Recently, the Bombay High Court rejected the Maharashtra State Tax Department’s attempt to offset a refund against earlier outstanding tax dues from prior years, ordering an immediate payout of Rs. 2.7 crore with applicable interest.
The case is a writ petition filed by a machinery manufacturing company, Andreas Stihl Pvt Ltd, who challenged the tax department’s move to adjust a substantial refund for the financial year 2016-2017 against tax arrears from earlier years, specifically 2013-2014, 2015-2016, and 2017-2018.
The company, regularly filing Maharashtra Value Added Tax (MVAT) returns and subsequently assessed by the tax authorities, had accumulated arrears across several financial years due to assessments and appeals under the MVAT Act. For the years 2013-2014, 2015-2016, and 2017-2018, the tax authorities assessed outstanding dues totaling over Rs. 2.7 crore. However, an appeal order for 2016-2017 determined that the company was owed a refund of Rs. 2,72,08,381. The company applied for settlements of arrears under the Maharashtra Settlement of Arrears of Taxes, Interest, Penalties, or Late Fees Act, 2022 (Settlement Act), a statute enacted to help taxpayers settle tax disputes and outstanding dues more efficiently.
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In the settlement process, the company followed the necessary protocols, paying the required settlement amounts for each financial year, which were acknowledged by the tax authorities. However, in July 2023, the Joint Commissioner of State Tax, exercising powers under Section 50 of the MVAT Act, passed a review order that retroactively sought to offset the 2016-2017 refund against arrears for 2013-2014, 2015-2016, and 2017-2018.
The company contested this review order, arguing that the Settlement Act did not authorize inter-year adjustments of refunds to cover outstanding dues from other years, making the adjustment both unlawful and without jurisdiction.
During hearings, the company’s counsel asserted that the Settlement Act was a self-contained legal framework that did not permit the invocation of MVAT provisions for cross-year adjustments. The argument highlighted that the Settlement Act specified the calculation of arrears for each financial year independently and did not allow tax authorities to apply a refund from one year to reduce arrears from another. The counsel maintained that the tax authorities could not arbitrarily exercise powers under MVAT in a way that conflicted with the Settlement Act’s intent and procedures.
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The division bench, comprising Justice M.S. Sonak and Justice Jitendra Jain, noted that the Settlement Act clearly outlined procedures for the settlement of tax arrears year-by-year without any mandate to incorporate provisions from other tax laws, such as Section 50 of the MVAT Act, to apply refunds from one year against dues from another. The court observed that if the legislature had intended such a mechanism, it would have been explicitly provided for in the Settlement Act. Furthermore, the court held that since the tax authorities had accepted the company’s settlement applications as compliant with the Act’s requirements and had issued settlement orders, they could not later invoke MVAT provisions to alter the settled dues.
The High Court found that the review orders issued in July 2023 lacked jurisdiction and violated the intent of the Settlement Act. By making this retroactive adjustment, the tax authorities attempted to bypass the legislative intent behind the settlement framework, which was intended to expedite the resolution of tax disputes. The court observed that authorities administering the Settlement Act were acting outside their jurisdiction by invoking MVAT provisions, particularly in a manner that was not specified by the Settlement Act itself.
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Consequently, the court quashed the review orders and the subsequent communication proposing to adjust the refund, and directed the tax authorities to issue the full refund of Rs. 2.7 crore to the petitioner, along with applicable interest.
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