ADJUSTMENT AGST. REFUNDS ONLY AFTER COMPLIANCE U/S 245 :HIGH COURT

I am sharing with you a bench mark judgment by Hon'ble Delhi High Court to address a problem on account of non credit allowed by the ...

I am sharing with you a bench mark judgment by Hon'ble Delhi High Court to address a problem on account of non credit allowed by the Income Tax Department for Tax Deducted at Source (TDS) if it does not match with Form 26AS and simultaneously the department is adjusting the refunds due against the outstanding demands of past years (say 7-8 years even more than that) without informing the assessee as required U/s 245 of the Income Tax Act1961 and does not give the details of outstanding demand and does not entertain any correspondence from assessees or by his legal representatives. The Hon. Delhi High Court on its Own Motion has considered these two issues and passed directions to Central Board of Direct Taxes (CBDT) to address these issues which will mitigate the hardship being caused to the assessees and their legal representatives for no faults theirs. The citation of the judgment reported is 352 ITR 273 (Del) in the case of Court on its Own Motion v. Commissioner of Income Tax.The full judgment is attached for your ready reference.

I trust you will find it useful.

CA. Naveen ND Gupta

SU-113, Pitampura B-4, Gulmohar Park

Delhi – 110088 New Delhi – 110049
Check your Income Tax refund status online here


Case Brief Topics

1. Section 139, read with sections 143(1), 154, 245, 200 and 244A, of the Incometax Act, 1961 
2. Return of income - General [Guidelines] 
3. Public interest Litigation was filed alleging numerous difficulties faced by income tax assessees after implementation of computerization and central processing of returns 
4. To remove such difficulties, mandamus were issued regarding 
• (i) maintenance of register for receipt and disposal of rectification applications under section 154; 
• (ii) procedure prescribed under section 245 to be followed by CPC before making adjustment of refund payable with existing demand; 
• (iii) past adjustments, where procedure under section 245 had not been followed; 
• (iv) interest under section 244A to be allowed when assessee is not at fault; 
• (v)  uncommunicated intimation under section 143(1); (vi) verification and correction of unverified TDS in Form 26AS and unmatched challans, within a time period to be fixed; 
• (vii) credit of TDS to an assessee when tax deducted has been deposited with revenue but incorrect particulars have been uploaded by deductor [Paras 16, 18, 26, 27, 33, 34, 49, 50 & 57] [In favour of assessee]

FACTS

The petitioners filed a Public Interest Litigation (PIL) regarding the numerous  difficulties faced by Income tax assessees due to the faulty processing of income tax returns and tax deducted at source, and requested the Court to issue appropriate directions.

1. The first issue was regarding the delayed disposal of rectification application made under section 154.
2. The second issue raised was regarding uploading of wrong or fictitious demand in the Central Processing Unit (CPU) at Bengaluru. The verification and reconciliations of demands uploaded at the CPU were disputed by the assessees. It was claimed that the demands adjusted against the refunds were not recorded. Consequently, a circular was issued by CBDT regarding the same.
3. The third issue relates to the adjustment of refund against demand, without giving prior intimation in writing to assessee-contrary to the provisions of section 245. 
4. The fourth issue relates to interest on refunds under section 244A, wherein it was claimed that interest was payable if assessee was not at fault. However, revenue contended that interest under section 244A was not payable on self assessment tax, but on advance tax and TDS. 
5. The fifth issue was regarding uncommunicated intimation under section 143(1) resulting either in demand or reduction in refund.
6. The sixth issue was regarding the unverified TDS under the headings 'U', 'M' 'P' in Form 26AS.
7. The seventh issue related to credit of TDS or rejection of credit, even when the TDS stood paid by the deductor, on account of mismatch between the details available in Form 26AS and the details furnished by assessee in his return. The grievance of the assessees was that inspite of approaching deductors to rectify and correct TDS details, deductors failed to do so as their failure did not entail any adverse consequence or action against them, while the deductee, being the taxpayer, was harassed.

HELD(In brief)

1. Uploading of wrong or fictitious demand and delayed disposal of rectification applications :

• Uploading of the details of the said registers(register u/s 154) should be made online preferably within a period of six months. This would be in accordance with the mandate of the Citizen Charter of the Department which states that the respondents believe in equity and transparency. [Para 16]
• Each application under section 154 has to be disposed of and decided by a speaking order. This is the mandate of the Act. The order has to be communicated to the assessee and there is a relevant column to be filled in the register, which is now required to be maintained. [Para 18]

2.Regarding adjustment of refund contrary to the mandate of section 245

• The respondents accept that when a return of income is processed under section 143(1) at Central processing Unit at Bengaluru, the computer itself adjusts the refund due against the existing demand, i.e., there is adjustment but without following the two stage procedure prescribed in section 245.
• In the order dated 31-8-2012, the respondents were directed to follow the procedure prescribed under section 245 before making any adjustment of refund payable by the CPC at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply must be considered and examined by the Assessing Officer before any direction for adjustment is made. The process of issue of prior intimation and service thereof on the assessee would be as per the law. The assessees would be entitled to file their response before the Assessing Officer mentioned in the prior intimation. The Assessing Officer would thereafter examine the reply and communicate his findings to the CPC,Bengaluru, who would then process the refund and adjust the demand, if any payable. The final adjustment will also be communicated to the assessee. [Para 23]
• The said interim order is confirmed. It is noticed that the respondents have taken remedial steps to ensure compliance of section 245 as they now give an option to the assessee to approach the Assessing Officer. [Para 24]

3.Regarding past adjustments.

• Inspite of the opportunity given to the Revenue to take steps, prescribe, adopt a just procedure, to correct the records, etc., nothing has been done and they have not taken any decision or steps. In these circumstances, direction is issued, which will be applicable only to cases where returns have been processed by the CPC Bengaluru and refunds have been fully or partly adjusted against the past arrears while passing or communicating the order under section 143(1) without following the procedure under section 245. In such cases, it is directed that :A. All such cases will be transferred to the Assessing Officer;B. The Assessing Officers will issue notice to the assessee which will be served as per the procedure prescribed;C. The assessees will be entitled to file response/reply to the notice seeking adjustment of refund;D.After considering the reply, if any, the Assessing Officers will pass an order under section 245 permitting or allowing the refund;E. The Board will fix time limit and schedule for completing the said process. [Para 26]
• There are three reasons why the said direction has been issued. Firstly, the respondents accept and admit the position that wrong and incorrect demands have been uploaded in the CPC Bengaluru. Secondly, the respondents have not followed the mandate and requirement of section 245 before making the adjustment. The two stage process with the opportunity and right of the assessee to submit a reply before the adjustment is made, has been denied. CPC Bengaluru did not entertain or accept any application of the assessee questioning past arrears uploaded in their system as they were not custodian of past records. CPC Bengaluru entertained online applications but did not entertain physical or hard copy applications. Assessing Officer similarly did not entertain any application by the assessee on the ground that the order under section 143(1) was passed by the CPC Bengaluru and they did not have the files/return with them. Thus, the problem was created and caused by the respondents who did not realize the effect and impact of incorrect and wrong arrears being uploaded in CPC Bengaluru and did not follow the statutory requirements of section 245. [Para 27]

4.Regarding interest on refund under section 244A

• An assessee can certainly be denied interest if delay is attributable to him in terms of sub-section (2) to section 244. However, when the delay is not attributable to the assessee but is due to the fault of the Revenue, then interest should be paid under the said section. False or wrong uploading of past arrears and failure to follow the mandate before adjustment under section 245, cannot be attributed and treated as a fault of the assessee. These are lapses on the part of the Assessing Officer i.e. the Revenue. Interest cannot be denied to the assessees when the twin conditions are satisfied and in favour of the assessee.However, even in such cases Assessing Officer may deny interest for reasons to be recorded in writing, if the assessee was in fault and responsible for the delay. [Para 32]

5 Regarding uncommunicated intimations under section 143(1)

• The grievance of the petitioner is with regard to the uncommunicated intimations under section 143(1) which remained on paper/file or the computer of the Assessing Officer. This is a serious challenge and a matter of grave concern. The law requires that intimation under section 143(1) should be communicated to the assessee, if there is an adjustment made in the return resulting either in demand or reduction in refund. The uncommunicated orders/intimations cannot be enforced and are not valid. The contention of the Revenue, that where an order under section 143(1) was sent and communicated to the assessee but could not be served due to non-availability/change of address or other valid reasons, should not be treated at par with cases where there was no communication or no attempt was made to serve the order whatsoever, is valid. But when there is failure to dispatch or send communication/intimation to the assessee, consequences must follow. Such intimation/order prior to 31-3-2010,will be treated as non est or invalid for want of communication/service within a reasonable time. [Para 33]
• The onus to show that the order was communicated and was served on the assessee is on the Revenue and not upon the assessee. If an order under section 143(1) is not communicated or served on the assessee, the return as declared/filed is treated as deemed intimation and an order under section 143(1). Therefore, if an assessee does not receive or is not communicated an order under section 143(1), he will never know that some adjustments on account of rejection of TDS or tax paid has been made. While deciding applications under section 154, or passing an order under section 245, the Assessing Officers are required to know and follow the said principle. Of course, while deciding application under section 154 or 245 or otherwise, if the Assessing Officer comes to the conclusion and records a finding that TDS or tax credit had been fraudulently claimed, he will be entitled to take action as per law and deny the fraudulent claim of TDS etc. The Assessing Officer, therefore, has to make a distinction between fraudulent claims and claims which have been rejected on ground of technicalities, but there is no communication to the assessee of the order/intimation under section 143(1). In the latter cases, the Assessing Officer cannot turn around and enforce the demand created by uncommunicated order/intimation under section 143(1). [Para 34]

6.Regarding unverified TDS under different headings

• The problem highlighted relates to the use of alphabets 'U', 'M' and 'P' in Form 26AS. The said alphabets stand for 'unmatched challan', 'matched challan' and 'provisional booking'. Provisional booking is applicable for DDOs, i.e., Government deductors and shall be shortly discontinued. 'Unmatched challans' relate to challans where the report by the deductor in the TDS statement are not found available in the OLTAS data base (Online Tax Accounting System). The respondents will fix a time limit within which they shall verify and correct all  unmatched challans. This will necessarily require communication with the deductor and steps to rectify. The time limit fixed should take into account the due date of filing of the return and processing of the return by the Assessing Officer. An assessee as a deductee should not suffer because of the fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee. [Para 42]

7.Regarding failure of deductor to file correct TDS statements in time 

• Therefore, it is directed that when an assessee approaches the Assessing Officer with requisite details and particulars, the said Assessing Officer should verify whether or not the deductor has made payment of the TDS and if the payment has been made, credit of the same should be given to the assessee.These details or the TDS certificate should be starting point for the Assessing Officer to ascertain and verify the true and correct position. The Assessing Officer will be at liberty to get in touch with the TDS circle, in case he requires clarification or confirmation. He is also at liberty to get in touch with deductors by issuing a notice and compelling them to upload the correct particulars/details.The said exercise must be and should be undertaken by the Revenue i.e., the Assessing Officer as an assessee who suffers in such cases is not due to his fault and can justifiably feel deceived and defrauded. The stand of the Revenue that they can only write a letter to the deductor to persuade him to correct the uploaded entries or to upload the details cannot be accepted. Power and authority of the Assessing Officer cannot match and are not a substitute to the beseeching or imploring of an assessee to the deductor. Section 234E will also require similar verification by the Assessing Officer. In such cases, if required, order under section 154 may also be passed. [Para 50]