Commissioner of Income
Tax, Bhopal Vs. M/S. Shelly Products & Anr [2003] Insc 272 (8
May 2003)
N. Santosh Hegde & B.P.
Singh B.P. Singh, J.
These four appeals by special leave have been preferred by the revenue
impugning the common judgment and order of the High Court of Madhya Pradesh at Jabalpur
dated July 9, 1996 in M.C.C. Nos. 368 - 369 of 1993 and Misc. Petition Nos.
2750 of 1984 and 3773 of 1987.
The question that arises for consideration in these appeals is whether on
the facts and in the circumstances of the case the respondents are entitled to
the refund of income-tax paid by them by way of advance tax and self-assessment
tax in the event of assessment framed being nullified by the Tribunal on the
ground of jurisdiction and there being no possibility of framing a fresh
assessment. The High Court by its common judgment and order has answered the
question in the affirmative rejecting the submission of the department that the
refund must be limited to income-tax paid pursuant to order of assessment, other
than income tax paid by way of advance tax and self-assessment tax.
The facts of the case, in so far as they are relevant for the disposal of
these appeals, are not in dispute. The respondents herein are the assessees and
the assessment year in question is 1976-1977. The assessments were framed by
the Income Tax Officer on August 23, 1980 under section 143(3) read with
section 144B of the Income-Tax Act (hereinafter referred to as 'the Act')
against which the assessees went in appeal to the Commissioner (Appeals). The
appellate Commissioner by his order dated February 3, 1981 partly allowed the appeal on other points but rejected the contention urged on behalf of
the assessees that the assessments made by the Income Tax Officer Indore were
without jurisdiction. The assessees went up in appeal before the Income Tax
Appellate Tribunal. Their appeals were allowed by the Tribunal by its order
dated January 14, 1984 which held that the assessment orders passed by the
I.T.O. (SIC)-1, Indore on August 23, 1980 were ab initio void on the ground
that I.A.C. Assessment Indore had no jurisdiction to deal with the pending
reference under section 144(N)(i) of the Act and to issue directions to the
Income Tax Officer (SIC)-1, Indore under section 144B of the Act.
The revenue sought a reference to the High Court which was refused, but by
order dated April 21, 1989 the High Court directed the Tribunal to refer the
questions of law in both references for its decision. Accordingly the Tribunal
framed the questions of law and referred the matter to the High Court for its
opinion. The said reference is still pending before the High Court.
In the meantime the assessees filed applications before the Assessing
Officer for refund of the tax paid pursuant to the Tribunal's order dated January 14, 1984. The Income Tax Officer by his letter dated August 13, 1984 informed the assessees that the refund may be given for taxes paid on regular assessments
which have since been annulled excluding tax paid in advance and on self
assessments. The second application for refund of tax was also not granted and
the Income Tax Officer by his order dated August 21,1987 informed the assessees that the refund has been withheld till the reference application filed in
the case of M/s. Shelly Products Bhopal is decided by the High Court. Appeals
were preferred to the Appellate Commissioner, which were allowed by orders
dated February 3, 1981 and the Income Tax Officer was directed to refund to the
assessees the advance tax and self assessment tax also. The Tribunal on appeal
affirmed the order of the Appellate Commissioner, but at the instance of the
revenue framed the following question of law for decision of the High Court :-
"Whether on the facts and in the circumstances of the case the ITAT was
justified in directing the Assessing Officer to refund the tax with interest
paid by the assessees on the income returned." The two references were
numbered as M.C.C. Nos. 368-369 of 1993 which were heard by the High Court
alongwith Misc.
Petition Nos. 2750 of 1984 and 3773 of 1987 challenging the orders passed by
the Income Tax Officer refusing to refund the tax as prayed for by orders dated
August 13, 1984 and August 21, 1987. All these four matters were disposed of
by the High Court by a common judgment which is impugned in these appeals.
The High Court has answered the reference in the affirmative and in favour
of the assessees. The revenue has, therefore, challenged the correctness of the
decision of the High Court.
Two main submissions have been advanced before us on behalf of the revenue.
Firstly it was contended that when an order of assessment is set aside or
annulled and no further assessment can be made, the assessee would be entitled
only to the amount of tax paid consequent to final assessment, and not the tax
paid by him by way of advance tax or self-assessment tax. This is on the
premise that the tax paid by the assessee under these two heads are paid by the
assessee admitting his liability in law to pay the tax.
Secondly it was contended, the amendment of section 240 with effect from April 1, 1989 by addition of proviso (b) is declaratory of the law, and will apply to the
assessments in question. The assessees are, therefore, not justified in
contending that only with effect from the date on which the law was amended,
the department is entitled to retain the tax paid by way of self assessment or
advance tax. On the other hand the assessees supported the judgment of the High
Court and contended that even the tax paid by way of advance tax or self-assessment
tax become refundable if the revenue authorities failed to pass an order of
assessment as required by law. On the failure of the authorities to pass an
assessment order no income is chargeable to tax in the year in question. The
revenue has, therefore, no right to retain even the tax deposited by the
assessee by way of advance tax or self- assessment tax. Such retention or
collection of income-tax is unauthorized and in the teeth of Article 265 of the
Constitution.
In the impugned judgment the High Court has taken the view that under the
scheme of the Income Tax Act the amount of tax is recoverable under section 156
by way of demand only when the liability of tax has been assessed by the
competent authority. If the assessment has been made and any amount has been
found to be due from the assessee, then alone the law confers a power on the
assessing authority to recover the same. It is only after the assessment has
been made in accordance with the provisions laid down in the Act, then and then
alone, the liability to recover tax arises. Thus once the order of assessment
is quashed, there remains no alternative for the assessing authority but to
return the amount of tax or any self assessment tax paid by the assessee
because the first and foremost condition for recovery of the amount is that
there should be an assessment and an amount of tax due against the assessee
under the provisions of the Act. The recovery of tax or retention of any amount
of tax paid by the assessee becomes unauthorized in the absence of an order of
assessment.
The mere fact that the assessee is obliged under the law to file return and
pay advance tax or self-assessment tax, makes no difference, and only after a
proper assessment is framed, he may be assessed to the liability of tax. The
High Court did not agree with the view expressed by a Full Bench of the Gujarat
High Court in Officer : [1992] 194 ITR 659 which held that there was no warrant
for holding that the entire amount of income-tax which is properly chargeable
under the Act and is collected by the department in accordance with the
provisions of the Act should be refunded on the failure to make a regular
assessment. The High Court agreed with the view expressed by the Madhya Pradesh
High Court in Gulabchand Motilal vs. C.I.T. : [1994] 205 ITR 62 and R. Gopal
Ramnarayan vs. Third Income Tax Officer : [1980] 126 ITR 369 in which a Single
Judge of the Karnataka High Court took the contrary view. The High Court also
agreed with the principle laid down by the Punjab and Haryana High Court in
Deep Chand Jain vs. I.T.O. : [1984] 145 ITR 676.
The High Court was further of the view that the amendment to section 240 by
the Direct Tax Laws (Amendment) Act, 1987 with effect from April 1, 1989 which
introduced the proviso, has brought about a change in the legal position, but
the proviso is applicable only with effect from April 1, 1989 and would not
apply to the assessments in question.
We may at the threshold observe that in the reported decisions the assessees
have laid considerable emphasis on Article 265 of the Constitution of India
which provides that no tax shall be levied or collected except by authority of
law. The arguments advanced before the High Courts proceed on the premise that
the tax paid by way of advance tax or self-assessment tax acquires the
character of income tax only after an order of assessment is made in accordance
with the provisions of the Income Tax Act. As a corollary, if no order of
assessment is made in accordance with the provisions of the Act, the retention
of the tax paid shall be in breach of the provisions of Article 265 of the
Constitution of India.
Before considering the authorities cited at the Bar it may be useful to
notice the relevant provisions of the Income Tax Act which have a bearing on the
question which falls for consideration.
Section 4 of the Act, as it stood during the relevant period, provided as
follows :- "4. (1) Where any Central Act enacts that income-tax shall be
charged for any assessment year at any rate or rates, income-tax at that rate
or those rates shall be charged for that year in accordance with, and subject
to the provisions of, this Act in respect of the total income of the previous
year or previous years, as the case may be, of every person :
Provided that where by virtue of any provision of this Act income-tax is to
be charged in respect of the income of a period other than the previous year,
income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall
be deducted at the source or paid in advance, where it is so deductible or
payable under any provision of this Act." Sub-section (2) of section 4 in
terms provides for payment of tax in advance or deduction of tax at source as
provided under the Act. For the deduction of tax at source and payment of tax
in advance, the relevant provision is section 190. It provides that
notwithstanding that the regular assessment in respect of any income is to be
made in a later assessment year, the tax on such income shall be payable by
deduction at source or by advance payment, as the case may be, in accordance
with the provisions of Chapter XVII. This is without prejudice to the charge of
tax on such income under the provisions of sub-section (1) of section 4.
Section 192 enjoins on any person responsible for paying any income
chargeable under the head "Salaries" to deduct income tax on the
amount payable at the average rate of income tax at the time of making payment.
Section 199 provides that any deduction made in accordance with the provisions
of sections 192 to 194 and other sections mentioned therein and paid to the
Central Government shall be treated as payment of tax on behalf of the person
from whose income the deduction was made and credit shall be given to him for
the amount so deducted. Section 202 clarifies that the power to levy tax under
the aforesaid sections is without prejudice to any other mode of recovery.
Under section 205 where tax is deductible at the source, the assessee shall not
be called upon to pay the tax himself to the extent to which tax has been
deducted from his income.
Under section 207 tax is payable in advance in accordance with the
provisions of section 208 to 219 except in the cases of incomes specified
therein. Such advance tax is payable during the financial year in accordance
with the provisions of section 208.
Section 209 and 210 provide for computation of advance tax and for payment
of advance tax by the assessee. Section 211 prescribes the instalments of
advance tax and the due dates.
The aforesaid provisions, therefore, clearly spell out the scheme of the Act
which provides for deduction of tax at source and advance payment of tax. On
such deduction or deposit of tax credit is given to the assessee for the amount
so deducted or paid as advance tax.
Section 139 of the Act mandates every person to furnish a return of the
total income during the previous year if the income is chargeable to tax.
Section 140A provides for self-assessment and lays down that any tax payable on
the basis of any return required to be furnished under section 139 or section
148, after taking into account the amount of tax, if any, already paid, shall
be paid by the assessee together with interest payable under any provision of
the Act for any delay in furnishing return or for any default or delay in
payment of advance tax. Thus an assessee who has defaulted or delayed payment
of advance tax or the instalment of advance tax, is liable to pay interest. The
provisions of the Act, therefore, cast an obligation on the assessee to pay the
advance tax by making the deposits in instalments as required by the provisions
of the Act, and after taking into account the tax paid in advance, to pay the
balance of the tax and interest, if any payable, while filing the return of
income. Similar is the provision with regard to the income tax deducted at
source. It cannot, therefore, be contended that the deposit of advance tax or
deduction of income tax at soruce is not authorised by law in view of the clear
mandatory provisions of the Act. The question is whether the charge itself
fails if there is no computation of total income by the assessing officer and
whether as a consequence thereof the tax paid as advance tax or self-assessment
tax or tax deducted at source, cannot be retained by the department without
violating the provisions of Article 265 of the Constitution of India.
We shall first refer to the judgment of the Full Bench of Gujarat High Court
in Saurashtra Cement and Chemical Industries Ltd. (supra). In that case also it
was argued on behalf of the assessee that the liability to pay the tax did not
crystallize nor was it quantified unless a regular assessment was made under
the Act.
Payment by way of advance tax, tax deducted at source and tax paid by way of
self-assessment were ad hoc payments to be adjusted ultimately when the regular
assessment was made under section 143. Even though a liability to tax arises
under section 4 of the Act, no liability to pay the tax arises until the
regular assessment is made. If regular assessment is not possible for any
reason, the charge itself would fail since the tax payable cannot be quantified
or determined and consequently no recovery can be made. Any retention of such
amount collected towards the tax, which could not be ultimately determined,
would violate the provisions of Article 265 of the Constitution of India since
such a recovery would become a levy and collection of tax without the authority
of law. On this reasoning, it was argued that the entire amount so collected
must be refunded.
The Full Bench of the Gujarat High Court after a detailed consideration of
the provisions of the Act held that in view of the elaborate provisions made in
the Act for deduction of tax at source and advance payment of tax, it could not
be said that the tax has been levied and collected without authority of law and
in violation of Article 265 of the Constitution of India whether it is deducted
or paid in accordance with the provisions of the Act. These provisions
eloquently indicate that the liability to pay tax is not dependent on the
regular assessment being made by the assessing officer, and where returns are
filed under section 139 on the basis of which tax is payable, the assessee is
made liable to pay such tax together with interest payable for any delay in
furnishing the return or any default or delay in payment of advance tax. After
referring to section 234B pertaining to interest for default in payment of
advance tax and more particularly to Explanation 1, it observed :- "It
would, thus, be clear that, not only the liability to be subjected to tax
arises under the charging section 4, but the liability to pay tax also arises
immediately on determination of the rates of taxes with effect from the date on
which such rates are made applicable and the liability to pay crystallizes in
the context of such rates when the total income is computed in accordance with
the provisions of the Act. On filing of the return under section 139, wherein
such total income is indicated, section 140A, providing for self-assessment,
comes into operation and it becomes obligatory on the part of the assessee to
discharge his liability which has arisen to pay the tax together with the
interest that may be payable for late furnishing of returns. The tax payable on
the basis of the returns filed by the assessee is treated as "assessed
tax". It is not at all made dependent on any regular assessment being made
though, in the event of regular assessment, the amount paid under sub-section
(1) of section 140A is deemed to have been paid towards the regular assessment.
Therefore, by no stretch of imagination, can the tax paid and collected under
section 140A be described as a mere ad hoc or interim payment which can be said
to fail in the absence of a regular assessment, as was sought to be contended
on behalf of the petitioners".
It further held that when the assessee files his return under section 139
and pays tax under section 140A by way of self- assessment claiming allowance
of the advance tax or tax deducted at source in the amount of tax payable
according to him, there is clear admission of the liability that has arisen
under the Act to pay the tax on the total income as is computed by the assessee
and duly quantified in the return. The procedure of assessment by the
Income-tax Officer is essentially to check the computation of total income done
by the assessee. Therefore the acceptance of the proposition canvassed by the
assessee would produce a startling result where though, according to the
assessee, he is liable to pay the tax as per the return filed by him and has in
fact paid the tax in accordance with the provisions of section 140A of the Act
and the Assessing Officer did not find it necessary to assess the total income
since he may have accepted the return on expiry of the period during which the
regular assessment is required to be made, the entire tax amount, admittedly
payable under the Act would be required to be refunded. The scheme of the Act
clearly indicates that the liability to pay income tax chargeable under section
4(1) of the Act does not depend upon the assessment being made by the
Income-tax Officer but depends on the enactment by any Central Act prescribing
rate or rates for any assessment year. Thus, as soon as the rates are
prescribed by the appropriate legislation, the liability to pay tax arises on
the total income which is to be computed by the assessee in accordance with the
provisions of the Act. By the process of self-assessment, the assessee is
required to pay tax on the basis of his return and such tax is treated as
assessed tax. Therefore, until it is disturbed by any further regular
assessment, it remains as tax levied and collected in accordance with law.
Having considered all aspects of the matter the Full Bench concluded :-
"We are, therefore, of the view that, on failure of a regular assessment
being made within the time prescribed or in the event of annulment of the
assessment order pursuant to which any further demand is required to be made
under section 156, no consequence of refund of the entire tax collected
according to the total income shown in the returns filed by the assessee can
ensue and such tax which is collected on the basis of the return filed by the
assessee remains a valid and legal recovery in accordance with the provisions
of the said Act and there is no question of any violation of Article 265 of the
Constitution of India in respect of the tax so recovered on the basis of the
total income shown by the assessee in his return." So far as the amendment
to section 240 is concerned, the Full Bench of Gujarat High Court rejected the
contention of the assessee that the proviso to section 240 brought in by way of
amendment could not be given retrospective effect. It was held that section 240
even as it stood before the addition of the proviso, made the refund of any
amount becoming due as a result of an order passed in appeal or other
proceeding under the Act subject to other provisions in the Act. There is no
indication in section 240 as it stood prior to the addition of the proviso that
the entire amount of tax which was properly chargeable under the Act was
required to be refunded. Clearly, therefore, the provision contained in clause
(b) of the proviso to section 240 only makes explicit what was always implicit,
namely, to refund the amount which exceeded the tax which was properly
chargeable under the Act. In sum and effect it was held that clause (b) of the
proviso to section 240 which was brought in by amendment with effect from April
1, 1989 was only clarificatory of the law.
We may at this stage observe that clause (a) of the aforesaid proviso has
been held to be clarificatory by this Court in Commissioner of Income-Tax vs.
Chittoor Electric Supply Corporation and another : [1995] 212 ITR 404 (S.C.).
A learned Judge of the Madhya Pradesh High Court in Chandra Mohan vs. Union
of India and others: [2000] 241 ITR 484 followed the principle laid down by the
Full Bench of Gujarat High Court in Saurashtra Cement and Chemical Industries
Ltd.
(supra) and held that the assessee having filed his return and paid the
taxes, even if no order of assessment was passd within the time provided under
the Act, the taxable income shown in the return filed by the petitioner shall
be binding on him unless he files a revised return claiming some non-taxable
income and on that basis refusing the liability of tax payment. The assessee
was, therefore, not entitled to refund of the tax paid. The learned Judge
distinguished the decisions in R. Gopal Ramnarayan (supra) of Karnataka High
Court and Deep Chand Jain (supra) of Punjab and Haryana High Court on the
ground that the principles laid down therein were not applicable to the facts
of the case.
A learned Judge of the Kerala High Court in E. Philip Joseph vs. Income-Tax
Officer and another : [1998] 234 ITR 846 followed the Full Bench of the Gujarat
High Court. In that case there was no dispute as to the refund of tax which was
levied on the income added by the Income-tax Officer at the time of regular
assessment. The dispute was only with regard to the refund of tax on the income
returned as per the self-assesment. It also appears from the report that the
assessment framed by the Assessing Officer was set aside in appeal by the
Commissioner of Income-tax who set aside the additions made by the Income-tax
Officer and thereafter no fresh assessment was made pursuant to the appellate
order. The assessee made a representation before the Commissioner whereafter
the Income-tax Officer passed an order on the basis of the directions issued by
the Commissioner of Income-tax. As against the said order the assessee filed a
revision petition before the Commissioner and the Commissioner finally passed
an order under section 264 of the Act which was impugned by the assessee before
the High Court. The learned Judge held that the setting aside of the regular
assessment did not mean that the self-assessment made under section 140A had
been set aside.
Even if the regular assessment is declared to be void, it has no effect on
the self-assessment made under section 140A. The direction to refund the tax
paid on regular assessment does not mean that the tax paid along with the
return under section 140A shall be refunded, because the payment of tax under
self- assessment is on the admitted income returned by the assessee.
When tax has been paid on the admitted income, even if the income added by
the Income-tax Officer by way of addition in the regular assessment has been
set aside in appeal or revision, the assessee has no legal right to claim
refund of the tax so paid because what has been set aside is not the
self-assessment but the regular assessment.
Counsel For the revenue drew our attention to certain observations made by
this Court in Commissioner of Income-Tax vs. Chittoor Electric Supply
Corporation and another (supra). In that case the question which arose for
consideration by this Court was whether a claim for refund arose where an
assessment order was set aside and a fresh assessment which was directed to be
made was pending when the application for refund was made.
This Court held that refund became due only upon making the fresh assessment
and refund could not be claimed after the earlier assessment was set aside and
proceedings for fresh assessment were taken pursuant to the direction of the
appellate authority. In such a case it must be held that during the pendency of
the proceedings for fresh assessment it could not be said that any amount of
refund had become due to the assessee in respect of that assessment year
because the proceeding was still pending and, therefore, it was idle to talk of
any amount or any refund becoming due to the assessee in respect of that
assessment year. The judgment of the Full Bench of Gujarat High Court in
Saurashtra Cement and Chemical Industries Ltd. (supra) has been referred to in
the judgment of this Court but this Court was primarily concerned with proviso
(a) to section 240 which was brought in by amendment with effect from April 1,
1989. This Court held inter alia that the said proviso was merely clarificatory
of the law.
Counsel for the respondent sought to rely upon certain observations made in
the judgment but we cannot give any benefit of those observations to the
revenue because this Court has itself made it clear that what has been held in
that judgment is confined to a case where an appellate or other authority under
the Act sets aside or cancels the assessment and directs a fresh assessment to
be made i.e. a situation contemplated by clause (a) of proviso to section 240.
It has been clearly stated that this Court did not propose to express any view
as to what would be the position where the situation is different.
In R. Gopal Ramnarayan (supra) a learned Judge of the Karnataka High Court
dealt with a case where the order of assessment framed by the Income-tax
Officer was annulled by the Income Tax Appellate Tribunal, whereafter the
assessee made a demand for refund of the tax paid. The demand was rejected by
the Income-tax officer compelling him to file a writ petition under Article 226
of the Constitution of India for direction to the Income- tax Officer to refund
the tax paid by the petitioner for the relevant assessment year on the ground
that there being no assessment order made in accordance with law the tax
retained by the Income-tax officer was without the authority of law and was
liable to be refunded under section 240 of the Act. It was held that the
payment of advance tax was a mere convenience of collection which was liable to
be adjusted against the actual tax due when the final assessment order was
made. It is well settled that no tax can be levied except with the authority of
law as enjoined by Article 265 of the Constitution of India. After noticing
section 240 of the Act the learned Judge held :- "As is apparent from the
language of the section, it is very wide in its scope and application. There is
a mandate on the revenue to make the refund even without a demand.
That, in turn, leads me to the irresistible conclusion that if a demand is
properly made then it certainly cannot be refused. Section 240 of the Act
provides for refund of any amount that becomes due to the assessee. It cannot
be restricted to excess payment only. It is possible in many instances that for
a good number of reasons the whole of the advance tax paid may become
refundable, if the assessee is ultimately found not liable to pay tax after the
assessment proceedings are completed. Such a possibility cannot be ruled out.
If that be the position, the mere fact of the compulsion of payment under
section 210 of the Act, as contended by Shri Rajasekhara Murthy, cannot be
accepted to mean that, by the operation of that section, that tax had been
levied, assessed and collected.
Assessment is the final process which completes the levy of tax under
section 4 of the Act." The learned Judge went on to hold that the effect
of annulment of assessment order is that there is no assessment at all in the
eye of law and in such a case the revenue could not take a stance that even
without an assessment order in existence, the assessee for the relevant
assessment year, was liable to tax under section 4 of the Act. Until and unless
the quantum of tax is determined in accordance with the procedure laid down by
law, the revenue has no right to collect the tax and if tax by way of advance
tax or on self-assessment or tax deducted at source has been paid by the
assessee, the same cannot be retained contrary to the requirements of Article
265 of the Constitution.
A learned Judge of Punjab and Haryana High Court in Deep Chand Jain's case
(supra) agreed with the view taken by the Karnataka High Court in R. Gopal
Ramnarayan's case (supra) and observed :- " Computation of total income
and tax thereon envisages the final determination by the assessing authority in
terms of sections 143 or 144 of the Act. The assessee, who, for instance, had
paid tax on the basis of self- assessment under a wrong assumption that the
entire income shown therein was liable to tax, is entitled to assert before the
assessing authority when the case is taken up for assessment that either whole
or part thereof was not liable to form part of the taxable income and that the
tax paid on the basis of self- assessment was not liable to be paid, and the
assessing authority, if it finds that either the whole income or part thereof
was not liable to be included in the taxable income, is bound to give effect to
the claim of the assessee and compute the total income of the assessee in
accordance with law and not accept self- assessment regarding his total
income." It was further observed that advance tax collected from the
assessee had to be related to a final assessment order and since no final
assessment order could be passed, the same having become barred by limitation,
the collection of the advance tax itself became illegal and so also its
retention.
Counsel for the respondents placed reliance on Smt.
Shantibai vs. Commissioner of Income-Tax : [1984] 148 ITR 49.
We find that this judgment is of no assistance to the respondents since that
judgment relates to the appellability of an order refusing to refund the tax paid
on the basis of provisional assessment. Such a question does not arise in these
appeals.
Reliance placed on Gulabchand Motilal vs. Commissioner of Income-tax and
others : [1994] 205 ITR 62 is also not of much assistance to the respondents
since no reasons have been given in that judgment. Moreover the question which
arises for consideration in these appeals was not urged or considered in that
case.
The decision of a Division Bench of the Delhi High Court in Aroon K. Basak
vs. Union of India and others : [1999] 236 ITR 931 is in respect of a claim
where the assessee himself did not claim refund of the tax which was
legitimately payable by him and which he had paid. Refund was claimed only of
that amount which was disputed by the assessee and which amount had been
deducted at source by his employer. That was also a case where no fresh
assessment could be made as it was barred by limitation.
In the cases in hand the question is only with regard to the refund of tax
paid by way of advance tax or self-assessment tax which was paid by the
assessees themselves admitting their liability to pay such tax. The asseessees
do not contend that the tax of which refund is claimed was not chargeable or
payable, but claim refund on the sole ground of the failure of the authorities
to pass an order of assessment.
Having considered the authorities on the subject, we find ourselves in
agreement with the view of the Gujarat High Court in Saurashtra Cement and
Chemical Industries Ltd. (supra). The question that falls for our consideration
in these appeals is whether on the failure or inability of the authorities to
frame a regular assessment after the earlier assessment is set aside or
nullified, the tax deposited by an assessee by way of advance tax or self
assessment tax, or tax deducted at source is liable to be refunded to the
assessee, since its retention by the revenue would result in breach of Article
265 of the Constitution which prohibits the levy or collection of any tax
except by authority of law. The revenue does not dispute the position that if
an assessment is framed, which is later nullified in appeal or revision or
other proceedings, any amount paid by way of income tax pursuant to the order
of assessment, over and above the advance tax and self-assessment tax is
undoubtedly refundable under section 240 of the Act. The only dispute is with
regard to the refund of the advance tax and self-assessment tax which is paid
by the assessee on his own assessment of his liability and is based on the
return of income filed by him. According to the revenue, the tax so paid
represents the admitted liability of the assessee, and failure or inability to
frame another assessment after the earlier assessment is set aside or nullified
in appropriate proceedings, does not entitle the assessee to claim refund
because to this extent the assessee has admitted his liability to pay tax in
accordance with law. The tax liability is computed on the basis of the relevant
Fiance Act laying down the rate or rates at which the tax is payable and provides
for other matters relevant to the computation of tax. Thus the tax is required
to be paid in advance by the assessee, even before assessment is made, and he
himself is required to compute his liability having regard to the rates and
exemptions applicable. Thus, both the levy and collection of tax is in
accordance with law.
We find considerable force in the submission of the revenue and it must be
upheld. We have earlier noticed the scheme of the Act. Section 4 of the Act
creates the charge and provides inter alia for payment of tax in advance or
deduction of tax at source. The Act provides for the manner in which advance
tax is to be paid and penalises any assessee who makes a default or delays
payment thereof. Similarly the deduction of tax at source is also provided for
in the Act and failure to comply with the provisions attracts the penal
provisions against the person responsible for making the payment. It is,
therefore, quite apparent that the Act itself provides for payment of tax in
this manner by the assessee. The Act also enjoins upon the assessee the duty to
file a return of income disclosing his true income. On the basis of the income
so disclosed, the assessee is required to make a self-assessment and to compute
the tax payable on such income and to pay the same in the manner provided by
the Act. Thus the filing of return and the payment of tax thereon computed at
the prescribed rates amounts to an admission of tax liability which the
assessee admits to have incurred in accordance with the provisions of the
Finance Act and the Income Tax Act. Both the quantum of tax payable and its
mode of recovery are authorized by law. The liability to pay income tax
chargeable under section 4(1) of the Act thus, does not depend on the
assessment being made. As soon as the Finance Act prescribes the rate or rates
for any assessment year, the liability to pay the tax arises. The assessee is
himself required to compute his total income and pay the income tax thereon
which involves a process of self-assessment. Since all this is done under
authority of law, there is no scope for contending that Article 265 is
violated.
What then is the effect of the failure to make an order of assessment after
the earlier assessment made is set aside or nullified in appropriate
proceedings ? If the assessing authority 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 assessing
authority 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. In other words, the tax paid by the assessee must be accepted as it
is, and in the event of the tax paid being in excess of the tax liability duly
computed on the basis of return furnished and the rates applicable, the excess
shall be refunded to the assessee, since its retention may offend Article 265
of the Constitution.
We cannot lose sight of the fact that the failure or inability of the
revenue to frame a fresh assessment should not place the assessee in a more
disadvantageous position than in what he would have been if a fresh assessment
was made. In a case where an assessee chooses to deposit by way of abundant
caution advance tax or self- assessment tax which is in excess of his liability
on the basis of return furnished or there is any arithmetical error or
inaccuracy, it is open to him to claim refund of the excess tax paid in the
course of assessment proceeding. He can certainly make such a claim also before
the concerned authority calculating the refund. Similarly, if he has by mistake
or inadvertence or on account of ignorance, included in his income any amount
which is exempted from payment of income-tax, or is not income within the
contemplation of law, he may likewise bring this to the notice of the assessing
authority, which if satisfied, may grant him relief and refund the tax paid in
excess, if any. Such matters can be brought to the notice of the concerned
authority in a case when refund is due and payable, and the authority
concerned, on being satisfied, shall grant appropriate relief. In cases
governed by section 240 of the Act, an obligation is cast upon the revenue to
refund the amount to the assessee without his having to make any claim in that
behalf. In appropriate cases therefore, it is open to the assessee to bring
facts to the notice of the concerned authority on the basis of the return
furnished, which may have a bearing on the quantum of the refund, such as those
the assessee could have urged under section 237 of the Act. The concerned
authority, for the limited purpose of calculating the amount to be refunded
under section 240 of the Act, may take all such facts into consideration and
calculate the amount to be refunded. So viewed, an assessee will not be placed
in a more disadvantages position than what he would have been, had an
assessment been made in accordance with law.
It was contended before us that proviso to section 240 was inserted by an
amendment which came into effect from April, 1 1989. Proviso (b) is applicable
to the facts of the case under consideration. Section 240 reads as under :-
"240. Where, as a result of any order passed in appeal or other proceeding
under this Act, refund of any amount becomes due to the assessee, the Assessing
Officer shall, except as otherwise provided in this Act, refund the amount to
the assessee without his having to make any claim in that behalf :
Provided that where, by the order of aforesaid, - (a) an assessment is set
aside or cancelled and an order of fresh assessment is directed to be made, the
refund, if any, shall become due only on the making of such fresh assessment ;
(b) the assessment is annulled, the refund shall become due only of the
amount, if any, of the tax paid in excess of the tax chargeable on the total
income returned by the assessee." It was submitted that after April 1,
1989, in case the assessment is annulled the assessee is entitled to refund
only of the amount, if any, of the tax paid in excess of the tax chargeable on
the total income returned by the assessee. But before the amendment came into
effect the position in law was quite different and that is why the legislature
thought it proper to amend the section and insert the proviso. On the other
hand learned counsel for the revenue submitted that the proviso is merely
declaratory and does not change the legal position as it existed before the
amendment. It was submitted that this Court in Commissioner of Income-Tax vs.
Chittoor Electric Supply Corporation and another : (supra) has held that
proviso (a) to section 240 is declaratory and, therefore, proviso (b) should
also be held to be declaratory. In our view that is not the correct position in
law.
Where the proviso consists of two parts, one part may be declaratory but the
other part may not be so. Therefore, merely because one part of the proviso has
been held to be declaratory it does not follow that the second part of the
proviso is also declaratory. However, the view that we have taken supports the
stand of the revenue that proviso (b) to section 240 is also declaratory. We
have held that even under the unamended section 240 of the Act, the assessee
was only entitled to the refund of tax paid in excess of the tax chargeable on
the total income returned by the assessee. We have held so without taking the
aid of the amended provision. It, therefore, follows that proviso (b) to
section 240 is also declaratory. It seeks to clarify the law so as to remove
doubts leading to the courts giving conflicting decisions, and in several cases
directing the revenue to refund the entire amount of income-tax paid by the
assessee where the revenue was not in a position to frame a fresh assssment.
Being clarificatory in nature it must be held to be retrospective, in the facts
and circumstances of the case. It is well settled that the legislature may pass
a declaratory Act to set aside what the legislature deems to have been a
judicial error in the interpretation of statute. It only seeks to clear a
meaning of a provision of the principal Act and make explicit that which was
already implicit.
Learned counsel for the respondents then relied upon the Circular issued by
the Central Board of Direct Taxes dated 23rd January, 1990. The relevant part
of Circular contained in paragraph 13.2 thereof is as follows :- "13.2
Further, where the assessment had been annulled in appeal, say for want of
jurisdiction or for any other technical reason, and such annulment became
final, the judicial pronouncement did not permit retention of even the tax due
on the basis of the returned income.
Several High Courts had held that in such a case even the tax paid by way of
tax deducted at source or advance tax and the tax which was due on the basis of
the returned income had to be refunded to the assessee. Equity demanded that
even where an assessment was annulled for any reason, the liability of the
assessee, at least to the extent of tax payable on the basis of the income
declared in the return, should remain.
To overcome this difficulty and to make the position clear, the proviso to
section 240, inserted by the Amending Act, 1987, provides that where the
assessment is annulled, the refund shall become due only in respect of the
amount, if any, paid in excess of the tax chargeable on the total income returned
by the assessee." (emphasis supplied) The respondents contend that the
Circular of the Board is binding upon the authorities of the Income-tax
department and, therefore, so far as the income-tax authorities are concerned,
they must give to the amendment brought about in section 240 only prospective
operation.
We find that paragraph 13.2 of the Circular does not advance the case of the
respondents. The Circular only states that some of the judicial pronouncements
did not permit a retention of even the tax due on the basis of the returned
income and directed the refund of tax deducted at source or advance tax. To
overcome this difficulty and to make the position clear, the proviso to section
240 was inserted. A plain reading of the circular also indicates that the Board
also took the view that the amendment was clarificatory and that it had become
necessary to get over the difficulties posed by the judicial pronouncements
directing refund of the entire tax including the advance tax and tax deducted
at source, which were payable on the basis of income declared in the return by
the aseessee himself. It is, therefore, not necessary for us to consider the
larger question as to the extent to which such circulars are binding upon the
department. In any event, as submitted by counsel for the appellant, the
relevant part of the Circular contains only a statement of fact. There is no
instruction, direction or order to the authorities to act in a particular
manner.
As rightly submitted by him, the statutory provision has to be examined for
its true effect and the Circular, in the instant case, is not relevant.
In the result these appeals are allowed. The judgment and order of the High
Court is set aside and the question referred in M.C.C. Nos. 368-369 of 1993 is
answered in the negative and in favour of the revenue. Misc. Petition Nos. 2750
of 1984 and 3773 of 1987 are dismissed. There shall be no order as to costs.
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