By TIOL News Service

NEW DELHI, DEC 15, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether the Revenue Department reserves the right to adjust the demands against the refunds that may arise but have not yet been determined due to ongoing scrutiny proceedings. YES IS THE VERDICT.

Facts of the case:

The assessee company is engaged in the business of providing telecommunication services. During the year under consideration, two amalgamation involving merger of certain Vodafone group companies were undertaken to re-structure business operations and increase operational efficiencies. Four Vodafone group entities namley HVDL, VEL, VSLand VCL, amalgamated with Vodafone under the first scheme of amalgamation. Further, the second scheme of amalgamation, two other groups VSPL and VWL amalgamated with Vodafone and the Department was duly intimated about the two schemes of amalgamation. As a consequence, all proceedings in the case of amalgamating entities were to be carried on in the name of Vodafone. As a consequence, the revised e-returns pertaining to AY 2014-15 and AY 2015-16, were filed claiming refunds of Rs.1,532.09 crores and Rs.1,355.51 crores, respectively. Subsequently, in view of the Advance Pricing Agreement entered by Vodafone with the CBDT u/s 92CC, it had filed modified tax return as per the mandate of section 92CD. However, such returns were processed till date. The return of income pertaining to AY 2016-2017, claiming refund of Rs. 1128.47 crores was also not processed till date. In the meanwhile, the Revenue filed a Civil Miscellaneous Application, whereby it agreed to process the tax returns filed by Vodafone for AYs 2012-13 to 2016-17 irrespective of the pending assessments. The Revenue, by such application sought this court's permission to process such return and adjust the refunds to the extent of the stayed outstanding tax demand. However, such application was later withdrawn. Accordingly, Vodafone requested the Department for expeditious processing of pending income tax returns. In the meanwhile, through notice, the Department sought to delay the issuance of refunds arising from the processing of returns, inter alia calling for details of the amalgamating entities as well asking Vodafone to give "consent" to adjustment of refunds due to Vodafone against demands, which had already been stayed by the various Courts and Tribunals. In response, it was submitted that the refund sought was because of delay in issuing the "Nil" withholding certificate sought by Vodafone in August, 2016. While Vodafone had sought a nil withholding order, a lower withholding order was issued after a delay of five months. It is submitted that while the time limit prescribed under the provisions of section 143(1) had not yet lapsed for the year, it could not act as a bar on the processing of return and the grant of consequential refund to Vodafone since such refund had arisen largely on account of delay on the Revenue's part.

Hence, present petition had been preferred on account of inaction on the part of Asst CIT in not processing income tax returns for four A.Ys 2014-15 to 2017-18, which would result in issuance of refunds aggregating to Rs.4759.74 crores along with applicable interest u/s 244A.

High Court held that,

++ it is noteworthy that till June 01, 2001, Section 241 enabled the AO to withhold any refund under certain circumstances. Section 241, after the amendment of April 01, 1989 till it was withdrawn w.e.f. 01.06.2001 read that where refund of any amount becomes due to the assessee as a result of an order under this Act or under the provisions of sub-section (1) of section 143 after a return has been made u/s 139 or in response to a notice u/s 142(1) and the AO is of the opinion, having regard to the fact that (i) a notice has been issued, or is likely to be issued u/s 143(2) in respect of the said return; or (ii) the order is the subject-matter of an appeal or further proceeding; or (iii) any other proceeding under this Act is pending, that the grant of the refund is likely to adversely affect the revenue, the AO may with the previous approval of the Chief CIT or Commissioner, withhold the refund till such time as the Chief CIT or Commissioner may determine. In the facts of the present case, the issue canvassed is on the interpretation of Section 143(1D). On reading of the Section 143, it is apparent that when returns are filed either u/s 139 or pursuant to a notice u/s 142(1), Section 143(1) mandates that the returns shall be processed in the manner prescribed in clauses (a) to (e) thereof. The processing of a return thus involves determination of total income or loss, tax and interest, if any, payable and sum payable by, or the amount of refund due to the assessee. Section 143(1)(d) stipulates that an intimation shall be prepared or generated and sent to the assessee specifying the sum determined payable by, or the amount of refund due to the assessee under clause(c). Section 143 (1) (e) provides that the amount of refund due in pursuance of the determination under clause (c) shall be granted to the assessee;

++ the provision of Section 143(1D) begins with a non-obstante clause, i.e. that notwithstanding anything contained in Section 143(1), the processing of return shall not be necessary where a notice has been issued to the assessee u/s 143(2). In this regard, the CBDT issued instructions dated Jan 13, 2015 which stated that the provision of sub-section (1D) was enacted to prevent the grant of refund after processing as the scrutiny proceedings may result in demand for taxes on finalization of the assessment subsequently. Thus, in short, the instructions provided that in no case, the return can be processed where a notice u/s 143(2) was issued. This instruction was a subject matter of challenge before this court in Tata Teleservices, wherein it was held that, by the device of issuing an instruction in purported exercise of its power u/s 119, the CBDT cannot proceed to interpret or instruct the income tax department to 'prevent' the issue of refund. In the event that a notice is issued to the Assessee u/s 143(2), it will be a matter the discretion of the concerned AO whether he should process the return. This view of the court was relied upon by a Division Bench of the Bombay High court in Group M. Media India Pvt. Ltd., wherein it was concluded that non-processing of return by taking benefit of discretionary powers, is preposterous. In Corrtech International Pvt. Ltd. vs. Deputy Commissioner of Income Tax - 2017-TIOL-2047-HC-AHM-IT, the Gujarat High Court explained the application of Section 143(1D) in co-relation to Section 241A in similar cases, and observed that the reasonable interpretation of the statute and the situation in such a case would be, to expect the AO to take up an expeditious disposal of the processing of return u/s 143(1) at least once the assessee requests for release of the refund, and send as an intimation to the assessee if he wishes to withhold the same. In the case of Rayala Corporation Pvt. Ltd. vs. Assistant Commissioner of Income Tax - 2013-TIOL-839-HC-MAD-IT, the Madras High Court held that the procedure of centralised processing u/s 143(1)(1A) finds place under the heading "Assessment" u/s 143, there appears to be a clear distinction and dichotomy in procedure;

++ a reading of the judgements and the relevant provisions, clearly shows 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. U/s 143(1D) as introduced by the Finance Act, 2012 processing of a return u/s 143(1)(a) is not necessary where a notice has been issued u/s 143(2). This provision has now been amended by the Finance Act, 2016 to provide that if scrutiny notice is issued u/s 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. The assessee's argument in these proceedings is 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 u/s 143(2). To this court, it appears that the net effect of Tata Teleservices is that the Revenue cannot beinactive, 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. and the Bombay High Court in case of Group M Media India (P) Ltd. that it would be wholly inequitable for the AO to merely sit over the assessee's request for refund citing the availability of time up to the last date of framing the assessment u/s 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;

++ however, in the facts of the present case, for the AYs in consideration, the assessee has approached the AAR and for AYs 2015-16 and 2017-18, and scrutiny assessments are pending before the AO. The AO has exercised discretion u/s 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 assessee 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 this 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. Therefore, there is some merit in the Revenue's argument that substantial outstanding demand are pending against the assessee. 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 u/s 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 u/s 143(2) is pending, such right to claim refund can accrue.

(See 2018-TIOL-2615-HC-DEL-IT)