2018 (12) TMI 1221 - HC - Income Tax

Seeking refund with interest on the basis of Income Tax Returns (ITR) - Withholding of refund u/s 241A - scrutiny assessment u/s 143(3) is pending - ACIT not processing income tax returns for four Assessment Years - Revenue argued that processing of returns without scrutiny would be prejudicial to its interests - interpretation of Section 143 (1D) - as per assessee once the one year period in proviso to Section 143 (1) ends, the return and whatever calculations are contained in it, with respect to tax liability as well as the consequential refunds, become final, subject to only one event issuance of notice under Section 143 (2). Held that - Section 143(2) empowers, the AO to issue notice to the assessee to produce documents or other evidence, to prove the genuineness of the income tax return. Under section 143(1D) of the Act as introduced by the Finance Act, 2012 processing of a return under Section 143(1)(a) is not necessary where a notice has been issued under Section 143(2) of the Act. This provision has now been amended by the Finance Act, 2016 (with effect from the AY 2017-18) to provide that if scrutiny notice is issued under Section 143(2), processing of return shall not be necessary before the expiry of one year from the end of the financial year in which return is submitted. In this case, acknowledgement or intimation had not been sent by the AO. There is no doubt that the period of one year indicated in the second proviso to Section 143 (1). However, Section 143 (1D) begins with a non-obstante clause that overbears that provision. For the AYs in consideration, for AY 2014-15, the petitioner has approached the AAR and for AYs 2015-16 and 2017-18, scrutiny assessments are pending before the AO. The AO has exercised discretion under Section 143(1D) not to process the returns considering the fact that substantial demand has been raised on completion of scrutiny assessment of earlier years. The petitioner has undertaken two schemes of amalgamation involving merger of certain group companies in order to restructure its business operations and increase operational efficiencies. In light of the above fact, assessments for the AY 2012-13 and 2013-14 are under special audit and any demand that would arise from the processing of the said assessment years are to be allowed to be adjusted against the refund claims. The petitioner s position is that it is not in a good financial condition. There is some merit in the revenue s argument that substantial outstanding demand are pending against the petitioner. Further, the likelihood of substantial demands upon the assessee after the scrutiny for the AYs is completed, cannot be ruled out. The Revenue should have the right to adjust the demands against the refunds that may arise but have not yet been determined due to ongoing scrutiny proceedings. As far as the argument that the expiry of the one year period, per second proviso to Section 143 (1) resulting in finality of the intimation of acceptance, this court is of opinion that the deeming provision in question, i.e. Section 143 (1) (d) only talks of two eventualities shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a). Secondly, that intimation or acknowledgement cannot confer any greater right than for the assessee to ask the AO to process the refund and make over the money; it is up to the AO- wherever the possibility of issuing a notice under Section 143 (2) exists, or where such notice has been issued, to apply his mind, and decide whether given the nature of the returns and the potential or likely liability, the refund can be given. It does not mean that when an assessment -pursuant to notice under Section 143 (2) is pending, such right to claim refund can accrue. This court also recollects the decision of the Supreme Court in Deputy Commissioner of Income Tax v Zuari Estate Development Investment Co Ltd 2015 (8) TMI 480 - SUPREME COURT which held that an intimation under Section 143 (1) is not to be considered as an assessment. No merit in petitioners argument - Appeal dismissed.

Issues Involved:
1. Inaction by the Assistant Commissioner of Income Tax in processing income tax returns for AYs 2014-15 to 2017-18.
2. Entitlement to refunds aggregating to ?4759.74 crores along with applicable interest under Section 244A of the Income Tax Act.
3. Legitimacy of the Revenue's refusal to process returns due to pending scrutiny and special audits.
4. Interpretation of Section 143(1D) and its impact on the processing of returns and issuance of refunds.
5. The effect of amalgamation of Vodafone group entities on the processing of returns and refunds.
6. The financial hardship caused to Vodafone due to the delay in processing refunds.
7. The legal validity of the Revenue's reliance on Section 241A to withhold refunds.

Detailed Analysis:

1. Inaction by the Assistant Commissioner of Income Tax:
The petitioner, Vodafone, filed a writ petition under Articles 226 and 227 of the Constitution of India due to the inaction of the Assistant Commissioner of Income Tax in processing its income tax returns for AYs 2014-15 to 2017-18. Vodafone claimed that this inaction would result in a delay in issuing refunds totaling ?4759.74 crores along with applicable interest under Section 244A of the Income Tax Act.

2. Entitlement to Refunds:
Vodafone argued that the Revenue's deliberate omission to process and grant refunds for the relevant period was contrary to Section 143(1), which mandates the processing of returns not later than one year from the end of the relevant financial year. Vodafone cited precedents, including Tata Teleservices Limited vs. CBDT and Group M Media India (P) vs. Union of India, to support its claim that returns should be processed within a year unless the issuance of refunds would be detrimental to the collection of demands.

3. Legitimacy of Revenue's Refusal:
The Revenue contended that processing returns without scrutiny would be prejudicial to its interests due to the likelihood of substantial additions to Vodafone’s income based on various grounds, such as transfer pricing adjustments, capitalization of license fees, and other issues. The Revenue argued that the scrutiny assessments and special audits for the relevant AYs were pending, and substantial demands were likely to arise, justifying the withholding of refunds.

4. Interpretation of Section 143(1D):
Vodafone argued that the one-year period prescribed under Section 143(1) had expired, and there had been no correspondence from the Revenue exercising discretion under Section 143(1D). The court referred to the interpretation of Section 143(1D) in Tata Teleservices and Group M Media India, which held that the Revenue cannot be inactive where the assessee claims a refund and the one-year period is over. The AO must apply their mind and decide whether to grant or withhold the refund based on the facts and circumstances.

5. Effect of Amalgamation:
Vodafone underwent two schemes of amalgamation involving the merger of certain group companies to restructure its business operations. The Revenue was duly informed about these schemes. Vodafone argued that the ITD System has functionality enabling the manual grant of tax credit in case of a merger, and system-related issues should not be held against it to deny its due refunds.

6. Financial Hardship:
Vodafone submitted that the delay in processing refunds caused it grave financial hardship, particularly given its sustained losses. It argued that withholding refunds violated the principles contained in Articles 265 and 300A of the Constitution of India, which mandate that no tax shall be levied or collected except by authority of law and that no person shall be deprived of their property save by authority of law.

7. Legal Validity of Section 241A Reliance:
The Revenue relied on Section 241A to withhold refunds, arguing that the grant of refunds would adversely affect the recovery of revenue given the substantial outstanding demands against Vodafone. The court noted that Section 241A allows the AO to withhold refunds if it would adversely affect revenue recovery, provided reasons are recorded in writing and with the previous approval of the Principal Commissioner or Commissioner.

Conclusion:
The court dismissed Vodafone's writ petition, holding that the Revenue's decision to withhold refunds was justified given the substantial outstanding demands and the likelihood of further demands arising from pending scrutiny assessments and special audits. The court emphasized that the AO must exercise discretion and apply their mind to decide on the issuance of refunds, considering the facts and circumstances of each case. The court also noted that the deeming provision in Section 143(1)(d) does not confer an automatic right to refunds when an assessment pursuant to notice under Section 143(2) is pending.

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