241A of the ITA, 1961 (through the Finance Amendment Act, 2017). Whereas, in reality it doesn’t seem to be. This article in an attempt to check if such a replacement from Section 143(1D) is a saviour remedy, analyses that when the intention of law makers is to enable quick redressal can the High Court’s attempt to rewrite it. Are High Courts empowered to do so?

The IT Returns filed u/s 139(1) or in response to a notice u/s 142(1), have to be processed u/s 143(1) by the Centralised Processing Centre (CPC) for the limited scope of arithmetical errors, addition of income appearing in Form 26AS while computing the total income of the return and such other mistakes that are enunciated u/s-143(1)(a) of the Act. and grant refund as per the returns, if there are no mistakes apparent on the face of the record. However, s.241A of the Act provides for blocking such refund granted if the AO anticipates any liability in the pending assessments.

Section143(1D) was the draconian provision, which allowed the AO to exercise his discretion and block the potential refund by suppressing the process u/s143(1), when notice u/s 143(2) is issued. The AO here assumed himself as the revenue collector for Government of India by forgetting him as a tax administrator with quasi-judicial powers. The rescinding of s.143(1D) and inserting 241A is a blessing, as it removes the discretion powers conferred with AO and moved to adjudication mechanism.

The birth of s. 241A is from instruction no.1 dated 13.01.2015 issued u/s 119 by CBDT, which was challenged before the High Court of Delhi[1] and Bombay[2]. The Courts held that such an instruction issued u/s 119 cannot be pre-judicial to the Assessee and struck down the instruction that was issued. Subsequent to this, the Government introduced the new section 241A and the authors here intend to review, whether this section is also pro-revenue or neutral.

• Whether the intimation u/s 143(1) issued by CPC, granting refund can be claimed as a matter of right by the Assessee or does the AO has the option to dwell further?

• Whether the year of refund and year for which potential tax liability is expected be different or same?

The Hon’ble Delhi High Court in Vodafone Mobile Services Ltd v. ACIT[3] held that, intimation is not equivalent to the right given to the assessee to demand for disbursal of refund when the notice u/s 143(2) is pending for disposal. However, the compliance contemplated u/s 241A should have been adhered for blocking the refund granted vide order u/s 143(1) until assessment u/s 143(3) is completed.

The time period for issuing notice u/s 143(2) is three months from the end of the Financial Year in which the return is filed, while the time period for processing returns u/s 143(1) is nine months from the same cut off date. Hence, CPC has additional six-month time to release intimation. Since AO has six- month time to issue notice u/s 241A and adhere to the process contemplated under the section, should AO wait for the intimation u/s 143(1) is the study under scrutiny.

Now, under the following three scenarios the concerns put forward are:

1. Issuance of s. 241A order just after the receipt of intimation u/s 143(1);

2. Issuance of s. 241A order much after intimation u/s 143(1) and a year after the receipt of notice u/s 143(2);

3. Issuance of s. 241A order just after the matter is escalated to the High Court.

Issuing order u/s 241A, just after the intimation is nowhere barred by the provisions for the reasons laid down by the Bombay High Court in the case of Vodafone supra held that mere intimation is not enough for refunding; AO’s consent is required for such remittance granting Refund.

Issuing order u/s 241A much after intimation u/s 143(1), but before initiation of any legal steps by the assessee, is also not barred by the time and covered by the decision in the case of Vodafone supra.

Finally, impending to the third question, issuing notice u/s 241A after matter has been escalated to the HC is a matter undealt, by any High Court.  The point of concern here is, whether issuance of notice u/s 241A is triggered by the Assessee’s action of escalating the blockage of refund without complying the requirement u/s 241A is legally tenable or not.

The following are the aspects dealt by the HC u/s 241A and they are:

• The check mechanism is provided in 241A itself.

i. The AO has to record the reasonings that if not such refund is withheld it can cause adverse effect to the revenue.

ii. Get the approval of Principal Commissioner or Commissioner.

This makes sure that the AO forms an opinion based on certain materials that AO got hold of. Introduction of s. 241A is to provide balanced perspective. Mainly, to reduce the delay and in doubtful cases, AO can do positive scrutiny by recording reasons u/s 241A, if it affects the Revenue adversely[4]. This way a revenue friendly provision is refrained from being applied mechanically.

• The Hon’ble Calcutta HC in Mcnally Bharat[5], held that, mere issuance of notice u/s 241A will not suffice to block the credit in the absence of proper reasons, causing adverse effects to Revenue and under due process of law. The court also insisted for completion of assessment at the earliest. The same ratio has laid down in Ericsson India (P) Ltd^[6]. and Cooner Institute of Health Care & Research Centre (P) Ltd[7].

• Further, in WRIT jurisdiction, court cannot enter into determination of tax liability of the Assessee. Determination of likelihood of finding as to whether there exists tax demand payable by or refund payable to the assessee is a proceeding u/s 143(3). Except when an appeal is preferred u/s 260A[8].

• The Hon’ble Delhi HC in Cooner has granted another opportunity for the AO to comply with s. 241A and the same was not referred in any decisions pronounced in last two years by any High Court.

• With all respects due to the Hon’ble Court, the decision is bad in law in Cooner for the following reasons and which also answers the question of law raised:

° In this case, personal hearing was granted without even serving notice u/s 241A; the personal hearing was in response to the three representations filed by the Assessee

° Court granted three-week time to the AO for passing reasoned order; but the AO failed to consider the fact that there was no order in place even when personal hearing was granted and only based on the directions of the Court the order was served which led to amendment of the Writ;

° Further, the notice u/s-241A was issued only to scuttle the process of disbursing the refund and therefore, a mechanical issuance of notice under the said section will render the purpose of s. 241A otiose and redundant;

° When there was no notice in place before blocking the credit, whether the ratification is tenable or not;

When the law is clear and categorical that, blocking can be done only after complying the s. 241A and, any opportunity for the AO to comply after exercising what ought to be done only after complying, will become precedent and defeat the reason for rescinding of Sec 143(1D). This would defeat the purpose of s. 241A and the discretion power exercised by the AO would be legalised by way of complying Sec 241A post exercising.

Since Cooner cannot be applied to answer the question whether, issue of notice u/s 241A post the assessee approaching the HC or even the Authority against the blocking of refund, is legally tenable or not?  - In such a scenario, the authors are of the opinion that, in the absence of compliance u/s 241A, any blocking of refund is bad in law and encouraging the same by the Courts in the interest of Revenue would defeat the intention of law makers.

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[1] TATA Tele Services v. CBDT [TS-5338-HC-2016(Delhi)-O]

[2] Group M. Media India (P) Ltd v. Union of India [TS-5901-HC-2016(Bombay)-O]

[3] [TS-7129-HC-2018(Delhi)-O]

[4] Huawei Telecommunications (India) Company (P.) Ltd v. Union of India [TS-5129-HC-2020(PUNJAB & HARYANA)-O]

[5] Mcnally Bharat Engineering Co. Ltd. v. ACIT [TS-6169-HC-2021(Calcutta)-O]

[6] Ericsson India (P) Ltd v. Additional Commissioner of Income Tax, [TS-5049-HC-2020(Delhi)-O]

[7] Cooner Institute of Health Care & Research Centre (P.) Ltd vs Income Tax Officer [TS-5279-HC-2020(Delhi)-O]

[8] G E Capital Mauritius Overseas Investments v. Deputy Commissioner of Income Tax, [TS-5614-HC-2021(Delhi)-O]