Whether refund claim is to be allowed to assessee consequent to an order passed in appeal irrespective of whether a fresh assessment order has been passed by AO or not - YES: HC

THE issues before the Bench are - Whether refund claimed by the assessee could be granted only on a fresh assessment u/s 240; Whether refusal of assessing officer to grant refund to the assessee on ground of pendency of final assessment order would amount to collection of taxes without the authority of law and Whether a refund claim is to be allowed to an assessee consequent to an order passed in an appeal irrespective of whether a fresh assessment order has been passed by the AO in this regard. And the verdict favours the assessee.

Facts of the case

The assessee a company had duly filed its return declaring total income to a certain extent. The AO however, assessed the assessee’s income to a greater extent and raised a further tax demand of such amount inclusive of interest. Being aggrieved, the assessee preferred an appeal against the order of the AO to the CIT(A). In the mean time, the assessee in consequence of the assessment order deposited some amount and the AO suo moto adjusted the refund due to the assessee for the earlier A.Ys to the extent of remaining amount against the total dues payable for the A.Y in question. In the result, the assessee had deposited with the Revenue an amount/ pending the disposal of its appeal by the CIT(A). This deposit was in excess of the tax payable on the returned income. The CIT(A) set aside the assessment order and restored the file to the AO for proper adjudication. The AO however, did not comply with the directions for reassessment and in due course, the time to pass assessment order had expired. However, in view of the failure of the AO to pass any assessment order, the assessee addressed a communication to the Chief CIT and sought direction to the AO to refund the tax and the interest paid by the assessee. In response to assessee’s representation, the AO denied the assessee’s request for refund on the ground that the refund could not be granted by virtue of Section 240(a).

The counsel for assessee submitted that the impugned order of AO refusing to grant due refund on the ground that refund during the pendency of final assessment order amounted to collecting taxes without the authority of law. The counsel submitted that the Revenue was taking advantage of its own wrong in first not passing the assessment order and thereafter on the basis of above failure, unlawfully retaining the assessee’s property without authority of law. It was submitted that though the CIT(A) had remanded the matter to the file of AO for denovo adjudication, the AO had not passed the reassessment order till date. Therefore, there was no occasion to invoke section 240(a). It was further submitted that this issue was concluded in favour of assessee by the decision of the Supreme Court in CIT v. Shelly Products.

However, the Departmental Representative contended that no assessment order ought to be passed by the AO as the order of CIT(A) directing denovo adjudication was never received by the AO. Thus, in the absence of the order of the appellate authority being served upon the AO, the period of limitation did not begin to run and the AO being a creature of the IT Act was bound to act in a manner as mandated by section 240(a) i.e. no refund could be granted on the basis of the order of the Appellate authority till a reassessment order was passed as directed by the CIT (A).

Having heard the parties, the High Court held that,

++ we have considered the rival submissions. Section 240 casts an obligation upon the Revenue to refund any amount due to an assessee as a consequence of an order passed in appeal without the assessee having to make any claim to that effect and the proviso (a) u/s 240 has been incorporated only to ensure that when an assessment has been restored to the AO for fresh assessment order then the refund which is due on account of the appellate order will be granted only after a fresh assessment order is passed by the AO. So far as proviso (b) to Section 240 is concerned, it clearly provides that where assessment is annulled by the appellate authority and the refund becomes due to an assessee, the refund to be paid would only be the excess of the tax paid to the tax payable on the returned income. In this case, the assessee is not seeking refund of the tax payable on the basis of the returned income but seeking refund of the tax and interest paid in excess of that payable on the returned income. This was consequent to the assessment order passed by the AO. An identical issue was subject matter of consideration before the Supreme Court in CIT vs. Shelly Products, wherein the Supreme Court has observed that :

[“….If the AO cannot make a fresh assessment in accordance with the provisions of the Act it amounts to deemed acceptance of the return of income furnished by the assessee. In such a case the AO is denuded of its authority to verify the correctness and completeness of the return, which authority it has while framing a regular assessment. It must accept the return as furnished and shall not in any event raise a demand for payment of further taxes. Accepting the income as disclosed in the return of income furnished by the assessee, it must refund to the assessee any tax paid in excess of the liability incurred by him on the basis of income disclosed. Even if the tax paid is found to be less than that payable, no further demand can be made for recovery of the balance amount since a fresh assessment is barred….”]

++ these observations of Supreme Court are applicable to the facts of the assessee’s case. Moreover, the stand of the AO that no refund could be granted as no assessment order on remand could be passed because copy of the order of CIT(A) was not served upon him is not acceptable for the reason that the AO could have himself called for a copy of the same from the office of the CIT(A). In any case a copy of the order was served upon the AO with a copy of this petition some time in 2005 and since then no order of assessment has yet been passed by the AO. Once CIT(A) has remanded the proceedings to the AO for passing fresh assessment order, it is not open to the AO not to carry out the directions of the CIT(A) to the detriment of the assessee. If the revenue's submission that no refund can be granted to an assessee consequent to an order passed in an appeal unless the AO passes a fresh assessment order is accepted, then in that event Revenue would be able to deprive all assessees of their property without the authority of law by merely stating that it is helpless on account of its failure to pass an assessment order consequent to an order of appeal;

++ the Punjab & Haryana High Court in case of Bharti Engineering Corporation vs. Union of India and ors, took a view that revenue is bound to refund the amount in excess of the tax payable of the return. The AO is under legal bar to pass a fresh order because of the expiry of the period permitted under law and the assessee cannot be made to suffer on account of lapse on the part of the AO or any other officer of the Department. These observations equally apply to the present facts. In view of the above, the revenue is directed to grant refund of the amount along with interest in accordance with law after due verification.