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 paid, but under section 240 the refund is limited to tax paid in excess of the tax chargeable on the total income returned. Proviso (b) to s.240 is declaratory and retrospective, clarifying that where no fresh assessment is possible the revenue need not refund amounts beyond the excess on returned income. Revenue may, for calculating a s.240 refund, consider facts the assessee could have urged in assessment.

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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.

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