By TIOL News Service:

NEW DELHI, MAY 18, 2016: THE issue is - Whether adjustment of refund payable against tax arrears can be made without any prior intimation to assessee. NO is the answer.

Facts of the case:

The assessee is a theatre. Consequent to filing of its returns for the A.Ys 1991-92 and 1995-96, the AO made additions to the disclosed income of the Assessee and raised demands of Rs.6,75,413 and Rs.66,804/- respectively. In the meanwhile, the KVSS was announced by the Government of India. Accordingly, the assessee submitted an application under the said scheme, seeking to settle the demands arising out of the assessment orders for the two AYs in question. In the said application, it was stated that just before filing, the assessee became aware that against its tax liability for the aforementioned two AYs, the refund due to them for the subsequent AYs 1996-97 and 1997-98, had been adjusted by the AO. Accordingly, in a note appended the information provided in Column 5 of the application. Earlier to the submission of the above application, the assessee made an application to the AO for stay of the tax for the AYs 1991-92 to 1995-1996, which was however rejected.

The assessee's counsel contended that the AO had directed the assessee to deposit Rs.20 lakhs against the disputed demand for the AYs 1991-92 to 1995-96. The Assessee contested the total tax demand computed by the AO at Rs.61,03,757 comprising tax (Rs.27,73,212) and interest (Rs.33,30,545). It was pointed out that the demand for AY 1993-94 did not take into account a payment of Rs. 4.10 lakhs already made by the Assessee. It was further pointed out that if the TDS certificates furnished by the assessee for AY 1995-96 were accounted for, no demand would remain outstanding and instead a refund would be due. However, at no stage was the assessee formally informed by the AO that in relation to the arrears of tax for AYs 1991-92 and 1995-96 an adjustment had already been made by the AO of the refund that was due to the assessee for the subsequent AYs. n given". Even at this stage there was no formal intimation to the Petitioner of adjustment having been made of the refund due to the Petitioner against the tax arrears.

After hearing the parties, the High Court had held that,

++ it is seen that in response to the notice issued for outstanding demand, a counter affidavit was filed. First, a preliminary objection was raised stating that the assessee's application under the KVSS had already been rejected on 20th February, 1999 whereas the Petition was filed in October, 1999. As far as this objection is concerned, the Court notes that the present petition was filed on 15th October 1999 which is not too long after the date of rejection of the assessee's application under the KVSS. Consequently, this preliminary objection is rejected. Further, it is stated in the counter affidavit that "....the income tax demand raised for the A.Ys 1991-92 and 1995-96 were adjusted against the refunds due to the Assessee. Although the assessee was not informed about the adjustments but was very well aware and have full knowledge about the adjustments. The assessee has also impliedly given its consent and no objection to the adjustment...." In order to substantiate the above contention, the Revenue has enclosed a copy of the proceedings drawn up in hand by the AO which contains at the bottom the signature of the assessee's counsel. Apart from the said signature of counsel, there is nothing to indicate that the assessee consented to the adjustment of the tax arrears the AYs 1991-92 and 1995-96 that had already been made by the AO against the refund due to the assessee. The case of the Revenue is that the assessee had itself, through counsel, made a request for such refund by the letter, which was in the context of the assessee's request for stay of the demand of tax for the years 1991-92 to 1995-96. The assessee's case was that the tax demand was actually much lower. The assessee at this stage had no formal intimation about the adjustment that had already been made. Therefore, no inference can be drwan as an ex post facto consent of the assessee to the adjustment;

++ further, although the assessee did make the above request, it was not accepted by the Revenue. The CIT reiterated the total tax arrears of Rs. Rs. 61,03,757 and asked the assessee to contact the AO "to whom necessary instructions in the matter have been made of the refund due to the assessee against the tax arrears". During the hearing of the present petition two specific questions were asked to be addressed by the Revenue, which reads as "....1. If an adjustment had already been made of the A.Ys 1991-92 and 1995-96, why was the amount outstanding against the assessee still shown as Rs.61,03,757/- in Revenue's letter? ; 2. Was there any formal adjustment order made by the competent officer and was any intimation regarding such adjustment required to be sent? If so, whether any such order was passed and an intimation sent to the assessee?...." As regards the first question, counsel for the Revenue is unable to dispute that the CIT's letter continued to refer to the arrears of tax as of that date at Rs.61,03,757. Yet in the counter affidavit it is stated that adjustment was made of the arrears of tax against the refund due, without any prior intimation to the assessee. The mandatory requirement of Section 245 that a prior intimation must be given to the Assessee if a refund is proposed to be adjusted against the arrears of tax has been explained by this Court in its decision in Glaxo Smith Kline Asia (P) Ltd. v. CIT. However, counsel for the Revenue seek to rely on the decisions in CIL Securities Ltd. v. Commissioner of Income-tax, Brij Bhushan Lal & Sons v. Designated Authority and M.V. Ganesh v. Commissioner of Income-tax, to urge that the requirement of a prior intimation u/s 245 was only directory and a failure to do so would be a mere irregularity without any attendant consequence of invalidity of the action of the Revenue. However, the facts of the present case are quite different from those in the cases cited;

++ as far as second question posed by the Court to the Revenue, the fact of the matter is that no order was passed before the adjustment was made of the refund due to the assessee against the arrears of tax for AYs 1991-92 and 1995-96. Therefore, the said question has to be answered in the negative. The factual position is that contrary to the mandate of Section 245, without any prior order or prior intimation to the assessee, an adjustment of the refund against the arrears of tax was made. After making such adjustment, an attempt was made to justify the adjustment by seeking to infer an ex post facto consent of the assessee to such adjustment. Such course was legally impermissible for the Revenue to adopt. The fact of the matter also is that there was express or implied consent by the assessee to such adjustments. As is evident from the note to the assessee's application under the KVSS, the assessee protested against such adjustment no sooner than it learnt of that fact. Therefore, unlike the facts of the decisions cited by the Revenue, where the Court was able to infer an implied consent of the Assessee to the adjustment made, in the present case the Court is unable to imply any such consent by the assessee to the adjustment already made by the AO without passing any order and without sending any prior intimation. Interestingly, even on 29th May, 1998 there was no formal intimation to the assessee of such adjustment. The CIT mentioned the arrears of tax as Rs.61,03,757 which could not have been the case if in fact the adjustments had formally been made by passing an order. The action of the Revenue appears to be contrary to the law explained by this Court in various decisions. Consequently, the Court sets aside the decision of the Revenue rejecting the assessee's application under the KVSS Scheme. The adjustments made by the Revenue of the refunds due to the assessee against the demand of tax for AYs 1991-92, 1995-96, are declared to be invalid and are accordingly set aside. The Revenue is directed to consider afresh the assessee's application under the KVSS.

(See 2016-TIOL-948-HC-DEL-IT)