Calcutta High Court Says Reasons Are Mandatory To Withhold Income Tax Refund

Calcutta High Court Says Reasons Are Mandatory To Withhold Income Tax Refund

The matter was decided only on the interpretation of various provisions of the Income Tax Act and termed withholding of refund as arbitrary

The High Court of Calcutta granted income tax refund to the Petitioner as the Assessing Officer had withheld the refund without assigning any reason though the statute mandates for recording the same.

A single-judge court of Justice Arindam Mukherjee in the High Court of Calcutta dealt with a petition titled Mcnally Bharat Engineering Company Limited & Anr v Assistant Commissioner of the Income Tax & Ors.

The matter was decided only on the interpretation of various provisions of the Income Tax Act, 1961 since no factual clarification was required. The Petitioner – Assessee through this petition had challenged the action of the Assessing Officer withholding the Petitioner's refund as per provision of Section 241A of the Income Tax Act, 1961. The Petitioner submitted that the Assessing Officer did not record any reason to form an opinion that the refund was likely to adversely affect the revenue as per Section 241A of the Act.

The Respondent – Revenue Authorities, on the other hand, submitted that there was a total demand of ₹47,76,28,500 as against the Petitioner for different periods for which scrutiny in respect of such periods was going on and thus, the authorities as such were not liable to make the refund in view of the provision of Section 245 of the said Act. No other specific reason for withholding the refund apart from the above-stated reason was provided by the Respondent.

The Court interpreted the following provisions in order to ascertain the issue:

• Section 143(1) read with Sections 143(2) and 143(3) of the said Act provided for assessment on scrutiny proceedings initiated against the assessee.

• Section 241A of the said Act provided for withholding of refunds if the officer concerned found that the refund would have an adverse effect on the revenue.

The Court observed that the very essence of passing of the order u/S 241A was the application of mind by the Assessing Officer to the issues, which are germane for withholding the refund on the basis of statutory prescription contained in the said section. It was further stated that the scope of the power u/S 241A was narrow, making it clear that a speaking order was required to be passed culling out the reasons as to how the grant of the refund was likely to affect the revenue.

The Court noted that no reasons were assigned by referring to any materials on how the refund declared in the case of the Petitioner would adversely affect the revenue, nor was there any demand as against the Petitioner, pending on the date when the refund was notified.

The Court concluded that the Assessing Officer withheld the refund without assigning any reason though the statute mandates for recording the same, which showed he acted arbitrarily as there was no proper application of two independent provisions as in Section 241A and Section 143.

Therefore, the Court held that the Petitioner was entitled to a mandatory order of refund and directed the same by allowing the petition.