Plain meaning of refund rules preserved, while pending refund claims may be adjusted against later tax demand in suitable cases

Rule 36(6) was interpreted according to its plain language: refund by adjustment or payment could be made only after an order sanctioning refund under rule 36(3), and section 32 was limited to interest on delayed refund rather than extinguishing a later tax liability. At the same time, the court exercised equitable relief in a suitable factual matrix, directing that the later demand proceedings be kept in abeyance until the earlier refund claims were decided, after which the refundable amount and interest could be set off against the subsequent demand and interest payable.

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Issues: (i) Whether, under rule 36(6), refund by way of adjustment or payment could be made only after a formal order sanctioning refund was passed and the provision could be construed to permit adjustment of an admitted refund against a later tax demand before such sanction. (ii) Whether the demand notice for the subsequent assessment year should be kept in abeyance and the refund claims for earlier years adjusted against the tax and interest payable for that year.

Issue (i): Whether, under rule 36(6), refund by way of adjustment or payment could be made only after a formal order sanctioning refund was passed and the provision could be construed to permit adjustment of an admitted refund against a later tax demand before such sanction.

Analysis: The statutory language of rule 36(6) was held to be clear and unambiguous. Refund, whether by adjustment or actual payment, was stated to follow only after an order sanctioning refund under rule 36(3). In the absence of any challenge to the validity of the provision, there was no basis to read down the rule or depart from its plain meaning. Section 32 was held to operate only for the limited purpose of interest on delayed refund, and not to relate back the substantive entitlement to refund so as to extinguish an existing tax liability for a later assessment year.

Conclusion: The Court held that rule 36(6) must be given its plain effect, and refund could be adjusted only after sanction of refund under rule 36(3).

Issue (ii): Whether the demand notice for the subsequent assessment year should be kept in abeyance and the refund claims for earlier years adjusted against the tax and interest payable for that year.

Analysis: The refund claims for the earlier assessment years had remained pending without explanation, while the assessments had attained finality. The Court held that, in an appropriate case, judicial relief could be moulded to prevent injustice and secure substantial justice. Relying on the principle that admitted refund and recoverable demand may be adjusted in a suitable factual matrix, the Court directed that the demand proceedings be held in abeyance until the refund claims were decided, after which the refundable amount with interest could be adjusted against the later demand and interest thereon up to the date the refund became due.

Conclusion: The Court directed that the demand notice be kept in abeyance and that the refund claims be decided and then adjusted against the later tax liability.

Final Conclusion: The petition succeeded to the extent that immediate recovery under the impugned demand was deferred, while the earlier refund claims were required to be determined and then set off against the subsequent liability in accordance with the Act and the Rules.

Ratio Decidendi: Where the relevant refund rule is clear, it must be applied according to its plain language, but a court may still mould relief in an appropriate case by directing disposal of long-pending refund claims and permitting adjustment against a later demand to secure substantial justice.

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