2019 (11) TMI 340 - HC - Income Tax

ower to withhold refund in certain cases u/s 241A - Claim of Interest u/s 244A - adjust the outstanding amount of TDS and GST payable by Petitioner Company against the pending refund amount without charging of any interest for the delayed payments - HELD THAT - 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. 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. 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.

Summary

Issues Involved:
1. Refund of income tax due to excess deduction of tax at source for Assessment Years 2017-18 and 2018-19.
2. Validity of withholding the refund under Section 241A of the Income Tax Act.
3. Application of Section 143(2) and its impact on withholding refunds.
4. Procedural requirements and application of mind by the Assessing Officer and Principal Commissioner of Income Tax.

Issue-wise Detailed Analysis:

1. Refund of Income Tax Due to Excess Deduction of Tax at Source:
The petitioner sought a writ of Mandamus directing the respondent to refund the excess tax deducted at source (TDS) for the Assessment Years 2017-18 and 2018-19. The petitioner claimed that the excess TDS caused financial difficulties, including acute cash flow constraints, inability to service customers and lenders, and delays in paying statutory dues.

2. Validity of Withholding the Refund under Section 241A of the Income Tax Act:
The court found that the exercise undertaken by the respondents under Section 241A was not in consonance with the statutory requirements. The Assessing Officer (AO) did not provide written reasons to justify the withholding of the refund, nor did the Principal Commissioner of Income Tax examine the reasons for passing the order under Section 241A. The court directed the respondents to reconsider whether the refund or any part thereof should be withheld under Section 241A, with detailed reasons and proper application of mind.

3. Application of Section 143(2) and its Impact on Withholding Refunds:
The court noted that the mere issuance of a notice under Section 143(2) does not automatically justify withholding the refund. The AO must assess whether the refund would adversely affect the revenue by considering factors such as the probability of additions in the scrutiny assessment, the quantum of such additions, the financial standing of the petitioner, and other relevant factors. The court emphasized that the AO must provide a detailed and reasoned order, which should be approved by the Principal Commissioner of Income Tax.

4. Procedural Requirements and Application of Mind by the Assessing Officer and Principal Commissioner of Income Tax:
The court highlighted that the AO must make a prima facie assessment of the probability of additions in the scrutiny assessment, the quantum of such additions, and the likely tax effect. The AO should also assess the financial standing of the petitioner and consider other factors such as past demands and outstanding litigation. The reasons for withholding the refund must be recorded in writing and approved by the Principal Commissioner of Income Tax. The court directed that if the respondents fail to comply within two weeks, the refund amount should be transmitted to the petitioner with interest.

Conclusion:
The court concluded that the respondents had not correctly undertaken the exercise under Section 241A and directed them to reconsider the withholding of the refund with detailed reasons and proper application of mind. The petition was disposed of with specific directions for compliance.