Recent judgement of Delhi High court in the case of Maple Logistic (P) Ltd. Has again highlighted the matter of withholding the refund of assessee without following spirit of law. When a case of assessee is selected for scrutiny, refund is withheld. It is against the law and court has taken very adverse view on this. In my humble opinion refund blockage by income tax department and GST department is one of the major reason of suffocation of SME units in India. The TDS rate is 2% so sometimes it is more then profit of units. So the AO should keep this in its mind before and blocking should not be done in lighter manner or just to meet their budget targets.

If any assessee is facing such withholding, he may approach the courts.

Whithholding tax WHT concept written in a notebook

History:

There is a long history of  Right of Assessing officer regarding right of withholding of refund of assessee.

(a) Erstwhile section 241:

 “241. Power to withhold refund in certain cases. – Where refund of any amount becomes due to the assessee as a result of an order under this Act or under the provisions of subsection (1) of section 143 after a return has been made under section 139 or in response to a notice under sub-section (1) of section 142 and the Assessing Officer is of the opinion, having regard to the fact that-

(i) a notice has been issued, or is likely to be issued, under sub-section (2) of section 143 in respect of the said return ; or

(ii) the order is the subject-matter of an appeal or further proceeding ; or

(iii)  any other proceeding under this Act is pending, that the grant of the refund is likely to adversely affect the revenue, the Assessing Officer may, with the previous approval of the Chief Commissioner or Commissioner, withhold the refund till such time as the Chief Commissioner or Commissioner may determine”

 After the omission of the aforesaid provision, process of refund was governed by Section 143(1D) of the Act. The said provision as it existed prior to the amendment by the Finance Act 2017 w.e.f 01.04.2017 (hereinafter “the 2017 amendment”), read as under:—

“(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2):

Provided that such return shall be processed before the issuance of an order under sub-section (3).”

 After the amendment, the said provision reads as under:—

“(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the asssessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.”

(b) The aforesaid noted amendment was simultaneous to the insertion of Section 241A by the Finance Act 2017 w.e.f. 01.04.2017, which reads as under:

“For every assessment year commencing on or after the 1st day of April, 2017, where refund of any amount becomes due to the assessee under the provisions of sub-section (1) of section 143 and the Assessing Officer is of the opinion, having regard to the fact that a notice has been issued under sub-section (2) of section 143 in respect of such return, that the grant of the refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, as the case may be, withhold the refund up to the date on which the assessment is made.”

 Section 241A provides that where there is a refund payable on the returns furnished under Section 143 (1) of the Act, and the Assessing Officer is of the opinion that grant of refund is likely to adversely affect the revenue, he may withhold the refund up to the date on which the assessment is made, subject to reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, as the case may be. On a combined reading of Section 143, (pre and post amendment) with section 241A, it can be discerned that by virtue of the new proviso, it is now mandatory to process the return under sub-section (1) of section 143, and proceed with grant of the refund determined therein, unless, sufficient reasons exist under Section 241A showcasing that the grant of refund is likely to adversely affect the revenue.

It may also be noted that in Section 241, the reason that “grant of refund is likely to adversely affect the revenue” was, inter alia, one of the grounds mentioned for withholding of refund. However, in the newly inserted Section 241A, adverse effect on the revenue is the sole ground for such withholding. Therefore, the 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.

1. Ashwin D Mehta (HUF) v. CIT [1995] 215 ITR 411 (Gujarat),

FACTS

The petitioner assessee filed returns wherein substantial income earned by him was shown as agricultural income. The ITO did not accept the said returns and held that the income in question was income from undisclosed sources and, therefore, the assessee was liable to pay income-tax thereon. The Commissioner (Appeals) allowed the assessee’s appeal and held that it was entitled to refund of the excess amount ordered to be paid by the ITO. The payment was, however, not made by the ITO by invoking section 241 on ground that the order passed in favour of the petitioner was challenged by the department and the appeal was pending.

On petition, the assessee submitted that no satisfaction that the amount of the refund was likely to adversely affect the revenue had been arrived at by ITO, therefore, the action of withholding of payment was clearly contrary to law and unlawful.

Ruling:

the order passed by ITO withholding the refund was quashed and set aside. The petition was allowed.

2. Consolidated Petrotech Industries Ltd. v. Asstt. CIT [1993] 202 ITR 306,

 Section 241 of the Income-tax Act, 1961 – Refunds – Power to with hold in certain cases – Assessment year 1991-92 – ITO withheld amount of refund payable to petitioner on ground that some proceedings were pending before High Court in respect of an earlier assessment year – Whether since order was non-speaking order and it did not disclose any reason as to how ITO believed that refund was likely to adversely affect revenue, order was liable to be quashed and set aside – Held, yes 

Punjab and Haryana High Court:

Naurata Ram v. CIT [1998] 100 Taxman 266

A conjoint reading of the provisions of sections 240 and 241 shows that in the ordinary circumstances the Assessing Officer has to refund the amount which has become due to the assessee as a result of any order passed in appeal or other proceedings under the Act. Proviso to section 240 specifies two circumstances in which the refund cannot be granted as a matter of course. Section 241 empowers the competent authority to withhold refund in certain cases provided that the Assessing Officer forms an opinion that the grant of refund is likely to adversely affect the revenue. Such an order can be passed only with the previous approval of the Chief Commissioner or Commissioner. The power to withhold the refund cannot be exercised merely because some proceedings are pending before the authorities constituted under the Act or a Court of law. In other words, mere pendency of the proceedings cannot itself be a ground to deny the refund on the assumption that such refund would adversely affect the revenue. The competent authority has to form an opinion on the basis of relevant material for coming to the conclusion that the order of refund will necessarily cause prejudice to the revenue of the State. If the Legislature had intended to prohibit the refund of the amount due to the assessee only on the ground that the revenue has preferred an appeal/revision, etc., then section 240 would have been couched in a different phraseology. Absence of specific provision in the statute providing for withholding of refund only on the ground of pendency of the proceedings is clearly indicative of the intention of the Legislature that pendency of proceedings will not by itself be a ground for withholding the refund.

Hence, the writ petition was allowed, and the Assessing Officer directed to refund the amount due to the assessee.

 Shreyans Industries Ltd. v. CIT [1998] 101 Taxman 498/[2001] 252 ITR 544 (Punj. & Har.),

Section 241 authorises the Assessing Officer to withhold the refund with the previous approval of the Commissioner for such time as may be determined by the Commissioner, but some facts are required to be brought on record to justify the withholding of refund. The mere fact and the only fact that the order was under challenge either before the High Court or before the Tribunal, was no ground to withhold the refund or to reach a conclusion that the refund would adversely affect the revenue. In the instant case, a huge amount had been withheld only on the ground that the appeal against the order of the Commissioner (Appeals) was pending before the Tribunal. No material was forthcoming on the record which could justify the withholding of the refund. The petitioner who was an assessee was not shown to be in default in the payment of income-tax dues or even in the matter of filing of returns. Once that was so the order of the Assessing Officer recommending the withholding of refund and the order of the Commissioner granting the approval for withholding of the refund, could not be justified under the provisions of section 241. Therefore, the orders of the Commissioner withholding refund were quashed and the revenue was directed to pay the amount to the petitioner in accordance with law.

 Maple Logistics (P) Ltd. V/s Principal CCIT (112 Taxmann.com 199)(Delhi High Court)

We find that the exercise undertaken by the respondents under Section 241A of the Act is not in consonance with Section 241A inasmuch, as the Assessing Officer has not given due regard to the facts of the case and he has not applied his mind as to why the refund is likely to adversely affect the revenue. There are no reasons recorded in writing by him to justify withholding of the refund due to the petitioner in terms of Section 143(1) for the assessment year 2017-18 and we also find that the Principal Commissioner of Income Tax, in the present case, while granting his approval has also not examined the reasons for passing the order under Section 241A and the relevant and germane considerations have also not received the attention of the Principal Commissioner of Income Tax.

We, accordingly, find that the entire exercise under Section 241A has not been correctly undertaken by the respondents. At the same time, we are conscious of the fact that the Scrutiny Proceedings under Section 143(2) were initiated by issuance of notice, as early as on 17.08.2018 i.e. even before the issuance of the intimation under Section 143(1), which was issued on 16.03.2019.

We, therefore, grant two weeks time to the respondents to consider the aspect whether the amount found due to be refunded, or any part thereof, is liable to be withheld under Section 241A. While doing so, the Assessing Officer shall, firstly, with reasons, make a prima facie assessment of the probability that additions would be made in the Scrutiny Assessment Proceedings, secondly; he shall make an assessment of the quantum of additions, if any, that may be made to the income returned, and the likely tax effect that such additions may have, thirdly; he should assess the financials and financial standing of the petitioner with regard to its ability to meet and service any demand for tax that may be raised as a result of the Scrutiny Proceedings; and also take into consideration such other factors eg. past demands, any outstanding litigation and the past conduct of the assessee etc. All the aforesaid aspects should be examined to ascertain if the payment of the refund, or any part thereof, are likely to have adverse affect on the Revenue. The order must reflect due application of mind of the Assessing Officer while making a proposal whether, or not, to withhold any part of the refund amount. Such a proposal should be examined by the Principal Commissioner of Income Tax with due application of mind on all the aforesaid aspects. The entire consideration, with the approval of the Principal Commissioner of Income Tax to the withholding of the refund amount, or any part thereof, should be completed within two weeks from today, failing which, we direct that without awaiting any further orders, the respondents shall transmit the amount of Rs. 4,79,93,740/- with interest to the petitioner, upon the petitioner furnishing an undertaking that the said amount shall forthwith be deposited with the GST Authorities. We have laid down the aforesaid time line considering the fact that the refund was found payable as early as on 16.03.2019.

In the eventuality of the respondents recording any reasons for withholding a part of, or the entire amount due for refund to the petitioner under Section 143(1), the reasons thereof as approved by the Principal Commissioner of Income Tax shall be provided to the petitioner forthwith. Needless to state that the reasons recorded for withholding of refund under section 241A would only amount to a tentative view and would not come in the way of the Assessing Officer to frame the assessment under section 143(3) of the Act.

In our considered opinion, the AO has completely misunderstood the refund mechanism and the import of Section 241A of the Act. The legislative intent is clear and explicit. The processing of return cannot be kept in abeyance, merely because a notice has been issued under section 143(2) of the Act. Post amendment, sub-section (1D) of section 143 is inapplicable to returns furnished for the AY commencing on or after 1st Day of April 2017. The only provision that empowers the AO to withhold the refund in a given case presently, is section 241A.Now the refunds can be withheld only in accordance with the said provision. The aforesaid provision is applicable to such cases where refund is found to be due to the Assessee under the provisions of Sub-Section (1) of Section 143, and also a notice has been issued under Sub-Section (2) of Section 143 in respect of such returns. However, this 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.

 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. On the contrary, section 241A enjoins the AO to process the determined refunds, subject to the caveat envisaged under Section 241A. The language of section 241A envisages that the aforesaid provision is not resorted to merely for the reason that the case of the assessee is selected for scrutiny assessment. 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.

 The AO is duty bound to process the refund where the same are determined. He cannot deny the refund in every case where a notice has been issued under Sub-Section (2) of Section 143. The discretion vested with the AO has to be exercised judiciously and is conditioned and channelized. Merely because a scrutiny notice has been issued should not weigh with the AO to withhold the refund.The AO has to apply his mind judiciously and such application of mind has to be found in the reasons which are to be recorded in writing. He must make an objective assessment of all the relevant circumstances that would fall within the realm of “adversely affecting the revenue“.

 In the present case, the AO has completely lost sight of the words in the provision to the effect that, “the grant of the refund is likely to adversely affect the revenue.” The reasons that are relied upon by the Revenue to justify the withholding of the refund in the present case, are abysmally lacking in reasoning. Except for reproducing the wordings of Section 241A of the Act, they do not state anything more. The entire purpose of Section 241A would be negated, in case the AO was to construe the said provision in the manner he has sought to do. It would be wholly unjust and inequitable for the AO to withhold the refund, by citing the reason that the scrutiny notice has been issued.Such an interpretation of the provision would be completely contrary to the intent of the legislature. The AO has been completely swayed by the fact that since the case of the assessee has been selected for scrutiny assessment, he is justified to withhold the refund of tax.

 The power of the AO has been outlined and defined in terms of the Section 241A and he must proceed giving due regard to the fact that the refund has been determined. The fact that notice under section 143(2) has been issued, would obviously be a relevant factor, but that cannot be used to ritualistically deny refunds. 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, to state a few would be the prima facie view on the grounds for the issuance of notice under section 143(2); 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; the creditworthiness or financial standing of the assessee, and all factors which address the concern of recovery of revenue in doubtful cases.

Therefore, merely because a notice has been issued under section 143(2), it is not a sufficient ground to withhold refund under section 241A and the order denying refund on this ground alone would be laconic. Additionally, the reasons which are to be recorded in writing have to also be approved by the Principal Commissioner, or Commissioner, as the case may be and this should be done objectively.

Thus in view of the foregoing discussion, the entire exercise under Section 241A has not been correctly undertaken by the respondents. The petition is disposed of and 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.

Conclusion:

1) Scrutiny notice is not sufficient ground to withheld refund.

2) The AO has to record the reasons in writing and CIT should give his approval after due consideration of facts that how it will adversely affect the revenue.

3) There should be analysis of probable Tax liability due to scrutiny proceedings

4) The Past history of Assessee

5) The financial standing of the assessee

6) Other factors about recovery

So the assessee may also ask reason to withheld the refund. Even RTI may be used to gather relevant information. The department may also set some SOP for this so that SME units of country can get relief from Liquidity crisis and grow further to generate employment. 

Author Bio

Qualification: CA in Practice
Company: Rajesh Bhauwala & Co.
Location: SURAT, Gujarat, IN
Member Since: 12 Feb 2019 | Total Posts: 6
I am practicing since 1997 in the field of Direct Tax, Indirect Tax, Project finance, Subsidy matters. Appearing at ITAT level and having specialisation in handling GST Search matters. Delivered Lectures on Direct Tax and Indirect Taxes at Study Circles, Trade Associations, Public Meetings .Also As View Full Profile

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