KVSS Cannot Bar Refund of Tax Outside Settlement: Rajasthan HC

CIT Vs Hindustan Zinc Ltd. (Rajasthan High Court)

Summary: The Rajasthan High Court decided two connected Revenue appeals concerning Hindustan Zinc Ltd. arising from a common ITAT order, but reached different conclusions for AY 1993-94 and AY 1995-96 because the scope of the respective Kar Vivad Samadhan Scheme, 1998 (KVSS) settlements differed materially. For AY 1993-94, the KVSS certificate dated 02.02.1999 reflected an outstanding demand of Rs.20,30,04,511 entirely towards interest, against which Rs.10,15,02,255 was paid. Subsequently, while giving effect to an ITAT order relating to AY 1992-93, the Assessing Officer determined a brought-forward loss of Rs.5.53 crore available for set-off against AY 1993-94 income. The High Court held that the assessee’s right to consequential refund crystallised only through the order dated 30.12.2002 and could neither have been included nor covered by the earlier KVSS declaration and certificate. Since no outstanding income-tax demand was covered by the AY 1993-94 certificate, the Court agreed with the ITAT that the assessee’s right to set-off and refund could not be denied merely because it had availed KVSS in relation to interest. Revenue’s D.B. ITA No.96/2008 was therefore dismissed. For AY 1995-96, however, the certificate dated 03.02.1999 recorded a total outstanding demand of Rs.50,30,76,207, including income tax of Rs.22,13,44,799, and Rs.16,84,14,519 was paid in full and final settlement. The High Court held that refunding tax attributable to the subsequently determined brought-forward loss of Rs.4,03,12,165 would reduce the settled income-tax demand and effectively reopen the conclusive KVSS settlement, contrary to Section 90(3) of the Finance (No.2) Act, 1998. Accordingly, the ITAT’s refund direction for AY 1995-96 was set aside and Revenue’s D.B. ITA No.161/2008 was allowed.

FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT

1. These two appeals filed by the Revenue are being disposed of by this common order, as the facts involved are analogous and both appeals arise out of the same order dated 23.01.2008 passed by the learned Income Tax Appellate Tribunal (ITAT).

1.1. By the impugned order, the ITAT set aside the appellate order dated 04.03.2004 passed by the Commissioner of Income Tax (Appeals) [for short- CIT(A)]. In the CIT(A) order it was held that the amount paid by the assessee was deemed to have been paid under the Kar Vivad Samadhan Scheme, 1998, and therefore no refund could be granted in view of Section 93 of the Finance (No. 2) Act, 1998. The CIT(A) further held that the Assessing Officer was justified in not granting refund with reference to the reduced income. Consequently, the assessee’s appeal was dismissed.

2. BRIEF BACKDROP:

2.1. Pursuant to the Kar Vivad Samadhan Scheme, 1998 (hereinafter referred as ‘KVSS’), the assessee submitted a declarations under Section 88 of the Finance (No.2) Act, 1988 qua the Assessment Years (A.Y.) 1993-94 and 1995-96. In this connection, the CIT, Udaipur issued two certificates dated 02.02.1999 and 03.02.1999, respectively under Section 90(2) read with Section 91 of the Act, ibid. In these certificates issued by the CIT, Udaipur it has been stated inter alia as under:

Certificate dated 02.02.99 AY 1993-94:

“And whereas the Designated Authority by order dated 6.1.99/28.1.99 determined the amount of Rs. 10,15,02.255/- payable by the declarant in accordance with the provisions of the Scheme and granted certificate setting forth therein the particulars of tax arrears and the sum payable after such determination towards full and final settlement of tax arrears as per details given below:

And whereas the declarant has paid Rs. 10,15,02,255/- on 1.2.99 being the sum determined by the designated authority.”

x-x-x-x-x

Certificate dated 03.02.99 AY 1995-96:

“And whereas the Designated Authority by order dated 4.1.99/1.2.99 determined the amount of Rs. 16,84,14,519/- payable by the declarant in accordance with the provisions of the Scheme and granted certificate setting forth therein the particulars of tax arrears and the sum payable after such determination towards full and final settlement of tax arrears as per details given below:

And whereas the declarant has paid Rs. 16,84,14,519/- on 2.2.99 being the sum determined by the designated authority.

x-x-x-x-x

Now, therefore, in exercise of the powers conferred by sub Section (2) of Section 90 read with Section 91 of the Finance (No.2) Act, 1988, the designated authority hereby issues this certificate to the said declarant

(a) Certifying the receipt of payment from the declarant towards full and final settlement of tax arrears determined in the order dated 4.1.99/1.2.99 on the declaration made by the aforesaid declarant,

(b) Granting immunity, subject to the provisions contained in the scheme, from instituting any proceeding for prosecution for any offence under Aaykar or from imposition of penalty under the enactment in respect of matters covered in the aforesaid declaration made by the declarant”

x-x-x-x-x

2.2. For giving effect to the order of the learned ITAT in ITA Nos. 639/JP/98 dated 30.09.2002 and 635//JP/98 dated 24.09.2002, in relation to Assessment Year (A.Y.) 1993-94 the Assessing Officer/Assistant Commissioner of Income Tax, Circle 2, Udaipur passed order dated 30.12.2002 (Annexure-3) holding as under:

It is found that the assessee has paid demand for the assessment year 1993-94, as per the provisions of Kar Vivad Samadhan Scheme, 1998 at Rs. 10,15,02,225/- on 1-2-99 in respect of the above mentioned income of Rs. 42,57,61,140/. Since the assessed income of Rs. 42,57,61,140/- is covered by KVSS, the tax paid there on can not be refunded. As such, refund on account of setting off of loss in the assessment year 1993-94 is not allowable to the assessee.”

2.3. While deciding assessee’s appeal against said order of the Assessing Officer, an order dated 04.03.2004 (Annexure-2) qua A.Y. 1993-94 was passed by the CIT(A) dismissing the appeal and holding/directing as under :

“Keeping in view the above facts it is clear that the above amount, which has been paid by the assessee is also deemed to have been paid under the KVSS scheme and accordingly, no refund can be granted as per the provisions of Section 93 off the said Act. In view of the above, the AO was justified in not granting the refund with reference to the reduced income.”

2.4. Appeal against the said order dated 04.03.2004 filed by the assessee was accepted vide impugned order dated 23.01.2008 (Annexure-1) passed by the learned ITAT of which the relevant part is as under:

“To same extent is the judgment in the case of Faridabad Investment Co. Ltd [supra]. The idea underlined in these judgments is the conclusiveness of the certificate issued under KVSS and not the matters which are outside the purview of this Scheme. As the assessee had not opted for KVSS with reference to payment of tax on the assessed income, the matters connecting therewith are open to the regular proceedings available under the Act. Admittedly, the appeal of the assessee for the preceding A.Y. was decided after filing of KVSS declaration and the AO, on giving effect to the order passed by the Tribunal determined the loss of Rs. 5.53 crores available for set off against the income of the instant year. We are, therefore, of the considered, opinion that the right of the assessee for claiming set off cannot be snatched simply for the reason that it had availed the benefit of KVSS for the interest payable under the Act. We, therefore, hold that the amount of tax on the brought forward loss of Rs. 5.53 crores be refunded to the assessee. However, the assessee would not be entitled to interest on the refund to the extent of the amount having been covered under the declaration. The order of the Ld. CIT(A) is, therefore, set aside. As the necessary details are not emanating for the calculation of the refund, we direct the AO to decide this matter in consonance with our directions contained hereinabove after allowing hearing opportunity to the assessee.

8. In the result, the appeal is allowed for statistical purposes.

Α.Υ. 1995-96

9. Grounds raised by the assessee in this year are mutatis mutandis similar to those of A.Y. 1993-94. Both the sides are in agreement that the facts and circumstances of this year are similar to those of the earlier year. We, therefore, set aside the impugned order and restore the matter to the file of the AO for a fresh decision in accordance with the directions given in A.Y. 1993-94. Needless to say the AO would allow reasonable opportunity of being heard to the assessee before deciding the matter.

10. In the result, the appeal is allowed for statistical purposes.”

2.5. The revenue filed the appeal No.96/2008 seeking to set aside/quash the impugned order dated 03.10.2009 passed by the learned ITAT and for affirming the order dated 18.12.2008 passed by the CIT(A).

3. The appeal was admitted vide order dated 21.02.2011 on following substantial questions of law:

(i) Whether the Tribunal was justified in directing A.O. to refund amount of tax which according to the assessee they had become eligible to claim as carry forward loss of earlier year?

(ii) Whether the Tribunal was justified in properly interpreting KVSS scheme with reference to the claim of the asessee relating to refund?

4. Another connected appeal No. 161/2008 pertaining the A.Y. 1995-96 was admitted vide order dated 21.02.2011 on following substantial questions of law:

(i) Whether the Tribunal was justified in directing A.O. to refund amount of tax which according to the assessee they had become eligible to claim as carry forward loss of earlier year?

(ii) Whether the Tribunal was justified in properly interpreting KVSS scheme with reference to the claim of the assessee relating to refund?

5. We have heard the learned counsel for the parties and with their able assistance have gone through the record.

ARGUMENTS OF THE APPELLANT/REVENUE

6. Learned counsel for the appellant argued in line with the grounds taken in appeal urging, inter alia, that the reasoning put forth by the learned Tribunal is miscounted, as interest and tax cannot be segregated as they are related to the “disputed income”;

6.1. That if there had been no disputed income, there would not have been any tax payable or interest payable;

6.2. That it cannot be said that the refund can be made in respect of tax paid in pursuance of the settlement under KVSS even though there is no bar to the refund out of tax already paid (prior to KVSS);

6.3. That in determining the demand as on 31.03.1998, the tax already paid (prior to KVSS settlement) were taken into account to arrive at the quantum of tax arrears;

6.4. That the assesee having opted for KVSS, had accepted the amount of income and tax which had been determined;

6.5. That the amount paid by the assesee is deemed to have been paid under the KVSS and that as per the provisions of Section 93 of the Finance (No.2) Act, 1988, any amount paid in pursuance of declaration under Section 88 is not refundable under any circumstances.

7. To sum up, it is contended that the learned Tribunal has erred while directing that amount of tax on brought forward loss of Rs.5.53 crores be refunded to the assessee.

ARGUMENTS OF THE ASSESSEE

8. Learned counsel for the assessee contested the aforesaid submissions.

8.1. It was argued that the amount of brought forward loss of Rs. 5.53 crores and consequential refundable tax was not the subject matter of or covered by the assessee’s declaration and the certificate under sub Section (2) of Section 90 read with Section 91 of the Finance (No.2) Act, 1988, issued by the designated authority. The same being outside the scope of the KVSS.

8.2 The assessee was entitled to refund of tax on amount of the brought forward loss of Rs. 5.53 crores. The learned Tribunal had thus rightly granted the refund of tax, is the argument.

DISCUSSION AND ANALYSIS

9. Having heard the rival contentions and upon perusal of the record, we shall now proceed to render our opinion in light of the discussion and the reasons stated hereafter.

10. Relevant part of certificate dated 02.02.99 A.Y. 1993-94under sub Section (2) of Section 90 read with Section 91 of the Finance (No.2) Act, 1988, issued by the designated authority reproduced above shows that the settlement under KVSS was only in respect of the outstanding demand of interest and absolutely no outstanding demand of tax was shown therein, let alone covered by the settlement under KVSS.

11. The assessee’s right to refund of tax crystallized by virtue of order dated 30.12.2002 (Annexure-3) passed by the Assessing Officer/Assistant Commissioner of Income Tax, Circle 2, Udaipur, whereby the brought forward loss of Rs.5.53 crores was set off against the income for A.Y. 1993-94. It could not possibly have been nor was it included/ covered by the antecedent declaration of the assessee and certificate dated 02.02.99 A.Y. 1993-94issued by the designated authority under the KVSS.

12. The fact here is that there was no outstanding demand of tax on income as is evident from certificate dated 02.02.99 A.Y. 1993-94 issued by the designated authority under the KVSS and that the entire outstanding demand of Rs. 20,30,04,511/- was only on account of interest. The contention of the learned counsel for appellant that if there had been no disputed income, there would not have been any tax payable is, thus, against record and is, therefore, rejected.

13. We are unable to accept the contention on behalf of the revenue that in determining the demand for A.Y. 1993-94 as on 31.03.1998, the tax already paid (prior to KVSS settlement) was taken into account to arrive at the quantum of tax arrears. Here the assessee had paid tax on the amount of Rs.5.53 crores for the previous year (A.Y. 1992-93). This amount of Rs.5.53 crores being the loss of income for AY 1992-1993 was brought forward and reduced from the income of A.Y. 1993-1994 vide AO’s order dated 30.12.2002 Annexure-3. KVSS settlement pertained to the A.Y. 1993-94.

13.1.Certificate dated 02.02.99 for A.Y. 1993-94 issued by the designated authority under the KVSS shows that the entire outstanding demand of Rs.20,30,04,511/- was only on account of interest. In this situation, it makes no difference if, as contended, that in determining the demand for A.Y. 1993-94 as on 31.03.1998, the tax already paid (prior to KVSS settlement) were taken into account to arrive at the quantum of tax arrears.

14. Certificate dated 02.02.99 for A.Y. 1993-94 issued by the designated authority under the KVSS does not make any mention of the amount of assessee’s income and/or outstanding demand for tax. The entire outstanding demand was for interest only. It cannot, therefore, be said, as contended that the assesee having opted for KVSS, had accepted the amount of income and tax which had been determined.

15. Tax on the income of Rs.5.53 crores had been paid by the assessee for the previous year (A.Y. 1992-93). Tax paid on that amount for AY 1992-93 cannot, therefore, be said to been paid under the KVSS, which was for A.Y. 1993-94.

16. While passing the impugned order, the learned ITAT held that under the KVSS, conclusiveness is of the certificate under sub Section (2) of Section 90 read with Section 91 of the Finance (No.2) Act, 1988 issued by the designated authority and not the matters which are outside the purview of this Scheme. As the assessee had not opted for KVSS with reference to the payment of tax on the assessed income, the matters connected therewith were open to the regular proceedings available under the IT Act. Admittedly, the appeal of the assessee for the preceding A.Y. (1992-93) was decided after filing of KVSS declaration and the AO, on giving effect to the order passed by the Tribunal (ITAT), determined the loss of Rs.5.53 crores available for set off against the income of the instant year (1993-94).

16.1. The learned Tribunal was, therefore, of the considered opinion that the right of the assessee for claiming set off cannot be snatched simply for the reason that it had availed the benefit of KVSS for the interest payable under the Act.

16.2. The learned Tribunal, thus also held and directed that the amount of tax on the brought forward loss of Rs. 4,03,12,165/- be refunded to the assessee. We are inclined to agree with the aforesaid sound reasons recorded, the conclusion reached and direction given by the learned ITAT and affirm the same.

17. As a result, we hold that the learned Tribunal was justified in directing A.O. to refund amount of tax which, according to the assessee, they had become eligible to claim as carry forward loss of earlier year and that the learned Tribunal was justified in properly interpreting KVSS scheme with reference to the claim of the assessee relating to refund. The substantial questions of law reproduced above are answered accordingly.

18. It thus follows that the appeal No. DB ITA No.96-2008 of the revenue concerning the A.Y. 1993-94 is liable to be dismissed.

19. We now turn to Revenue Appeal No. DB ITA No. 161/2008 relating to Assessment Year (A.Y.) 1995–96.

20. As per the certificate dated 03.02.1999 issued by the Designated Authority under Section 90(2) read with Section 91 of the Finance (No. 2) Act, 1998, for A.Y. 1995–96, the total outstanding demand was Rs. 50,30,76,207/-. This comprised:

a). Rs. 22,13,44,799/- towards income tax;

b). Rs. 23,94,46,911/- towards interest; and

c). Rs. 4,22,84,497/- towards further interest.

Against the said demand, the Designated Authority determined a sum of Rs. 16,84,14,519/- payable by the declarant under the Kar Vivad Samadhan Scheme (KVSS). The declarant paid the said amount on 02.02.1999, and thereafter the certificate was issued certifying receipt of payment in full and final settlement of the tax arrears determined pursuant to the declaration made by the assessee.

21. While giving effect to the order of the learned ITAT in ITA No. 84/JDPR/99 for A.Y. 1994–95, the Assessing Officer / Assistant Commissioner of Income Tax, Circle-2, Udaipur passed order dated 30.12.2002 (Annexure-3), whereby the brought forward loss for A.Y. 1994–95 was recomputed and adjusted against the income of A.Y. 1995–96. After such adjustment, the net income for A.Y. 1995–96 was determined at Rs. 70,85,31,785/-. Relevant extract of the said order dated 30.12.2002, Annexure-3, is as under:

“The set off of loss for the assessment year 1994-95 is allowed in the assessment year 1995-96 as under:

Less: Already set of in Assessment year 1995-96:

Since it is found that the assessee had paid tax of Rs. 16,84,14,519/- on 2-2-1999 under Kar Vivad Samadhan Scheme in respect of income of Rs. 74,07,38,947/- and the income of Rs. 74.07.38.947/- is covered by KVSS tax paid on income of Rs. 74,07,38,947/- cannot be refunded to the assessee. Since the subsequent addition of Rs. 81,05,000/- is not covered by KVSS the tax and interest u/s 234B and 220(2) thereon total of which comes to Rs. 1,07,89,327/- along with interest u/s 244A is refunded to the assessee by this Order. Refund in respect of the remaining sum of Rs. 3,22,07,165/- (Rs. 4,03,12,165/- minus Rs. 81,05,000/-), which is in respect of Rs. 74,07,38,947/-being covered by KVSS, is not allowable to the asseessee.”

21.1. The Assessing Officer thus further held that since the assessee had already paid Rs. 16,84,14,519/- under the KVSS in respect of income of Rs. 74,07,38,947/-, and such income stood covered by the settlement, no refund of tax paid under the KVSS could be granted. However, as a subsequent addition of Rs. 81,05,000/- was not covered under the KVSS, refund of tax and interest thereon was granted to that limited extent. Refund relating to the balance amount of Rs. 3,22,07,165/- was denied, as it pertained to income already covered under the KVSS settlement.

22. The assessee’s appeal before the CIT(A) was dismissed. Thereafter, the matter was carried in appeal before the learned ITAT, which passed the impugned order dated 23.01.2008 directing that the tax attributable to the brought forward loss of Rs. 4,03,12,165/- be refunded to the assessee.

23. In our considered opinion, the learned ITAT erred in arriving at this conclusion and in directing refund of tax on the said amount. Let us see how.

24. The learned ITAT rightly held that conclusiveness attaches to a certificate issued under Section 90(2) read with Section 91 of the Finance (No. 2) Act, 1998 under the KVSS Scheme. However, having so held, the Tribunal contradicted itself in further directing refund of tax on the brought forward loss of Rs. 4,03,12,165/-.

25. As noted above, the certificate dated 03.02.1999 for A.Y. 1995–96 records that the total outstanding demand of Rs. 50,30,76,207/- included Rs. 22,13,44,799/- towards income tax. Against this total demand, the assessee paid Rs. 16,84,14,519/- in full and final settlement under the KVSS. Consequently, the entire remaining outstanding demand stood extinguished.

26. If, as directed by the learned ITAT, tax on the brought forward loss of Rs. 4,03,12,165/- were to be refunded, it would necessarily result in a corresponding reduction of the income tax demand of Rs. 22,13,44,799/- for A.Y. 1995–96, thereby reopening the conclusive settlement evidenced by the certificate dated 03.02.1999.

27. We are of the view that such a recourse is impermissible in light of the bar contained in Section 90(3) of the Finance (No. 2) Act, 1998, which provides that every order determining the sum payable under the Scheme shall be conclusive as to the matters stated therein, and no matter covered by such order shall be reopened in any proceeding under any direct tax enactment or any other law in force.

28. Further, any reduction of the settled demand would undermine the finality and integrity of the KVSS settlement. It would also confer an undue and unfair benefit upon the assessee, over and above the substantial benefit already obtained by settling an outstanding demand of Rs. 50,30,76,207/- on payment of only Rs. 16,84,14,519/-.

29. Thus we hold that the learned Tribunal was not justified in directing the Assessing Officer to refund tax which, according to the assessee, became refundable on account of carry forward loss of an earlier year. The Tribunal failed to correctly interpret the KVSS Scheme in relation to the assessee’s refund claim.

30. The substantial questions of law framed vide order dated 21.02.2011 in Appeal No. 161/2008 pertaining to A.Y. 1995–96 are answered accordingly.

CONCLUSION

31. It follows that Revenue Appeal No. 161/2008 relating to A.Y. 1995–96 deserves to be allowed by setting aside the direction contained in the impugned order requiring refund of tax on the brought forward loss of Rs. 4,03,12,165/-. We order accordingly.

32. In the earlier part of this order, by giving reasons, it has been held that the appeal No. DB ITA No. 96-2008 of the revenue concerning the A.Y. 1993-94 is liable to be dismissed and it is accordingly so ordered.

33. All pending applications also stand disposed of.