Interim withholding of tax refund pending appeal upheld as constitutional and applicable to pending transition proceedings.

Section 241 of the Income-tax Act, 1961 was treated as an interim procedural safeguard that permits withholding a refund only when the refund is under appeal or further proceedings, the officer forms an adverse-revenue opinion, and prior Commissioner approval is obtained; on that basis, the provision was upheld as constitutional and not violative of Article 14. The provision was also held applicable to refund proceedings arising from assessments under the repealed 1922 Act because the refund right arose after the new Act commenced, and section 241 regulates only the timing and forum of refund, not the substantive entitlement. The writ petition was rejected and the refund withholding order sustained.

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Issues: (i) Whether section 241 of the Income-tax Act, 1961 is ultra vires on the ground that it enables withholding of a refund despite an earlier judicial decision in favour of the assessee and confers arbitrary power offending article 14 of the Constitution of India; (ii) Whether section 241 of the Income-tax Act, 1961 can apply to refund proceedings arising out of assessments under the repealed Indian Income-tax Act, 1922.

Issue (i): Whether section 241 of the Income-tax Act, 1961 is ultra vires on the ground that it enables withholding of a refund despite an earlier judicial decision in favour of the assessee and confers arbitrary power offending article 14 of the Constitution of India.

Analysis: The provision was construed as an interim procedural safeguard allowing withholding of refund only where the refund order is the subject-matter of an appeal or further proceeding and only with the previous approval of the Commissioner. The power was held to be circumscribed by objective conditions, including the requirement that the Income-tax Officer must form an opinion that the refund is likely to adversely affect revenue. The Court held that the section does not annul judicial decisions, does not trench upon judicial power, and merely regulates the timing of refund pending final determination. The existence of supervisory approval was treated as a safeguard against arbitrariness.

Conclusion: Section 241 was upheld as constitutional and not violative of article 14; the challenge failed.

Issue (ii): Whether section 241 of the Income-tax Act, 1961 can apply to refund proceedings arising out of assessments under the repealed Indian Income-tax Act, 1922.

Analysis: The Court held that the right to seek refund arose only after the assessee succeeded in the reference, by which time the new Act had come into force. It further held that section 241 dealt only with the procedure and forum for postponing refund pending appellate proceedings, not with the substantive right to refund. The provision was therefore treated as applicable to pending proceedings under the transition scheme in section 297(2) of the Income-tax Act, 1961.

Conclusion: Section 241 was held applicable to the refund proceedings notwithstanding that the underlying assessments related to the repealed Act.

Final Conclusion: The writ petition was rejected, and the order withholding the refund was sustained.

Ratio Decidendi: A statutory provision that merely regulates the interim withholding of refund pending appeal, subject to objective conditions and prior approval, is constitutionally valid and may apply to pending refund proceedings as a procedural measure without impermissibly nullifying a judicial decision.

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