T. C. A. Ramanujam on the issue of refunds and time-barred assessments

T. C. A. Ramanujam

ARTICLE 265 of the Constitution lays down that no tax shall be levied or collected except by authority of law. What happens if taxes are paid and returns filed, but no assessment is made computing the tax liability of the taxpayer? Can it be claimed that in the absence of proper assessment, the tax paid should be refunded?

Section 240 of the Income-Tax Act, 1961 provides that when an assessment is annulled in appeal, tax refund shall become due only in respect of the amount, if any, paid in excess of the tax chargeable on the total income returned by the assessee. This legal position was enshrined in the Act by a clarificatory amendment of 1987. Before this amendment, several High Courts held that even regular taxes due on returned incomes cannot be retained if the assessments were annulled for technical reasons or for want of jurisdiction.

As for regular assessments, there can be no difficulty in retaining the taxes due as admitted in all such cases of annulled assessments in appeal. The position became tricky when proceedings were taken for reassessments. The principle of finality of assessment has an exemption in the law of reassessments. Courts have consistently held that proceedings under Section 147 of the Act are for the Revenue's, and not the assessee's, benefit.

It is not open to the taxpayer to convert the reassessment proceedings into a regular assessment proceeding and agitate issues, which were concluded earlier in the original assessment proceedings. The income-tax liability cannot be reduced to a figure less than that determined in the original assessment. These principles have been established by a number of cases.

There can, however, be cases where the taxpayer pays advance tax but does not file the return of income, and proceedings are initiated to reopen the assessment to compel the taxpayer to file the return. This is what happened in the CIT vs Vali Brothers (199 CTR 294) case. In response to the notice under Section 148 of the Act, the assessee filed the return and claimed refund of the advance tax of Rs 1 lakh paid in March 1989. The reassessment was completed accepting the return and exempting the profit from export business under Section 80HHC.

Since there was no escapement of income, the reassessment proceedings were dropped without determining either the income or the refund due. As no assessment was made, the Revenue declined to issue the refund. The matter was considered in some detail by the Allahabad High Court. The claim for refund was not made in the prescribed time. The assessee need not have waited for the reopening notice under Section 148. In the light of the law that reassessment, technically, is not meant to benefit the taxpayer, the Revenue felt justified in refusing the refund even though there was no tax liability.

The High Court referred to Section 237, which entitles an assessee to get a refund of the excess tax paid. The court pointed out that no amount was held chargeable in the Vali Brothers case and, therefore, the entire amount deposited towards advance tax was in excess and refundable. The court was not convinced with the argument that since proceedings were dropped, there was no assessment entitling the assessee to a refund.

It pointed out that it was also well established that `no proceedings' meant termination of the assessment proceedings. It should be construed as meaning that the assessee had no assessable income. No section in the Act provides for closing an assessment with an NA (no assessment) order, but asssessing officers often close cases with an NA entry.

The order for filing the proceedings will have to be treated as an order of assessment. In the Vali Brothers case, the order closing the case amounted to an order of assessment in pursuance of return filed under Section 148 of the Act, and refund of the excess tax deposited in advance was ordered.

Technically, the ruling raises uncomfortable questions in the light of the settled position in the law that reassessment is not meant to benefit the taxpayer. Refund should have been claimed in the prescribed form within the prescribed time. Remedy would have been to approach the CBDT to condone the delay in making the refund claim.

The High Court, however, felt that the Revenue could not be permitted to derive benefit by way of unjust enrichment by not refunding the amount of advance tax after arriving at the conclusion that the assessee had no taxable income. The judgment stresses on fairness and overrides the technicalities of the law relating to reassessment proceedings. One wishes that tax authorities had imbibed the spirit of the law laid down by the Allahabad High Court.

(The author is a former Chief Commissioner of Income-Tax.)

(This article was published in the Business Line print edition dated December 17, 2005)
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