Understanding different factors involved in claiming income tax refunds

1. Introduction:-

1.1 When a taxpayer submits their Income Tax Return (ITR) and requests a refund, they need to wait for the Centralized Processing Center (CPC) to process it. Currently, CPC processing is quite efficient, with an average turnaround time of 15 to 45 days from the date of e-verification of the ITR. If the offline verification method (using the ITR-V form) is chosen, the processing time may be longer. Once the ITR is processed, the taxpayer will receive an Intimation under Section 143(1) of the Income Tax Act, 1961. According to the Act, no intimation under Section 143(1) will be issued more than nine months after the end of the financial year in which the return was filed. Therefore, for ITRs related to Assessment Year 2023-24, submitted on July 31, 2023 (with the end of the financial year being March 31, 2024), the intimation notice will be sent by December 31, 2025, at the latest. Since the CPC operates as a faceless entity, taxpayers can only check on pending refunds through the e-filing portal. If there are delays, taxpayers can utilize the available grievance redressal mechanisms on the portal. Let’s explore the potential reasons for delays or the non-receipt of refunds.

2. Position of Law in claiming refunds:-

2.1 According to Section 237 of the Income Tax Act, if a taxpayer demonstrates to the Assessing Officer that the tax amount paid by or on their behalf, or considered as paid, exceeds the amount determined as payable for a given assessment year, they are entitled to receive a refund of the excess paid. Filing an income tax return under Section 139 of the Income tax Act, after calculating the refund due, is sufficient to establish that the taxpayer has made a statutory claim to the revenue authorities with reference to provisions of section 239 of the I.T Act. Furthermore, if the refund is determined, the taxpayer is entitled to simple interest at a rate of 0.5 percent per month until the refund is granted as per section 244A (1)(a) of the I.T Act. However, if the refund is less than 10% of tax determined, then the taxpayer is not eligible for interest.

2.2 According to the section 245 of the Income tax Act, the revenue authorities may setoff the taxpayer’s refund against any outstanding demands against the taxpayer’s account, provided they offer the taxpayer an opportunity to address the issue. Additionally, the refund may be withheld by the authorities as per section 241A of the I.T Act, if there are pending assessment or reassessment proceedings in the taxpayer’s case, but only after recording the reasons and obtaining prior approval from the Commissioner or Principal Commissioner.

3. Issuance of refund by the CPC:-

3.1 The Central Processing Centre (CPC) is responsible for processing income tax returns (ITRs) submitted by taxpayers. Once the returns are processed, refunds are calculated based on any tax paid in excess of the liability determined under Section 143(1) or through a rectification order under Section 154. Refunds are issued only when taxpayers have overpaid their taxes. The entire return processing is automated; eligible refunds are directed to the ‘Ready for Refund Banker’ queue in the Financial Accounting System (FAS). The FAS then initiates the Refund Outward program, and the relevant files are uploaded to the Regional Computer Centre (RCC). These refunds are later consolidated at the National Computer Centre (NCC) in Delhi, where refunds from all over the country are gathered. After consolidation, the files are sent to the State Bank of India, which is the authorized bank for processing ECS refunds to taxpayers. Refunds will only be processed if all required fields, such as Account Number and IFSC, are correctly filled in during the ITR filing or updated online by the taxpayer before processing is completed. If any of these fields are left blank or incorrectly filled, the refunds cannot be processed.

4. The following aspects are very important with respect to granting of refund to the taxpayer:-

4.1 Pre-validate Bank Account: Bank account pre-validation is a crucial step in ensuring the efficient processing of income tax refunds. It involves confirming that a taxpayer’s bank details are accurate and linked to their Permanent Account Number (PAN) on the income tax department’s e-filing portal. The taxpayer is also empowered to Pre-validate a bank account that is linked to the PAN using the e-filing portal and steps for revalidating a bank account.

4.2 Notice u/s.245 of the Income tax Act: The refund determined is considered for issuance only after checking if any outstanding demand(s) exist for the PAN. In case there is outstanding demand for the PAN, a notice u/s.245 of the Income tax Act is issued to the taxpayer with a proposal to adjust the refund against the outstanding demand in a chronological order of Assessment Years of the demand if there are more than one assessment year where demand exists.

4.3 Refund to Legal Heir: In cases where refund needs to be issued to the legal heir, when the taxpayer expires then the refund will be issued to the Legal heir. These Legal heirs are required to register themselves on the e-filing portal for purpose of filing any ITR or documents if needed. In order to claim any failed refund, they are required to send the documents to CPC as per the proforma issued by CPC in this regard. Once the documents are received at CPC, they are forwarded to the Assessing Officer (AO), who will process the paper in the ITBA system and share the Bank Account of the legal heir to whom refund of the deceased person is required to be transmitted. Once the bank account details are received at CPC via the interface with ITBA, CPC system transmits the refund of deceased person to the bank account of the legal heir as confirmed by the AO in ITBA system.

4.4 Refund to representative Assessee: Section’s 140, 159, 160,168,176, 178 etc. of the Income Tax Act, 1961 envisages many situations where a person would not be able to attend to their Income Tax related affairs on their own. In such cases, their guardian or any other competent person can act on their behalf with specific authorization. Under the circumstances mentioned below, a user can register as representative of another person for carrying out their activities in e-filing portal.

4.5 Foreign Nationals/entities: (Refund transmission in cases for foreign nationals or foreign legal entitled):-

4.5.1 For non-residents and foreign entities, income tax refunds can only be credited to a bank account located in India. If a non-resident taxpayer does not have a mobile number in India, they can register on the e-filing portal by providing a foreign mobile number along with their email address. However, all verification PINs and OTP communications will be sent exclusively to the provided email address.

4.5.2 In cases where the principal contact of a taxpayer’s company or firm is a foreign national or non-resident without a PAN, they should select the checkbox indicating “I am a Non-Resident Director without a PAN” during the registration process, allowing them to proceed without entering a PAN.

4.5.3 If the principal contact lacks a PAN and their Digital Signature Certificate (DSC) is associated with a default PAN, attempting to upload or register the DSC will result in a PAN mismatch error. In such instances, the DSC without PAN encryption should be utilized, as the e-filing application will not accept a DSC linked to a default PAN.

4.5.4 For generating the XML of the Income Tax Return (ITR) when the principal contact is a foreigner or non-resident, if registered as a “Non-Resident Director without PAN,” you should use the default PAN “FFFPF9999F” in the verification section of the ITR. This allows for seamless generation and upload of the XML, but it’s important to note that the default PAN can only be used for verification purposes; a DSC linked to a default PAN will not be accepted.

4.5.5 Regarding pre-validation for individual NRIs, there is no separate process. The taxpayer account must be validated either through the e-filing portal or via National Payments Corporation of India (NPCI) for refunds to be issued. Similarly, for foreign companies, an Indian bank account is required, and this account must also be pre-validated through e-filing or NPCI to facilitate the issuance of refunds.

5. Refund failure and refund re-issue:-

5.1 The failure of refund could be classified under the following two categories:-

5.2 After rectifying the above errors, the taxpayer can request the reissuance (Refer: “Raise Service Request FAQ”[1] in e portal) of refunds from the CPC. Therefore, taxpayers must exercise greater caution when filing their ITR and ensure that it is completed with accurate information to avoid the errors mentioned above.

6. Importance of Form 26AS : –

6.1 Form 26AS is a crucial document for taxpayers, detailing TDS/TCS transactions effected during the financial year relevant to the assessment year by the taxpayer. It includes tax payments made by the taxpayer, such as advance tax, self-assessment tax, and other regular payments, as well as any refunds obtained by the taxpayer from the revenue. Additionally, it records high-value transactions by the taxpayer, including foreign remittances, mutual fund purchases, and dividends. Taxpayers can easily access and download Form 26AS from the TRACES website.

6.2 It’s important for taxpayers to ensure that their claims for prepaid taxes—like TDS/TCS, advance tax, and self-assessment—align with the amounts shown in Form 26AS. If any prepaid taxes are missing or underreported in the form, taxpayers may not receive the full credit they claim in their income tax returns. Therefore, verifying the accuracy of TDS certificates is essential to confirm that the tax deducted from their income has been credited to the income tax department.

7 Form 26AS operates on a receipt basis, whereas the taxpayer follows an accrual basis. Here’s how to claim TDS in this situation:-

7.1 It is pertinent to note that Form 26AS follows a cash accounting system, meaning that any TDS deducted will appear in the taxpayer’s Form 26AS for the relevant financial year. However, if the taxpayer claims that the income associated with that TDS, had already been reported in a previous financial year on accrual basis, the revenue authority may disallow the TDS credit, arguing that the corresponding income was not declared in the current year. Consequently, the CPC may restrict the TDS under Section 199, in conjunction with Rule 37BA of the Income Tax Rules.

7.2 In such cases, the taxpayer must file an application under section 155 (20) of the I.T Act, with the Assessing Officer -CPC (AO-CPC) / Jurisdictional Assessing Officer (JAO) to claim the disallowed TDS credit for the year in which the income was actually reported. This provision was introduced vide the Finance Act 2023 inserted sub-section (20) to Section 155 with effect from 01-10-2023. Section 155 (20) is reproduced below for sake of clarity:-

[(20) Where any income has been included in the return of income furnished by an assessee under section 139 for any assessment year (herein referred to as the relevant assessment year) and tax on such income has been deducted at source and paid to the credit of the Central Government in accordance with the provisions of Chapter XVII-B in a subsequent financial year, the Assessing Officer shall, on an application made by the assessee in such form, as may be prescribed, within a period of two years from the end of the financial year in which such tax was deducted at source, amend the order of assessment or any intimation allowing credit of such tax deducted at source in the relevant assessment year, and the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified in sub-section (7) of that section shall be reckoned from the end of the financial year in which such tax has been deducted:

Provided that the credit of such tax deducted at source shall not be allowed in any other assessment year.]

7.3 As stated supra, the Finance Act 2023 inserted sub-section (20) to Section 155 with effect from 01-10-2023. This new sub-section is applicable when an income has been reported in an income tax return for a specific assessment year, and tax was withheld by the deductor and paid to the government in a later financial year. This situation arises when a deductor withholds tax in the year in which the income is paid to the taxpayer. However, the taxpayer has already included that income on an accrual basis in his earlier tax returns. This causes a TDS mismatch, as the income has already been taxed on accrual basis, but tax is only deducted later when payment is made. Section 155(20) enables the assessee to apply to the AO within two years of the financial year in which the tax was withheld, and the AO will amend the assessment and allow credit for the tax.

7.4 To implement this provision, the Central Board of Direct Taxes (CBDT) issued Income-tax (Twentieth Amendment) Rules, 2023 and inserted Rule 134[2]. This Rule mandates the assessee to furnish an application in Form No. 71. This form shall be furnished electronically under digital signature or through the electronic verification code. It seeks the following information from the assessee: Personal details (Name, Address, PAN, Aadhaar, Residential Status, E-mail Id, Mobile Number and relevant assessment year, date of furnishing return of income etc.).Total income of the assessee returned in the relevant assessment year, amount of specified income and rate at which such specified income was subject to tax. Amount of tax deducted, date of deduction of tax, section and rate at which tax deducted, date of payment of tax deducted to the central Government and amount of tax claimed for the relevant assessment year. Name, PAN and TAN of deductor.

7.5:- Before October 1, 2023, the taxpayer may need to approach the AO (CPC)/JAO with an application under Section 154, requesting TDS credit for the financial year relevant to the assessment year in which the corresponding amount was offered after withdrawing the TDS claim from the current year. The taxpayer may need to file an income reconciliation statement regarding the income reported and the TDS claimed. Please be aware that the AO-CPC/JAO can only make amendments within four years from the end of the financial year in which the order to be amended was issued. Therefore, keep this four-year outer time limit in mind when requesting for rectification.

8. If the tax deductor does not file the quarterly TDS returns, the TDS credit will not appear in the taxpayer’s 26AS, what to do ?:-

8.1 A situation may arise where TDS has been deducted from payments to the taxpayer, who has reported this income in the financial year relevant to the assessment year. However, if the corresponding TDS is not reflected in Form 26AS, the Central Processing Centre (CPC) may disallow these claims due to the absence of TDS in Form 26AS. This issue commonly occurs when the taxpayer’s employer or deductor fails to file the necessary TDS quarterly returns. In such cases, the taxpayer should request the deductor to submit the TDS returns. Once the deductor files the quarterly return, the taxpayer can claim TDS credit by filing a revised income tax return. The deadline for submitting revised returns is December 31 of the relevant assessment year (AY) or before the assessment is completed, whichever comes first. If the deductor has not filed the revised TDS return by December 31 of the relevant assessment year, the opportunity for the taxpayer to file a revised return is lost. If the deductor files the TDS return after this date, the taxpayer can request an amendment under Section 155(14) of the Income Tax Act to the intimation, asking for credit of the TDS that was not provided during the ITR processing due to the deductor’s late filing. However, the taxpayer must remember that Section 155(14) requires the application to be made to the Assessing Officer within two years from the end of the relevant assessment year.

8.2 If the deductor has not filed the revised TDS quarterly returns within two years from the end of the relevant assessment year during which the income is assessable, the taxpayer will need to approach the “Competent Authorities” for condonation of delay under Section 119(2)(b) of the Income Tax Act to file a revised return for claiming a refund based on TDS reflected in Form 26AS due to the deductor’s default. It’s important to note that this condonation application must be submitted within six years from the end of the relevant assessment year; otherwise, the Competent Authorities may reject the application due to limitations.

8.3 Recently, a ruling from the Delhi High Court in the case of Hari Kishan Sharma vs Govt of NCT of Delhi and Another[3] has provided relief for taxpayers facing issues with TDS not being reflected in Form 26AS due to the deductor’s failure to file TDS returns. The Court stated that the income tax department cannot deny a taxpayer’s refund claim solely because TDS is not shown in Form 26AS. The ruling quashed the department’s order that rejected the taxpayer’s application to file a revised return and directed that the refund be processed accordingly.

[1] https://www.incometax.gov.in/iec/foportal/help/raise-e-filing-service-requests-faq

[2] Notification No. 73/2023, dated 30-08-2023:-

[3] Hari Kishan Sharma vs Govt of NCT of Delhi and Another in WP(C) 915/2019 dated 03.09.2024

Reference: Hand book for Tax Consultants/Taxpayers, November 2020, CPC, Income tax Department.

Author’s Note:- This article is intended to create tax awareness and for academic purposes only.