2003 (5) TMI 4 - SC - Income Tax

Section 240 limits refunds to excess tax on returned income; Proviso (b) clarifies retrospective restriction when no fresh assessment possible

SC allowed the appeals. The Court held that self-assessment and advance tax create a lawful liability and an assessee may claim refund of any excess tax ... Refund of advance tax and self-assessment tax - assessment annulment and its effect on tax liability - self-assessment as admission of tax liability - deemed acceptance of return where fresh assessment is barred - Article 265 - levy and collection of tax only by authority of law - proviso (b) to section 240 - declaratory and retrospectiveRefund of advance tax and self-assessment tax - assessment annulment and its effect on tax liability - Article 265 - levy and collection of tax only by authority of law - self-assessment as admission of tax liability - Whether advance tax and self-assessment tax deposited by an assessee must be refunded when an assessment is annulled and no fresh assessment can be framed. - HELD THAT: - The Court examined the statutory scheme (including provisions requiring advance payment, deduction at source, filing of returns and self-assessment) and the contention that retention of such deposits after annulment of assessment would violate Article 265. It held that the Act authorises payment of tax by advance payment, deduction at source and by self-assessment; filing of the return and payment under section 140A constitute an admission of liability computed by the assessee in accordance with the Finance Act and the Act. Consequently, liability under section 4(1) does not depend upon framing of a regular assessment; the quantum and mode of payment are authorised by law. However, where a fresh assessment cannot be made (for example because it is barred), the assessing authority is deprived of the power to re-open or adjust the return: the return must be accepted and any tax paid in excess of the liability computed on the basis of the return must be refunded. Thus retention of amounts in excess of tax chargeable on the income returned would offend Article 265; amounts properly chargeable on the returned income and paid by self-assessment or advance tax need not be refunded. The Court contrasted authorities taking the contrary view and followed the reasoning of the Full Bench of the Gujarat High Court in Saurashtra Cement and Chemicals Industries Ltd.'s case that tax paid under self-assessment is not merely an interim payment and remains a valid collection when computed on the returned income unless the amount exceeds the tax chargeable on that return.Advance tax and self-assessment tax need not be refunded in full on annulment of assessment; refund is due only to the extent the tax paid exceeds the tax chargeable on the total income returned by the assessee, and retention of any excess would breach Article 265.Proviso (b) to section 240 - declaratory and retrospective - assessment annulment and its effect on tax liability - Whether proviso (b) to section 240 (inserted with effect from April 1, 1989) is declaratory of the pre-existing law and therefore retrospective in operation. - HELD THAT: - The Court considered the effect of the amendment introducing proviso (b) to section 240 and whether it changed the law or merely clarified it. Without relying on the amendment, the Court reached the conclusion that under the unamended section 240 an assessee was entitled only to refund of tax paid in excess of the tax chargeable on the income returned. Consequently the proviso merely made explicit what was implicit in the earlier provision. Being clarificatory, the proviso is declaratory in nature and is to be treated as retrospective in the facts and circumstances of the case.Proviso (b) to section 240 is declaratory of the existing law and may be given retrospective effect; it clarifies that where an assessment is annulled, refund is limited to tax paid in excess of tax chargeable on the income returned by the assessee.Final Conclusion: Appeals allowed; the High Court judgment is set aside. The assessees are not entitled to refund of advance tax or self-assessment tax except to the extent such payments exceed the tax chargeable on the total income returned; proviso (b) to section 240 is declaratory and clarifies this position. Issues Involved:1. Entitlement to refund of income-tax paid by way of advance tax and self-assessment tax when the assessment is nullified and no fresh assessment is possible.2. Applicability and interpretation of Section 240 and its proviso (b) of the Income-tax Act, 1961.3. Impact of judicial precedents and constitutional provisions, specifically Article 265 of the Constitution of India, on the refund of taxes paid.Detailed Analysis:1. Entitlement to Refund of Income-tax Paid by Way of Advance Tax and Self-assessment Tax:The core issue was whether the respondents (assessees) were entitled to a refund of income-tax paid by way of advance tax and self-assessment tax when the assessment framed was nullified by the Tribunal on jurisdictional grounds, and there was no possibility of framing a fresh assessment. The High Court had ruled in favor of the assessees, stating that the refund should include taxes paid in advance and on self-assessment. However, the Supreme Court overturned this decision.The Supreme Court held that the tax paid by the assessee on the basis of advance tax or self-assessment tax represents the admitted liability of the assessee. The failure or inability to frame another assessment after the earlier assessment is set aside does not entitle the assessee to claim a refund of these amounts. The Court emphasized that the tax liability arises under Section 4 of the Income-tax Act, which requires payment of tax in advance or through self-assessment, and this is a legal obligation.2. Applicability and Interpretation of Section 240 and its Proviso (b):The Revenue argued that the amendment of Section 240 with effect from April 1, 1989, by the addition of proviso (b), was declaratory of the law and should apply to the assessments in question. The assessees contended that the proviso should only apply prospectively.The Supreme Court concluded that proviso (b) to Section 240 is declaratory and clarificatory in nature. It was intended to clarify that even if an assessment is annulled, the refund shall only be due for the amount paid in excess of the tax chargeable on the total income returned by the assessee. The Court held that this interpretation aligns with the principle that the tax paid by the assessee on his own assessment of liability is based on the return of income filed by him and represents an admission of tax liability.3. Impact of Judicial Precedents and Constitutional Provisions:The Court reviewed various judicial precedents and constitutional provisions, particularly Article 265 of the Constitution, which states that no tax shall be levied or collected except by the authority of law. The assessees argued that retaining the tax paid without a valid assessment order would violate Article 265.The Supreme Court referred to the Full Bench decision of the Gujarat High Court in Saurashtra Cement and Chemicals Industries Ltd.'s case, which held that the liability to pay tax arises under the charging section 4 of the Act and is not dependent on the regular assessment being made by the Assessing Officer. The Court agreed with this view and held that the tax paid as advance tax or self-assessment tax is not collected without the authority of law, as it is based on the statutory provisions of the Income-tax Act.Conclusion:The Supreme Court allowed the appeals, set aside the judgment and order of the High Court, and answered the question referred in favor of the Revenue. It held that the assessees are not entitled to a refund of the advance tax and self-assessment tax paid by them, even if the assessment is annulled and no fresh assessment is possible. The Court emphasized that the tax paid represents the admitted liability of the assessee and is collected in accordance with the provisions of the Income-tax Act, thereby not violating Article 265 of the Constitution.