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

Commissioner of Income-Tax Versus Shelly Products And Another

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 ... 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 - Jurisdiction to deal with the pending reference under section 144A(1) - Applicability of Section 240 and its proviso (b) - HELD THAT:- On the basis of the income so disclosed, the assessee is required to make a self-assessment and to compute the tax payable on such income and to pay the same in the manner provided by the Act. Thus the filing of the return and the payment of tax thereon computed at the prescribed rates amounts to an admission of tax liability which the assessee admits to have incurred in accordance with the provisions of the Finance Act and the Income-tax Act. Both the quantum of tax payable and its mode of recovery are authorised by law. The liability to pay income-tax chargeable under section 4(1) of the Act thus, does not depend on the assessment being made. As soon as the Finance Act prescribes the rate or rates for any assessment year, the liability to pay the tax arises. The assessee is himself required to compute his total income and pay the income-tax thereon which involves a process of self-assessment. Since all this is done under the authority of law, there is no scope for contending that article 265 is violated. In a case where an assessee chooses to deposit by way of abundant caution advance tax or self-assessment tax which is in excess of his liability on the basis of the return furnished or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of the assessment proceeding. He can certainly make such a claim also before the concerned authority calculating the refund. Similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of income-tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the concerned authority in a case when refund is due and payable, and the authority concerned, on being satisfied, shall grant appropriate relief. In cases governed by section 240 of the Act, an obligation is cast upon the Revenue to refund the amount to the assessee without his having to make any claim in that behalf. In appropriate cases therefore, it is open to the assessee to bring facts to the notice of the concerned authority on the basis of the return furnished, which may have a bearing on the quantum of the refund, such as those the assessee could have urged under section 237 of the Act. The concerned authority, for the limited purpose of calculating the amount to be refunded under section 240 of the Act, may take all such facts into consideration and calculate the amount to be refunded. So viewed, an assessee will not be placed in a more disadvantageous position than what he would have been, had an assessment been made in accordance with law. In our view that is not the correct position in law. Where the proviso consists of two parts, one part may be declaratory but the other part may not be so. Therefore, merely because one part of the proviso has been held to be declaratory it does not follow that the second part of the proviso is also declaratory. However, the view that we have taken supports the stand of the Revenue that proviso (b) to section 240 is also declaratory. We have held that even under the unamended section 240 of the Act, the assessee was only entitled to the refund of tax paid in excess of the tax chargeable on the total income returned by the assessee. We have held so without taking the aid of the amended provision. It, therefore, follows that proviso (b) to section 240 is also declaratory. It seeks to clarify the law so as to remove doubts leading to the courts giving conflicting decisions, and in several cases directing the Revenue to refund the entire amount of income-tax paid by the assessee where the Revenue was not in a position to frame a fresh assessment. Being clarificatory in nature it must be held to be retrospective, in the facts and circumstances of the case. It is well settled that the Legislature may pass a declaratory Act to set aside what the Legislature deems to have been a judicial error in the interpretation of the statute. It only seeks to clear a meaning of a provision of the principal Act and make explicit that which was already implicit. In any event, as submitted by counsel for the appellant, the relevant part of the circular contains only a statement of fact. There is no instruction, direction or order to the authorities to act in a particular manner. As rightly submitted by him, the statutory provision has to be examined for its true effect and the circular, in the instant case, is not relevant. In the result these appeals are allowed. 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.