2012 (9) TMI 163 - HC - Income Tax

Difficulties in receiving credit of Tax Deducted at Source - Held that - Section 245 envisages prior intimation to the assessee so that he can respond before any adjustment of refund is made towards a demand relating to any other assessment year. Thus opportunity of response/reply is given and after considering the stand and plea of the assesse, an order/direction for adjustment when justified and proper is made. The section postulates and mandates a two stage action. Prior intimation, and then a subsequent action when warranted and necessary of adjustment, of the refund towards arrears - as accepted by department that when a return is processed under Section 143(1), the CPU itself adjusts the refund due against the existing demand i.e. there is adjustment, but without following the procedure prescribed under Section 245, which requires prior intimation so that the assessees can respond or give their explanation, thus interim direction to the respondents that they shall in future follow the procedure prescribed under Section 245 before making any adjustment of refund payable by the CPU at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply will be considered and examined by the Assessing Officer before any direction for adjustment is made. Difficulties in getting refunds on account of adjustment towards arrears - Held that - There can be small and insignificant mismatches, which if purely technical should be condoned or ignored. After all tax has been paid or credited in the name of the assessee. Once the amount is correctly and rightly reflected in Form AS26, small or technical mismatch in the return should not be a ground to deny credit of the amount paid, in such cases, if the AO feels that benefit of TDS reflected in AS26 should not be given, he should issue notice to the assessee to revise or correct the mistake and only if the necessary rectification or correction is not made, an order under Section 143(1) should be passed and the demand should be raised. We issue an interim direction to this effect. As in several cases refunds have been adjusted on account of the debit entry made under the head modified . These entries are made by the AO and thus the refund is reduced to nil or zero. Copies of two such adjustment orders have been shown, thus the said orders will be filed in the Registry and copies will be given to the counsel for the Revenue, who will take appropriate instructions on this aspect. It is stated that there are thousands of cases of similar nature. Learned counsel for the Revenue will obtain instructions whether directions can be issued to the AO to provide full details and particulars of the entries made under the head modified . We may note that in these cases, processing has been done for the purpose of intimation under Section 143(1) of the Income Tax Act, 1961.

Issues Involved:
1. Difficulties in receiving credit of Tax Deducted at Source (TDS).
2. Adjustment of past demands or arrears from the refund payable.
3. Compliance with Section 245 of the Income Tax Act, 1961.
4. Incorrect data uploaded by Assessing Officers.
5. Non-action against deductors for incorrect TDS details.
6. Small errors or mistakes resulting in denial of TDS credit.
7. Adjustment of refunds without following proper procedure.

Issue-wise Detailed Analysis:

1. Difficulties in Receiving Credit of TDS:
The judgment acknowledges that taxpayers face significant difficulties in receiving credit for TDS. This issue is bifurcated into two categories: (a) cases where the amount is reflected in Form 26AS but due to incorrect entries in the return or small mismatches, credit is denied; and (b) cases where TDS has been deducted by the deductor, but credit is denied due to the deductor's failure to correctly upload TDS details. The court notes that this problem is particularly severe, with 43% and 39% of returns processed in Delhi for the financial years 2010-11 and 2011-12 found to be defective, resulting in substantial arrears.

2. Adjustment of Past Demands or Arrears from Refund Payable:
The court observes that the Income Tax Department has initiated centralized computerization of records and processing of returns, which is commendable. However, the problem arises from incorrect data uploaded into the system. The court highlights that the Assessing Officers were instructed to verify and correct arrears before uploading them to the Central Processing Unit (CPU) at Bengaluru. Despite this, many demands uploaded were incorrect, leading to wrongful adjustments of refunds.

3. Compliance with Section 245 of the Income Tax Act, 1961:
Section 245 empowers an Assessing Officer to adjust refunds against demand after giving prior intimation to the taxpayer. The court emphasizes that this procedure must be strictly followed, providing taxpayers an opportunity to respond before any adjustment is made. However, it is noted that the CPU at Bengaluru often adjusts refunds without following this procedure, leading to taxpayer grievances.

4. Incorrect Data Uploaded by Assessing Officers:
The judgment highlights that incorrect data uploaded by Assessing Officers has led to wrongful adjustments of refunds. The court points out that the CPU at Bengaluru has collected demands amounting to Rs. 4800 crores by adjusting refunds based on incorrect data. The court directs the Revenue to file an affidavit explaining the procedure followed and to rectify and correct their records.

5. Non-action Against Deductors for Incorrect TDS Details:
The court criticizes the Revenue's response to the issue of deductors failing to correct TDS details, which leads to taxpayers being denied credit. It is noted that there are no penal provisions for deductors who fail to correct errors, leaving taxpayers to bear the burden. The court directs the Board to examine whether Section 272BB, which prescribes a penalty for such failures, can be invoked.

6. Small Errors or Mistakes Resulting in Denial of TDS Credit:
The court acknowledges that small errors or mismatches should not result in the denial of TDS credit. It directs that if the amount is correctly reflected in Form 26AS, minor mismatches should be condoned, and taxpayers should be given an opportunity to correct mistakes before any demand is raised.

7. Adjustment of Refunds Without Following Proper Procedure:
The court issues an interim direction that the procedure prescribed under Section 245 must be followed before making any adjustment of refunds. Taxpayers must be given an opportunity to respond, and their replies must be considered by the Assessing Officer before any adjustment is made. The court also addresses the issue of adjustments made for non-existing or fictitious demands and directs the Revenue to rectify such errors.

Conclusion:
The court highlights the magnitude of the problems faced by taxpayers due to incorrect data and non-compliance with statutory procedures. It emphasizes the need for the Revenue to take appropriate remedial and corrective actions to ensure fairness and reduce taxpayer grievances. The court issues specific directions to ensure compliance with Section 245 and to address issues related to TDS credit and wrongful adjustments of refunds.

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