2016 (5) TMI 724 - HC - Income Tax

Court quashes CBDT Instruction hindering return processing, emphasizes AO discretion

Tata Teleservices Limited Versus Central Board Of Direct Taxes & Anr

The court held that CBDT Instruction No. 1 of 2015, which prevented processing returns after notices under Section 143(2) of the Income Tax Act, was ... Withholding of refund - Instruction No. 1 of 2015 dated 13th January 2015 issued by the Central Board of Direct Taxes challenged - refunds were declined for the reason that the case was pending scrutiny and that in the light of Section 143(ID) and the Instructions of the CBDT, refund could not be processed for the said AYs - Held that:- 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. Issues Involved:1. Legality of CBDT Instruction No. 1 of 2015 dated 13th January 2015.2. Denial of refund under Section 143(1) of the Income Tax Act, 1961 for AYs 2012-13, 2013-14, and 2014-15 due to pending scrutiny.Issue-wise Detailed Analysis:1. Legality of CBDT Instruction No. 1 of 2015:The core issue in this writ petition is the challenge to the legality of Instruction No. 1 of 2015 issued by the Central Board of Direct Taxes (CBDT) on 13th January 2015. This instruction interprets Section 143(1D) of the Income Tax Act, 1961, which states that the processing of a return shall not be necessary where a notice has been issued under Section 143(2). The CBDT's instruction clarified that the processing of a return cannot be undertaken after notice has been issued under Section 143(2) of the Act, effectively preventing the issue of refunds in such cases.The court examined the language of Section 143(1D) and found that it gives discretion to the Assessing Officer (AO) to decide whether the return of income has to be processed where a notice has been issued under Section 143(2). The court noted that the instruction issued by the CBDT curtailed this discretion by 'preventing' the AO from processing the return, which was not the legislative intent. The court emphasized that the CBDT's power under Section 119 to issue instructions is limited and should not be prejudicial to assessees or contrary to the statute.The court referred to the Supreme Court's rulings in UCO Bank v. Commissioner of Income Tax and Commissioner of Central Excise, Bolpur, v. Ratan Melting & Wire Industries, which clarified that circulars and instructions beneficial to assessees are binding on the authorities, but those that impose a higher burden than the statute are not legally valid.Consequently, the court held that the impugned Instruction No. 1 of 2015 is unsustainable in law and quashed it. The court directed that the instruction should not be relied upon to deny refunds to assessees where notices have been issued under Section 143(2). The decision to process the return should be left to the discretion of the AO.2. Denial of Refund under Section 143(1):The petitioner, engaged in the telecom services business, challenged the denial of refunds for AYs 2012-13, 2013-14, and 2014-15. The refunds were primarily due to tax deducted at source (TDS) despite the petitioner incurring substantial losses. The denial was based on the pending scrutiny and the CBDT's instruction.The court noted that Section 143(1) mandates the processing of returns and the determination of refunds. However, Section 143(1D) inserted by the Finance Act, 2012, states that processing of a return is not necessary where a notice has been issued under Section 143(2). The court observed that the language of Section 143(1D) gives discretion to the AO rather than mandating non-processing of returns.The court found that the petitioner's returns for the relevant AYs were eventually processed, and the assessments were completed. However, the petitioner continued to challenge the impugned instruction, arguing that it led to routine issuance of notices under Section 143(2) to avoid processing returns and issuing refunds. The petitioner highlighted the substantial refund amounts due to it, which were delayed unnecessarily.The court emphasized that the CBDT's instruction should not add to the difficulties of taxpayers and should not be prejudicial. The court reiterated that the AO should have the discretion to decide whether to process the return, even if a notice under Section 143(2) has been issued.In conclusion, the court quashed the CBDT's Instruction No. 1 of 2015 and directed that the instruction should not be relied upon to deny refunds. The AO should exercise discretion in processing returns where notices under Section 143(2) have been issued. The petition was disposed of in these terms.