THE issue is – Whether Revenue can resort to adjustment of pending demand against refund due to the assessee without issuing notice u/s 245. No is the answer.
Facts of the case
The assessee, Vijay Singh Kadan, the legal heir of late Mr. Randhir Singh Kadan, has been constrained to approach the Court for a second time with this writ petition. The deceased Assessee had filed his return for the AY 2006-07 declaring taxable income of Rs. 25,64,290 which comprised income from salaries and income from other sources. The Assessee claimed tax exemption on long term capital gains with respect to sale of agricultural land. AO denied the exemption from capital gains. On appeal, CIT(A) partly allowed the appeal. Against the said order, both the Assessee and the Revenue filed their respective appeals before ITAT. During the pendency of the aforesaid proceedings, Revenue had recovered a sum of Rs. 1,40,17,266 from the Assessee during the period from 31st March 2009 till 24th March 2014. The Assessee also deposited certain amount on account of tax for AY 2006-07. It was stated that the total entitlement of tax credit of the Assessee for AY 2006-07 (excluding interest) was Rs. 1,45,28,863. ITAT allowed the Assessee’s appeal and dismissed the Revenue’s appeal. As a result, the Assessee was entitled to refund of the aforesaid tax payment/collection together with the statutory interest thereon. During the pendency of the above proceedings, the Assessee expired and the matter was pursued by his legal heir, Mr. Vijay Singh Kadan. Soon after the order of the ITAT, assessee submitted an application requesting the Revenue to grant appeal effect to the order of the ITAT and issue the refund along with the statutory interest. It had also sent reminders. The HC also dismissed the Revenue’s appeal against an order of the ITAT. Thereafter , the assesse sent a third reminder and explained that the Assessee had expired as a result of cancer and the assessee, his legal heir, was in urgent need of the refund along with statutory interest. When no response forthcoming even thereafter, the assesse filed Writ Petition, in which it was stated that the refund, consequent upon the appeal effect along with interest, in accordance with law, has been processed and the same shall be paid to the assessee within two weeks.
In the meanwhile, a computer generated letter was addressed to assessee by the Transaction Banking Unit of the State Bank of India enclosing a demand draft in the sum of Rs. 1,29,01,503 stating it to be on account of ‘income tax refund’ for AY 2006-07. The assessee states that his refund entitlement was Rs. 1.65 crore inclusive of interest and therefore, was surprised that a sum of Rs. 36.30 lakh had been withheld while granting refund. It was further stated that while following up the matter with the Revenue authorities the assessee was informed that the aforementioned sum which was adjusted pertained to demand for AY 2008-09. The assessee was furnished with a defaced refund adjustment voucher, which reveals that the net refund amount payable is shown as Rs. 1,65,35,770. In another portion thereunder titled ‘adjustments – regular refunds payable to income tax’, under a column titled ‘amount to be adjusted’ a demand of Rs. 20,68,392 (under Section 144A of the Act), penalty of Rs. 15,200 (Under Section 271(1)(b) and Rs. 15,48,222 (under Section 271 (1) (c) of the Act’) have been shown. The aggregate amount ‘to be adjusted’ worked out to Rs. 36,34,267 which, according to the assessee, was in fact adjusted against the total refund amount resulting in the assessee being issued a demand draft only for a sum of Rs. 1,29,01,503. The assessee’s contention was that such adjustment of demand pertaining to AY 2008-09, without prior intimation to the assessee or affording him an opportunity of being heard was in gross violation of Section 245. Further, the assessee stated that against the demand raised for AY 2008-09 by the AO, the assessee had already filed an appeal before the CIT (A) together with an application for stay which was pending disposal by the CIT (A).
Held that,
++ the power given u/s 245 is discretionary and not mandatory is indicated by the word ‘may’. Secondly, the set off is in lieu of payment of refund. Thirdly, before invoking the power, the officer is expected to give an intimation in writing to the Assessee to whom the refund is due informing him of the action proposed to be taken under this Section. We reiterate that the restrictions on the power u/s 241, as explained judicially, would apply with equal, if not appear, force to Section 245. A mechanical invocation of the power u/s 245 irrespective of the fact situation, can lead to misuse of the power by the Revenue in order to delay the refund till such time a fresh demand for the subsequent AYs is finalized. If reasonable time limits are not set for the processing of and disposal of an application for refund by the Revenue, it may result in the Assessee not being able to get the refund at all. Also, the statute by stipulating the payment of interest on refunds and interest on delayed refunds has underscored the importance of timely processing of refund claims. As already noticed, this discretionary power has to be exercised after giving an opportunity to the Assessee of being heard preceded by an intimation to the Assessee in writing of the action proposed to be taken u/s 245. A further implicit requirement is that the Revenue will have to be satisfied that the Assessee will not be in a position to satisfy the demand of tax and that but for the set off, the outstanding tax amount cannot be recovered at all;
++ in the present case although the refund voucher uses the word ‘adjustment to be made’ as far as the Petitioner is concerned, the refund issued was after the adjustment was made. The explanation offered by the Revenue that it was merely ‘withholding’ Rs. 36,34,267 pending verification and not ‘adjusting’ it is not acceptable. The Revenue is fully aware that the demand raised for AY 2008-09 had been challenged by the Petitioner before the CIT (A) and an application for stay of recovery of the demand had also been filed. The Revenue in fact does not dispute that both the appeal and the application are pending for disposal before the CIT (A). Therefore, it cannot be said that the withholding of the above amount was pending ‘verification’ of the demand for AY 2008-09 or AY 2010-11. Incidentally the show cause now issued to the Assessee u/s 245 is dated 21st March 2016, i.e., two months after notice had been issued by this Court in the present petition. Whatever the demand may be for the AYs 2008-09 and 2010-11, the fact remains that prior making the adjustment of such demand against the refund due to the Petitioner, no notice was issued to the Petitioner as mandatorily required u/s 245. By issuing a notice on 21st March 2016 u/s 245, two months after the notice was issued in the present petition, the Revenue cannot seek to correct the fatal error arising from the clear violation of the mandatory requirement u/s 245. Consequently, the Court issued the direction that the Revenue will forthwith issue to the Petitioner the balance refund of Rs. 36,34,267 together with statutory interest up to the date of the payment. The sum will be issued/credited to the Petitioner in the same manner in which the first instalment of Rs. 1,29,01,503 was paid, without any further delay and in any event not later than 9th May 2016. The CIT (A) will pass an order on the stay application filed by the Petitioner against the assessment order for AY 2008-09 within a period of four weeks from today and in any event not later than 23rd May 2016. Till such time the CIT (A) does not pass an order in the stay application filed by the Petitioner along with the appeal for AY 2008-09, no coercive steps should be taken by the Revenue to enforce the demand for AY 2008-09. In case of any disobedience of the aforesaid directions issued by the Court, it will be open to the Petitioner to apply to the Court. The writ petition is disposed of in the above terms, with no order as to costs.
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