Tax Refund Adjusted Without Proper Notice: High Court Orders Refund to Assessee

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Case Name

Tata Communications Ltd. vs. Union of India & Anr. (High Court of Bombay)

Writ Petition No. 732 of 2021

Date: 6th April 2021

Key Takeaways

• Prior Notice is Mandatory: The Income Tax Department must give a clear, prior intimation under Section 245 (of Income Tax Act, 1961) before adjusting any refund against outstanding tax demands.
• Reasoned Order Required: The department must consider and respond to the assessee’s objections, record reasons if objections are rejected, and communicate this before making any adjustment.
• Court Orders Refund: The adjustment made without following these procedures was set aside, and the refund was ordered to be released with interest.
• Model Litigant Principle: The court criticized the Revenue for not acting as a “model litigant” and for not following due process.
• Precedents Reinforced: The judgment reinforces earlier decisions that stress the importance of procedural fairness in tax adjustments.

Issue

Did the Income Tax Department lawfully adjust Tata Communications’ tax refund against outstanding demands without giving proper prior notice and a reasoned order as required under Section 245 (of Income Tax Act, 1961)?

Facts

• Parties: Tata Communications Ltd. (the petitioner/assessee) vs. Union of India & Income Tax Department (the respondents).
• Tax Refund Due: For Assessment Year (AY) 2019-20, Tata Communications filed its return and was due a substantial refund (over Rs. 200 crores).
• Outstanding Demands: The department claimed there were outstanding tax demands for AYs 2007-08 and 2008-09.
• Stay Orders: Tata Communications argued that these demands were stayed by orders of the High Court and the Income Tax Appellate Tribunal (ITAT), and that interim orders were in force due to the COVID-19 pandemic.
• Communication Issues: The department issued an intimation under Section 143(1) (of Income Tax Act, 1961) mentioning a separate intimation under Section 245 (of Income Tax Act, 1961) would be issued for adjustment, but Tata Communications claimed it never received such a notice.
• Adjustment Made: The refund was adjusted against the old demands without a separate, prior intimation or a reasoned order addressing Tata Communications’ objections.
• Petition Filed: Tata Communications approached the High Court, seeking to quash the adjustment and for the refund to be released.

Arguments

Tata Communications Ltd. (Petitioner)

• No prior intimation under Section 245 (of Income Tax Act, 1961) was received before the adjustment.
• The outstanding demands were stayed by court/tribunal orders, so adjustment was not permissible.
• The department did not consider or respond to their objections or provide a reasoned order.
• Cited legal precedents requiring strict compliance with Section 245 (of Income Tax Act, 1961).

Union of India & Income Tax Department (Respondents)

• Claimed that the petitioner was aware of the proposed adjustment through communications and meetings.
• Argued that the procedure under Section 245 (of Income Tax Act, 1961) was followed, and the petitioner had an opportunity to respond.
• Claimed that the stay orders had expired, and thus the demands were recoverable.
• Asserted that the adjustment was made before the expiry of the court-ordered period for refund.

Key Legal Precedents

The court relied on several important precedents:

1. A. N. Shaikh and Others v. Suresh B. Jain, 165 ITR 86

• Held that simultaneous intimation of adjustment in the assessment order does not satisfy Section 245 (of Income Tax Act, 1961); prior written intimation is mandatory.

2. Hindustan Unilever Ltd. v. Deputy Commissioner of Income Tax and Others, [2015] 377 ITR 281 (Bom)

• Stressed that prior intimation under Section 245 (of Income Tax Act, 1961) is mandatory to allow the assessee to raise objections, and the officer must apply his mind, record reasons, and communicate them before adjustment.

3. Milestone Real Estate Fund v. Assistant Commissioner of Income Tax and Others, [2019] 415 ITR 467 (Bom)

• Reiterated that the assessing officer must consider objections, record reasons, and communicate them before making any adjustment under Section 245 (of Income Tax Act, 1961).

Statutory Reference:

• Section 245 (of Income Tax Act, 1961) – Deals with the set-off of refunds against tax remaining payable.

Judgement

• Decision: The High Court ruled in favor of Tata Communications Ltd.
• Reasoning: The court found that the Income Tax Department did not comply with the mandatory requirements of Section 245 (of Income Tax Act, 1961). There was no evidence of a separate prior intimation, no reasoned order addressing the assessee’s objections, and no communication of such an order before the adjustment.
• Orders:
• The adjustment of the refund was set aside.
• The department was directed to refund the amount due for AY 2019-20, with interest, within four weeks.
• The court emphasized that the Revenue must act as a model litigant and follow due process.

FAQs

Q1: What is Section 245 (of Income Tax Act, 1961)?

A: Section 245 (of Income Tax Act, 1961) allows the Income Tax Department to set off any refund due to a taxpayer against any outstanding tax demand, but only after giving prior intimation and an opportunity to respond.

Q2: Why did the court set aside the adjustment?

A: Because the department did not give a separate, prior notice under Section 245 (of Income Tax Act, 1961), did not consider or respond to the assessee’s objections, and did not communicate a reasoned order before making the adjustment.

Q3: What should the department have done?

A: The department should have issued a clear, prior intimation under Section 245 (of Income Tax Act, 1961), considered the assessee’s objections, recorded reasons if objections were rejected, and communicated this before making any adjustment.

Q4: What happens now for Tata Communications?

A: The department must refund the amount due for AY 2019-20, with interest, within four weeks.

Q5: Does this case set a precedent?

A: Yes, it reinforces the requirement for strict compliance with Section 245 (of Income Tax Act, 1961) and procedural fairness before adjusting refunds against outstanding demands.

1. Rule. Rule made returnable forthwith and heard learned advocates for the parties, finally, by consent.

2. The petitioner is a telecommunications company engaged in offering services as referred to in the writ petition. Petitioner had filed its return of income for the Assessment Year (AY) 2019-20 of total income of Rs.638,05,85,060/- and Rs.220,62,55,842/- as total tax on said income. Petitioner had claimed a credit of Rs.425,84,02,174/- as tax paid in the form of Tax Deducted at Source (TDS) of Rs.425,83,76,387/- and Tax Collected

at Source (TCS) of Rs.25,787/- and had claimed refund of Rs.205,21,46,330/-. Processing of said return had been getting obfuscated and prolonged at the end of the respondents and the petitioner had been before this court in writ petition bearing (Lodging) No. 6965 of 2020. Said writ petition had been disposed of by this court on 11th January, 2021 directing to release due refund amount with interest within a period of two weeks from the date of

receipt of the order.

3. Petitioner had forwarded a copy of aforesaid order dated 11th January, 2021 to the respondents on 14th January, 2021 with a request to comply with the same and to release the refund with interest.

4. Respondent No. 6 issued an intimation under section 143(1) (of Income Tax Act, 1961), 1961 (Herein after “the Act”), on 17th January, 2021 and had determined income tax refund with interest payable to the petitioner to the tune of Rs.227.27 crore, referring, inter alia, to that certain demands were outstanding, including those for the AYs 2007-08 (Rs.153.91 crore) and 2008-09 (Rs.138.26 crore), further referring to that intimation pursuant to section 245 (of Income Tax Act, 1961) has been issued separately proposing to adjust outstanding demands against aforesaid determined refund, asking the petitioner to submit its response as release of refund would be considered with reference to the same.

5. Petitioner, had, in response, referred to that the petitioner had not received any notice under section 245 (of Income Tax Act, 1961), despite a statement in the intimation under section 143(1) (of Income Tax Act, 1961). It was pointed out that the outstanding demands stated were stayed by orders of the high court and the Income Tax Appellate Tribunal (ITAT), giving details thereof. It had been specifically pointed out that stay had been granted on 19th June, 2020 which was to remain effective up to 15th July, 2020 by the ITAT to the demands

of AYs 2007-08 and 2008-09 and while final hearing had been scheduled on 15th July, 2020 that could not take place. Thereafter, there had been series of orders by the high court where under status quo was maintained for all interim orders within the State till 31st January, 2021, as the high court had intervened in view of nationwide lock-down due to pandemic. It was referred to that petitioner had also met respondents No. 2 and 3 and explained aforesaid position and had requested to release refund which had

been due. Petitioner had also furnished substantiating material on, on-line portal of the Income Tax Department on 22nd January, 2021. The petitioner had again requested respondents No. 2 and 3 explaining status of the outstanding demands, highlighting that the demands stated in intimation dated 17th January, 2021 had been stayed or injunction has been clamped.

6. As nothing was heard from the respondents, the petitioner on 30th January, 2021 had requested the respondents to release refund as the period granted by the high court had come to an end. In the meanwhile, the petitioner had informed the respondents that it had requested to fix stay applications for AYs 2007-08 and 2008-09.

7. On 1st February, 2021, the petitioner found that demands pertaining to AY 2007-08 had been stopped appearing as outstanding and demand pertaining to AY 2008-09 had been reduced as on 31st January, 2021 on the income tax e-filing portal and “date of last refresh” mentioned therein was 31st January, 2021.

8. Since the petitioner had neither received any communication from the respondents nor the amount of refund, it had written on 2nd February, 2021 to respondents that there has been no communication with regard to refund and that it was surprised to see on 1st February, 2021 that online income tax e-filing portal suggested that demand for AY 2007-08 is no longer outstanding and for the next AY 2008-09, it had been reduced and clarification was sought in this respect as to whether refund of AY 2019-20 was adjusted against these demands, reiterating that demands for said AYs were stayed and could not be recovered.

9. Petitioner noticed, when status of income tax refund for AY 2019-20 on “Tax Information Network” of the Income Tax Department available on the website of National Securities Depository Limited (NSDL) was checked, that refund of AY 2019-20 was adjusted against the outstanding demands. Thus, the petitioner is before this court seeking writ of certiorari or writ of its nature to quash and set aside the adjustment of demands of AYs 2007-08 and

2008-09 against the determined refund due for the AY 2019-20. Petitioner also seeks writ of mandamus directing respondent No. 3 to release refund of AY 2019-20 along with interest as determined under the intimation dated 17th January, 2021 and to forthwith withdraw impugned adjustment purportedly done.

10. In the affidavit in reply to the writ petition, respondents refer to that return for the AY 2019-20 had been processed under section 143(1) (of Income Tax Act, 1961) and total refund of Rs.204,74,43,697/- plus interest under section 244A (of Income Tax Act, 1961) of Rs.22,52,18,796/- has been given under intimation dated 17th January, 2021 and there is a difference of Rs.47,02,633/- on account of lower TDS credits appearing in Form 26AS of the assessee. It has been referred to that the petitioner had been communicated details of outstanding tax demands, arrears from time to time and even the assessee has forwarded its reply through e-filing portal. It is referred to that an opportunity of being heard was granted to the petitioner and accordingly on 21st January, 2021, authorized representative of the petitioner had been heard and e-mail was sent by the petitioner to the respondents on 22nd January, 2021 and thus, the petitioner had been granted opportunity to present its stand on outstanding demands and accordingly adjustment under section 245 (of Income Tax Act, 1961)

has been carried out by CPC, which is in accordance with law.

11. It is being submitted that order dated 11th January, 2021

of this court has been complied with. The return of income for AY

2019-20 was processed under section 143(1) (of Income Tax Act, 1961) and

intimation dated 17th January, 2021 was generated and served on the

petitioner. The petitioner has furnished reply on 21st January, 2021 to

notice under section 245 (of Income Tax Act, 1961). The direction was to release

“due refund amount” which is after giving effect to all provisions of

law, including section 245 (of Income Tax Act, 1961). It is submitted that the

petitioner had been confronted with outstanding demands and after

considering response, the respondents had communicated to CPC

regarding demands which are currently not recoverable (on account

of stay by ITAT), including that stay in respect of demands for AYs

2007-08 and 2008-09 was not in operation. In short, it is submitted

that it is not the case that the petitioner had no communication/intimation with regard to proposed adjustment.

12. It is referred to that stay to demands for AYs 2007-08 and 2008-09 expired on 15th July, 2020 and 7th April, 2020 and during hearing it was enquired with the petitioner as to whether there had been further stay granted and the assessee had not produced any stay order. It is contended that the suo motu writ petition, referred to by the petitioner was in context of restraint on eviction by public authority and Union of India had not been a party and no directions were issued with regard to the Act. It is under these circumstances, while two weeks’ period was to expire, demands were adjusted.

13. It is submitted that procedure, as per provisions of the

Act had been followed before adjusting the demands under section

245 of the Act and there is an acknowledgment with respect to the

same vide petitioner’s e-mail dated 22nd January, 2021. It is being

referred to that while the stay had been operating, as contended on

behalf of the petitioner and had been extended till 31st January,

2021, then no plausible explanation is coming forth from the

petitioner as to why the petitioner had got stay orders extended in

respect of other AYs until September, 2020 and why argument had

not been advanced that the stay orders were automatically extended.

14. It is referred to in the reply that the period granted by

this court was to expire on 28th January, 2021 and, as such, approval

to adjustment was given on 27th January, 2021.

15. It is, thus, submitted that proper procedure as per law

had been followed while adjusting the refund and that the petitioner

has an alternate remedy and, as such, the request of the petitioner

may not be accepted and the writ petition be dismissed.

16. While resistance of the respondents is as aforesaid,

learned senior advocate Mr. Jahangir Mistri appearing on behalf of

the petitioner, submits that there has been no intimation as required

under section 245 (of Income Tax Act, 1961), before making adjustment of refund

towards outstanding demands. He contends that contention on

behalf of the respondents that the petitioner has been heard over

adjustment under section 245 (of Income Tax Act, 1961), is not proper and is

fallacious. There has been no intimation whatsoever issued to the

petitioner in respect of adjustment as required under section 245 (of Income Tax Act, 1961) of

the Act. As a matter of fact, the intimation dated 17th January, 2021

under section 143(1) (of Income Tax Act, 1961) under note specifically refers to that

“An intimation under section 245 (of Income Tax Act, 1961) has

been issued separately proposing to adjust the outstanding demands

against the refund determined as per this order. Since, the release of

the refundable amount will be considered on the basis of your

response/compliance to the Intimation U/s 245 (of Income Tax Act, 1961), you are requested to

submit your response expeditiously.” He submits that pursuant to the

same the petitioner has not received, any intimation under section

245 of the Act, at all.

17. Apart from aforesaid, he submits that it had been

explained to the authorities that demand of taxes for AYs 2007-08

and 2008-09 are pending adjudication and that stay had been

operating under orders passed from time to time by tribunal as well

as this court. However, all aforesaid contentions have fallen on deaf

ears and the respondents, with a view to not to pay refund to

petitioner, have rushed to adjust due refund amount to petitioner for

AY 2019-20, which is absolutely without authority of law and

without jurisdiction and an act which is patently capricious.

18. In support of his submissions, Mr. Mistri purports to refer

to and rely on a decision of division bench in the case of “A. N.

Shaikh and Others V/s Suresh B. Jain”, Income Tax Reports Vol.165,

page 86, wherein it has been found that – “Intimation given in the

assessment order for 1983-84 that the tax liability of the respondent

(original petitioner) came to Rs.7,47,732/- and that the amount of

refund for the previous assessment year 1982-83 is adjusted against

the said liability does not amount to intimation in writing as

contemplated by section 245 (of Income Tax Act, 1961). Section 245 (of Income Tax Act, 1961) clearly requires a previous

intimation of the proposed action for adjustment and not

simultaneous intimation.”

19. Yet another division bench judgment of this court in the

case of “Hindustan Unilever Ltd., V/s Deputy Commissioner of

Income Tax and Others”, [2015] 377 ITR 281 (Bom) has been

referred to. It has been observed in said judgment that “Giving of

prior intimation under section 245 (of Income Tax Act, 1961) is mandatory, the

purpose being to enable the party to point out that there are factual

errors or some further developments, if any ..... the officer of the

Revenue exercising power under section 245 (of Income Tax Act, 1961) must apply

his mind to it and must record reasons why the objection is not

sustainable and also communicate these to the party before or at the

time of adjusting the refund. This alone would ensure that the power

of adjustment under section 245 (of Income Tax Act, 1961) is not exercised

arbitrarily.”

20. Learned senior advocate also refers to a decision of

division bench of this court in the case of “Milestone Real Estate

Fund V/s Assistant Commissioner of Income Tax and Others” [2019]

415 ITR 467 (Bom), wherein as well it has been observed that the

assessing officer while exercising powers under section 245 (of Income Tax Act, 1961) of the

Act, must apply his mind to the objections raised by the assessee and

record his reasons why the objection is not sustainable or otherwise

and communicate it to the party before making the adjustment. It has

further been observed that when the issue stands concluded in favour

of the assessee by orders of the appellate authority in assessee’s own

case, it would be proper to grant stay to demand for the assessment

year under section 220(6) (of Income Tax Act, 1961) till the appeal of the assessee

against the order is disposed of. Thus, this court had set aside

adjustment of refund. It is submitted that it is well settled that the

reasons in affidavit would not substitute and replace a reasoned

quasi judicial order and its communication.

21. Learned senior advocate submits that the petitioner had

placed on record order of the high court dated 26th March, 2020 in

the suo motu writ petition (2 of 2020). He submits, title of the order

clearly suggests that it is with reference to extension of interim

orders (page 97 of this writ petition). From time to time thereafter,

orders were passed extending operation of interim orders till 31st

January, 2021. Said orders as well have been supplied to the

respondents and it is not in dispute. He submits that perusal of the

orders would show that those are not confined only to eviction /

dispossession of persons and it embraces all the cases of interim

orders passed by courts, authorities and tribunals, etc. He, therefore,

submits that there is not only contumacy in refund adjustment

violating stipulation under section 245 (of Income Tax Act, 1961) and letter and spirit

of order dated 11th January, 2021, but also the reply filed by the

respondents is even more contumacious wherein it is purportedly

contended that orders of this court in suo motu writ petition would

hardly put on hold adjustment of refund.

22. He submits that in the present matter, neither any notice

had been issued to the petitioner under section 245 (of Income Tax Act, 1961) nor

any order has been passed on the submission and/or the objections

inasmuch as there is no communication of orders to the petitioner.

He, thus, urges to allow the writ petition.

23. Mr. Suresh Kumar, learned advocate appearing for the

Revenue, however, submits that the record sufficiently reveals that it

is not the case that the petitioner had no idea that the department is

purporting to have adjustment of refund towards outstanding

demands. An intimation about adjustment would be considered, had

been given under the intimation pursuant to section 143(1) (of Income Tax Act, 1961) of the

Act.

24. He submits that petitioner had been given opportunity

and had been before the authorities on 21st January, 2021 over the

issue of adjustment of refund in respect of AYs 2007-08, 2008-09.

Assuming that the orders cover only eviction / dispossession of

persons, he purports to submit that order of high court in suo motu

petition would not be legitimately said to cover matters before ITAT.

He submits that the order dated dated 11th January, 2021, having

regard to facts and circumstances, has been complied with. Order for

adjustment of refund has been made before expiry of period of

fourteen days from the date of orders of the court dated 11th January,

2021. He submits that the provisions of the Act under section 245 (of Income Tax Act, 1961) of

the Act have been duly followed before adjusting outstanding

demands. He, therefore, submits that the petition would not be said

to carry any weight in it and the same be not entertained and be

rejected.

25. This court, under its order dated 11th January, 2021 in

writ petition (Lodging) No. 6965 of 2020 had observed as under:

“ 10. From the above, it is seen that the grievance of

the petitioner is now within a narrow compass. Matter

is with respondent No. 5 which will intimate the

petitioner regarding processing and release of refund

since processing of the income tax return for the

assessment year 2019-20 has been completed. It is also

seen that the said respondents have admitted that

certain amount of refund is due to the petitioner

processing of which at the level of respondent No. 2 is

complete after resolution of all technical issues.

11. Having heard learned counsel for the parties and

having considered the provisions of section 143(1) (of Income Tax Act, 1961) of

the Act, we direct respondent No. 5 to complete the

processing of the refund claim of the petitioner and

thereafter, release the due refund amount to the

petitioner along with applicable interest in accordance

with law within a period of two weeks from the date of

receipt of a copy of this order.”

26. Paragraphs of the order, reproduced above, show that

respondents had admitted that certain amount of refund is due to the

petitioner for AY 2019-20 and in the next paragraph, it has been

directed to release the due refund within a period of two weeks. The

observations about admission of refund amount due and its release

are in tandem.

27. Although it is referred to that on 21st January, 2021,

petitioner was communicated about adjustment and was

acknowledged under e-mail dated 22nd January, 2021, perusal of the

e-mail annexed to the reply refers to “status of outstanding demands

and intimation under section 143(1) (of Income Tax Act, 1961) (‘Act’)”

and not to under section 245 (of Income Tax Act, 1961). It also emerges that there is

no record made available by the respondents about any separate

intimation being issued to the petitioner under section 245 (of Income Tax Act, 1961)

for adjustment of demands from the refund from AY 2019-20 as

referred to under note in intimation pursuant to section 143(1) (of Income Tax Act, 1961) of

the Act. The affidavit in reply is silent over the same.

28. It is not the case of the respondents that revenue officer

had passed an order, inter alia, with regard to contention that there is

no receipt of intimation under section 245 (of Income Tax Act, 1961) at the end of the

petitioner and reasons were recorded as to why those are not

sustainable and that it was communicated to the petitioner before

adjusting the refund.

29. Although the respondents purport to contend that proper

procedure had been followed, record does not bear that there had

been any communication made to the petitioner as to its submissions

being not acceptable before or at the time of making the adjustment.

30. Decisions in the cases of “A. N. Shaikh”, “Hindustan

Unilever Ltd.,” and “Milestone Real Estate Fund” (supra) relied on,

on behalf of the petitioner have not been met with by the

respondents nor it is the case of the respondents that any other

course could be adopted for adjustment of refund. There is stark

absence of material showing compliance of requirements viz:

application of mind to contentions on behalf of the petitioner,

reasoned order and its communication to the assessee. The facts and

circumstances lend lot of substance to submissions advanced on

behalf of the petitioner that there is absence of compliance of

requirements under section 245 (of Income Tax Act, 1961), coupled with observations

of high court in the decisions relied upon on behalf of the petitioners.

31. Perusal of order dated 26th March, 2020 by this court

(copy of entire order is appended to the writ petition), which is with

reference to extension of interim orders it does not appear that the

canvas of order is limited to eviction by public authorities from

building / structures. Copy of the order is at page 97 as Annexure-1.

Relevant portion thereof reads, thus,

“In this situation, we find it appropriate to continue all

interim orders which are operating till today and are not

already continued by some other courts / authority

including this court and the same shall remain in force

till 30/04/2020, subject to liberty to parties to move for

vacation of interim orders passed by this High Court at

Mumbai, Aurangabad, Nagpur and Panaji as also all

courts / Tribunal and authorities subordinate over which

it has power of superintendence expiring before

30/04/2020, shall continue to operate till then. It is

clarified that such interim orders which are not granted

for limited duration and therefore, are to operate till

further orders, shall remain unaffected by this order.”

32. Said order was continued from time to till 31st January,

2021. The order specifically refers to that same is applicable to

interim orders of courts, tribunals and authorities over which the

court has power of superintendence. All the subsequent orders are

also made available whereunder there does not appear that their

operation is limited to the extent of eviction / dispossession of

persons / tenants.

33. Having regard to aforesaid extract of the order of this

court and the order passed from time to time, as have been annexed

by the petitioner to the writ petition, it would be discernible that

interim orders passed by the tribunal were to be operative till 31st

January, 2021. In the scenario, it is difficult to go by the explanation

and submission that there had hardly been any interim relief granted

by the tribunal operating in respect of demands for AYs 2007-8 and

2008-09. It is difficult to appreciate the stand of the respondents that

the order passed by the high court would not cover/operate over the

matters and orders passed by the ITAT, Union of India being not a

party to the matter. Such a justification from and the approach of, the

respondent authorities is difficult to be approved of which is not in

fitness of stature, especially of the state department, which is

supposed to act like a model litigant.

34. We, therefore, consider in the circumstances of the case

and emerging position, it would not be said that the action of the

respondents of adjusting the amount is sustainable.

35. As such, writ petition is allowed in terms of prayer clause

b (i). The respondents would refund the amount to the petitioner for

AY 2019-20 as determined under intimation under section 143(1) (of Income Tax Act, 1961) of

the Act dated 17th January, 2021 with interest thereon, as per law,

within a period of four weeks from the date of receipt of this order.