Concept of Unjust enrichment refers to situations in which one person is enriched at the expense of another in circumstances which the law treats as unjust. Whenever the word unjust enrichment is told by someone two names immediately crept in the mind one is highest authority of indirect tax i.e. CGST and other one is Income tax department and its highest authority known as CBDT.

Though concept of unjust enrichment is generally heard in the field of indirect tax and various court decisions have been delivered on this concept but seldom used in the direct tax and it is very hard to see any court judgement on this point but Incorrect interpretation of statute, wrong tax calculation, Imposition of wrong demand and allowance of low refund citing various reasons are some sort of unjust enrichment to the Income tax department because department is getting revenue which it should not have been earned and in turn assesse is losing his legitimate right of money and losing the benefit of fund leveraging. On one side government admit this fact that liquidity is very important for a businessman and this fact is acknowledging by the fact that availability of liquidity in the hands of businessman is considered as stimulus package for COVID 19 whereas on other hand working of the income tax department specially CPC is snatching the liquidity from assesse through various ways which are not in accordance with the provisions of the Act.

Hon’ble Supreme Court in the Landmark decision in case of Mafatlal Industries has laid down following principles: (a) Article 265 of the Constitution is declaratory in nature. It says that “no tax shall be levied or collected except by authority of law”. This, no doubt, means that taxes collected contrary to law have to be refunded. However, Article 265 refers to only valid laws and wherever the validity of such laws have to be ascertained, the same should be according to other relevant Articles of the Constitution. Article 265 cannot be read in isolation. It must be read in the light of the concepts of economic and social justice.

It is observed that various assesse are losing handsome amount of interest and opportunity benefit associated with the funds due to unjust enrichment and functioning of the income tax department specially CPC.

Page Contents

1. Non- claim of TDS by the persons who are “Tax Payer” but not return filers

A few months ago CBDT has issued a beautiful analysis related to Income tax known as time series data. Before reading of these time series data, I frequently got confused on the various different data submitted by the government regarding no of return filers and tax payers and wide variation was also noticed between figures of tax payer and return filers but now it got clarified.

As per time series data A “Taxpayer” is a person who either has filed a return of income for the relevant Assessment Year (AY) or in whose case tax has been deducted at source in the relevant Financial Year but the taxpayer has not filed the return of income. And assessee refers to the person who had filed return for that assessment year. 

As per time series data, Data of tax payer and assesse for previous three FY/AY are as under: Here figure of tax payers are linked with AY and figures of assesse is linked with FY.

A Y/F Y No of Tax Payers No of assesse Difference
2016-17 6,92,25,199 4,47,06,909 2,45,18,290
2017-18 7,42,49,558 5,45,07,997 1,97,41,561
2018-19 8,45,21,487 6,33,18,586 2,12,02,901

This table shows that there is wide variation between no of tax payers and assesse though difference between AY and FY is also generating such variation still substantial no of assesse are left every year whose TDS is deducted but they are not filing their return of Income. Thus unclaimed TDS of such small tax payers may run into thousands of Crore which is remains with the Government mainly due to ignorance of the assessee which is otherwise not available to the government if those persons would have filed their return of Income because most of such amount will be refundable in that case.

Let me clarify my views with the figures obtained from this time series data itself.

Particulars Amount(Cr)
Aggregate Tax liability of all tax payers related to AY 2018-19 8,07,728

This Tax liability might have been adjusted through immediate year’s TDS, Advance tax collection and self-assessment tax collection of current year i.e. AY 2018-19. Interestingly total of these figures are as under:

Particulars Amount(Cr)
TDS collection of AY 2017-18(FY 2016-17) 3,43,134
Advance tax collection of AY 2017-18 (FY 2016-17) 4,06,769
Self-Assessment tax Paid in AY 2018-19 (FY 2017-18) 1,01,873
Total Tax liability for AY 2018-19 would have been 8,51,776

This shows that every year around 40,000 to 50,000 crore is unclaimed TDS which is may not be claimed by the tax payers as a refund because practically all these are small tax payers who does not have taxable income hence need not file their return of income.

2. Adjustment of non-exist outstanding tax liabilities against refund by CPC:

It is observed that refund is generally adjusted against outstanding tax liability despite the disagreement made by the assesse in response to notice issued u/s 245 of the Act.

As per operating manual of CPC, our response is sent to jurisdictional Assessing officer for their comment but it is seldom taken care by the assessing officer and cyclostyle reply is sent to CPC for adjustment of refund.

At the time of migration from manual to digital various tax liability has been uploaded to the system which were in fact non-existent for various reason at the time of migration itself. Majority of these demand is mainly related to AY 2009-10 to AY 2011-12. In these years’ return were mainly used to file manually and processing of these returns were made very fast within short span of time because of mounting pressure of CBDT on jurisdictional assessing officer. A lot of demand was generated as credit was given through tax credit available in 26AS. As system of TDS return filing was not robust in these years hence majority of TDS credit could not find through 26AS. Even intimation of these years were not sent to the assesse. Most of the assesse came to knowledge of such demand later on through e filing portal itself.

Everyone who is connected with this field know this reality that refund back of such adjusted non-existent tax liability is very cumbersome and tedious job and most of persons give up which is unjust enrichment of income tax department.

3. Recovery of interest u/s 220(6) on non-existent tax liability from refund:

Once liability is uploaded to the system whether it is correct or wrong and adjusted against refund or paid than immediately interest liability is also generated by the system itself. Moreover, this interest is not an appealable issue and no calculation is provided to the assesse. In most of cases it is not corrected and assesse is left with no option other than to pay it.

It is also observed that assesse generally used to pay interest u/s 220(6) more than the quantum demand. As quantum demand in various cases are very old but due to non-availability of old records like challan, rectification order etc, Assesse can-not go for rectification and left with no option other than to pay demand and interest thereon for peace of mind.

4. Non-Allowance of TDS credit despite reflection in 26AS:

It is also observed in many cases that TDS credit is not allowed or partly allowed despite the fact that total amount is reflected in 26AS. Such amount is shown as mismatch between claim of the assesse and amount of credit in 26AS. It is not getting rectified despite several attempt and assesse is left with no option other than to accept short refund or pay the demand.

5. Non-Allowance of Tax credit where TDS is properly deducted but not reflecting in 26AS:

In recent times, It is generally observed that TDS is not deposited by the payer to the account of central government due to precarious financial positions or file incorrect TDS return hence TDS is not credited to the 26AS of the assesse. Credit for such TDS is not allowed despite the claim of the assesse. It is generally happened in case of large corporate employers who does not pay TDS on account of their precarious financial health. Demand is generally determined in such cases and assesse is left with no option other than to pay demand or file appeal. As we know this fact also that no appeal is filed for meagre amount.

6. Charging of interest u/s 234 B and 234 C on income offered u/s 44AD:

As per section 211 of the Income Tax Act, An eligible assesse who is filing return u/s 44AD or u/s 44ADA under presumptive scheme of taxation, Advance tax need not to be paid in various instalments and they can pay advance tax in last instalment which is due on 15th In such a situation provisions of advance tax are not applicable accordingly interest u/s 234B and 234C is not chargeable. In various cases in earlier years, it was observed that wherever assessee have other income other than income offered u/s 44AD or 44ADA than interest u/s 234B and 234C has been charged and could not rectified despite various rectification request. The assesse had been left with no option other than to pay the demand along with interest u/s 220(6) of the Act.

7. Short allowance of interest u/s 244A of the Act:

Interest u/s 244A is allowable from 1st day of April to the month of receipt of refund if return is filed within due date of filing of return of income. If return is filed after due date than refund is allowable from the month of in which return is filed to the month in which refund is allowed. It is generally happened that due date is extended by the CBDT. Now a new trend is emerging that though due date is extended for all purpose except of charging of interest u/s 234A of the Act but it is observed that if an assesse has filed its return of income within extended due date but after original due date than interest is being allowed from extended due date instead of 1st Day of April. The assesse has left with no option other than to accept it or file appeal after futile attempt of rectification. Short allowance of interest in such a fashion is causing loss of thousands of crores to the assesse as a whole.

Let me clarify this problem with an example. Suppose original due date for AY 2019-20 was September 2019 which was extended to 31st October 2019. If an assesse has filed its return of income in September than he will be allowed interest from 1st April 2019 but if an assessee had filed its return of income in Oct 2019 than he is being compensated refund from Oct 2019 instead of 1st April 2019. Such erroneous interpretation by CPC is causing interest loss of Rs 3.00 Lac if allowable refund to the assesse is 1 crore.

8. Short allowance of interest where refund is determined but withheld for various reason:

Sometimes refund is determined in processing of return but withheld for various reasons like validation of bank accounts, Approval from AO etc. It is observed that proportionate interest for the intervening period is not allowed to the assessee be it 1 month or 1 year whereas section 244A is very much clear that interest on refund shall be allowed from 1st Day of April to the date on which refund is granted. The apex court has also held that date of refund granted is the date on which it is actually received by the assesse and not the date on which it is determined. Though it may carry small amount of interest to an individual assesse but constitute substantial amount if considered CBDT as a whole coupled with the fact that denial of such interest for intervening period is contempt of court.

9. Denial of benefit of section 11 & 12 to the trust if return is filed in between original due date and extended due date:

While processing the return for AY 2019-20 for public trust by the CPC, It was observed that benefit of section 11 and 12 is not allowed to the trust who had filed audit report and return of income between original due date and extended due date stating that the trust registered u/s 12AA has not filed the Audit report in form 10B on or before filing the return of income hence exemption claimed u/s 11(1) is not allowed in accordance with the provision of section 12A(1)(b) of the Act.

It is faulty interpretation of statue and is not getting rectified easily which is creating undue hardship and demand on the public trust. Generally small amount is not contested in the appeal which is unjust enrichment of the CBDT.

10. Withheld of refund for validation of bank accounts:

It was observed that all of sudden additional requirement is put forward which was not required or compulsory for filing of return of income. Like validation of bank accounts was made must for issue of refund from AY 2017-18 but no such conditions were put forward at the time of filing of return of income. Most of refund was withheld of those assesse whose accounts were either on small co-operative bank or small public sector banks whose database were not linked with the Income Tax department but want of validation of accounts. Various times it was also observed that though bank account is adhar linked still accounts were not validated. This single step has resultant big move of accounts from small banks to private sector banks. It is also observed that sometimes refund is withheld for minor difference in bank accounts. Like name of the assesse is XYZ Private Limited as per PAN data but name as per bank account is XYZ PVT LTD. Such type of decisions are causing lot of pains to the wounds of the assesse.

11. Non transfer of file from One jurisdiction to other:

It is observed that jurisdiction of the assesse is not getting transferred from one PCCIT range to another specially in case of HUF assessee despite several reminders. Such non-action is causing withheld of refund or determination of demand in various cases which was manually filed and rectification is needed in such cases. In most of cases either assesse accepted the fact and forget their refund or paid the demand.

12. Faulty processing of return in case of private discretionary/specific trusts:

This is the area where most of assessee are facing wraths of the central processing centre. Every year pattern of processing is modified which is resulting calculation of tax at maximum marginal rates instead of normal tax rate and demand is being determined or short refund is allowed. Rectification of such returns are very tedious job and ultimately assesse is left with no option other than to file appeal.

13. Faulty processing of return where business accounts includes special rate income and shown accordingly in return:

It is observed that if an assesse have some special rate income or exempt income which is part of business income and bifurcated separately in computation either as exempt income or specific head like capital gain etc than such assesse is getting intimation u/s 143(1)(a) for addition.

Suppose an assesse had dividend income of Rs 50,000/-  and profit on sale of assets is Rs 5,00,000/-. Total income of the assesse is 10,00,000/- which is includes of above two incomes. While computing total income the assesse has shown following income under various heads as under:

Total Income as per Profit/Loss accounts
Less: Income Considered separately

under other head

Dividend (Other Sources) 50,000
Profit on Assets( Capital Gain) 5,00,00 5,50,000
4,50,000

Dividend income has been claimed as exempt income and long term capital gain was Rs 1.00 lac only after index cost and claim of available deduction.

In such a situation, Assessee are getting intimation for prima facie adjustment u/s 143(1)(a) and additions are being made in most of cases that Special Income schedule does not carry same amount of income as reduced from business income in computation of total income.

In such a cases, The assesse is being left with no option other than to pay tax or file appeal which one should not supposed to be if proper processing would have been made.

14. Adjustment of Income in processing of return for debatable Issues u/s 143(1)(a):

Most of assesse are getting intimation for proposed addition for debatable issues which are outside the purview of adjustment u/s 143(1)(a) of the Act. 30 Days time is given for response but reply is ever positively considered in final processing.

Section 143(1) of the Income tax Act provides that ‘where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely –

(a) the total income or loss shall be computed after making the following adjustments, namely:—

(i) any arithmetical error in the return;

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80- ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode: Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:

Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018.

Several persons received notices from the CPC for disallowance u/s 36(1)(va) of the Income tax for delayed payment of employees contribution to any provident fund or superannuation fund or any fund setup under the provisions of the Employees State Insurance Act or any other fund for the welfare of such employees. The reasons as are even for the proposed disallowance in the notice generally states “Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return143(1)(a)(iv)”.

In electronic era, The Tax auditor has been not given any space to give his comment about disallow ability of the claim and he has to simply give data in fixed format.

The disallowances are being made which are paid little late even  for 1-2 days delay. The purpose of section 143(1) is to reduce the revenue loss which arise due to clerical mistake or where there is no two opinions can be formed or where the adjustment can be made due to a mistake which occurred in the return of income in view of the declaration made by the assessee in the tax audit. In the case of disallowances u/s 36(1)(va) which are being made while processing the return u/s 143(1), it cannot be said that there is a clerical mistake in the computation of the returned income as per income tax return filed electronically. There are judicial pronouncements of various courts holding in favour as well as against the assessee. The tax auditor under clause 20(b) of tax audit report only give the details of the payment of employees’ contribution in the prescribed manner. Thus, the adjustment in the income of the assessee electronically is made without considering the explanation of the assessee which is totally incorrect.

Like wise various assesse are also getting notice for adjustment in total income where corresponding income of TDS is not disclosed in the return of income. Here it is pertinent to note that TDS is deducted as per provisions of income tax act whereas books of accounts are prepared as per accounting standard and difference between two are bound to be occurred. For example, TDS on contract of Rs 1.00 Crore is deducted but sales shown in the return was 95 Lacs after adjustment of discount, claim etc. In such a situation assesse are getting intimation for addition of Rs 5.00 Lacs being difference between corresponding income in 26As and income declared in return of Income.

Reply to the intimation for proposed addition is seldom considered and addition is being made and assesse is left with no option either to pay demand or file appeal.

15. Non allowance of business loss or unabsorbed depreciation against addition u/s 68 to 69D:

It is almost settled issue that assesse shall be entitled to set off of business loss and unabsorbed depreciation against income assessed u/s 68 to 69D up to AY 2017-18 but various assessing officer are not allowed such set off and creating huge demand on the basis of a few court decisions that these incomes are head less income hence set off is not permissible.

The assesse had to pay substantial amount of tax against such demand to get stay. Such actions are badly affecting the working capital and profitability of an assesse to a great extent because assesse will get interest @ 6% on refund whereas one has to pay interest almost @ 12% on bank finance and unsecured loan from the market.

16. Refund in case of Legal Heir:

It is also observed that wherever assesse is deceased legal heir is added to file his return of income. In various cases, it is noticed that legal heir has filed return of income of deceased assesse and furnished his bank account for issue of refund. In such cases, though bank accounts of the legal heir is mentioned in the refund order but irony of the case is that name of the deceased assesse is given in the refund orders and refund orders could not credited in the bank accounts due to such mistake. Reissue of refund is getting very much time and assesse is incurring interest loss and opportunity cost for delayed receipt of refund.

17. Limiting the scope of section 154 of the Act:

Now almost assesse are supposed to file return of income electronically and such return are processed by CPC. If there are mistake apparent from records than assesse can file rectification application u/s 154 through e filing portal itself. Earlier assesse was given option to write the basis of application and most of application were disposed off positively on the basis of reason narrated by the assesse but now scope of application is narrow down and two option is provided to the assesse:

(1) Whether there is changes in XML

(2) Only reprocess the return

There may be hundreds of reason for which assesse might have been made application u/s 154 without requirement of changes in XML but now he has to simply choose the option as “Reprocess the return”. In such a situation his grievance is not settled and one has been left with no option other than to file appeal for the same.

18. Adjustment of Refund against demand before expiry of time period mentioned in the notice u/s 245:

In various cases, It is observed that though notice is issued u/s 245 of the Act for proposed adjustment of refund against outstanding tax liability but refund has been adjusted before expiry of time period mentioned in the notice and same adjustment has been reflected in the 26AS also. Irony of the instances is that reminder is also being received to give reply for the proposed adjustment. Such type of unauthorised adjustment is posing various type of difficulties to the assesse and department is getting undue benefit.

19. No time limit for issue of form no 13 for lower deduction/Nil deduction of TDS:

Whenever the assesse want to receipt income on deduction of TDS on lower rate or nil rate than one has to apply in form no 13 to the jurisdictional TDS officer online. In various large cases, It is observed that officer delayed the process and issue certificate after with much passes of time or never issued despite follow up by the assesse as no time limit is prescribed in the Act for issue of such lower deduction or NIL certificate under the Act. Such non issue of certificate is causing financial loss to the assesse in the form of blockage of working capital and interest loss.

20. Repetitive issue of notice u/s 245 in every year for same subject matter:

Once assesse had disagreed for proposed addition in a specific year on account of various reason like demand already been paid or appeal effect is pending etc than in such a situation notice u/s 245 in succeeding year should not be issued for the same subject matter. It is practically possible that most of assesse had given their consultant e mail if for correspondence in the income tax and E mail sent by the CPC remain unnoticed and reply could not be sent. In such a situation refund will get adjusted against such demand which is direct loss to the assesse.

21. Non granting of credit of Taxes withheld by foreign countries (FTC) :

In case of resident assessees, who earns income outside India and where the said income is taxable in both the countries i.e. in the source country, where income is earned and the resident country, i.e. India, where assessee earning such income qualifies as a resident. This may result in double taxation of the same income as per the domestic tax laws of both the countries. In order to avoid such double taxation, India grants relief under its domestic tax laws in the form of ‘foreign tax credit’ (FTC). Relief from double taxation is also available under the Double Taxation Avoidance Agreements (DTAA) entered into by India with several countries. In order to claim FTC, the taxpayer is required to furnish a statement of foreign income and taxes paid thereon in Form 67 which is required to be filed electronically along with the return of income on or before the due date of filing return of income. While the mechanism to claim FTC appears straight forward, there are certain practical difficulties which a taxpayer generally One such instance is where the tax years are different in the home country and the source country. As a result, it would be practically difficult to furnish evidence in respect of the foreign income earned during the intervening period and calculate foreign tax credit thereon in the absence of a corresponding US tax return. Sometimes assessee not required to file return in the source country, in such scenario also claiming FTC is subject to litigations.

Further, where an employee travels outside India and pays taxes overseas, as per the law of the particular country, employers cannot grant credit for such taxes while calculating withholding taxes on salaries in India. The employee can claim credit for such taxes only at the time of filing return, which may result in a refund situation and affect the cash flow in the hands of the employee.

Generally in such cases, credit for FTC is not allowed and demand is determined or case is transferred to jurisdictional assessing officer.

There are various other situations under which department is getting unjust enrichment but tried to get it shortened as far as possible still hope that policy makers will take appropriate decisions on these issues to make the life of poor assesse more simple. All of these problems can be solved with one solution that government should allowed interest on refund at the same rate which is being charged by it from assesse on their default and accountability should be fixed. This will create level playing field between the department and the assesse. Thought transformation of digital world make the life simple to large extent still various assesse are facing more problem as their refund is being withheld for uninformed reasons and processing itself is withheld on single instruction of CBDT without written communication or knowledge of the general public which was not possible in earlier era.

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3 Comments

  1. Amit Kothari says:

    Raising very practical issues and unjust enrichment. Definitely the scope processing return is limited, and various adjustment are made which are not apparent errors or arithmetical errors.

  2. CA Harshal Sevak says:

    Mukesh sir…very much helpful and detailed article you have published which make all of us clear about the concept of Unjust Enrichment…surprisingly reality…thank you so much on behalf of CA Fraternity and other professionals…

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