2025 (6) TMI 165 - HC - Income Tax

Income Tax Returns Protected: TDS Discrepancies Cannot Automatically Invalidate Claims Without Proper Communication and Procedural Fairness

Mukesh Garg Versus Assistant Commissioner Of Income Tax, Circle 46-1 & Ors.

The HC examined the validity of income tax returns and refund claims. The court held that returns cannot be rejected due to TDS discrepancies without ... Refusal of refund claim treating the petitioner's returns as defective - as submitted on behalf of the Revenue, that the revised return filed by the petitioner was also considered defective and therefore, was not processed HELD THAT:- We find little merit in the said contention as the affidavit on behalf of the Revenue states, in unambiguous terms, that there is no recording of any sought in the records of the Revenue which records that the revised return filed by the petitioner, is invalid. Thus, we are unable to accept that any decision in this regard was rendered by the AO or any other authority as it finds no mention in any of the records of the Revenue. As is borne out from extract of the affidavit, admittedly no intimation of the revised return filed by the Revenue, as noted above being defective was ever communicated to the petitioner. We also find the objection to the effect that TDS does not match with the return of income of an assessee, cannot be considered as a ground for disregarding the return filed by an assesee. The finding of discrepancy between the return filed and the TDS collected/deposited by the deductors may pose a ground for further inquiry and to test whether the amount of income which has been disclosed by an assessee is true and correct. But, it cannot be a ground for the Revenue to totally ignore the same. Whether proceedings u/s 153C cannot accrue to the benefit of the assessee and no refund could be processed as the initial return was found defective? -We find that the petitioner’s return as rectified could not be ignored as stated earlier. Since no addition has been made by the AO on the scrutiny of the return at the initial stage, the petitioner’s claim for refund was required to be processed. Second, that the learned counsel for the Revenue, on instructions, has made a statement that the petitioner’s application for rectification of the assessment order passed under Section 153C of the Act to seek grant of refund on account of the excess tax paid after adjusting the tax liability in terms of the assessment order under Section 153C of the Act would be processed. The present petition is disposed of albeit with a direction that the Revenue would be bound down to the statement made in this court. It is also made clear that the petitioner is at liberty to file the rectification application relying on the amount of Advance Tax and TDS as reflected in Form 26AS. In view of our finding that the refund due to the petitioner was required to be processed; the assessment order passed under Section 153C determining a lesser amount of refund due to the additions made, cannot be considered as providing an advantage to the petitioner in proceedings u/s 153C of the Act. The core legal questions considered by the Court include:(a) Whether the petitioner's original and subsequently rectified income tax returns for Assessment Year 2016-17 were validly filed and processed under the Income Tax Act, 1961;(b) Whether the Revenue was justified in treating the petitioner's returns as defective and refusing to process the refund claim;(c) Whether discrepancy between Tax Deducted at Source (TDS) and income declared in the return can serve as a ground for rejecting a return;(d) The implications of reassessment proceedings initiated under Section 153C of the Income Tax Act on the petitioner's refund claim and whether the refund can be processed in light of such proceedings;(e) The procedural requirements for communication of defects and recording of decisions by the Revenue in the context of return processing and refund claims.Issue-Wise Detailed Analysis1. Validity and Processing of Original and Rectified ReturnsThe petitioner filed the original return under Section 139(1) declaring income and claiming a refund based on excess tax paid. Subsequently, a notice under Section 139(9) was issued by the Centralized Processing Centre (CPC) alleging defectiveness due to mismatch between TDS claimed and income declared. The petitioner filed a rectified return within the prescribed 15-day period.Relevant legal framework includes Section 139(1) for filing returns, and Section 139(9) which allows the Revenue to point out defects and require rectification. The Revenue's contention was that the return remained defective even after rectification and hence was not processed.The Court examined the affidavit filed by the Revenue which explicitly stated that there was no order or recording declaring the rectified return invalid, nor was any intimation sent to the petitioner regarding defectiveness of the revised return. The absence of any formal communication or order was critical.The Court held that the Revenue cannot ignore a return on grounds of defectiveness unless such defect is formally recorded and communicated. The mere discrepancy between TDS and declared income cannot justify outright rejection of the return. Such a discrepancy can only trigger further inquiry but does not invalidate the return.2. Discrepancy Between TDS and Declared Income as Ground for RejectionThe Revenue argued that since the TDS claimed was not commensurate with the income declared, the return was defective. The Court rejected this argument, emphasizing that the mismatch is a trigger for further scrutiny but cannot be a ground for ignoring or rejecting the return outright.The Court reasoned that the purpose of Section 139(9) is to provide an opportunity to the assessee to rectify defects, not to deny processing of returns on technical mismatches. The Court's approach aligns with the principle that returns should not be disregarded merely due to discrepancies which can be addressed through further assessment procedures.3. Effect of Reassessment Proceedings under Section 153CDuring the pendency of the petition, the Revenue initiated reassessment proceedings under Section 153C following a search on another person, resulting in an assessment order dated 31.05.2023 which increased the petitioner's income and reduced the refund amount.The Revenue contended that the petitioner could apply for rectification of this assessment order to claim refund, but the petitioner's requests were rejected on the ground that returns under Section 139(1) were defective and no refund could be processed.The Court declined to adjudicate on the merits of the reassessment or rectification application in the present proceedings, noting two reasons:(i) The rectified return could not be ignored as defective, and since no addition was made in the initial scrutiny, the refund claim should have been processed;(ii) The Revenue's counsel had given an unequivocal undertaking that any rectification application filed by the petitioner to claim refund post-assessment under Section 153C would be processed.The Court thus left the matter open for the petitioner to pursue refund through rectification proceedings, binding the Revenue to the assurance given.4. Procedural Requirements and Communication by RevenueThe Court underscored the procedural necessity that any defect in a return or its rectification must be formally recorded and communicated to the assessee. The absence of any such communication or order renders the Revenue's refusal to process the return and refund untenable.This principle promotes transparency and fairness in tax administration, ensuring that assessees are not left in limbo without clear reasons for rejection or non-processing of their returns.Significant HoldingsThe Court held: 'We find little merit in the said contention as the affidavit on behalf of the Revenue states, in unambiguous terms, that there is no recording of any sought in the records of the Revenue which records that the revised return filed by the petitioner, is invalid.'It was further held: 'We also find the objection to the effect that TDS does not match with the return of income of an assessee, cannot be considered as a ground for disregarding the return filed by an assessee.'On the reassessment issue, the Court stated: 'We do not consider it apposite to examine this issue in these proceedings for essentially two reasons... the learned counsel for the Revenue, on instructions, has made a statement that the petitioner's application for rectification of the assessment order passed under Section 153C of the Act to seek grant of refund on account of the excess tax paid... would be processed.'Core principles established include:- A return filed under Section 139(1), and rectified under Section 139(9), cannot be ignored or treated as invalid unless the Revenue records and communicates the defect formally.- Discrepancies between TDS and declared income are not grounds for outright rejection of returns but may trigger further inquiry.- The Revenue is obligated to process refund claims based on valid returns and cannot withhold refunds on uncommunicated or unrecorded grounds.- Undertakings by the Revenue in court regarding processing of rectification applications are binding and must be honored.Final determinations included directing the Revenue to process the petitioner's refund claim in accordance with law and permitting the petitioner to file rectification applications relying on TDS and advance tax as reflected in official Form 26AS. The Court disposed of the petition with these directions, emphasizing procedural fairness and adherence to statutory mandates.