Court rules on tax refund dispute, emphasizing adherence to legal procedures for adjustments.

Get the full picture - access the original judgement of the court order here

Case Name:

Commissioner of Income Tax (TDS) vs. State Bank of India & Another (High Court of Uttarakhand)

Special Appeal No. 525 of 2015

Date: 12th October 2015

Key Takeaways:

• The court emphasized the necessity of prior intimation under Section 245 (of Income Tax Act, 1961) of the Income Tax Act before adjusting refunds against outstanding tax demands.
• The ruling reinforces the principle that tax authorities must adhere to established legal procedures to avoid arbitrary actions.
• The decision clarifies that a refund due cannot be denied simply because there are pending appeals or assessments unless proper procedures are followed.

Issue:

Did the Income Tax Department properly adjust the tax refund due to the State Bank of India against outstanding demands without providing prior intimation as required by law?

Facts:

• The State Bank of India (the petitioner) had a tax refund due of approximately ₹46 crores, which was to be refunded following a favorable ruling from the Income Tax Appellate Tribunal regarding the applicability of Section 194A (of Income Tax Act, 1961) of the Income Tax Act.
• The Income Tax Department issued a letter on December 4, 2014, adjusting this refund against a demand of ₹97 crores for the assessment year 2014-15 without prior notice to the bank.
• The bank contested this adjustment, leading to the writ petition.

Arguments:

• For the Petitioner (State Bank of India): The bank argued that the adjustment of the refund was illegal as it was done without prior intimation, violating Section 245 (of Income Tax Act, 1961) of the Income Tax Act. They contended that the demand against which the refund was adjusted had been annulled, and thus, no amount was outstanding.
• For the Respondent (Income Tax Department): The department maintained that the adjustment was valid and necessary due to the outstanding demand. They argued that the bank was aware of the pending assessments and appeals.

Key Legal Precedents:

• The court referenced Section 240 (of Income Tax Act, 1961) and Section 245 (of Income Tax Act, 1961) of the Income Tax Act, which govern the procedures for tax refunds and adjustments.
• The court also cited previous cases, including Union of India & others vs. Ramlakshi Finance Corporation Ltd. and Maruti Suzuki India Ltd. vs. Deputy Commissioner of Income Tax, which established that refunds cannot be withheld merely due to pending appeals without proper justification.

Judgement:

The court ruled in favor of the State Bank of India, stating that the adjustment of the refund was improper due to the lack of prior intimation as mandated by Section 245 (of Income Tax Act, 1961). The court directed the Income Tax Department to process the refund application in accordance with the law, emphasizing that the bank was entitled to the refund along with interest if the assessment for the year 2014-15 was indeed annulled.

FAQs:

Q1: What does this ruling mean for the State Bank of India?

A1: The ruling means that the State Bank of India is entitled to receive its tax refund of approximately ₹46 crores, along with any applicable interest, as the adjustment made by the Income Tax Department was deemed improper.

Q2: Why was the adjustment of the refund considered illegal?

A2: The adjustment was considered illegal because the Income Tax Department failed to provide prior intimation to the bank, which is a requirement under Section 245 (of Income Tax Act, 1961) of the Income Tax Act.

Q3: What are the implications of this case for future tax refund adjustments?

A3: This case reinforces the necessity for tax authorities to follow legal procedures when adjusting refunds against outstanding demands, ensuring that taxpayers are given proper notice and opportunity to respond.

Q4: Can the Income Tax Department still appeal this decision?

A4: Yes, the Income Tax Department has the option to appeal the decision if they believe there are grounds to contest the ruling, but they must adhere to the legal processes involved in such appeals.

Appellants are respondent Nos. 1 to 3 in the writ petition. Respondent No. 1 Bank filed a writ petition seeking the following reliefs:

“a. Issue a writ, order or direction in the nature of mandamus directing the respondent No. 2 and 3 to refund to the petitioner the entire amount which it has coercively recovered on 29-03-2014 along with 15% interest per annum,

as per sections 240 (of Income Tax Act, 1961) and 244(1) of ITA, and,

b. Issue any other writ, order or direction in the nature of

certiorari quashing letter dated 04-12-2014 (Annexure No. 5)

issued by the Respondent No. 3 granting an illusory refund,

and instead direct respondent No. 2 and 4 to make actual

refund under section 240 (of Income Tax Act, 1961) and 244(1) along with interest @

15%.”

2. Very briefly put, the case of respondent No. 1 / writ petitioner was

as follows:

On 18.07.2014, the Income Tax Appellate Tribunal, Delhi Bench,

in three appeals, passed a judgment and allowed the appeals filed by the

writ petitioner and dismissed the appeals filed by the Income Tax

Department (hereinafter referred to as the “Department”) holding that the provision of Section 194A(1) (of Income Tax Act, 1961) (hereinafter referred to as the “Act”) is not applicable to the SRF deposit made. On

30.07.2014, on the basis of the said judgment, writ petitioner applied for refund of 44,36,57,686/- with interest, which the Department had

coercively recovered from the writ petitioner. It is necessary to notice

that recovery was effected by proceedings dated 29.03.2014, by which the

Department attached the account of the writ petitioner with RBI in a sum

of 44 and odd crores, which amount related to 2013-2014. Writ

petitioner further sent communication dated 08.09.2014 (Annexure No. 4)

seeking refund. It is, thereafter, that the impugned letter dated 04.12.2014 (Annexure No. 5) was issued, which reads as follows:

“F.No. DCIT(TDS)DDN/SBI/AY2013-14/2014-15/26

Office of the

Dy. Commissioner of Income Tax (TDS)

Dehradun

Dated: 04/12/2014

To,

The Branch Manager

State Bank of India

Tel Bhawan, Dehradun.

Sir,

Subject: Adjustment of Refund of Rs. 46,14,03,993/- for

the AY 2013-14 against the demand of Rs. 97,85,38,937/-

outstanding for the AY 2014-15 U/s 245 (of Income Tax Act, 1961) – Regarding.

Kindly refer to the above mentioned subject.

In this connection, the demand of Rs. 88,73,15,372/- for the

AY 2013-14 was created on 12/12/2013. The said demand become

nil after giving appeal effect U/s 251 (of Income Tax Act, 1961) dated 01/12/2014 and a refund

of Rs. 46,14,03,993/- is payable to you for the AY 2013-14.

The demand of Rs. 97,85,38,937/- for the AY 2014-15 is still

pending. The refund of Rs. 46,14,03,993/- is therefore being

adjusted U/s 245 (of Income Tax Act, 1961) against the demand due of Rs. 97,85,38,937/- for

the AY 2014-15.

Yours faithfully

Sd./-

(A.K. Sonkar)

Dy. Commissioner of Income Tax (TDS)

Dehradun”

3. It is, on these facts, that the writ petition was filed.

4. The learned Single Judge allowed the writ petition. From the

judgment of the learned Single Judge, we find that he notes the argument

of the writ petitioner that the Commissioner of Income Tax (Appeals) has

directed to delete the assessment in a sum of ` 97,85,38,937/-, which,

apparently, was the basis for Annexure No. 5, and, as of today, no amount was outstanding against the writ petitioner Bank and there is no question of adjustment or set off. We, further, note that the learned counsel for the appellants contended that he was not aware of the judgment dated 03.03.2015 and that, if the amount has been directed to be deleted, the assessee would be entitled to refund of the amount with interest under Section 240 (of Income Tax Act, 1961), read with Section 244 (of Income Tax Act, 1961). The learned Single Judge held as follows:

“I am of the opinion that once I.T.A.T. has opined that

Section 194A (of Income Tax Act, 1961) is not applicable against the

Bank on SRF deposit, then the same legal position would be

applicable in the subsequent assessment years as well, unless of

course, Section 194A (of Income Tax Act, 1961) is amended or is substituted by any new law.

Therefore, submission of Mr. Bishwajit Bhattacharya, learned

Senior Counsel appearing for the petitioner Bank that amount of

Rs. 97,85,38,937/- has been deleted against the assessee/Bank

seems to be correct.

Since, it is not within the knowledge of Mr. Hari Mohan

Bhatia, learned counsel for the Revenue, as to whether order dated

03.03.2015 has been passed by the Commissioner of Income Tax

(Appeals), therefore, in the peculiar facts and circumstances of the

case, I direct that on the applications of the petitioner seeking

refund, an appropriate decision shall be taken within two weeks

positively and if it is found that vide order dated 03.03.2015

amount of Rs. 97,85,37,937/- has been deleted against the assessee,

amount of Rs. 44,36,57,686/- shall be refunded to the petitioner

Bank along with interest as provided under Section 240 (of Income Tax Act, 1961) read with

Section 244 (of Income Tax Act, 1961).

It is, however, clarified that unless and until order passed by

the Income Tax Appellate Tribunal has been stayed or set aside by

the higher Forum, refund shall not be denied to the petitioner.

Petition stands disposed of accordingly.”

5. It is feeling aggrieved by the same that the appeal has been filed.

6. We heard Mr. Hari Mohan Bhatia, learned counsel appearing for

the appellants and Mr. Bishwajit Bhattacharya, learned Senior Counsel

appearing on behalf of respondent No. 1 / writ petitioner.

7. Mr. Hari Mohan Bhatia would submit that it is true that the

assessment for ` 97,85,38,937/- for the Assessment Year 2014-2015 has

been set aside by the Commissioner of Income Tax (Appeals), as was

contended by the writ petitioner; but, he would take exception to the

direction of the learned Single Judge that, if the said assessment was

indeed cancelled, as was the case of the writ petitioner, then, the amount should be refunded. Equally, he would take objection to the statement that, as long as the order passed by the Income Tax Appellate Tribunal has not been stayed or set aside by the higher forum, refund should not be denied to the writ petitioner. He would submit that, in fact, assessment has been completed for the year 2015-2016 and it is pointed out that the same was done by order dated 12.05.2015 and a total demand of 105,68,13,294/- has been raised. No doubt, he does not dispute that the writ petitioner has preferred an appeal before the Commissioner of Income Tax (Appeals), Dehradun, and it is pending. It is, in fact, pointed out by Mr. Hari Mohan Bhatia that this fact, which was well-known to the writ petitioner, was not brought to the notice of the learned Single Judge.

The counsel was also not aware of the said assessment and the judgment

was rendered on 31.08.2015 after the assessment for the year 2015-2016

dated 12.05.2015. Therefore, he would contend that, while the appellants

had no objection in considering the application for refund filed by the writ petitioner, the judgment must be modified so that the direction must be to direct the officer to take a decision in accordance with law and this would take in Section 245 (of Income Tax Act, 1961). It is pointed out that Section 245 (of Income Tax Act, 1961) enables the authority to adjust any amount due to the Department against the refund. He would also submit that the observation in the judgment of the learned Single Judge that, unless and until the Tribunal’s order is set aside or stayed, refund cannot be refused, cannot be sustained.

8. Per contra, Mr. Bishwajit Bhattacharya would submit that this is a

case, where the appeal is filed without any basis. He would contend that

this is an affront to the rule of law, which, he would point out, has been held by the 13 Judges Bench of the Hon’ble Apex Court in Kesavananda Bharati Sripadagalvaru & others vs. State of Kerala & another,reported in (1973) 4 SCC 225, as also by the Constitution Bench in Indira Nehru Gandhi vs. Shri Raj Narain & another, reported in AIR

1975 SC 2299, to be a basic feature of the Constitution. He would

complain of arbitrariness on the part of the Department in refusing to

grant refund of the amount, which was illegally attached. He would point

out that, actually, there is only a single deposit made by ONGC with the

Bank and, in regard to the said deposit, Section 194A (of Income Tax Act, 1961) is not

applicable. He points out that, for Assessment Year 2013-2014, an

amount of ` 44 and odd crores came to be recovered by the Department

by attaching the account of the Bank. While so, the Income Tax

Appellate Tribunal, vide judgment dated 18.07.2014 (Annexure No. 2 to

the writ petition), allowed the appeals filed by the writ petitioner for the Assessment Years 2010-2011, 2011-2012 & 2012-2013. Thereafter, for

Assessment Year 2014-2015, even though the matter stood concluded by

the judgment of the Tribunal, the Assessing Officer, by order dated

15.09.2014, assessed the writ petitioner again in respect of the very same deposit made by ONGC on the basis of the non deduction under Section 194A (of Income Tax Act, 1961), an issue which stood concluded by the order of the Income Tax Appellate Tribunal. It was this order, which was set aside in appeal by order dated 03.03.2015. He would submit that it is absolutely necessary for the upkeep of the rule of law that the decisions taken by the

superior forums in a hierarchy of authorities must be followed by the

authority at the bottom of the pyramid. It is contrary to the same that,

however, the Assessing Officer, on an issue which stood concluded, again

sought to assess the writ petitioner by assessing him for the Assessment

Year 2014-2015 and this has finally resulted in the impugned order being

passed, by which, even without complying with the mandatory

requirement of prior intimation under Section 245 (of Income Tax Act, 1961), the amount, which became payable by way of refund, came to be adjusted against the illegal demand raised for the Assessment Year 2014-2015. The learned Senior Counsel would submit the following case law in support of his contentions:

i. Union of India & others vs. Ramlakshi Finance Corporation Ltd.,

reported in 1992 Supp (1) SCC 443;

ii. Glaxo Smith Kline Asia P. Ltd. vs. Commissioner of Income Tax &

others, reported in (2007) 290 ITR 35 (Delhi);

iii. Maruti Suzuki India Ltd. vs. Deputy Commissioner of Income Tax,

reported in (2012) 347 ITR 43 (Delhi);

iv. Suri Sons vs. Commissioner of Income Tax & another, reported in

(1988) 169 ITR 320;

v. Shreyans Industries Ltd. vs. Commissioner of Income Tax &

another, reported in (2001) 252 ITR 544;

vi. Vijay Kumar Bhati vs. Commissioner of Income Tax & another,

reported in (1994) 205 ITR 110;

vii. Commissioner of Income Tax vs. J.K. Industries Ltd., reported in

(2000) 245 ITR 457;

viii. A.N. Shaikh & others vs. Suresh B. Jain, reported in (1987) 165

ITR 86; and

ix. State Bank of Patiala vs. Commissioner of Income Tax & another,

reported in (1999) 239 ITR 421.

9. The learned Senior Counsel would stress that the principle that

Section 194A (of Income Tax Act, 1961) is not applicable to the deposit made by ONGC

stands concluded, as things stand, by the order passed by the Income Tax

Appellate Tribunal and there is no rhyme or reason for the lower

authorities to take a different view for the subsequent assessments and to generate illegal demands as it were and, thereafter, the authority resorting to Section 245 (of Income Tax Act, 1961) for making adjustment. This is apart from his contention that, as far as the impugned order is concerned, there is no prior intimation as required under Section 245 (of Income Tax Act, 1961).

10. In order to appreciate the contentions of the parties, we deem it

necessary to refer to the scheme of the Act in regard to refunds. Refunds figure under Chapter XIX of the Act. Section 237 (of Income Tax Act, 1961) provides, inter alia,that, if a person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of the excess. We need not be detained with Section 238 (of Income Tax Act, 1961). Section 239 (of Income Tax Act, 1961) provides for the form of the claim for refund and limitation. Section 240 (of Income Tax Act, 1961) being relevant, we extract the same as under:

“240. Refund on appeal, etc. – Where, as a result of any

order passed in appeal or other proceeding under this Act, refund of

any amount becomes due to the assessee, the Assessing Officer

shall, except as otherwise provided in this Act, refund the amount

to the assessee without his having to make any claim in that behalf:

Provided that where, by the order aforesaid,-

(a) an assessment is set aside or cancelled and an order of

fresh assessment is directed to be made, the refund, if

any, shall become due only on the making of such

fresh assessment;

(b) the assessment is annulled, the refund shall become

due only of the amount, if any, of the tax paid in

excess of the tax chargeable on the total income

returned by the assessee.”

11. Section 241 (of Income Tax Act, 1961), though it figures in a number of cases relied on by the

writ petitioner, has been repealed by the Finance Act of 2001 with effect from 01.06.2001; but, we will advert to the same when we advert to the case law based on the Section as it stood prior to the repeal.

12. Section 242 (of Income Tax Act, 1961) provides as follows:

“242. Correctness of assessment not to be questioned. – In

a claim under this Chapter, it shall not be open to the assessee to

question the correctness of any assessment or other matter decided

which has become final and conclusive or ask for a review of the

same, and the assessee shall not be entitled to any relief on such

claim except refund of tax wrongly paid or paid in excess.”

13. Section 243 (of Income Tax Act, 1961) provides for interest on delayed refunds. Section 244 (of Income Tax Act, 1961)

deals with interest on refund where no claim is needed. Section 244A (of Income Tax Act, 1961)

declares that the assessee entitled to refund will be entitled to receive, in addition, simple interest calculated in the manner provided therein. Finally, we come to Section 245 (of Income Tax Act, 1961), which is at the center of the controversy. It provides as follows:

“245. Set off of refunds against tax remaining payable. –

Where under any of the provisions of this Act, a refund is found to

be due to any person, the Assessing Officer, Deputy Commissioner

(Appeals), Commissioner (Appeals) or Chief Commissioner or

Commissioner, as the case may be, may, in lieu of payment of the

refund, set off the amount to be refunded or any part of that

amount, against the sum, if any, remaining payable under this Act

by the person to whom the refund is due, after giving an intimation

in writing to such person of the action proposed to be taken under

this section.”

14. Having set out the statutory framework, we pass on to the

consideration of the case law, which is cited by the learned Senior

Counsel for the writ petitioner.

15. In Union of India & others vs. Ramlakshi Finance Corporation

Ltd., reported in 1992 Supp (1) SCC 443, the Hon’ble Apex Court, inter

alia, held as follows:

“6. Sri Reddy is perhaps right in saying that the officers

were not actuated by any mala fides in passing the impugned

orders. They perhaps genuinely felt that the claim of the assessee

was not tenable and that, if it was accepted, the Revenue would

suffer. But what Sri Reddy overlooks is that we are not concerned

here with the correctness or otherwise of their conclusion or of any

factual mala fides but with the fact that the officers, in reaching in

their conclusion, by-passed two appellate orders in regard to the

same issue which were placed before them, one of the Collector

(Appeals) and the other of the Tribunal. The High Court has, in our

view, rightly criticised this conduct of the Assistant Collectors and

the harassment to the assessee caused by the failure of these

officers to give effect to the orders of authorities higher to them in

the appellate hierarchy. It cannot be too vehemently emphasised

that it is of utmost importance that, in disposing of the quasi-

judicial issues before them, revenue officers are bound by the

decisions of the appellate authorities; The order of the Appellate

Collector is binding on the Assistant Collectors working within his

jurisdiction and the order of the Tribunal is binding upon the

Assistant Collectors and the Appellate Collectors who function

under the jurisdiction of the Tribunal. The principles of judicial

discipline require that the orders of the higher appellate authorities

should be followed unreservedly by the subordinate authorities. The

mere fact that the order of the appellate authority is not

"acceptable" to the department - in itself an objectionable phrase -

and is the subject matter of an appeal can furnish no ground for not

following it unless its operation has been suspended by a competent

court. If this healthy rule is not followed, the result will only be

undue harassment to assessees and chaos in administration of tax

laws.”

It is, at once, necessary to notice the facts involved in the said case.

The Assistant Collector of Central Excise took the view that the product

of the respondent, who manufactured electrical insulation tapes, fell under Heading 39.19 of the Schedule to the Central Excise Tariff Act, 1985.

The assessee joined issue with the officer on the ground that it fell under Heading 85.47. An order in respect of another plant was distinguished by the Assistant Collector. In appeal, the Collector (Appeals) observed that the reason given for not following the order of the Collector (Appeals) was totally untenable and directed the Assistant Collector to pass a speaking order. When the matter went back, the Assistant Collector reiterated the conclusion reached by his predecessor. No reason was given why the appellate authority’s order in respect of the other plant was not followed. Despite a decision of the Appellate Tribunal being placed favourable to the assessee, the same was distinguished on the ground that the Department had appealed the decision. The Hon’ble Apex Court notes that the second order was practically a repetition of the earlier order.

The High Court quashed the said order and directed the Department to

allocate the matter to a competent officer to pass a proper order. It was this order, which was challenged by the Government of India.

16. Next, the learned Senior Counsel for the writ petitioner referred us

to the judgment of the Bench of the Delhi High Court in Glaxo Smith

Kline Asia P. Ltd. vs. Commissioner of Income Tax & others, reported

in (2007) 290 ITR 35 (Delhi). The judgment was rendered in a writ

petition under Article 226 filed seeking a mandamus to the respondents to give effect to the order of the Tribunal and grant refund with interest. The petitioner therein entered into an agreement with a Company for providing various services. The petitioner was to reimburse the cost incurred by the Company for providing the services plus 5 per cent, which was referred to as “cross charges”. There was no basis laid down for allocation of costs and the parties agreed to engage a firm of Chartered Accountants to determine the basis. For the Assessment Year 1998-1999,the cross charges were worked out. However, the Assessing Officer took the view that the increase in cross charges was not fully and exclusively for the purpose of the business of the petitioner and justifiable only to the extent of 7 per cent of the net sales. The order was confirmed by the

appellate authority. Similar approach was taken in Assessment Year

1999-2000 also by the Assessing Officer and the appellate authority. The

petitioner therein successfully appealed before the Tribunal and the

Tribunal deleted the disallowance for Assessment Years 1998-1999 and

1999-2000. The said order of the Tribunal attained finality, apparently, as the appeal filed by the Revenue before the High Court was dismissed on 20.07.2005, wherein the court took the view that there was no substantial question of law. For the Assessment Year 2001-2002, the Assessing Officer continued to disallow the cross charges / administrative expenses.

A demand was raised on 16.02.2005 and the amount was recovered by

attaching the bank accounts on the very next day. The petitioner therein

filed an application before the Tribunal seeking refund of the amount

recovered pending disposal of the appeal by the Tribunal. By order dated

03.03.2005, the Tribunal directed the Revenue to refund the amount

within two weeks from the date of receipt of the order. The said order

was challenged by the Revenue in a writ petition. The said order was

stayed by the High Court by order dated 27.04.2005. Ultimately, the

Revenue withdrew the said petition, as the assessee’s appeals for

Assessment Years 2000-2001 and 2001-2002 were allowed by the

Tribunal by a common order dated 19.08.2005. The Tribunal took the

view that there is no difference in the facts from the earlier assessment years. It is noted that the appeals against the said order of the Tribunal had been admitted and pending consideration before the High Court.

Thereafter, the petitioner, on 13.09.2005, sought refund based on the

order of the Tribunal and, thereafter, filed the writ petition on 10.02.2006 giving rise to the judgment. On 15.02.2006, the court directed that, till the next date of hearing, the respondents should not adjust the amount of refund, if any, due to the petitioner Company without the leave of the court. On 05.04.2006, the Revenue filed an application seeking permission to set off the refund against the demand raised / to be raised against the assessee relying on Section 245 (of Income Tax Act, 1961), noting in their application that after giving effect to the order of the Tribunal for the Assessment Years 2000-2001 and 2001-2002, amounts of 7.39 crores and 4.44 crores were due to the assessee, and, at the same time, an amount of 3.55 crores was outstanding against the assessee for the Assessment Year 2002-2003 and ` 7.14 crores for the Assessment Year 2003-2004. The petitioner joined issue. By order dated 17.08.2006, the court had noticed that, for the Assessment Year 2001-2002, petitioner was entitled to refund of 11.79 crores; whereas, according to the Revenue, it was entitled to recover ` 10.69 crores for the Assessment Years 2002-2003 and 2003-2004. An excess amount of ` 1.10 crores was withheld without any justification. The said amount was directed to be refunded along with interest and the same was paid. Thereafter, the question related to the refund of ` 10.69 crores. The issue which finally fell for decision was, whether the petitioner was entitled to refund for the

Assessment Year 2001-2002 of the amount already computed by the

Revenue by its orders dated 28.12.2005 and 01.05.2006. The Revenue

sought to adjust it against the subsequent Assessment Years 2002-2003

and 2003-2004. The court referred to Section 241 (of Income Tax Act, 1961), as it stood prior to

01.06.2001. The said provision was as follows:

“241. Power to withhold refund in certain cases.- Where

refund of any amount becomes due to the assessed as a result of an

order under this Act or under the provisions of Sub-section (1) of

Section 143 (of Income Tax Act, 1961), after a return has been made under Section 139 (of Income Tax Act, 1961) or in

response to a notice under Sub-section (1) of Section 142 (of Income Tax Act, 1961) and the

Assessing Officer is of the opinion, having regard to the fact that-

(i) a notice has been issued, or is likely to be issued,

under Sub-section (2) of Section 143 (of Income Tax Act, 1961) in respect of the said return;

or

(ii) the order is the subject matter of an appeal or further

proceedings; or

(iii) any other proceeding under this Act is pending; and

(iv) that the grant of the refund is likely to adversely affect

the revenue,

the Assessing Officer may, with the previous order of the

Chief Commissioner or Commissioner, withhold the refund till

such time as the Chief Commissioner or Commissioner may

determine.”

Thereafter, the court proceeded to note the distinction between the

provisions as follows:

“23. The difference between the two provisions is that

Section 241 (of Income Tax Act, 1961) gave a much wider power and did not require the

assessed to whom the refund was due to be put on notice of the

proposed withholding of the refund. Secondly, the discretion was to

be exercised by the Assessing Officer with the previous approval of

the Chief Commissioner or Commissioner. Thirdly, the refund

could be withheld for any indefinite time on the formation of an

opinion that the grant of the refund was going to adversely affect

the Revenue. On a plain reading of the two provisions, it is clear

that Section 241 (of Income Tax Act, 1961) gave the Revenue a much wider power than

Section 245 (of Income Tax Act, 1961).

24. A Division Bench of the Punjab and Haryana High

Court has in Naurata Ram [1998] 100 Taxman 266 held that the

power under Section 241 (of Income Tax Act, 1961) cannot be used arbitrarily and refund

cannot be denied merely because the Revenue had filed certain

proceedings by way of appeal, and that such appeal was pending. It

was explained (page 269):

“On a careful reading of the plain language used in the

statute, it becomes clear that the power to withhold the

refund cannot be exercised merely because some proceedings

are pending before the authorities constituted under the Act

or a court of law. In other words, mere pendency of the

proceedings cannot by itself be a ground to deny the refund

on the assumption that such refund would adversely affect

the revenue. The competent authority has to form an opinion

on the basis of relevant material for coming to the conclusion

that the order of refund will necessarily cause prejudice to

the revenue of the State. If the Legislature had intended to

prohibit the refund of the amount due to the assessed only on

the ground that the Revenue has preferred an appeal/revision,

etc., then Section 240 (of Income Tax Act, 1961) would have been couched in a different

phraseology. Absence of specific provision in the statute

providing for withholding of refund only on the ground of

pendency of the proceedings is clearly indicative of the

intention of the Legislature that pendency of proceedings will

not by itself be a ground for withholding the refund.”

26. In our view, the power under Section 245 (of Income Tax Act, 1961), is

a discretionary power given to each of the tax officers in the higher

echelons to "set off the amount to be refunded or any part of that

amount against the same, if any, remaining payable under this Act

by the person to whom the refund is due." That this power is

discretionary and not mandatory is indicated by the word "may".

Secondly, the set off is in lieu of payment of refund. Thirdly, before

invoking the power, the officer is expected to give an intimation in

writing to the assessed to whom the refund is due informing him of

the action proposed to be taken under this section.

27. We reiterate that the restrictions on the power under

Section 241 (of Income Tax Act, 1961), as explained judicially, would apply with equal, if not

greater, force to Section 245 (of Income Tax Act, 1961). A mechanical invocation of the power

under Section 245 (of Income Tax Act, 1961) irrespective of the fact situation, can lead to

misuse of the power by the Revenue in order to delay the refund till

such time a fresh demand for the subsequent assessment years is

finalized. If reasonable time limits are not set for the processing of

and disposal of an application for refund by the Revenue, it may

result in the assessee not being able to get the refund at all. Also,

the statute by stipulating the payment of interest on refunds

(Section 244A (of Income Tax Act, 1961)) and interest on delayed refunds (Section 243 (of Income Tax Act, 1961)) has

underscored the importance of timely processing of refund claims.

28. As already noticed, this discretionary power has to be

exercised after giving an opportunity to the assessed of being heard

preceded by an intimation to the assessed in writing of the action

proposed to be taken under Section 245 (of Income Tax Act, 1961). A further implicit

requirement is that the Revenue will have to be satisfied that the

assessed will not be in a position to satisfy the demand of tax and

that but for the set off, the outstanding tax amount cannot be

recovered at all.

29. The High Courts have emphasized the importance of

hedging the power of the Revenue under Section 245 (of Income Tax Act, 1961) with certain

safeguards in order to prevent its misuse. The decisions in State

Bank of Patiala v. CIT and Sabeta Detergents Ltd. v. CIT are to the

same effect. This apart, while proposing to invoke the power under

Section 245 (of Income Tax Act, 1961), the Revenue should, as far as possible, adopt a

consistent approach. Of course, if the fact situation in the particular

assessment year is so different so as to justify the changed stance of

the Revenue, the Revenue should, while filing an appeal to the

higher forum, seek a stay from that forum itself of the refund due to

the assessed before straightaway invoking the power under Section

245. Such a procedure would while ensuring greater efficiency also

ensure respect for the rule of consistency and deference to the

orders of the higher judicial forum which are binding on the

Revenue as much as they are on the assessed.

30. Although the Revenue may be right in contending that

the words "against the sum, if any, remaining payable under this

Act" should be given a literal interpretation, and that the minute the

demand is finalised at the very first level by the Assessing Officer

for the particular assessment year, the requirement of Section 245 (of Income Tax Act, 1961)

stands satisfied, this argument, cannot in the context of Section 245 (of Income Tax Act, 1961)

itself, be accepted without qualification. The decision in S. RM.

AR. RM. Ramanathan Chettiar v. AMI ITO [1956] 29 ITR 683

(Mad), upon which reliance was placed by the Revenue, was in a

different context. The relevant provision considered in the said case

was Section 49E (of Income Tax Act, 1961), which read as under:

“Section 49E (of Income Tax Act, 1961) : Where under any of the provisions of

this Act, a refund is found to be due to any person, the

Income-tax officer,... may, in lieu of payment of the refund,

set off the amount to be refunded, or any part of that amount

against the tax, interest or penalty, if any, remaining payable

by the person to whom the refund is due.”

31. It may be straightaway noticed that Section 49E (of Income Tax Act, 1961) of the

Indian Income-tax, 1922 is not in pari materia with the power under

Section 245 (of Income Tax Act, 1961). The latter power can be exercised only after prior

intimation has been sent to the assessed of the action proposed to be

taken by the Revenue. Therefore, the mere liability to pay tax,

which was never in issue in the above case, is not sufficient to

attract the provision of Section 245 (of Income Tax Act, 1961).”

It is, however, also important to notice the following observations

in paragraphs 34 & 35:

“34. Turning to the facts of the present case, we find that no

notice under Section 245 (of Income Tax Act, 1961) was issued to the assessed proposing to

set off the demand against the outstanding tax amount due from it.

There is no explanation why such notice was not issued except

saying that after the order of the Tribunal dated August 17, 2005,

the Revenue was processing the refund application made by the

writ petitioner. It could dispose of this application only on

December 27, 2005. Even at this stage, there was no proposal to

invoke Section 245 (of Income Tax Act, 1961) although on this date there was an outstanding

demand for the assessment year 2000-01. The petitioner was,

therefore, compelled to come to this court assailing the delay in

processing this application for refund. The application moved by

the Revenue in this court appears to be a device to pass the

responsibility of taking a decision under Section 245 (of Income Tax Act, 1961) on to the court

only because the petitioner had come to this court. To us, this does

not appear to be a sufficient justification for by-passing the

procedural requirement under Section 245 (of Income Tax Act, 1961).

35. If the Department has decided to issue a refund

voucher for the assessment year 2000-01, by the same yardstick it

should also be willing to make the refund for the subsequent the

assessment year 2001-02. The mere fact that appeals in respect of

the two assessment years are pending in this court is not by itself a

sufficient ground for denying the refund. The fact remains that the

procedure contemplated under Section 245 (of Income Tax Act, 1961) has not been

invoked. It is not without significance that the order dated February

15, 2006, by this court only restrained the Revenue from making

any adjustment of the amount of refund "without the leave of this

court." This did not mean that the procedure under Section 245 (of Income Tax Act, 1961) was

to be dispensed with. It is, therefore, strange that by the application

filed, the Revenue was seeking permission from this court to

straightaway set off the refund against the outstanding demand

without following the procedure under Section 245 (of Income Tax Act, 1961). The Revenue

seeks to justify invoking the power under Section 245 (of Income Tax Act, 1961) only on the

ground that its appeals for the two assessment years are pending in

this court. However, having issued the refund voucher for the

assessment year 2000-01 in respect of which also the appeal is

pending in this court, there appears to be no justifiable reason for

withholding the refund due in respect of the other assessment year

2001-02.”

17. The said judgment, apparently, was followed in Maruti Suzuki

India Ltd. vs. Deputy Commissioner of Income Tax, reported in (2012)

347 ITR 43 (Delhi). Following the aforesaid judgment, it was, inter alia, held that the pendency of appeal proceedings by itself cannot be a ground to not refunding the amount due and payable and it is not sufficient to pass an order of adjustment for demand on issues, which have been decided against the Revenue. Therein, the court was dealing with the question, whether Section 220(6) (of Income Tax Act, 1961) was applicable when appeal is preferred before the Tribunal. It was held that the Tribunal had power to stay recovery. It was, further, noted that Section 245 (of Income Tax Act, 1961) permits recovery of the demand of one year, which is pending, by adjusting the refund due for another year. It was a case, where the petitioner was entitled to refund of 122.57 crores and ` 107.41 crores for the Assessment Years 2003-2004 and 2005-2006 respectively. However, the Department adjusted the refund against the demand for the year 2006-2007. An application for stay before the Tribunal was dismissed. The writ petition filed was allowed on the principle that recovery was made in respect of additions on issues, which were covered against them by the earlier orders of the Tribunal or the Commissioner (Appeals).

18. In Suri Sons vs. Commissioner of Income Tax & another,

reported in (1988) 169 ITR 320, a Bench of the Punjab & Haryana High

Court was dealing with the case, where the assessment for the year 1979-

1980 was annulled by the Appellate Tribunal and the same was

questioned under Section 256(1) (of Income Tax Act, 1961). On the basis of the

annulment, refund became due. The court repelled the contention based

on Section 241 (of Income Tax Act, 1961), as it stood then, for the reason that the

proceedings questioning the validity of the order were pending before the High Court. The court, further, held as follows:

“As held by us in our judgment in Civil Writ Petition No.

4378 of 1986 [Leader Valves Private Ltd. vs. CIT (1987) 167 ITR

542], the assessing authority is not justified in withholding the

refund which has become due to the assessee merely for the reason

that the proceedings initiated by the Revenue questioning the

validity of the order under which the refund has become due are

pending before the appropriate authority. Accordingly, for the

reasons given by us in our judgment in Writ Petition No. 4378 of

1986 [Leader Valves Private Ltd. vs. CIT (1987) 167 ITR 542], the

petition succeeds and is allowed. The respondents are directed not

to withhold the refund which has become due to the petitioner as a

result of the annulment of its assessment for the year 1979-80 on

the ground that the proceedings questioning the validity of the order

annulling the assessment are pending before the High Court.”

19. In Shreyans Industries Ltd. vs. Commissioner of Income Tax &

another, reported in (2001) 252 ITR 544, again, a Bench of Punjab &

Haryana High Court was dealing with the scope of Section 241 (of Income Tax Act, 1961).

The court took the view as follows:

“Section 241 (of Income Tax Act, 1961), does authorise the

Assessing Officer to withhold the refund with the previous approval

of the Commissioner of Income-tax for such time as may be

determined by the Commissioner of Income-tax, but some facts are

required to be brought on record to justify the withholding of

refund. The mere fact and the only fact that the order is under

challenge either before the High Court or before the Tribunal is no

ground to withhold the refund or to reach a conclusion that the

refund would adversely affect the Revenue.

Held, that, in the present case, nothing had been brought out

in the letter of the Assessing Officer justifying the withholding of

the refund. The Commissioner of Income-tax (Appeals) deleted the

total additions on the merits by holding that the assessee was

carrying out the scientific research at his premises and that the

reasons for reopening the assessment were not sufficient. The

Assessing Officer in his letter only recommended the filing of the

appeal against the order of the Commissioner of Income-tax

(Appeals) and at the same time sought permission to withhold the

refund as refunding the amount at this stage would adversely affect

the interest of the Revenue. A huge amount had been withheld only

on the ground that the appeal against the order of the Commissioner

of Income-tax (Appeals) was pending before the Tribunal. No

material was forthcoming on the record in this case which could

justify the withholding of the refund. The petitioner who was an

assessee was not shown to be in default in the payment of income-

tax dues or even in the matter of filing of returns. Hence, the order

of the Assessing Officer recommending the withholding of refund

and the order of the Commissioner of Income-tax granting the

approval for withholding of the refund could not be justified under

the provisions of section 241 (of Income Tax Act, 1961).”

The court noted that a huge amount has been withheld only on the

ground that the appeal against the order of the Commissioner of Income

Tax (Appeals) was pending before the Tribunal and there is no material

forthcoming, which would justify the withholding of the refund. It was

found that the petitioner, who was an assessee, was not shown to be in

default in the payment of income tax dues or even in the matter of filing of returns.

20. In Vijay Kumar Bhati vs. Commissioner of Income Tax &

another, reported in (1994) 205 ITR 110, a Division Bench of the Delhi

High Court was, again, dealing with the case under Section 241 (of Income Tax Act, 1961) of the

Act. The petitioner was a non-resident Indian and he sought a mandamus

for refund along with interest. The writ petition was filed in August,

1987. The factum of entitlement to refund was not disputed by the

Revenue; but, it took the stand that a petition under Section 256(1) (of Income Tax Act, 1961) was

pending before the Appellate Tribunal for referring certain questions of

law. An order under Section 241 (of Income Tax Act, 1961) was also passed to withhold the refund

until 30.04.1988. Besides, there is reference to criminal proceedings also.

The petition under Section 256(1) (of Income Tax Act, 1961) was dismissed by the Tribunal. A

petition under Section 256(2) (of Income Tax Act, 1961) before the High Court was also dismissed.

So was the fate of the complaint filed under Sections 276C (of Income Tax Act, 1961) and 277 of the Act. With six months’ intervals, orders were being passed under Section 241 (of Income Tax Act, 1961). There were penalty proceedings for the Assessment Year 1988-1989. The officer found that certain amount is due to the petitioner as interest on the refund. The writ petition was amended seeking further relief. The court proceeded to deal with Section 241 (of Income Tax Act, 1961) after its substitution w.e.f. 01.04.1989. The court took note of the order passed under Section 241 (of Income Tax Act, 1961) permitting withholding of the refund upto 31.10.1991 or till the disposal of the Special Leave Petition before the Apex Court, whichever was earlier. However, the petitioner disputed filing of any Special Leave Petition. The court, further, took note of the proceedings before the Supreme Court. The Special Leave Petition could not be listed earlier for some reasons. No certificate was granted by the court under Section 261 (of Income Tax Act, 1961) making it a case fit for appeal to the Supreme Court. Therefore, the matter under Section 256(2) (of Income Tax Act, 1961) had come to an end and, thereafter, the court proceeded to find that, if the Revenue wanted to withhold the refund after the filing of the petition under Section 136 (of Income Tax Act, 1961), it has to obtain a stay from the

Supreme Court and cannot rely on Section 241 (of Income Tax Act, 1961). There was nothing to

show the pendency of the Special Leave Petition itself and thwarting the

right of the petitioner to refund by merely filing a Special Leave Petition in the Registry after limitation had expired, was noted as grossly illegal. In regard to Section 245 (of Income Tax Act, 1961), the Bench took the following view:

“There is nothing on the record or even in the letter to

suggest that before passing the order, the provisions of section 245 (of Income Tax Act, 1961)

were complied with. For the purpose of any set of an intimation has

to be given in writing to the assessed of the action proposed to be

taken under this section. Earlier to this order it has never been the

case of the Revenue to claim any set of. This order purporting to be

under section 245 (of Income Tax Act, 1961) is neither fair, nor just, nor reasonable

and has to be ignored. This order also shows scant respect by the

authorities for the pendency of these proceedings in this court and

this does not commend itself to us, to say the least.

We have not been told by the Revenue any reason as to why

assessments for years subsequent to the assessment year 1988-89

were not taken though interest was accruing all this period on the

refund due to the petitioner. We are of the view that the assessment

order for the assessment year 1988-89 and penalties imposed on the

petitioner have no meaning particularly when we are of the view

that withholding of the refund by the respondents was illegal and all

orders passed under section 241 (of Income Tax Act, 1961), after dismissal of the

application under section 256 (of Income Tax Act, 1961) by this court, were without

jurisdiction and illegal. Rather it has been contended by the

petitioner that the interest accrued on non-resident account

maintained in foreign exchange is not liable to tax. There had been

no answer to this by the Revenue.”

The writ petition was allowed.

21. In Commissioner of Income Tax vs. J.K. Industries Ltd.,

reported in (2000) 245 ITR 457, a Bench of the Calcutta High Court

declared that intimation should be given in writing before set off is made under Section 245 (of Income Tax Act, 1961). The court, in this regard, also relied on the judgment of the Bombay High Court in A.N. Shaikh & others vs. Suresh B.

Jain, reported in (1987) 165 ITR 86. The court held that Section 245 (of Income Tax Act, 1961)

clearly requires previous intimation of the proposed action for adjustment and not a simultaneous intimation. It was a case, where the intimation was that the amount of refund for the previous assessment is adjusted against the liability and it was the said intimation, which was found to be not amounting to intimation in writing, as contemplated under Section 245 (of Income Tax Act, 1961). The Calcutta High Court also took the same view.

22. In State Bank of Patiala vs. Commissioner of Income Tax &

another, reported in (1999) 239 ITR 421, a Bench of the Punjab &

Haryana High Court was dealing with a petition seeking refund. The

intimation, which was given, read as follows:

“Sub.: Adjustment of refund – Assessment year 1996-97 –

Intimation under section 245 (of Income Tax Act, 1961) –

Regarding.

Return of income for the assessment year 1996-97 was

processed under section 143(1)(a) (of Income Tax Act, 1961) on March 19, 1997, and a refund

of Rs. 16,27,64,936 has been determined to be refundable to you.

The said refund is adjusted against the following demand:

Thereafter, the demand and the assessment years were set out.

Thereafter, the Bench held as follows:

“On a plain reading of section 245 (of Income Tax Act, 1961), it would

appear that this provision enables the Assessing Officer or other tax

or appellate authorities to set off, after intimation to the claimant,

the amount to be refunded or any part thereof, against any sum

remaining payable under the Act by the person to whom the refund

is due. In the Indian Income-tax Act, 1922 (for short “the 1922

Act”), similar provision regarding set-off existed in section 49E (of Income Tax Act, 1961).

Requirement regarding intimation to the assessee did not, however,

find place in section 49E of the 1922 Act. Section 245 (of Income Tax Act, 1961) reproduces

section 49E of the 1922 Act with the addition of the requirement

that the Assessing Officer shall give intimation to the assessee

before making the adjustment under this section. Thus, an

additional requirement regarding intimation was engrafted in

section 245 (of Income Tax Act, 1961) which corresponds to section 49E of the 1922 Act.

The following conditions must exist or be fulfilled in order to

set off a refund under section 245 (of Income Tax Act, 1961):

(i) A refund is found due to a person under any provision

of the Income-tax Act;

(ii) The amount of refund is set off against another sum

which is payable by that person under Income-tax Act; and

(iii) The refundable amount is set off after intimation, in

writing, of such proposed action to that person.

In the present case, the first two conditions stand fulfilled,

but the third condition is missing. No intimation, in writing, was

given by the assessing Officer prior to the proposed action of set-

off. When the third condition in terms requires that intimation in

writing has to be given about the proposed action that must be

strictly followed. This course was not adopted by the Assessing

Officer. A perusal of the intimation dated March 26, 1997,

(reproduced earlier), would show that the Assessing Officer sent

the intimation to the assessee after making adjustment or it was a

simultaneous action. Thus, adjustment was made in violation of the

third condition contained in section 245 (of Income Tax Act, 1961). As has been

noticed earlier, there was no provision regarding intimation to the

assessee in section 49E of the 1922 Act. It would, thus, mean that

there was a purpose in adding a specific condition regarding

intimation in section 245 (of Income Tax Act, 1961). Obviously, the object was to

inform the assessee about the proposed action of set-off so as to

enable him to put forward his objection, if he so desired. There

cannot be any other object behind a prior intimation regarding the

proposed action. If the legislative intent was simply to give an

intimation about the set-off to the assessee, there would not be a

requirement of giving intimation before making the adjustment. It

would defeat the purpose of the provision if it is said that an

intimation simpliciter, while making adjustment of the refundable

amount towards the tax demand of other years, was sufficient.”

23. Section 245 (of Income Tax Act, 1961) corresponds to Section 49E (of Income Tax Act, 1961), 1922. It is, at once, relevant to extract Section 49E (of Income Tax Act, 1961). It provides as follows:

“49E. Power to set off amount of refunds against tax

remaining payable. – Where under any of the provisions of this

Act, a refund is found to be due to any person, the Income-tax

Officer, Appellate Assistant Commissioner or Commissioner, as the

case may be, may, in lieu of payment of the refund, set off the

amount to be refunded, or any part of that amount against the tax,

interest or penalty, if any, remaining payable by the person to

whom the refund is due.”

24. We may, at once, notice the fact that, while there are a number of

similarities in the provisions, it does contain differences. Apart from the fact that the persons, who may make use of the power, being different, which may not be relevant for our purpose; in the new incarnation, the law provides that the set off may be as against the sum, if any, remaining payable under the Act. Earlier in Section 49E (of Income Tax Act, 1961), the amounts were specified expressly as the tax, interest or penalty, if any, remaining payable under the Act by the person to whom such a refund is due. The third difference is, undoubtedly, the requirement in Section 245 (of Income Tax Act, 1961) of giving intimation in writing to the person of the action proposed to be taken under this Section. The words used therein are “after giving an intimation in writing”. Such a requirement was not there in Section 49E (of Income Tax Act, 1961).

25. We have already adverted to Section 241 (of Income Tax Act, 1961). The same

stands deleted w.e.f. 01.06.2001. In the decision of the Delhi High Court rendered in Glaxo Smith Kline Asia P. Ltd. vs. Commissioner of

Income Tax & others (supra), the Bench, after adverting to the same, has

taken the view that the restriction on the power under Section 241 (of Income Tax Act, 1961) would

apply with equal, if not greater, force to Section 245 (of Income Tax Act, 1961). It is, further, held that, if reasonable time limits are not set for processing of or disposal of the application for refund by the Revenue, it may result in the assessee not being able to get the refund at all. It was also a case, where there was no notice at all under Section 245 (of Income Tax Act, 1961) processing to set off the demand against the outstanding tax amount due from it. This was also a case, where the issue involved had attained finality in regard to the Assessment Years 1998-1999 and 1999-2000 by the dismissal of the appeals in the High Court by order dated 20.07.2005.

26. Time is, now, ripe to consider the purport of Section 245 (of Income Tax Act, 1961).Section 237 (of Income Tax Act, 1961), which is the first Section in Chapter XIX relating to Refunds, provides that when a person satisfies the Assessing Officer that he has paid an amount in excess of the amount with which he is properly chargeable, he will be entitled to a refund of the excess. Section 239 (of Income Tax Act, 1961) provides for the form of the claim for refund and also the period of limitation. Therefore, a refund is to be made on the basis of an application made within the period provided, ordinarily. An exception to this is found in Section 240 (of Income Tax Act, 1961), for the said provision declares that if, as a result of any order passed in an appeal or other proceeding under the Act, refund becomes due, the amount found due by way of refund is to be

refunded without the assessee having to make any claim. We are not to

be detained by the provisions contained in the proviso. In a claim for

refund, the assessee is not entitled to question the correctness of any

assessment or other matter decided finally or to seek a review of the same.

He is entitled only to the relief of refund. This is the purport of Section 242 (of Income Tax Act, 1961). When an order is passed within the meaning of Section 240 (of Income Tax Act, 1961), the Assessing Officer is obliged to refund the amount within three months from the end of the month, in which the order is passed. Failure to do so casts a liability on the Central Government to pay the assessee simple interest at the rate of 15 per cent per annum on the amount of refund due from the date immediately following the expiry of three months to the date on which refund is granted. Coming back to Section 240 (of Income Tax Act, 1961), it significantly provides that, if the said Section is attracted, the amount is to be refunded even without any claim, except where it is otherwise provided under the Act. It is by way of bringing up the rear that Section 245 (of Income Tax Act, 1961) figures as the last provision in Chapter XIX. It is all embracing, as it takes in all cases, where refund is found due. It enables the setting off of any amount remaining payable under the Act by a person to whom the refund is due as against the refund, no doubt, after prior intimation in writing. We have already set out the provisions of Section 241 (of Income Tax Act, 1961), as it stood prior to its deletion. We are of the view that Sections 241 and 245 operate in different fields. The objects of the provisions are different. As far as

Section 241 (of Income Tax Act, 1961) is concerned, it empowered the withholding of the refund in

the circumstances mentioned therein. Undoubtedly, the power was to be

exercised by the Assessing Officer; but only with a previous order of the Chief Commissioner or Commissioner. It related to situations, which

included cases, where the order was the subject matter of an appeal or

further proceeding. That is to say, the order under which refund became

due was subjected to an appeal or further proceeding. No doubt,

withholding of the refund could be for a long period of time.

27. But, we should notice, however, that withholding of refund was,

nonetheless, essentially ancillary or incidental in the sense that it was to be interlocutory in nature. It was substantially an interim arrangement. It was to be done during the pendency of the various contingencies, which were provided for. Furthermore, the exercise of power under Section 241 (of Income Tax Act, 1961) was subjected to the condition that, besides the contingencies provided therein being present, the officer had to form the opinion that the grant of refund is likely to adversely affect the Revenue. On the other hand, Section 245 (of Income Tax Act, 1961), though it figures in the Chapter dealing with

refunds, is essentially and substantially a provision, which facilitates

recovery of tax. Under the Act, collection and recovery of tax is

contemplated in Chapter XVII. Tax can be collected by deduction at

source. It also provides for advance payment of tax. Besides the same,

there is collection at source. Under Chapter XVII-D, a bunch of Sections

starting with Section 220 (of Income Tax Act, 1961), provides for the other modes of recovery of tax.

Section 222 (of Income Tax Act, 1961) provides for certificate being issued to the Tax Recovery

Officer for recovery as provided thereunder. Section 226 (of Income Tax Act, 1961) contemplates

other modes of recovery. Section 226 (of Income Tax Act, 1961) includes recovery by garnishee

proceedings, inter alia.

28. On the other hand, Section 245 (of Income Tax Act, 1961) does not contain the

restrictions, which are embedded in Section 241 (of Income Tax Act, 1961). The object of Section

245 is to empower the authorities specified therein to adjust the refund in lieu of actual payment against any sum remaining payable under the Act. In other words, the ordinary rule is that, when a refund becomes due, the authorities are obliged to pay the same in the circumstances either, where there is an application required, on such application being made or, where cases fall under Section 240 (of Income Tax Act, 1961), even without an application to the party entitled. In case of non-payment, the law visits the Revenue /Government with the liability to pay interest as provided. It is as an exception to this law to make the payment and, by way of effecting recovery of any amount remaining payable under the Act from the very same person, that Section 245 (of Income Tax Act, 1961) vests authority to adjust the refund against any sum remaining payable. Therefore, Section 245 (of Income Tax Act, 1961) is, essentially, intended for the purpose of enabling extinguishment of the right to the refund on the basis of adjusting the refund against the sum remaining payable from the same person. Quite clearly, the purport of Section 245 (of Income Tax Act, 1961) is different from Section 241 (of Income Tax Act, 1961), which, as we have explained, is intended to put things in a state of suspension in the contingencies provided therein, subject to the further superadded condition that the authority must take the view that, if the refund is not withheld, it will adversely affect the interest of Revenue. We do not see any scope for reading into Section 245 (of Income Tax Act, 1961) the conditions, which would have been germane under Section 241 (of Income Tax Act, 1961).

29. We must, further, examine what is the meaning of the words “in

lieu of” found in Section 49E of the earlier enactment and also in Section 245 (of Income Tax Act, 1961). Does Section 245 (of Income Tax Act, 1961) provide for a two-way traffic? In other words, does it enable the assessee to demand a set off of the refund due against any amount payable by him? This question is no longer res integra and it is profitable that we advert to some of the case law in this regard. We may, however, begin by noting the following commentary in the work The Law and Practice of Income Tax by Kanga, Palkhivala and Vyas, wherein we notice the following commentary:

“The provisions of this section are not merely for the benefit

of the department but for the convenience of both department and

the taxpayer. It would be the duty of the AO to allow a set-off

under this section if the assessee claims it and proves that he is

entitled to a refund.

When an application is made to the AO under this section, he

can decide whether a refund is due to the assessee, without there

being a prior adjudication of the claim to refund. However, a set-

off under this section cannot be demanded, if the claim to refund is

itself barred.”

30. The question arose in Hindustan Construction Co. Ltd. vs. V.S.

Gaitonde, Income Tax Officer, Companies Circle I(3), Bombay &

another, reported in (1965) 56 ITR 241 (Supreme Court). Therein, an

application for refund was made by the assessee, but beyond the time.

Thereafter, the assessee was served with demand notices for certain

assessment years. The assessee sought the benefit of set off under Section 49E (of Income Tax Act, 1961) of the refund, which was due according to it; but, which, according to the Department, had been rejected as being time-barred. The assessee took the contention that, though the words in Section 49E (of Income Tax Act, 1961) provide, inter alia, that “refund is found to be due to any person”, it does not require any prior adjudication to enable a person to claim a set off. It is, thereafter, that the court proceeded to discuss the effect of the words in the statute and it concluded as follows:

“The question then arises as to whether there should be a

prior adjudication existing before a set-off can be allowed under

section 49E (of Income Tax Act, 1961), and whether there is any other condition which is

necessary to be fulfilled before the section becomes applicable. We

are of the opinion that it is not necessary that there should be a prior

adjudication before a claim can be allowed under section 49E (of Income Tax Act, 1961).

There is nothing to debar the Income-tax Officer from determining

the question whether a refund is due or not when an application is

made to him under section 49E (of Income Tax Act, 1961). The words "is found" do not

necessarily lead to the conclusion that there must be a prior

adjudication. But this is not enough to sustain the claim of the

appellant. It must still show that a refund is due to it. The words

"found to be due" in section 49E (of Income Tax Act, 1961) may possibly cover a case where

the claim to refund has been held barred under rule 5 (of Income Tax Rules, 1962) of the Indian

States Rules but that this is not the correct meaning is made clear

by the expression "in lieu of payment". This expression, according

to us, connotes that payment is outstanding, i.e., that there is

subsisting obligation on the Income-tax Officer to pay. If a claim to

refund is barred by a final order, it cannot be said that there is a

subsisting obligation to make a payment. The expression "in lieu

of" was construed in Stubbs v. Director of Public Prosecutions,

(1890) 24 QBD 577. It was held there that where a liability has to

be discharged by A in lieu of B, there must be' a binding obligation

on B to do it before A can be charged with it. In our opinion, there

must be a subsisting obligation to make the payment of refund

before a person is entitled to claim a set off under S. 49E. In this

case, in view of the orders of the Commissioner and the Central

Board of Revenue mentioned above there was no subsisting

obligation to pay, and, therefore, the claim of the appellant must

fail.”

The position at law under Section 245 (of Income Tax Act, 1961) cannot be

different, as, when the Legislature repeats the same words, which have

been interpreted by the court, the Legislature must be deemed to have

accepted the interpretation placed by the court.

31. N.C. Mukherjee & Co. vs. Union of India & another, reported in

(1968) 68 ITR 500 (SC) was a case, where the court directed to set off the amounts due from the assessee as against the refund due, which had not been determined for a long period of time. Let us take certain concrete examples. Assuming for a moment, there is a refund falling due by virtue of an order within the meaning of Section 240 (of Income Tax Act, 1961) and,

subsequently, an assessment is completed against the very same assessee.

Let us further proceed on the basis that the assessee accepts the

assessment and does not appeal the same. He, instead, requests that the

refund due to him may be adjusted against the amount payable by him.

Will it be open to the officer to deny the benefit of Section 245 (of Income Tax Act, 1961)? Will it remain a matter of discretion? We would think that, in such

circumstances, it would not only be a power, but would be a power

coupled with a duty, as Section 245 (of Income Tax Act, 1961) is intended to benefit both, the

Revenue and the assessee.

32. Likewise, let us take a situation, where, again, a refund is due for a certain year. An assessment order is passed. The matter, in the

meantime, received the attention of the jurisdictional court. The assessee still prefers an appeal. In the meantime, he does not obtain an order of stay. The officer, who resorts to Section 245 (of Income Tax Act, 1961), forms a belief honestly,which means after considering all relevant aspects, that the appeal of the assessee before the appellate commissioner is entirely merit-less. Should the Revenue be saddled with the liability of paying the amount by way of refund and put off the recovery of the amount in regard to which there is no stay obtained or can the Revenue not adjust the refund against the amount becoming payable under the order of assessment?

33. There is one more aspect, which is relevant. Governments cannot

run except with funds. Achievement of various targets, ambitiously

proclaimed, flounders in the face of paucity of funds. Collection of

revenue due to the Government becomes its imperative duty, inasmuch as,

it sub serves the larger public good of arming the Government with the

requisite funds to carry out various welfare schemes, apart from meeting

its ever growing expenditure. Therefore, in situations where the matter is without much dispute, there cannot be anything wrong in resort being

made to Section 245 (of Income Tax Act, 1961). By doing so, the Government would be freed from

the situation of depriving itself of the funds, which it has in its hands, on the basis of the payment towards the refund, where the assessee, himself, owes money to the Government.

34. There may, however, be situations also, where the matter is

seriously contested by the assessee. The assessee pursues the matter

before the higher forum and, undoubtedly, he may obtain an order of stay,in which case, of course, there cannot be any scope for invoking the power to adjust the refund. We must keep in our minds that the effect of an adjustment under Section 245 (of Income Tax Act, 1961) is the extinguishment of the

duty to refund the amount and the loss of the right of the assessee to

refund. Therefore, when the assessment order, itself, is stayed, it could not then be said truly that the amount remains payable within the meaning of Section 245 (of Income Tax Act, 1961).

Effect of the words “after giving prior intimation in writing of the

proposal to adjust the refund”:-

35. Mr. H.M. Bhatia, learned counsel for the appellants would submit

that, in the letter (Annexure No. 5), actually, there was compliance of

Section 245 (of Income Tax Act, 1961). Mr. H.M. Bhatia would, in fact, submit that the statement in the letter (Annexure No. 5) was in compliance with Section 245 (of Income Tax Act, 1961) and a

response from the assessee was awaited; but, instead, the assessee rushed to the court. What is stated in Annexure No. 5 is that the refund is being adjusted. No doubt, in the cases, which we have adverted to at the instance of the assessee, the words, which have been used, would suggest that adjustment is made and the intimation adverts only to the fait accompli of the adjustment having been made and, therefore, it was held that it would amount to a simultaneous intimation and not prior

intimation, as was required by law.

36. This brings up the question as to what really is the purpose of

incorporating the words in Section 245 (of Income Tax Act, 1961), which words were not there in

Section 49E (of Income Tax Act, 1961), the previous version of the provision. Does it entail the

obligation to comply with the principles of natural justice?

37. A learned Judge of the Madras High Court in Sabeta Detergents

Ltd. vs. Commissioner of Income Tax, reported in (2001) 248 ITR 385,

after adverting to the decision of the Delhi High Court in Vijay Kumar

Bhati vs. Commissioner of Income Tax & another, reported in (1994) 205

ITR 110, which we have already adverted to; the decision of the Bombay

High Court in Suresh B. Jain vs. A.N. Shaikh, reported in (1987) 165 ITR

151; and the decision of the Calcutta High Court in Bank of Tokyo

Mitsubishi Ltd. vs. Commissioner of Income Tax, reported in (1999) 240

ITR 331, held, inter alia, as follows:

“There is nothing in section 245 (of Income Tax Act, 1961),

to warrant the conclusion that the task of adjusting the refund

towards the arrears of tax payable by the assessee is a quasi-judicial

proceeding. Section 245 (of Income Tax Act, 1961) in terms does not r

equire any

show-cause notice being given, calling upon the assessee to explain

as to why the adjustment should not be made nor does it

contemplate any hearing. All that section 245 (of Income Tax Act, 1961) requires

the authorities to do is to make a readjustment “after giving an

intimation in writing to such person of the action proposed to be

taken” under that section. The authorities are not required to go

beyond what the section itself requires them to do.”

38. We may also notice the recent judgment of the Bombay High Court

in Hindustan Unilever Limited vs. Deputy Commissioner of Income

Tax-1(1) & others, reported in (2015) 279 CTR (Bom) 71. It was held

in paragraph 15 as follows:

“15. In view of the above, as held by this Court in A.H.

Shaikh (supra) the giving of prior intimation under Section 245 (of Income Tax Act, 1961) of

the Act is mandatory. The purpose being to enable the party to

point out that there are factual errors or some further developments,

if any, for example a stay of the demand, Supreme Court decision

covering the demand which is still a subject matter of a pending

appeal etc which would warrant not adjusting the refund against the

pending demand. Thus when a party does raise such issues in

response to a prior intimation, the officer of the revenue exercising

powers under Section 245 (of Income Tax Act, 1961) must apply his mind to it and

must record reason why the objection is not sustainable and also

communicate it to the party. This before or at the time of adjusting

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

adjustment under Section 245 (of Income Tax Act, 1961) is not exercised arbitrarily.

Such a procedure would cause no prejudice to the revenue as the

occasion to grant the refund would not arise till the objection to the

intimation is disposed of. Of course the objections should be

disposed of expeditiously as undue delay in granting of refund

would cause prejudice to the party entitled to the refund.”

In fact, Mr. H.M. Bhatia, learned counsel for the appellants, would

take the stand that the adjustment had not taken place by virtue of the

notice (Annexure No. 5); but, in fact, the Revenue was awaiting a

response and he asked us to take notice of the words “is being adjusted”.

As far as this case is concerned, we are overtaken by the subsequent

development in the form of order dated 03.03.2015 passed by the

appellate authority canceling the assessment itself. The question,

therefore, may be academic; but, in view of the course we intend to adopt in this case, it is necessary to lay down the true purport of the words in question. A quasi-judicial authority is obliged to comply with the principles of natural justice. Rights cannot be adjudicated without

opportunity of either making a representation or, if the situation so

warrants, an opportunity of personal hearing. Even if the order is an

administrative order, as long as the administrative order has the effect of affecting legal rights of parties, the authority is not immune from the operation of the principles of natural justice. These principles are

elementary by now and we do not wish to burden the judgment with case

law in support of this proposition. When the competent authority,

mentioned in Section 245 (of Income Tax Act, 1961), decides not to pay the amount due by way of

refund and seeks to invoke Section 245 (of Income Tax Act, 1961) and set off the amount against any amount remaining payable, it cannot be said that it does not affect the right of the party. In the first place, when the power is invoked, the right of the concerned party to get the amount by way of refund will stand extinguished. The very words in Section 245 (of Income Tax Act, 1961) indicate that an amount must be due by way of refund. Therefore, there is a right with the party to claim the amount as such. Secondly, as noted in the decision of the Bombay High Court in Hindustan Unilever Limited vs. Deputy Commissioner of Income Tax-1(1) & others (supra), there could be areas of genuine dispute such as factual disputes, which may strike at the very root of the action proposed under Section 245 (of Income Tax Act, 1961). Thirdly, it may be open to the assessee to point out that the assessee has pursued the matter in appeal and, in fact,

obtained interim order of stay, which may not be even known to the

competent authority acting under Section 245 (of Income Tax Act, 1961). The assessee may even

bring to the notice of the authority any recent pronouncement of a binding superior court, which will have the effect of rendering the assessment completely vulnerable in law and in a matter where he is pursuing the statutory remedies within the time. He may point out that, though an order of stay was not granted by the appellate authority, it is not so granted on the basis that the appeal, itself, will be heard on a very near date. When there is no interim order obtained, then, certainly, in terms of the assessment order passed, the amount, as per law, when it falls due,will become payable and, therefore, legally, there cannot be any illegality as such in the amount being adjusted. But, even there, the authority would stay its hands on various relevant considerations. It may include the consideration that an identical issue, as raised in the appeal, has

already been answered by the higher forum provided under the Act. The

order, under which the amount has become payable and remains payable,

may be shown to be palpably unsustainable as, for instance, where the

assessment was done in naked violation of the principles of natural

justice. Benefits do flow from compliance with the principles of natural

justice, as they tend to advance the cause of justice. They would make the proceedings of the authority fair. Therefore, we would think that, in keeping with the object of the provision and the change in the law brought about by the Parliament, the intention was clearly not to reduce it to an empty formality; but, it was intended that a bare opportunity of hearing against the proposed refund being set off must be given to the party. It is,certainly, not sufficient to merely send a communication simultaneously.

This flows from the words, which are specifically used, namely, proposal

to set off. No doubt, vexed question relating to the legality of the

assessment, under which the amount has fallen due, cannot be raked -up

before the authority. Such, in our view, would be the purport of the words used.

39. However, the fact remains that, as far as Annexure No. 5 notice is

concerned, the adjustment of the refund was sought to be done with

reference to the assessment made for the year 2014-2015 and that was the

subject matter of the writ petition. But, there is no dispute that, much

prior to the judgment delivered before the learned Single Judge,

assessment was completed against respondent No. 1 / writ petitioner in a

sum of over ` 105 crores. This fact was, admittedly, not brought to the

notice of the learned Single Judge either by the writ petitioner or by the Revenue. The learned counsel for the Revenue would allege concealment of material fact. This is disputed by the learned Senior Counsel for the writ petitioner. He would contend that, in fact, it is not even a material fact. What is material is the principle involved and the act of the Revenue in passing assessment orders, which are in the teeth of the order of the Income Tax Appellate Tribunal, wherein similar issues arose, clearly betrays non-adherence to the principle of discipline by the Assessing Officer, in the sense, the principle was settled by the Tribunal and there being no difference in the facts, as the issue related to non-applicability of Section 194A (of Income Tax Act, 1961) to the deposit and, every year, the issue will remain the same and, therefore, there cannot be a resort to Section 245 (of Income Tax Act, 1961).

40. We must remind ourselves that there is an assessment order passed

for the Assessment Year 2015-2016. That assessment order is not

challenged before us. It is not even before us. In fact, it is not the subject matter of the writ petition itself. The learned Single Judge was also not made aware of the said assessment. The learned Single Judge, in fact,proceeded mainly on the basis that, in regard to the impugned order,where the refund was sought to be adjusted against the amount assessed for the year 2014-2015, as the assessment itself was cancelled by the appellate authority, nothing further remained in the way of the grant of refund. No doubt, the learned counsel for the Revenue did make a statement that, if it is found that the assessment for 2014-2015 had been cancelled, the amount would be paid. In that sense, under normal

circumstances, in the light of the fact that it is admitted that the

assessment for 2014-2015 was, indeed, cancelled by proceeding dated

03.03.2015, as contended by the learned Senior Counsel for the writ

petitioner and in view of the statement made by the learned counsel for

the Revenue / appellants, we would have had no occasion to entertain the

appeal.

41. But, in this case, we are faced with facts, which are not in dispute,which took place, in fact, prior to the pronouncement of the judgment.

The judgment was pronounced in August, 2015; whereas, the assessment

order for the year 2015-2016 was passed on 12.05.2015. In the light of

the said assessment order, though we did toy with the idea of relegating

the appellants to the remedy of a review, as the learned Single Judge did not have occasion to consider the effect of this development; we felt that it will be in the interest of parties that we took note of the development and dealt with the arguments of the parties in the appeal.

42. Even according to respondent No. 1 / writ petitioner, Section 245 (of Income Tax Act, 1961)

vests a discretion. Section 245 (of Income Tax Act, 1961) uses the word “may”. This is a case,

which attracts Section 240 (of Income Tax Act, 1961), as the refund became due by virtue of the order passed in assessee’s appeal for three years dated 18.07.2014. Writ petitioner has also moved an application for refund, as already noted. For the years 2010-2011, 2011-2012 & 2012-2013, as against the order of the Income Tax Appellate Tribunal dated 18.07.2014, it is pointed out by the appellants that appeals are pending before this Court and, for the year 2011-2012, it is pointed out that 50 per cent of the demand has already been realised by attachment under Section 226(3) (of Income Tax Act, 1961) by order dated 23.01.2014. The order of the Income Tax Appellate Tribunal has not attained finality at the hands of the jurisdictional High Court even for a single year, unlike the facts in Glaxo Smith Kline Asia P. Ltd. (supra).

But, at the same time, the order of the Income Tax Appellate Tribunal is

rendered in favour of the assessee, in the sense that it was held that

Section 194A (of Income Tax Act, 1961) does not apply to the deposit in question. No stay is

obtained by the appellants. As regards 2013-2014, in respect of which an

amount of nearly ` 44 crores is attached and which is the subject matter of the refund claimed, a second appeal is pending before the Tribunal.

43. Section 245 (of Income Tax Act, 1961), undoubtedly, vests a discretion with the

authorities concerned, except in those circumstances, where the discretion would be one, where there is a power coupled with a duty. We have pointed out the circumstances, in which, the assessee could, in fact,demand, as a matter of right, to adjust the refund against any assessment, which he accepts; and, if the refund is not barred, as was held by the Hon’ble Apex Court in Hindustan Construction Co. Ltd. vs. V.S.Gaitonde, Income Tax Officer, Companies Circle I(3), Bombay &

another, reported in (1965) 56 ITR 241, the Department may not be

justified in refusing to accede to the request. We cannot possibly

pronounce on the legality of the assessment for the year 2015-2016. We

cannot even, in any manner, pronounce on the question whether the

assessment is to be sustained or not. In fact, an appeal is pending

consideration before the appellate Assistant Commissioner. There is no

order of stay obtained by the writ petitioner. But, at the same time, there is a clear case that the issue at hand is one squarely covered, as things stand, at the hands of the appellate Tribunal in favour of the assessee and there is absolutely no difference in facts. As already noted, the effect of set off of refund under Section 245 (of Income Tax Act, 1961) against the sum remaining payable would be the extinguishment of the right to refund. It is also clear that an order under Section 245 (of Income Tax Act, 1961) would operate as a method of recovery of the tax or other amount due and remaining payable under the Act. The request of the appellants is that the officer concerned will decide the application for demand of refund bearing in mind Section 245 (of Income Tax Act, 1961) and also taking into consideration the amount assessed for the year 2015-2016 by order dated 12.05.2015.

44. In the circumstances of the case, we are inclined to accept the

request, namely, that a decision will be taken by the authority regarding the refund in accordance with law, which would include the right to consider whether, under Section 245 (of Income Tax Act, 1961), a case is made out for adjustment of the refund against the demand for the year 2015-2016. We

have adverted to the various principles and situations, in which Section

245 can operate. It may not be exhaustive. The officer is duty bound not

to invoke Section 245 (of Income Tax Act, 1961) without application of mind. Every repository of

discretionary power would be obliged to act, in the first place, being

guided by relevant considerations and ignoring irrelevant considerations.

The relevant considerations, in this case, would be the fact that there is no stay obtained by the assessee in the appeal against the assessment for the year 2015-2016; but, equally, the authority would be bound to consider the fact that, for the Assessment Years 2010-2011, 2011-2012 and 2012-2013, the Tribunal has ruled in favour of the assessee in regard to the applicability of the issue. If it is found that the issue considered by the Tribunal for the years 2010-2011, 2011-2012 and 2012-2013 is absolutely the same, which fell for consideration by the Assessing Officer for the year 2015-2016, particularly when it is not stayed by the High Court in the appeal pending against the same, it may amount to abuse of the discretionary power to satisfy the demand under the assessment order,which, though not stayed, has not been accepted by the assessee, but, instead, challenged before the competent forum. It is, undoubtedly, true that the amount due for the Assessment Year 2015-2016 is one, which is remaining payable as it still remains unsatisfied. As far as the right to refund is concerned, it is also not questioned by the appellants. The only question is, whether, in the circumstances obtaining as a whole, set off should be ordered. We have given sufficient indications, which should guide the authority. It is for the authority concerned to look into all these

aspects and, firstly, decide whether it should invoke the power under

Section 245 (of Income Tax Act, 1961). If it is of the view that the power should be

invoked; then alone, in view of the requirement of giving prior intimation,which we have held entails compliance with natural justice, appellants must issue a notice indicating the proposal to invoke Section 245 (of Income Tax Act, 1961). A decision should be taken within a period of 10 days from today and, if the competent authority, actually, decides to invoke Section 245 (of Income Tax Act, 1961), then, notice should be issued to the writ petitioner and, after giving an opportunity of being heard to the assessee, a decision shall be taken in accordance with law. If the authority finds, in the facts of this case, that no case is made out for invoking Section 245 (of Income Tax Act, 1961) on the basis of the assessment completed in 2015-2016 within a period of 10 days from today, then, the amount due by way of refund, along with due interest, shall be paid to the writ petitioner at the earliest. If, on the other hand, it decides to invoke Section 245 (of Income Tax Act, 1961), then the proceedings must be completed within a period of two weeks from the date of affording an opportunity to the writ petitioner.

45. The judgment of the learned Single Judge will stand modified as

above and action will be taken as per our judgment. The appeal is

allowed as above.

(V.K. Bist, J.) (K.M. Joseph, C. J.)