Disability pension tax refund ordered for Army officer, relying on CBDT Circular and unamended Rule 173, with interest

HC allowed the writ petition of a disabled Army officer seeking refund of income tax collected on disability pension (service and disability elements). Relying on CBDT Circular dated 02.07.2001, earlier HC and SC orders, and the unamended Rule 173, the court held that disability pension is exempt from income tax and no recovery could legally be made. HC directed refund of the tax paid for the relevant years with 9% p.a. interest within one month, plus costs of Rs. 1,00,000, failing which interest would increase to 18% p.a.

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Issues Involved:
1. Quashing of orders rejecting the refund claim for income tax on disability pension.
2. Applicability of CBDT Circulars regarding tax exemption on disability pension.
3. Delay in filing revised income tax returns.
4. Compliance with the Supreme Court's status quo order.

Summary:

Issue 1: Quashing of Orders Rejecting Refund Claim
The petitioner sought quashing of orders dated 21.01.2021, 01.12.2021, and 07.02.2022 rejecting his claim for a refund of income tax on his disability pension. The petitioner, a disabled officer of the Indian Army, was granted disability pension retrospectively from 01.12.2008, and he applied for a refund based on CBDT Circular No. 2/2001, which exempts disability pension from income tax. Despite this, his claim was rejected, leading to the present writ petition.

Issue 2: Applicability of CBDT Circulars
The petitioner argued that according to CBDT Circular No. 2/2001, his disability pension should be tax-exempt. The respondent, however, cited Circular No. 13/2019, which was challenged and stayed by the Supreme Court. The Court noted that the petitioner's application was filed before the issuance of Circular No. 13/2019, and thus, the exemption should apply.

Issue 3: Delay in Filing Revised Income Tax Returns
The respondent rejected the petitioner's claim based on the delay in filing revised returns, as per Circular No. 09/2015 and Circular No. 13/2019. However, the Court observed that the petitioner had filed revised returns within the stipulated time after receiving arrears of disability pension, and the delay should be condoned.

Issue 4: Compliance with Supreme Court's Status Quo Order
The Court highlighted that the Supreme Court had directed parties to maintain status quo regarding Circular No. 13/2019. Thus, no recovery of income tax on disability pension should have been made. The Court referenced judgments from the Delhi High Court and Madhya Pradesh High Court, which supported the tax exemption on disability pension and ordered refunds with interest.

Conclusion:
The writ petition was allowed, directing the refund of the income tax paid by the petitioner along with 9% interest per annum within one month. If not paid within the stipulated period, the interest rate would increase to 18% per annum. The Court also awarded costs of Rs. 1 lakh to the petitioner for the undue hardship faced.

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