Refund appropriation under a tax settlement scheme must go first to tax arrears, not penalty.

Under the Kar Vivad Samadhan Scheme, 1998, a tax refund from an earlier year could not be appropriated first towards penalty. The Board's clarification dated 03.09.1998 treated refund as a mode of payment of tax and required part-payments to be adjusted first towards tax and then towards interest, which the Court applied to the Scheme. The Scheme's special provisions governed the computation of the amount payable, and the normal rule under Section 140A of the Income-tax Act, 1961 did not control. The refund therefore had to be adjusted against tax arrears first, with the payable amount re-determined accordingly.

---

---

Issues: Whether, under the Kar Vivad Samadhan Scheme, 1998, a tax refund of an earlier year could be adjusted first towards penalty and only thereafter towards tax arrears, or whether it had to be adjusted first towards tax and then towards interest and penalty.

Analysis: The dispute turned on the manner of appropriation of refund against outstanding demand under the Scheme. The Board's clarification dated 03.09.1998 stated that refund payable is a mode of payment of tax and that part-payments are to be appropriated first towards tax and then towards interest. The Court treated this clarification as governing the Scheme and found no basis for placing the refund first against penalty. It also relied on the principle that the Scheme's special provisions govern the computation of amount payable, and that the normal rule under Section 140A of the Income-tax Act, 1961 does not control the Scheme's operation.

Conclusion: The refund could not be adjusted first towards penalty. It had to be adjusted towards tax arrears, and the amount payable under the Scheme was required to be re-determined accordingly, in favour of the assessee.

---