2021 (10) TMI 973 - HC - Income Tax

Refund withheld u/s 241A - Withholding the refund on the basis of statutory prescription - mandation of Application of mind by AO - HELD THAT - The very essence of passing of the order under Section 241A is application of mind by the Assessing Officer to the issues which are germane for withholding the refund on the basis of statutory prescription contained in the said Section. The power of the AO under the provisions of the section 241A can be exercised not only after he forms an opinion that the refund is likely to adversely affect the revenue and thereafter with the prior approval of the Chief Commissioner or Commissioner as an order for refund after assessment under Section 143(3) of the said Act pursuant to a notice under Section 143(2) is subject to appeal or further proceeding. In the instant case, after notice for refund was issued the refund was withheld with no reasons given. From the judgment reported in Maple Logistics Pvt. Ltd. 2019 (11) TMI 340 - DELHI HIGH COURT 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 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 prima facie demonstrating that the grant of refund is likely to adversely affect the revenue. The scope of the power under Section 241A is narrow, 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. The recording of reasons to substantiate why such withholding is necessary and how the refund will adversely affect recovery of subsequent revenue is essential. No reasons were assigned by the Officer concerned by referring to any materials that refund declared in case of the petitioner/assessee on being actually made will adversely affect the revenue. No demand as against the petitioner was pending on the date when refund was notified. The petitioner/assess became entitled to the refund immediately on completion of assessment and refund on being notified. The Assessing Officer could not have kept the refund withheld to link such refund with any demand against the petitioner for a subsequent period when such demand was not in existence on the date when the refund was notified. The powers under this revenue friendly provision cannot be used in a mechanical manner without application of mind, wherein the Assessing Officer being of the opinion that the grant of refund may make recovery of pending demands. In that case refund can be withheld only after recording reasons and obtaining approval of Principal Commissioner or Commissioner as held in the judgment reported in Vodafone idea Ltd. vs. DCIT 2020 (2) TMI 1282 - BOMBAY HIGH COURT -The assessee must also be given an opportunity of hearing before reasons are recorded for withholding the refund under this Section. In absence of these proceedings being followed the action of the Assessing Officer withholding refund is amenable to judicial review by way of writ petition under Article 226 of the Constitution of India. The action on the part of the respondents in withholding of the refund for the assessment year 2017-18 is not sustainable in law and is set aside and quashed. The petitioner, is therefor, entitled to a mandatory order of refund.

Summary

Issues:
1) Withholding of income tax refund under Section 241A of the Income Tax Act, 1961 without assigning reasons.
2) Interpretation of Section 241A in light of assessment proceedings and demands against the assessee.
3) Application of mind by the Assessing Officer in withholding refunds.
4) Judicial review of Assessing Officer's actions under Article 226 of the Constitution of India.

Analysis:
1) The petitioner, a public company, filed its return for the assessment year 2017-18, claiming a refund of tax deducted at source. Despite receiving an intimation of the assessed refund, the refund was withheld under Section 241A without reasons, leading to the filing of writ petitions challenging the withholding.

2) The Assessing Officer, without citing specific reasons, withheld the refund citing a demand of &8377; 47,76,28,500/- against the petitioner for different periods. However, no evidence was provided to establish a demand existing at the time of the refund notification. The petitioner argued that the demand referred to arose almost a year after the refund was due, questioning the validity of withholding the refund.

3) The court emphasized that the power under Section 241A requires the Assessing Officer to form an opinion that the refund would adversely affect revenue, supported by reasons and prior approval. In this case, the refund was withheld without any reasons given after the assessment was completed, highlighting a lack of application of mind by the revenue authority.

4) Referring to legal precedents, the court highlighted the necessity of passing a speaking order with reasons for withholding refunds under Section 241A. The failure to provide reasons linking the refund to potential revenue loss and the absence of an opportunity for the assessee to be heard before withholding the refund rendered the action subject to judicial review under Article 226 of the Constitution.

5) Following a detailed analysis of statutory provisions and case law, the court held that the withholding of the refund for the assessment year 2017-18 was not sustainable in law. The respondents were directed to refund the amount with interest within a specified period, emphasizing the need for adherence to legal procedures and principles in withholding income tax refunds.