Trade Tax refund withheld beyond stipulated period & adjusted from demand unjustified – SC

Trade Tax Department was unjustified in retaining refund beyond stipulated period and adjusting it against default notices issued subsequently.

In a recent judgment, the Hon’ble Supreme Court has held that Trade Tax Department was not justified in retaining refund amount beyond the stipulated period and then adjusting refund amount against the amounts due under default notices issued subsequent to the refund period.

AABCAUS Case Law Citation:
ABCAUS 3991 (2024) (05) SC

Important Case Laws relied upon:
Flipkart India Private Limited v. Value Added Tax Office 2023 SCC OnLine Del 5201
Swarn Darsan Impex v. Commissioner, Value Added Tax, 2010 SCC OnLine Del 4697

In the instant case, the Commissioner of Trade and Taxes had challenged the judgment passed by Delhi High Court quashing the adjustment order and directed refund of trade tax along with interest as provided under Section 42 of Delhi Value Added Tax Act, 2004 (the Act).

In The instant case, the issue before the Hon’ble Supreme Court was whether the timeline for refund under Section 38(3) of the Delhi Value Added Tax Act, 2004 (the Act) must be mandatorily followed while recovering dues under the Act by adjusting them against the refund amount.

The respondent company claimed refund of excess tax credit through revised return along with applicable interest under Section 42 of the Act. The Value Added Tax Officer did not pay the refund till five years but passed an adjustment order to adjust the respondent’s claims for refund against dues under default notices issued subsequently.

The respondent then filed a writ petition before the Delhi High Court for quashing the adjustment order and the default notices. The Hon’ble High Court quashed the adjustment order and directed refund along with interest as per Section 42. In respect of the default notices, the High Court gave liberty to the respondent to avail statutory appeal under Section 74 of the Act.

The Delhi High Court held that the department must scrupulously adhere to the time limit for processing and issuing the refunds under Section 38. Whenever the department seeks to obtain necessary information under Section 59 of the Act, it must take steps within the time limit envisaged under the Act. Further, the refund amount can be adjusted only when an enforceable demand in the nature of tax or duty is pending against the assessee. The department does not have any legal right or justification to retain the amount beyond the time limit prescribed under Section 38. It was held that the mandate of the Act has not been followed and hence the adjustment order is not maintainable.

The Hon’ble Supreme Court observed that Sub-section 1 of section 38 provides that any amount of tax, penalty and interest that is in excess of the amount due from a person shall be refunded to him by the Commissioner. Sub-section (2) permits the Commissioner to first apply such excess to recover any other amount that is due under the Act or the Central Sales Tax Act, 1956. Sub-section (3), which is relevant for our purpose, provides the assessee with the option of getting the refund or carrying it forward to the next tax period as a tax credit. In case of refund, Section 38(3)(a) provides the timeline for refund from the date on which the return is furnished or claim for refund is made as: (i) within one month, if the period for refund is one month; (ii) within two months, if the period for refund is a quarter. Sub-section (4) provides that if notice has been issued under Section 58 or additional information has been sought under Section 59, then the amount shall be carried forward to the next tax period as tax credit. Sub-sections (5) and (6) pertain to security. Sub-section (7)

provides certain exclusions while calculating the period under sub-section (3). Sub-sections (8)-(10) pertain to refund in cases of sale to registered and unregistered dealers. Lastly, sub-section (11) provides that the refund shall not be allowed to a dealer who has not filed any return that is due under the Act.

The Hon’ble Supreme Court observed that as per Section 38(3)(a)(ii), the refund should have been processed within two months from when the returns were filed. It is therefore evident that the default notices were issued after the period within which the refund should have been processed. Sub-section (2) only permits adjusting amounts towards recovery that are “due under the Act”. By the time when the refund should have been processed as per the provisions of the Act, the dues under the default notices had not crystallised and the respondent was not liable to pay the same at the time. The appellant-department is therefore not justified in retaining the refund amount beyond the stipulated period and then adjusting the refund amount against the amounts due under default notices that were issued subsequent to the refund period.

With respect to the contention of the Department that the purpose of the timeline provided under sub-section (3) is only for calculation of interest under Section 42, the Hon’ble Supreme Court rejected it and opined that it would defeat the object of the provision such an interpretation would effectively enable the department to retain refundable amounts for long durations for the purpose of adjusting them on a future date. This would go against the object and purpose of the provision.

Download Full Judgment Click Here >>

• No rejection of GST appeal for mere non filing of certified copy of order appealed
• Comparison Chart for Bank Fixed Deposit Interest rates of Public/Private Sector Banks  
• GST Form SRM-I enabled for manufacturers of Pan Masala and Tobacco
• Prosecution for late deposit of TDS stayed in view of Supreme Court judgment
• If no physical discrepancy found, mere increase in stock not undisclosed stock u/s 69B