Full Judgment Text
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CASE NO.:
Writ Petition (civil) 7501-7504 of 1997
PETITIONER:
Commissioner of Income Tax, Bhopal
RESPONDENT:
M/s. Shelly Products and another
DATE OF JUDGMENT: 08/05/2003
BENCH:
N. SANTOSH HEGDE & B.P. SINGH
JUDGMENT:
J U D G M E N T
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
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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
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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
Saurashtra Cement and Chemical Industries Ltd. Vs. Income Tax
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
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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
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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
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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
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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
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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 :-
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"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
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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
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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
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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.
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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
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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.
New Delhi
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