In this article we are going to discuss the judicial view to the provisions of section 241A inserted by Finance Act, 2017. However, prior to that, it would be prudent that due regards be given to the provisions prevailing prior to the Finance Act, 2017.
1. Legislative Background
2. Processing of Return prior to Finance Act, 2016
On filing of the Income Tax Return, section 143(1) provides for processing such return by the Central Processing Centre – Bangalore. However, processing of return was not necessary where a notice for conducting scrutiny assessment was issued under-section 143(2) of the Act. Consequent to non-processing of return, no refunds were issued.
3. Processing of return post amendment made by Finance Act, 2016.
Processing of returns were not necessary if a notice for conducting scrutiny assessment was issued under-section 143(2) of the Act but however, it needs to be processed before an order is passed under-section 143(3) of the Act.
On account of such provisions of the Act (both prior and post amendment by Finance Act, 2016), the Judicial precedents has often reiterated that though it was discretionary upon the Tax Authority to process the refund before the completion of assessment proceedings, however, the same could not be exercised merely because a notice under section 142(2) stood issued.
4. Processing of return and issuance of refund post amendment made by Finance Act, 2017.
a. Amendment to Section 143(1D)
The proviso to sub-section (1 D) is now amended to state that for all returns filed for AY 2017- 18 onwards, processing of return is mandatory even when a notice under-section 143(2) is issued. Therefore, from AY 2017-18 onwards, all returns filed will have to be mandatorily processed by the CPC-Bangalore.
b. Insertion of new section 241A
Section 241 A was inserted into the statue which gave power to the Tax Authority to withhold the refund determined in the Intimation issued u/s 143(1) for AY 2017-18 onwards, subject to certain pre-requisites which are to be fulfilled by the Tax Authority. The said section was very similar to section 241 of the Act which was omitted w.e.f 01 June 2001.
c. Legislative Intention behind the above Amendment
The Memorandum to the Finance Act, 2017 stated that the amendment in the proviso to section 143(1 D) is made with a view to address the grievance of delay in issuance of refund in genuine cases which are routinely selected for scrutiny assessment.
The Memorandum to the Finance Act, 2017 further stated that the new section 241A is inserted with a view to address the concern of recovery of revenue in doubtful cases. Therefore, such a section was only inserted to plug-in the recovery concerns of the revenue in doubtful cases and not in genuine cases.
5. Analysis of Section 241A of the Act.
Section 241A of the Income Tax Act, 1961 empowers the Income Tax Authority to withhold the refund due to the taxpayer which was determined in the intimation issued under-section 143(1) of the Act. The said section applies to all assessment years starting on or after 01 April 2017. In order to give effect to the provisions of the Act, the Tax Authority needs to satisfy the below:
1. Refund should be due for Assessment Year starting 01 April 2017
2. Refund becomes due on account of Intimation issued u/s 143(1) of the Act
3. Notice issued u/s 143(2) of the Act
4. Granting refund is likely to adversely affect the revenue
5. Reasons in writing to withheld refund with previous approval of Principal Commissioner or Commissioner
On satisfying the above and in accordance with the legislative intent to introduce such a section, the Tax Authority having valid authority in law can withheld the tax refund due to the taxpayer.
However, this section has been a subject matter of litigation wherein the taxpayers have been filing writ petition before Hon’ble High Courts seeking Courts direction to direct the tax authority to issue refund wherein a valid reason is not recorded to withhold the refund and that the refunds are still withheld since a notice u/s 143(2) is issued.
Judicial Precedents
In the case before the Hon’ble Court, the return of income was not processed u/s 143(1) of the Act and a notice was issued by the Assessing Officer proposing to withhold the refund relatable to assessment year 2017-18, in view of section 241 A
Against such a notice, the assessee filed an instant application before the Bombay High Court and the Court held as below:
“Section 241A of the Act empowers the Assessing Officer to withhold the refund which has become due for reasons stated therein, this only after determining the refund due under section 143(1) of the Act. It is an undisputed position that neither the regular return of income nor the revised return of income for the subject assessment year has been processed under section 143(1) till date. Consequently, the occasion to withhold any refund under section 24 1A at this stage does not arise. Therefore on the admitted facts the application/ invocation of section 24 1A of the Act is premature. [Para 9]
“In view of aforesaid impugned show-cause notice proposing to withhold refund due is quashed and set aside. [Para 10]”
Therefore, from the above it can seen that the Hon’ble Bombay High Court quashed the notice of the Tax Authority for not complying with the provisions of section 241 A of the Act.
In the case before the Hon’ble High Court, the assessee having filed return of income for AY 2017-18 onwards, claimed refund of TDS deducted by its customers/clients. The case of the assessee was selected for scrutiny assessment. On account of acute financial hardship and non-issuance of refund the assessee filed a writ petition with the Hon’ble Court. Before the Court, the Department conceded that the refund was withheld u/s 241 A of the Act.
The Hon’ble Court while adjudicating the matter walked through the legislation history of such provisions. Prior to insertion of section 241A, a similar section 241 prevailed in the Act which was omitted w.e.f. 01 June 2001. The provisions of such section are similar to the present provision of section 241 of the Act. In the erstwhile section 241 the Tax Authority could have withheld refund if the “grant of refund is likely to adversely affect the revenue”. However, in the newly inserted Section 241A, adverse effect on the revenue is the sole ground for such withholding. Therefore, the Hon’ble Court believed that scope of the power has been further narrowed, making it clear that a speaking order is required to be passed culling out the reasons as to how the grant of refund is likely to affect the Revenue.
Further, it was noted that it was a case against the erstwhile section 241 wherein the courts in several following decisions it has been held that the order withholding refund must essentially reflect that the grant of refund is likely to adversely affect the revenue:
1. Ashwin D Mehta (HUF) CIT [1 995] 215 ITR 411 (Gujarat)
2. Naurata Ram CIT [1 998] 100 Taxman 266 (Punj. & Har.)
3. Shreyans Industries Ltd. CIT [1 998] 101 Taxman 498/[2001] 252 ITR 544 (Punj. & Har.)
4. Pioneer Sports Works (P.) Ltd. CIT [1 997] 94 Taxman 29/227 ITR 89 (Punj. & Har.)
The Judiciary concluded in the following manner:
a. Prior to the amendment vide Finance Act, 2017, the processing of return cannot be kept in abeyance, merely because a notice has been issued under section 143(2) of the Act.
b. It does not mean that in every case where a notice has been issued under Sub-Section (2) of Section 143 and the case of the Assessee is selected for scrutiny assessment, the determined refund has to be withheld.
c. The legislature has not intended to withhold the refunds just because scrutiny assessment is pending. If such would have been the intent, Section 241A would have been worded so.
d. Sufficient checks and balances have been built in under the said provision and same have to be given due consideration and meaning. An order under section 241A should be transparent and reflect due application of mind.
e. The discretion vested with the AO has to be exercised judiciously and is conditioned and channelized.
f. The AO is required to apply its mind and evaluate all the relevant factors before deciding the request for refund of tax. Such an exercise cannot be treated to be an empty formality and requires the AO to take into consideration all the relevant factors. The relevant factors:
a. Grounds for the issuance of notice under section 143(2)
b. 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
c. The creditworthiness or financial standing of the assessee, and
d. All factors which address the concern of recovery of revenue in doubtful cases.
One of the important highlights of the judgments is the above factors which the Hon’ble Court laid before the department so as to exercise their discretion in a more logical and conclusive manner. Basis the above the Hon’ble Court held the entire exercise under Section 241A has not been correctly undertaken by the department and that the directive portion of the judgment as recorded in the order dated as dictated in the open Court must be duly adhered by the parties.
In the case before the Hon’ble High Court, the assessee having filed return of income declaring loss for AY 2017-18, claimed refund of TDS deducted by its customers/clients. The case of the assessee was selected for scrutiny assessment. The intimation received u/s 143(1) contained a paragraph that the refund has been withheld in accordance with the provisions of section 241A of the Act. Further, the assessee approached the Assessing Officer wherein the assessee learnt that huge losses of the assessee needed thorough investigation as there was positive income in the immediately preceding Financial Year.
The Hon’ble High Court held that basis the following aspects of the matter, the exercise of powers by the Assessing Officer does not fulfills requirement of section 241 A.
1. Note in the Intimation u!s 143(1) stating that refund is withheld u!s 241A of the Act.
a. Does not satisfy any of legal tests as the order was not passed by the Assessing Officer
b. Intimation u/s 143(1) is not even an order
c. It does not contain any reasons recorded in writing
d. It is not passed with the prior approval of the Principal Commissioner or Commissioner Such exercise of power which is conferred upon the Assessing Officer under no circumstances can be taken over by computerized system
2. Passing of Order u/s 241A by the Assessing Officer
a. The reference to the several issues because of which there could be a likely demand in future could not be a ground to withhold the refund.
b. The assessee having a positive income in the preceding previous year viz-a- viz huge amount of losses in current year could also not be a ground to withhold refund.
Therefore, from the above ruling it could be noted that a note in the Intimation u/s 143(1) was not a valid compliance of section 241A of the Act. Further, basis the facts of the case before the Hon’ble Court, the exercise of powers was not justified
♦ Ericsson India (P.) Ltd. v. Additional Commissioner of Income Tax [2020] 117 taxmann.com 381 (Delhi)
In the case before the Hon’ble High Court, the assessee having filed return of income for AY 2017-18 and AY 2018-19, claimed refund of TDS deducted by its customers/clients. The case of the assessee was selected for scrutiny assessment. Assessee made a number of requests to the AO for grant of refund, however despite assurance being given, the department did not process the return and issue the necessary refund. The Assessing Officer stated that since return had been selected for scrutiny under section 143(2), necessary refund would be issued only after completion of assessment proceedings.
The Hon’ble High Court placing reliance on the decision of this court in the case of Maple Logistics (P.) Ltd. v. Principal Chief Commissioner of Income Tax [2019] 112 taxmann.com 199 (Delhi High Court) held that in the absence of cogent reasons justifying withholding of the refund due the proposal as well as the approval granted by Principal Commissioner of Income-tax lacks consideration of the relevant and germane conditions. Accordingly, the order is set aside and the respondents are directed to undertake the exercise afresh and pass an order under section 241A.
♦ Vodafone Idea Ltd. v. Assistant Commissioner of Income-tax [2020] 117 taxmann.com 597 (Bombay)
The only point to be noted from the above decision is that the provisions of section 241A cannot be invoked to withhold refunds of any years prior to AY 2017-18.
In the case before the Hon’ble High Court, the assessee having filed return of income for AY 2017-18 onwards, claimed refund of TDS deducted by its customers/clients. The case of the assessee was selected for scrutiny assessment. The return was processed u/s 143(1), however no refund was issued to the assessee. After, filing various representations, the assessee was told in a personal hearing that the refund was withheld u/s 241A of the Act. However, no reasons as to why the refunds were withheld were provided, which then formed the base for filing this writ petition before the Court. During the course of hearing, the reasons were provided to the assessee.
It was noted that the Income-Tax Officer, with the approval of the PCIT, withheld the refund merely on the ground that the case of the assessee has been selected for limited scrutiny and cited the same reason for which the scrutiny has been ordered to be undertaken.
The Court held that the aforesaid reason is inherently flawed and contrary to the views expressed by this Court in aforesaid two cases i.e.Maple Logistics (supra) and Ericsson India Private Limited (supra).
Therefore, the Hon’ble Court set-aside the order u/s 241A and directed the department to reconsider the aspect in line with the decisions of this court as noted above.
6. Conclusion
The legislative intent behind the amendments made by Finance Act, 2017 to section 143(1 D) and 241A are very clear and to reiterate the same it has again listed below:
a. To address the grievance of delay in issuance of refund in genuine cases which are routinely selected for scrutiny assessment.
b. To address the concern of recovery of revenue in doubtful cases.
Further, the Judicial precedents rendered in connection with Section 241A state that to withhold the refund, the AO should give due considerations to the below aspects:
a. Grounds for the issuance of notice under section 143(2)
b. 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
c. The creditworthiness or financial standing of the assessee, and
d. All factors which address the concern of recovery of revenue in doubtful cases.
Further, mere issuance of notice u/s 143(2) and apprehension of likely demand on completion of assessment can also be no ground to withheld refund and that there should be thorough analysis and application of mind by both the AO and Principal Commissioner.
Also, the provisions of section 241 A are not retrospective and is applicable to returns filed for Assessment Year 2017-18 onwards.
Lastly, a note in the Intimation issued u/s 143(1) is invalid on account of the following reasons:
a. Does not satisfy any of legal tests as the order was not passed by the Assessing Officer
b. Intimation u/s 143(1) is not even an order
c. It does not contain any reasons recorded in writing
d. It is not passed with the prior approval of the Principal Commissioner or Commissioner Such exercise of power which is conferred upon the Assessing Officer under no circumstances can be taken over by computerized system.
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