2000 (3) TMI 29 - HC - Income Tax

Tax refunds cannot be set off against arrears without notice, court emphasizes natural justice principles.

The court held that setting off refunds against tax arrears without prior intimation under Section 245 of the Income Tax Act is illegal and void. It ... Refund Issues Involved:1. Legality of setting off refund due against tax arrears without prior intimation under Section 245 of the Income Tax Act.2. Compliance with principles of natural justice in the context of tax adjustments.3. Validity of post-decisional intimation as a substitute for pre-decisional hearing.4. Right to appeal against set-off orders under Section 245 of the Income Tax Act.5. Review of judgment based on written submissions filed after the delivery of the judgment.Issue-wise Detailed Analysis:1. Legality of Setting Off Refund Due Against Tax Arrears Without Prior Intimation Under Section 245 of the Income Tax Act:The primary issue in this case was whether the tax authorities could set off the refund due to the assessee against tax arrears without prior intimation. The court noted that the respondent-company's refunds for various assessment years were set off against the outstanding demand for the assessment years 1991-92 and 1992-93 without giving any prior intimation in writing as required under Section 245 of the Income Tax Act. The court observed that the requirement of prior intimation is a statutory mandate and non-compliance renders the set-off illegal and void.2. Compliance with Principles of Natural Justice in the Context of Tax Adjustments:The court emphasized the importance of adhering to the principles of natural justice, which require that the assessee be given a reasonable notice and an opportunity to represent their case before any adjustment is made. The court cited various judgments from different High Courts, including the Bombay High Court in A. N. Shaikh v. Suresh B. Jain and the Allahabad High Court in Hira Lal and Sons v. ITO, which held that prior intimation is necessary for any set-off under Section 245.3. Validity of Post-decisional Intimation as a Substitute for Pre-decisional Hearing:The court rejected the argument that post-decisional intimation could substitute for a pre-decisional hearing. It highlighted that the principles of natural justice mandate a pre-decisional hearing, and any action taken without such a hearing is illegal and void. The court referenced the Supreme Court's decision in Institute of Chartered Accountants of India v. L. K. Ratna, which underscored that pre-decisional hearing is essential unless explicitly excluded by statute.4. Right to Appeal Against Set-off Orders Under Section 245 of the Income Tax Act:The court noted the absence of a provision for appeal against set-off orders under Section 245, making it even more critical to ensure compliance with the requirement of prior intimation. The court reiterated that any order passed without following the due process is non est in the eye of the law and can be challenged by the affected party.5. Review of Judgment Based on Written Submissions Filed After the Delivery of the Judgment:The appellants sought a review of the judgment dated March 14, 2000, on the grounds that written submissions filed after the judgment were not considered. The court rejected this application, stating that the judgment was delivered based on the arguments advanced during the hearing, and no written submissions were filed within the time allowed. The court emphasized that the judgment could not be reviewed based on submissions filed post-delivery.Conclusion:The court upheld the impugned judgment, affirming that the set-off of refunds against tax arrears without prior intimation under Section 245 is illegal and void. The court dismissed the appeal, reinforcing the necessity of adhering to the principles of natural justice and statutory requirements. The application for review based on post-judgment submissions was also rejected.