2025 (5) TMI 721 - HC - Income Tax

Rejection of refund claim - validity of the impugned communication dated 16 June 2022 and legal status of the communication dated 29 November 2018 rejecting refund claim - communication dated 16 June 2022 rejects the Petitioner s claim for refund inter alia on the ground that previous communication dated 29 November 2018 is not a statutory order of refund made under any of the provisions of the IT Act but it is just the expression of the tentative opinion in response to Petitioner s application for refund which was not even made in the statutory form or after complying the statutory procedures under Sections 237 and 239 of the IT Act HELD THAT - The communication dated 29 November 2018 cannot be read by picking up one sentence in isolation but would have to be read in its entirety not ignoring the context. On a holistic reading of the entire communication dated 29 November 2018 what appears to have been said by Respondent No. 1 is that the determination of refund is based on preliminary verification and is subject to further processing. The communication dated 29 November 2018 appears to be akin to an interlocutory/ preliminary order wherein a prima facie view is expressed by Respondent No. 1 on the issue of refund. However the communication dated 29 November 2018 cannot be treated as a final and conclusive determination of the entitlement of the Petitioner to the refund. This is because Respondent No. 1 states that on preliminary verification the refund is determined at Rs. 20, 73, 06, 062/- and further it states that the same would be taken up for processing. The sentence the claim has been examined and found correct cannot be read in isolation de hors the subsequent statement which states that the refund due on preliminary verification is determined at Rs. 20, 73, 06, 062/- and the same would be taken up for processing. Communication dated 29 November 2018 should have been followed up by Respondent No. 1 by issuing a final and conclusive order. In this instance Respondent No. 1 has not taken any steps after the communication dated 29 November 2018 to verify the refund claim. The delay on the part of Respondent No. 1 in carrying out the verification and passing a final and conclusive determination through an order cannot be attributed to the Petitioner. Because such an exercise was not performed by Respondent No. 1 the communication dated 29 November 2018 cannot be regarded as a final determination culminating in an order as contemplated u/s 237 read with 246A of the IT Act. If upon final determination a refund is found conclusively due surely interest can be awarded to the Petitioner. Section 237 of the IT Act refers to the phrase satisfied . The phrase satisfaction means fully and conclusively satisfied and not a prima facie satisfaction. On a reading of communication dated 29 November 2018 it cannot be said that Respondent No. 1-Assessing Officer was fully satisfied with the entitlement of the Petitioner to the refund. This is so because the said communication specifically states that it is based on preliminary verification and is subject to further processing. Therefore in our view the communication dated 29 November 2018 cannot be treated as meaning that the Assessing Officer is satisfied as contemplated under Section 237 of the IT Act to the entitlement of the refund. Furthermore since it is in the form of interlocutory/ preliminary/prima-facie communication the same also cannot be considered an order . The reading of the communication dated 29 November 2018 would only mean that prima facie Respondent No. 1 found the claim to be correct on preliminary verification. There is no dispute that Respondent No. 1 has the authority to pass a final order granting a refund. This would encompass preliminary or prima facie orders and such orders are subject to verification and statutory limitations. The initial or prima facie orders are provisional and tentative but do not constitute final adjudication and can be modified upon detailed examination. This communication dated 29 November 2018 cannot be construed as a final adjudication order accepting the Petitioner s plea for the refund claim. In our view therefore since the communication dated 29 November 2018 does not specify conclusively the entitlement of the Petitioner to the refund claim it cannot be considered as a final determination culminating in a final order under Section 237 of the IT Act admitting the entitlement to a refund of the excess DDT. However we disagree with the reasoning in the impugned communication dated 16 June 2022 which states that since there is no mention of the Section in the communication dated 29 November 2018 the same does not constitute an order. Mere non-mentioning of any section would not mean that a communication finally determining the rights and liabilities of an Assessee cannot be treated as an order. However there is no final determination in the instant case and therefore the essential attribute of a conclusive order is missing. Second issue concerning the status of communication dated 29 November is decided in the above terms . The said communication cannot be regarded or elevated to the status of some statutory order conclusively or finally determining the issue of refund entitlement. Whether the Petitioner has made out a case for the issue of a writ of mandamus for the grant of a refund of Rs. 20, 73, 06, 062/- solely based on the communication dated 29 November 2018 - Having regard to the legal status of the communication dated 29 November 2018 obviously based on the communication dated 29 November 2018 no mandamus can be immediately issued directing refund of the amount of Rs. 20, 73, 06, 062/-. Some Competent Authority would have to conclusively determine issues of eligibility and entitlement for refund examine the merits of the contention based upon which the refund is applied and pass an appropriate order on the refund issue. Such an order will no doubt have to be made after giving the Petitioner full opportunity and considering all relevant material including the transactions and the treaty s provisions. Since in this case there is no final determination that refund was indeed due and payable to the Petitioner no case is made out for the issue of writ of mandamus to direct the Respondents to refund the amount of Rs. 20, 73, 06, 062/- to the Petitioner based solely on the communication dated 29 November 2018. Though for reasons discussed earlier we are inclined to quash and set aside the impugned communication dated 16 June 2022 a writ of mandamus cannot issue as a corollary to such quashing. The quashing of the impugned communication dated 16 June 2022 does not revive the communication dated 29 November 2018 or in any event does not confer upon the communication dated 29 November 2018 some statutory character of a refund order or some communication finally determining that refund of Rs. 20, 73, 06, 062/- was due and payable to the Petitioner without the necessity of any further verification or adjudication. Communication dated 16 June 2022 must be quashed and set aside for all the above reasons. However the communication dated 29 November 2018 cannot be treated or elevated to the status of a final and conclusive determination of the Petitioner s entitlement to a refund. No mandamus can be issued based entirely or solely on the said communication. The first Respondent is now directed to pass a final order determining the refund claim of the Petitioner within eight weeks from today after giving the Petitioner the opportunity of hearing and by passing a speaking order. All contentions on merits are left open.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered three core legal issues arising from the petition challenging the communication dated 16 June 2022, which denied the petitioner's refund claim based on an earlier communication dated 29 November 2018. These issues are:

(i) The validity and legal effect of the impugned communication dated 16 June 2022 rejecting the refund claim;

(ii) The legal status and character of the communication dated 29 November 2018-whether it constitutes a statutory order under the Income Tax Act, 1961 (IT Act) or merely a preliminary/ interlocutory communication;

(iii) Whether the petitioner is entitled to a writ of mandamus directing the respondents to grant the refund of Rs. 20,73,06,062/- solely based on the communication dated 29 November 2018.

2. ISSUE-WISE DETAILED ANALYSIS

(i) Validity of the impugned communication dated 16 June 2022

Relevant legal framework and precedents: The communication was issued by the Assessing Officer (AO) rejecting the refund claim on procedural grounds, stating that the earlier communication dated 29 November 2018 was not a statutory order under any section of the IT Act and directing the petitioner to file a rectification application under Section 154 or claim refund under Section 237 of the IT Act. The respondents also relied on Sections 237, 239, and Rule 41 of the Income Tax Rules to argue that refund claims must be made in the statutory return of income.

Court's interpretation and reasoning: The Court found that the impugned communication primarily rejected the refund claim on the ground that the earlier communication was not a statutory order and that the petitioner had not complied with procedural requirements for claiming refund. However, the Court noted that the impugned communication did not independently decide on the merits of the refund claim or conclusively deny entitlement. Furthermore, the Court observed that principles of natural justice were violated as the petitioner was not heard prior to issuance of the impugned communication, nor were the tentative grounds disclosed for effective response.

Key findings and application of law to facts: The Court held that the impugned communication was vulnerable and liable to be set aside for non-compliance with natural justice and for being based on incomplete grounds. It emphasized that judicial review concerns the decision-making process rather than merits, and here the process was flawed. The communication did not constitute a final adjudication on entitlement.

Treatment of competing arguments: While the respondents argued procedural non-compliance and merit-based disentitlement, the Court restricted its review to the grounds stated in the impugned communication and found them insufficient to sustain rejection. The Court declined to entertain additional grounds urged by the respondents outside the communication.

Conclusion: The impugned communication dated 16 June 2022 was quashed and set aside due to procedural infirmities and lack of finality on merits.

(ii) Legal status of the communication dated 29 November 2018

Relevant legal framework and precedents: Sections 237, 240, and 246A(1)(i) of the IT Act were central to this issue. Section 237 mandates that if the AO is satisfied that excess tax has been paid, the assessee is entitled to refund. Section 246A(1)(i) provides for appeal against orders under Section 237, implying such orders must be final and written. Article 265 of the Constitution of India prohibits levy or collection of tax without authority of law.

Court's interpretation and reasoning: The Court examined the communication dated 29 November 2018 and noted the absence of any mention of the statutory section under which it was issued. However, it held that mere non-mention of a section does not preclude a communication from being an order if it conclusively determines rights. The Court analyzed the language of the communication and found it to be tentative and interlocutory, stating that the refund was determined on "preliminary verification" and would be taken up for "processing" after adjustments. This indicated a lack of finality and conclusiveness required of an order under Section 237.

Key evidence and findings: The communication acknowledged the petitioner's claim under the India-Mauritius Tax Treaty and found the claim correct on preliminary verification but did not issue a final order granting refund. There was no final adjudication or satisfaction recorded by the AO as mandated by Section 237.

Application of law to facts: The Court emphasized that "satisfaction" under Section 237 must be unequivocal, final, and supported by reasons in writing to enable appeal and legal certainty. A preliminary or interlocutory communication cannot be elevated to a statutory order. The petitioner's entitlement under Article 265 cannot be founded on a non-final communication.

Treatment of competing arguments: The petitioner argued that the communication was a statutory order and that procedural formalities could not fetter the right to refund under Article 265. The respondents contended it was not an order and that refund claims must be made in statutory returns. The Court found the communication non-final and interlocutory, thus not qualifying as an order for refund.

Conclusion: The communication dated 29 November 2018 cannot be treated or elevated to the status of a final and conclusive statutory order under Section 237 of the IT Act. It was a preliminary/interlocutory communication and not a final adjudication of refund entitlement.

(iii) Entitlement to writ of mandamus for refund solely based on the communication dated 29 November 2018

Relevant legal framework and precedents: The writ of mandamus is an extraordinary remedy compelling performance of a public duty where there is a clear legal right and no alternative remedy. The petitioner sought mandamus directing refund solely on the basis of the 29 November 2018 communication.

Court's interpretation and reasoning: Since the 29 November 2018 communication was held to be interlocutory and not a final order, no conclusive entitlement to refund was established. The Court held that mandamus cannot issue without a final determination of eligibility and entitlement by the competent authority after due process and hearing.

Key findings and application of law to facts: The Court directed the revenue to pass a final speaking order within eight weeks after hearing the petitioner and considering all relevant material, including treaty provisions and transactions. Interest would be payable if refund was found due. The Court declined to decide merits or entitlement at this stage.

Treatment of competing arguments: The petitioner urged immediate refund based on the earlier communication, while the respondents opposed on grounds of procedural non-compliance and merit. The Court balanced equitable discretion and legal principles, refusing to grant mandamus without final adjudication.

Conclusion: No writ of mandamus can be issued solely on the basis of the communication dated 29 November 2018. The petitioner's claim requires final adjudication by the competent authority.

3. SIGNIFICANT HOLDINGS

"The impugned communication dated 16 June 2022 must be set aside as the principles of natural justice and fair play were not complied with before its issuance."

"The communication dated 29 November 2018 is not a final and conclusive determination of the entitlement of the Petitioner to the refund. It is a preliminary, interlocutory communication based on preliminary verification and subject to further processing."

"Section 237 of the IT Act requires an unequivocal and final satisfaction of the Assessing Officer in writing constituting an appealable order. The communication dated 29 November 2018 does not meet these criteria."

"No writ of mandamus can be issued directing refund solely based on the communication dated 29 November 2018 without a final order by the competent authority after hearing the petitioner."

"The first Respondent is directed to pass a final order determining the refund claim within eight weeks, after giving the petitioner an opportunity of hearing and passing a speaking order. Interest must be granted if refund is found due."