HC says once scrutiny notice is issued, refund not to be mandatorily processed within one year
The Delhi High Court has rejected the plea of Vodafone Mobile Services Ltd seeking direction to the IT department to expeditiously process its refund claim and issue refund of Rs 4,759.74 crore in respect of its income tax returns for assessment years 2014-15 to 2017-18 along with interest.
A bench of Justice S Ravindra Bhat and Justice Prateek Jalan said that “Section 143(2) empowers, the Assessment Officer 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 the instant case, Vodafone had moved court on account of inaction on the part of the Assistant Commissioner of Income Tax in not processing income tax returns for four Assessment Years—2014-15 to 2017-18 which, the company said, will result in issuance of refunds aggregating to Rs 4759.74 crores along with applicable interest under Section 244A of the Income Tax Act.
Vodafone told the court that there were seven group entities providing telecom services in different circles before two amalgamations involving the merger of certain Vodafone group companies were undertaken to re-structure business operations and increase operational efficiencies.
Group entities Vodafone Cellular Limited, Vodafone Digilink Limited, Vodafone East Limited and Vodafone South Limited amalgamated with Vodafone under the first scheme of amalgamation in April 2011.
Vodafone Mobile Services Ltd and Vodafone West Limited amalgamated with Vodafone in the year 2012.
The Revenue was duly intimated about the two schemes of amalgamation due to which all proceedings in the case of the amalgamating entities are to be carried on in the name of Vodafone.
Vodafone contended that revised e-returns of income pertaining to AY 2014-15 and AY 2015- 16, were filed by it on 31.03.2016 and 25.11.2016 claiming refunds of 1,532.09 crores and Rs 1,355.51 crores, respectively. The return of income pertaining to AY 2016-2017, claiming a refund of Rs 1,128.47 crores was filed on 30.11.2016. However, this too has not been processed to date.
Vodafone, represented by senior advocate Harish Salve, argued that 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).
Appearing for Revenue, senior standing counsel Zoheb Hossain submitted that 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 court noted that in the instant case, the revenue had relied on an order dated 28-7-2018, which inter alia, stated that “Considering pending special audit, pending scrutiny, opening demands of amount more than Rs 4500 crore, it will be prejudicial to the interest of the revenue to process the returns without completion of the pending scrutiny cases. Therefore, exercising powers under section 143(1) and under section 241A of the Act, the undersigned decline the processing of returns under section 143(1)”.
The bench further said, “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”.
“In the facts of the present case, 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,” it said.
During the arguments, Vodafone had relied on the decision of the high court in case titled Tata Teleservices Limited vs. CBDT, wherein it was held that the return should be processed within a year and only where the assessing officer is of the view that issuance of refund would be detrimental to collection of demands which may arise, he may invoke the provision of Section 143(1D) of the Act.
To this argument, the bench said, “To this court, it appears that the net effect of Tata Teleservices (supra) is that the revenue cannot be inactive, in cases where the assessee claims refund, and the one year period (under proviso to Section 143 (1)) ends. The AO has to apply his mind to consider whether the facts and circumstances of the case warrant some or all of the refund of the assessee’s amounts, or if all of it needs to be withheld, whenever the assessee presses for refund. This exercise should be undertaken promptly, keeping in mind the time limit under the normal provision of Section 143 (1) expires. This court held in Tata Teleservices Ltd. (supra) and the Bombay High Court in case of Group M Media India (P) Ltd. (supra) that it would be wholly inequitable for the Assessing Officer to merely sit over the petitioner's request for refund citing the availability of time up to the last date of framing the assessment under Section 143 (3). The proper interpretation of the statute and the situation in such a case would be, the AO should take up an expeditious disposal of the question once the assessee requests for release of the refund”.
The bench also referred to Commissioner Of Income-Tax v Gujarat Electricity, wherein it was held that once a regular assessment commences with the issuance of the notice, under Section 143 (2), summary proceeding of an intimation is not feasible.
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, the court was of the 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”.
Read the Judgment Here