Tax department cannot demand Form 26B or withhold post-assessment refunds without a Section 245 order, Delhi HC rules

Vodafone Idea Limited sought directions for release of income-tax/TDS refunds, together with applicable interest under Sections 244A and 244A(1A) of the Income Tax Act, 1961, for Assessment Years 2003–04, 2008–09 to 2011–12, 2012–13 and 2013–14.

The Income Tax Appellate Tribunal allowed the petitioner’s appeals by orders dated 30 April 2024, 5 June 2024, 26 November 2024 and 3 February 2025.

Pursuant thereto, the Assessing Officer passed orders giving appeal effect on 14 October 2024, 30 October 2024 and 15 May 2026, quantifying a total refund of ₹53,09,56,470.

The Department required the petitioner to furnish Form 26B.

Although the petitioner submitted the forms in respect of AYs 2012–13 and 2013–14, the applications were rejected on the ground that demands were outstanding against the petitioner’s PAN and associated/sister TANs.

No order under Section 245 of the Act adjusting or withholding the refunds was shown to have been passed.

Whether Form 26B and Rule 31A of the Income Tax Rules, 1962 can be insisted upon where a refund arises pursuant to an assessment under Section 201 of the Income Tax Act or an appellate order giving effect to such assessment?

Whether the Assessing Officer or the Centralised Processing Cell can withhold the quantified refund on the basis of outstanding demands against the petitioner’s PAN or sister/associated TANs, in the absence of a specific adjustment or withholding order under Section 245 of the Act?

Whether the petitioner was entitled to payment of ₹53,09,56,470 with statutory interest under Sections 244A and 244A(1A)?

The Court distinguished Section 200A of the Income Tax Act, 1961, which concerns processing and adjustment of TDS statements at the Centralised Processing Cell stage, from Section 201, which concerns assessment of a person liable to deduct tax but failing to deduct or deposit it.

Rule 31A and Form 26B facilitate refunds arising from adjustments in TDS statements under the Section 200A mechanism; they do not govern refunds crystallised pursuant to an assessment under Section 201 or an appellate order.

Once a competent authority or appellate authority determines that an amount is refundable, the assessee acquires a vested and crystallised right to the refund, subject to the Department’s lawful right of challenge and to adjustment or withholding under Section 245.

The refund must carry applicable interest under Sections 244A and 244A(1A).

Arbitrary withholding of the refund, absent lawful statutory authority, was held to violate Articles 14, 19(1)(g) and 300A of the Constitution.

The Court held that the refunds did not arise from a request to correct an erroneous TDS statement at the Section 200A/CPC stage; they arose after assessments under Section 201 and orders of the Tribunal, followed by orders giving appellate effect which quantified the amounts payable to the petitioner.

Consequently, Rule 31A and Form 26B were inapplicable, and the Department could not rely on its SOP to impose a procedural requirement unsupported by the governing statutory scheme.

Although the Department asserted outstanding demands against the petitioner and its sister TANs, the Court declined to determine the disputed quantum because that was a factual matter for the authorities.

More importantly, the Department had not passed any order under Section 245 authorising adjustment or withholding of the quantified refunds.

In the absence of such an order, withholding the refunds merely on the basis of pending demands was legally untenable and arbitrary.

The Court held that, after an assessment under Section 201 or an appellate order giving effect to such assessment, the Department cannot compel the assessee to furnish Form 26B under Rule 31A, nor withhold the refund on the basis of outstanding demands without a valid order under Section 245.

The respondents were directed to pay ₹53,09,56,470 to the petitioner, along with applicable interest under Sections 244A and 244A(1A), on or before 30 September 2026.

If the amount was not credited by that date, the entire amount would carry additional interest at 1% per month over and above the statutory interest.

All pending applications were disposed of.