Income Tax Refund cannot be withheld on ground that Scrutiny Notice was Issued: Delhi HC [Read Judgment]

ED’s - Rajiv Saxena - Agustawestland- Delhi High Court - Taxscan

The Delhi High Court has held that Assessing Officer cannot withhold the Income Tax Refund by citing the reason that the scrutiny notice has been issued.

The Petitioner Maple Logistics Private Limited has approached the High Court to refund the income tax amount on account of excess deduction of tax at source in respect of Assessment Years 2017-18 and 2018-19, and other consequential directions to adjust the outstanding amount of TDS and GST payable by Petitioner Company against the pending refund amount without charging of any interest for the delayed payments.

Petitioner Company is engaged in the business of providing multimodal logistics services including transportation through road, rail, etc., for its customers. Petitioner applied for a certificate of deduction as a TDS deduction of 2% causes financial difficulties, as its margin remains stuck with the government department in the form of TDS, causing acute cash flow constraints. As a consequence thereof, Petitioner is unable to service its customers, lenders and pay its statutory dues in a timely manner and assistant commissioner allowed tax deduction of 1%, Petitioner Company filed a revised income tax return in terms of Section 139(5) of IT Act to reduce the total TDS amount from Rs. 5,51,49,566/- to Rs. 5,42,91,774/- due to non-deposit of TDS by its customers. Accordingly, its refund claim stood revised to Rs. 4,79,93,740/- . Petitioner’s case was chosen for scrutiny as per computer-aided scrutiny

The division bench comprising of Justice Sanjeev Narula and Justice Vipin Sanghi observed that, “the AO has completely lost sight of the words in the provision to the effect that, “the grant of the refund is likely to adversely affect the revenue.” The reasons that are relied upon by the Revenue to justify the withholding of the refund in the present case, are abysmally lacking in reasoning. Except for reproducing the wordings of Section 241A of the Act, they do not state anything more. The entire purpose of Section 241A would be negated, in case the AO was to construe the said provision in the manner he has sought to do. It would be wholly unjust and inequitable for the AO to withhold the refund, by citing the reason that the scrutiny notice has been issued. Such an interpretation of the provision would be completely contrary to the intent of the legislature. The AO has been completely swayed by the fact that since the case of the assessee has been selected for scrutiny assessment, he is justified to withhold the refund of tax”.

The Court also said that “The power of the AO has been outlined and defined in terms of the Section 241A and he must proceed giving due regard to the fact that the refund has been determined. The fact that notice under section 143(2) has been issued, would obviously be a relevant factor, but that cannot be used to ritualistically deny refunds. The AO is required to apply its mind and evaluate all the relevant factors before deciding the request for a refund of tax. Such an exercise cannot be treated to be an empty formality and requires the AO to take into consideration all the relevant factors. The relevant factors, to state a few would be the prima facie view on the grounds for the issuance of notice under section 143(2); the amount of tax liability that the scrutiny assessment may eventually result in vis-a-vis the amount of tax refund due to the assessee; the creditworthiness or financial standing of the assessee, and all factors which address the concern of recovery of revenue in doubtful cases”.

While allowing the Writ Petition, the Court also said that “merely because notice has been issued under section 143(2), it is not a sufficient ground to withhold refund under section 241A and the order denying refund on this ground alone would be laconic. Additionally, the reasons which are to be recorded in writing have to also be approved by the Principal Commissioner, or Commissioner, as the case may be and this should be done objectively”.

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