CBDT Instruction No 1-2015 held illegal and quashed by Delhi High Court. Refunds not to be denied to assessees for notices issued u/s 143(2) cases

CBDT Instruction No 1-2015 held illegal and quashed by Delhi High Court It further directed that the said instruction shall not be relied upon to deny refunds to the Assessees in whose cases notices might have been issued under Section 143(2) of the Income Tax Act, 1961.

Case Law Details:
WP(C) 12304/2015 & CM 32604/2015

Tata Teleservices Limited (Petitioner) vs. Central Board of Direct Taxes (Respondents)
Date of Judgment: 11/05/2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru

Important Judgments Cited:
UCO Bank v. Commissioner of Income Tax (1999) 237 ITR 889 (SC)
Commissioner of Central Excise, Bolpur, v. Ratan Melting & Wire Industries (2008) 13 SCC

The Controversy:
The petitioner had challenge the Instruction No. 1 of 2015 dated 13th January 2015 issued by the Central Board of Direct Taxes (CBDT) relying on which the Deputy Commissioner of Income Tax (DCIT) denied the refund of the Petitioner under Section 143(1) of the Act for three assessment years 2012-13, 2013-14 and 2014-15. The refunds were declined for the reason that the case was pending scrutiny and that in the light of Section 143(ID) of the Income Tax Act, 1961 and the said Instructions of the CBDT, refund could not be processed.  

The Background:
The Finance Act, 2012 sub-section (1D) was inserted in Section 143 wef 1st July, 2012 which reads as under:

“(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2)”.

The Memorandum to the Finance Bill 2012 stated as under:

“Processing of return of income where scrutiny notice issued
Under the existing provisions every return of income is to be processed under sub-section (1) of Section 143 and refund, if any, due is to be issued to the taxpayer. Some returns of income are also selected for scrutiny which may lead to raising a demand for taxes although refunds may have been issued earlier at the time of processing.

It is therefore proposed to amend the provisions of the income-tax Act to provide that processing of return will not be necessary in a case where notice under sub-section (2) of Section 143 has already been issued for scrutiny of the return.

Was there any Ambiguity at all?
However, The Court observed that the Section 143(1D), gives a discretion to the AO by stating that the processing of return “shall not be necessary” and it does not expressly state that the return shall not be processed where a notice has been issued to the Assessee under Section 143(2) of the Act.

The Court even ridiculed CBDT stating that despite CBDT at its own felt that section 143(1D) though unambiguous, required clarification and issued the said instruction stating that the legislative intent was to prevent the issue of refund after processing as scrutiny proceedings may result in demand for taxes on finalisation of the assessment subsequently.

The Court observed that  the aggregate figure of the refund due to the Petitioner was Rs. 733.73 crores. which was very substantial figure considering the huge losses suffered by the petitioner over the years.

Powers of CBDT u/s 119 and Limitations thereto:
The Court observed that the Section 119 of the Income Tax Act, 1961 on the strength of which the said Instruction was issued by the CBDT, do not enables the CBDT to issue merely on the basis of “doubt” “such orders, instructions and directions” to the income tax authorities “for the proper administration of this Act”. The Court pointed out that the power of CBDT u/s 119 is subject to certain limitations as per proviso to section 119(1) and in particular as provided under Section 119(2) which states that the direction or instructions issued by the CBDT should not be “prejudicial to assessees”.

Important Excerpts from the Judgment:

The Court finds that it is this very impugned instruction which is being relied upon by the Department to deny refund, where notice has been issued under Section 143(2) of the Act. This is evident from the impugned letter dated 8th September 2015, addressed to the Petitioner. The power of the CBDT to issue such instructions can be traced only to Section 119 of the Act. Therefore, such ‘instruction’ also has to adhere to the discipline of Section 119 of the Act.

The real effect of the instruction is to curtail the discretion of the AO by ‘preventing’ him from processing the return, where notice has been issued to the Assessee under Section 143(2) of the Act. If the legislative intent was that the return would not be processed at all once a notice is issued under Section 143 (2) of the Act, then the legislature ought to have used express language and not the expression “shall not be necessary”. By the device of issuing an instruction in purported exercise of its power under Section 119 of the Act, the CBDT cannot proceed to interpret or instruct the income tax department to „prevent‟ the issue of refund. In the event that a notice is issued to the Assessee under Section 143 (2) of the Act, it will be a matter the discretion of the concerned AO whether he should process the return.

Consequently, the Court is of the view that the impugned Instruction No.1 of 2015 dated 13th January 2015 issued by the CBDT is unsustainable in law and it is hereby quashed. It is directed that the said instruction shall not hereafter be relied upon to deny refunds to the Assessees in whose cases notices might have been issued under Section 143(2) of the Act. The question whether such return should be processed will have to be decided by the AO concerned exercising his discretion in terms of Section 143 (1D) of the Act.

CBDT Instruction No 1-2015 held illegal and quashed

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