2021 (7) TMI 227 - HC - Income Tax

Tax refund adjustment towards the arrears of the tax - respondent authorities have applied the refund tax towards penalty only but not towards the arrears of tax - HELD THAT - On a conspectus of material on record, we find the action of the respondents in adjusting the tax refund towards penalty is legally impermissible. As rightly argued by the learned counsel for petitioner, the circular of the Board F.No.149/145/98-TPL dated 03.09.1998 is clear on this aspect. Division Bench set aside the method adopted by the Department and directed the 1st respondent therein to issue a fresh Certificate of Intimation in the light of the order of the Division Bench. Needless to emphasise that the above decision applies with all its fours to the case on hand. This writ petition is allowed and the respondent authorities are directed to adjust the tax refundable to the petitioner for the year 1996-97 to the tax arrears instead of penalty and accordingly, re-determine the amount payable by the petitioner under Section 90(1) of the Finance (No.2) Act, 1998 and grant certificate expeditiously, but not later than four (4) weeks from the date of receipt of a copy of this order

Summary

Issues:
1. Adjustment of tax refund under Karvivad Samadhan Scheme, 1998 - towards arrears of tax, interest, or penalty.

Analysis:
The primary issue in this case revolves around the adjustment of a tax refund under the Karvivad Samadhan Scheme, 1998. The petitioner, a company engaged in exporting tobacco, had filed returns for the assessment year 1986-87, disclosing a net income. Subsequently, assessments were made, leading to tax, interest, and penalty levies. The petitioner appealed against the assessments, leading to a series of legal proceedings. The introduction of the Karvivad Samadhan Scheme aimed to settle tax liabilities and avoid litigation. The petitioner filed a declaration under this scheme, leading to the determination of an amount payable towards tax arrears. However, a discrepancy arose regarding the adjustment of a tax refund towards penalty instead of tax arrears, as per the scheme's provisions.

The respondent authorities contended that the tax refund was correctly adjusted towards penalty before determining the arrears of tax payable under the scheme. However, the petitioner argued that such adjustment was legally impermissible, citing a circular by the Board emphasizing that refunds should first be adjusted towards tax before interest. The court analyzed relevant legal provisions and precedents, including a decision by the High Court of Karnataka, which clarified that payments towards tax arrears should prioritize tax over interest. The court highlighted the importance of correctly implementing the Board's circular and ensuring compliance with the scheme's provisions.

Based on the arguments presented and legal precedents cited, the court concluded that the adjustment of the tax refund towards penalty was incorrect. The court directed the respondent authorities to adjust the tax refund towards tax arrears instead of penalty and re-determine the amount payable by the petitioner under the Finance (No.2) Act, 1998. The court emphasized the need for expedited action in this regard, setting a timeline for compliance. The judgment underscored the importance of adhering to legal principles and ensuring proper application of tax refund adjustments under the Karvivad Samadhan Scheme, 1998.