2025 (11) TMI 1772 - HC - Income Tax

Delay Condoned Under s.119(2)(b); Full Tax Refund Ordered on Exempt Disability Pension of Retired Army Officer

HC quashed the order under s.119(2)(b) refusing condonation of delay in filing a revised return and refund claim for tax paid on disability pension of a ... Condonation of delay u/s 119(2)(b) in filing of revised return and belated Refund claim of tax paid - Benefit of Exemption - Disability pension received, with retrospective effect - Premature retirement of second lieutenant into Army due of disability - Retirement was voluntary retirement or not - HELD THAT:- Respondent no. 1 has not at all considered the facts of the case and the impugned order is passed only referring to Circular No. 9/2015 which would not be applicable. In the facts of the case, when it is not in dispute that disability pension received by the petitioner is exempt income, there is no liability to pay tax on such disability pension. The petitioner is therefore, entitled to refund of tax paid in view of decisions of Hon’ble Delhi High Court [2025 (2) TMI 127 - DELHI HIGH COURT], Hon’ble Madhya Pradesh High Court [2019 (9) TMI 316 - MADHYA PRADESH HIGH COURT] and Hon’ble Punjab & Haryana High Court [2023 (5) TMI 741 - PUNJAB AND HARYANA HIGH COURT] wherein, in similar facts and circumstances, the respondents are directed to refund the entire amount of income tax which has been recovered which was an exempted amount with interest. Petition succeeds and is accordingly allowed. The impugned order passed under section 119(2)(b) of the Act, passed by the respondent is hereby quashed and set aside. The respondents are directed to refund the amount of income tax paid by the petitioner for the relevant Assessment Years along with interest at the rate of 9% per annum within a period of three months from the date of receipt of a copy of this order. If the payment is not made within stipulated period, then interest at the rate of 18% per annum from the date of entitlement till amount actually paid to the petitioner shall be given as per the decision referred above. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether disability pension received by an ex-serviceman, sanctioned retrospectively, is exempt from income tax and consequently entitles him to refund of tax paid on such pension under the Income Tax Act, 1961. 1.2 Whether limitation prescribed by CBDT Circular No. 9/2015 and the provisions relating to condonation of delay under section 119(2)(b) bar consideration of refund claims arising from tax collected on exempt disability pension. 1.3 Whether CBDT Circular No. 13/2019 and its pendency before the Supreme Court can be invoked to deny exemption and refund of tax on disability pension. 1.4 Whether, upon holding that tax was wrongly collected on exempt disability pension, the revenue authorities are obliged to grant refund with interest, and at what rate. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exemption of disability pension and entitlement to refund Legal framework 2.1 The Court noted the contention that disability pension is exempt in view of Notification F. No. 878-F-IT dated 21.03.1922 issued under sections 60 and 60A of the Income Tax Act, 1922, which continues to have force by virtue of section 297 of the Income Tax Act, 1961. Reliance was also placed on CBDT's Circular dated 02.07.2001 (as discussed in other High Court judgments), reiterating that entire disability pension (disability element and service element) of a disabled officer of the Indian Armed Forces is exempt from income tax. 2.2 Sections 237 and 239 of the Act were relied upon: section 237 provides for refund where tax paid exceeds the amount properly chargeable; section 239 deals with the form and manner of making claims for refund through returns under section 139, and the earlier limitation in section 239(2) has been omitted with effect from 01.09.2019 (as recognized in the cited Delhi High Court decision). Interpretation and reasoning 2.3 It was undisputed on the facts that the petitioner's disability pension had been sanctioned by the competent defence authorities with retrospective effect and that such disability pension is exempt income. The Court emphasized that where an income is exempt, there is no liability to tax on such income, and any tax collected thereon cannot be retained by the revenue. 2.4 The Court relied on decisions of the Delhi High Court, Madhya Pradesh High Court, and Punjab and Haryana High Court, which in similar factual situations directed refund of income tax recovered on disability pension, holding that such income is exempt and that tax collected was an 'erroneous' or 'illegitimate' collection not sanctioned by law. 2.5 The Court particularly noted the reasoning adopted in those judgments that once disability pension is found to be exempt, the revenue has no option but to refund the tax collected on such income, and technical objections or procedural limitations cannot be used to defeat a substantive statutory exemption. Conclusions 2.6 The Court held that the disability pension received by the petitioner is exempt income and that there is no liability to pay any tax on such disability pension. 2.7 Consequently, the petitioner is entitled to refund of the income tax paid on such disability pension for the relevant assessment years under section 237 of the Act. Issue 2 - Applicability of limitation and CBDT Circular No. 9/2015 to refund claims on exempt disability pension Legal framework 2.8 CBDT Circular No. 9/2015 dated 09.06.2015 prescribes that no condonation application for claim of refund/loss shall be entertained beyond six years from the end of the relevant assessment year and lays down conditions for belated/supplementary refund claims. Section 119(2)(b) empowers the Board/authorities to admit belated claims to avoid genuine hardship. 2.9 The Court noted that other High Courts (notably in Sun Pharmaceutical Industries Ltd. and Colonel Ashwani Kumar Ram Singh) had considered the interplay of statutory provisions on refunds and the condonation power, holding that strict limitation should not defeat refund of tax not lawfully due, particularly after the omission of section 239(2). Interpretation and reasoning 2.10 The impugned order had rejected the petitioner's application under section 119(2)(b) for assessment years 2007-08 to 2015-16 solely on the ground that it was beyond six years from the end of the respective assessment years as per Circular No. 9/2015, without engaging with the special nature of the claim (refund of tax on exempt disability pension) or the factual circumstances (disability pension sanctioned only in 2018 with retrospective effect). 2.11 The Court found that the respondent authority had mechanically applied Circular No. 9/2015, without consideration of the undisputed exemption of disability pension, the retrospective sanction, and the principle that tax erroneously collected on exempt income cannot be retained. The Court considered Circular No. 9/2015 not appropriately applicable in such facts. 2.12 By referring to the reasoning of the Madhya Pradesh and Punjab and Haryana High Courts, the Court aligned with the view that delay in claiming refund in such disability pension cases, where the assessee was pursuing recognition of disability and pension entitlement, should not bar refund, and that technical limitation must yield to substantive justice when tax is collected on exempt income. Conclusions 2.13 The Court held that the respondent's refusal to entertain the refund claim and condonation application merely on the basis of the six-year bar in Circular No. 9/2015 was unsustainable. 2.14 The Court concluded that Circular No. 9/2015 cannot be applied in a manner that denies refund of tax collected on exempt disability pension in the facts of the case. Issue 3 - Effect of CBDT Circular No. 13/2019 and pendency before the Supreme Court Legal framework 3.1 Circular No. 13/2019 dated 24.06.2019, dealing with taxability/exemption of pension and disability element, has been challenged before the Supreme Court, which directed the parties to maintain 'status quo' in such matters. 3.2 The Court referred to the detailed analysis of this Circular and the Supreme Court's status quo order as considered in the judgment of the Punjab and Haryana High Court, including subsequent defence pension circulars which were issued and then withdrawn to comply with the Supreme Court's order. Interpretation and reasoning 3.3 The revenue had relied on the pendency of the challenge to Circular No. 13/2019 to justify non-entertainment of the petitioner's refund claim for later assessment years. The Court noted that, in similar cases, the Punjab and Haryana High Court had held that Circular No. 13/2019 could not be applied to deny exemption and refund to disabled ex-servicemen in the face of the Supreme Court's status quo direction. 3.4 The Court observed that it was not disputed that disability pension had been granted to the petitioner by competent authorities and that disability pension, as per existing notifications and circulars (including the 02.07.2001 Circular discussed by other High Courts), continued to be treated as exempt. The mere pendency of challenge to Circular No. 13/2019 could not override that position. Conclusions 3.5 The Court held that Circular No. 13/2019 and its pendency before the Supreme Court cannot be used as a ground to deny the benefit of exemption on disability pension or to refuse processing of the petitioner's refund claim. Issue 4 - Obligation to grant refund with interest and rate of interest Legal framework 4.1 The Court relied on the approach adopted by the Madhya Pradesh High Court and Punjab and Haryana High Court in similar disability pension refund cases, where directions were issued not only to refund the tax amount but also to pay interest, sometimes at enhanced rates, particularly where there was delay on the part of the revenue and no fault of the assessee. Interpretation and reasoning 4.2 Having found that the tax collected on the petitioner's disability pension was on exempt income and that denial of refund was unjustified, the Court followed the precedents which treated refund with interest as necessary relief to fully restore the assessee, especially in cases involving disabled armed forces personnel. 4.3 The Court adopted the interest rates applied by the Madhya Pradesh High Court and the Punjab and Haryana High Court, indicating a consistent judicial approach that in such circumstances mere principal refund is inadequate, and higher interest may be warranted if the revenue fails to comply within the stipulated time. Conclusions 4.4 The Court quashed the impugned order under section 119(2)(b) and directed the respondents to refund the income tax paid by the petitioner on disability pension for the relevant assessment years along with interest at 9% per annum within three months from receipt of the order. 4.5 It was further directed that if payment is not made within the stipulated three-month period, interest at 18% per annum shall be payable from the date of entitlement until the date of actual payment, in line with the approach adopted in earlier High Court decisions in analogous matters.