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Income tax is a duty levied by the Central Government on the incomes earned by the individuals or non-individual entities. Further, in some cases it so happens that the assessee pays the income tax which is greater than or above the actual income tax liability of that individual for any specific financial year. In the following case a process of refund of income tax takes place, where the income tax department returns any excess amount of tax paid by the taxpayer. This amount can be claimed by a tax payer under section 237 of the Income Tax Act, 1961, which deals with the refund of excess duty paid by the assessee. Under this section, it is mentioned that if the assessee is able to satisfy the Assessing Officer about the fact that the amount of tax paid for the relevant assessment year exceeds the actual leviable amount as per the calculations under the Act, the Officer then becomes entitled to refund the excess amount. However, the Assessing Officers also possess the power of withholding of this refund under the Income Tax Act, 1961; the following power can be exercised by the officers when they are of the opinion that releasing of such refund can adversely affect the interest of the revenue department.

Over the past few years, the taxpayers have been facing a lot of difficulties in obtaining their income-tax refunds and because of the same, there have been a number of writ petitions filed by the taxpayers across the country for the purpose of not receiving back their claimed income tax refunds. The said situation was because of the presence of section 143 (1D) in the Income Tax Act, 1961 where it is stated that if the Assessing Officer under Section 143(2) of the Act issues a notice to the assessee for any discrepancy found in the returns filed by him, it makes it non-mandatory or not necessary for the officer to process the involved return. The presence of this provision under the Act has created a lot of problems and hardship for the assessee, as once the amount involved is held up for the purpose of scrutiny, the completion of same normally takes 3 years from the end of the relevant financial year and here the whole amount of refund is also held up by the department. The following process results badly for the assessee who are involved in the cases dealing with huge amounts, as it leads up to large working capitals of the assessee being stuck and blocked, resulting in financial issues for them. The said process stands unfair for the assessee because the amount (the refund) which they were supposed to receive within 6 months of the filing of returns gets stuck for an indefinite period of time which is just because the processing of this return on income has not taken place. In order to curb this situation of delay in the issuance of refund, the Finance Bill of 2017 amended the section 143 (1D) of the Income Tax Act and the said section now ceases to apply to returns that are furnished for the assessment year 2017-18 and onwards. This amendment in this section will help in the reduction of delay in issuance of refund in genuine cases. Further the removal of this section has led to processing of all the incomes tax returns before any assessment by the Assessing Officers.

Also, in the Finance Bill 2017, a new section is inserted in the Income Tax Act which talks about withholding of refunds with the added concern of recovery of revenue in doubtful cases. The verbatim of this section is as follows:

Section 241A: Withholding of refund:

“For the Income Tax returns furnished for assessment year commencing on or after 1st April, 2017 where refund of any amount becomes due to the assessee under section 143(1) and the Assessing authority is of the opinion that grant of refund may adversely affect the recovery of revenue, he may, for the reasons recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, withhold the refund up to the date on which the assessment is made”[i]

The above section gives specified powers to the Assessing Officer to withhold the refunds, but with a proviso that there needs to be a prior approval of the commissioner or principle commissioner and that it should be clearly stated by the Assessing Officer before the withholding of the return as to how granting of the same can adversely affect the revenue department. The present section when scrutinized proves to inculcate in itself the essence of application of mind; the said feature in this section helps the assessee in not getting intertwined with the biasness of the Assessing Officer where they withhold the refunds for absolutely minor discrepancies. Further, it helps the Assessing Officer in issuing a detailed and reasonable notice, which as a result won’t let the assessees left clueless about why their refund is being withheld. Also, the application of mind leads to the issuance of a legal notice which is under the preview of the principles of natural justice because otherwise such notice can be treated as illegal. It can be further seen that, for the withholding of the assessee’s refund a prior permission of the commissioner is required, and this involvement of the commissioner in the said process of withholding subjects a check on the working of the Assessing Officer and also makes the said process efficient as dual stage of checks and balances gets involved. This leads to a smooth working of the Revenue department, which aims towards the ultimate goal of introduction of this section, which is to get the assessee out of the trouble of the unnecessary withholding of their refunds. Before the introduction of this section, the departments used to forward auto-generated responses with respect to the enquiry forwarded by the assessees in the cases of withholding of refunds, but now with the brought-in essence of application of mind, computerized responses are not allowed. The Assessing Officer is required to take into consideration all the relevant factors before the approval for the refund and this is a relevant process which is not just a formality as the factor that are taken of relevance can eventually prove to be the reasons to file a notice under section 143(2) of the Act, from where the scrutiny process ignites. This improves the efficiency in the working of the department and leads to a better functioning where the assessees won’t suffer with problems and biasness of the department. Prior to the amendment in section 143 (1D) of the Act, there was an ambiguity as to what is to be done when the Assessing Officer finds errors in the return on income of the assessee. The section used the term “not necessary” for the processing of the return on income, which provided the Assessing Officer with ambiguous power to use his discretion on what is to be done with the returns. And such ambiguous power was used by the officers for their own advantage, which was struck down with the amendment in the section 143 (1D) of the Act.

There are 2 major objectives that can be culled out of the introduction of section 241A and the amendment under section 143 (1D) i.e. (a) where the Assessing Officer is of the view that (only when) granting of a certain refund can adversely affect the revenue, such refunds should be withheld till the date of scrutiny assessment; and secondly (b) to avoid the unnecessary delay of return of refund in genuine cases where the assessee is not at fault and is suffering the consequences of the ambiguity present in the Act.

The power of the Assessing Officer under the section 241A of the Income Tax Act and the usage and scope of this section has been discussed, scrutinized and further explained by the various courts at various instances. Some of the important judgments relating to section 241A are as follows:

In the case of Vodafone Idea Limited v. Deputy Commissioner of Income Tax[ii], the Bombay High Court stated the objectives of section 241A; firstly that the said section is to avoid the unnecessary delay in the issuance of refund in the genuine cases where the assessees are not at fault and the second object of this section as per this judgment is to safeguard the interest of the department where the Assessing Officer is of the view that such grant  of refund may adversely affect the  department, the Officer should withhold the same by following certain conditions mentioned in the section. Further in this case it was found that the department had withheld certain refund of the assessee and with the help of an auto-generated communication the assessees were informed. And it was further held in this case that for the withholding of refund the following three things are necessary:

  1. only a competent Assessing Officer should pass a communication/ notice under section 241A of this Act;
  2. an order by the department with respect to the same is necessary, auto-generated communication forms no basis for a legible communication; and
  3. the reasons for withholding the refund should be clearly stated and the prior approval of the Principal Commissioner should be present.

Further in the case of Maple Logistics Private Limited & Anr. Vs. Principal Chief Commissioner of Income Tax[iii], the power of the Assessing Officer under section 241A has been defined by the Delhi High Court. Further, it is stated by the Court that, a mere notification under section 143 (2) of the Income Tax Act does not provide as relevant factor to deny the refunds, a reasoning behind the same for withholding is relevant as well. Also, that enumeration of relevant factors and reasons plays an important role in deciding the request for refund and should not be treated as an empty formality. The factors to keep in mind while deciding the request for as stated by the court are as follows:

  1. grounds on which the notice of section 143(2) is been issued should be thoroughly checked;
  2. the due amount of refund available to the assessee;
  3. the financial standing and creditworthiness of the assessee; and
  4. all the factors that address the doubt of recovery of revenue in certain cases.

It is then concluded by the Court that a notice under section 143(2) is not a sufficient ground to hold refund of assessees under section 241A and also that the prior approval of the commissioner is very necessary.

Further also, in the case of Huawei Telecommunications (India) Company Private Limited V. Union Of India[iv], the Punjab and Haryana High Court dealt with an issue relating to section 241A of the Income Tax Act. The issue involved stated that if the amount of refund can be withheld by the department without giving/mentioning proper conditions to do the same. The court in this following case referred to the Vodafone[v] decision given by the Bombay High Court and Maple Logistics Private Limited & Anr[vi]. decision of Delhi High Court where it was stated by both the courts that supplying of reasons for withholding of the refund is basic feature of section 241A and hence the revenue department in this case was ordered to refund the return to the assessee involved.

With the above description of the following section, it can be concluded that prior to the introduction of section 241A in the Act and amendment of section 143, the powers defined to the Assessing Officers were ambiguous in nature which lead to the misuse of such powers and further resulted in biasness and problems towards the assessee. The unnecessary withhold of the refund has also led to various writ petitions being filed in the various courts of law, which seems to overburden the already overburdened courts of the Indian legal system. And lately, with the introduction of Sabka Vishwas Scheme, 2019 and Vivad Se Vishwas Scheme, 2020 which aims towards the reduction in the pending litigation matters, it can be construed that the judiciary system is heavily burdened and is looking for setting off the pending cases and reducing their burden. With such ambiguous sections, the judiciary system experiences a greater level of pressure towards them. And further this section also increases the efficiency of the department and tries to make the process transparent which is the need of the hour and the well-being of the assessee.

[i] Section 241 A, Income Tax Act, 1961

[ii] 2019 SCC OnLine Bom 2923

[iii] C.M.No.10568-69/2020, decided on 01.05.2020

[iv] CWP No. 2698 of 2020, decided on 06.03.2020

[v] Ibid (i)

[vi] Ibid (ii)

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April 2024