Refund conundrum

[Abhijeet Mane]

Authors

1. Saurabh Kedia, Chartered Accountant

2. Bikash Kumar Jain, Chartered Accountant

3. Pulkit Chhajer, Chartered Accountant

Refund conundrum

With a view to remove overlaps and harmonize the various income tax provisions dealing with the powers of Income-tax authorities to withhold tax refunds due to the taxpayers, the Finance Bill, 2023 (‘the Bill’) has proposed to integrate the existing provisions of section 241A and section 245 of the Act w.e.f. 1 April 2023.

While section 245 empowers the department to set-off a refund due to the taxpayer against any tax or other sum payable by the taxpayer, section 241A enables the department to withhold the refund, where refund, if granted, may adversely affect the recovery of revenue.

Issuance of refunds claimed in the tax return - Scenario so far

Earlier, processing of a tax return was not necessary where notice of assessment was issued to a taxpayer [section 143(1D)]. This caused undue hardship to the taxpayer since the Assessing Officer’s used to hold back refunds for the mere reason that the case had been selected for scrutiny assessment. In order to address taxpayers’ grievance of delay in issuance of refunds in cases routinely selected for scrutiny assessment, applicability of section 143(1D) was withdrawn in respect of returns filed for AY 2017-18 and onwards.

However, to safeguard revenue’s interest in potential demand cases, section 241A was inserted w.e.f. AY 2017-18 which provides that where refund of any amount becomes due to the taxpayer under section 143(1) [order passed on processing of the tax return] and the Assessing Officer (JAO) is of the opinion that grant of refund may adversely affect the recovery of revenue, he may, for the reasons recorded in writing and with the previous approval of the Principal Commissioner, withhold the issuance of such refunds.

Thus, currently if a taxpayer files a return claiming a refund and a scrutiny notice is issued in respect of such tax return filed, the CPC while processing the tax return does not issue the tax refund, citing the following reason for holding back the refund -

‘Release of refund is subject to decision under section 241A of the Act by the Assessing officer’.

Process followed while applying section 241A to withhold refunds

As a next step, the CPC seeks consent through its system from the JAO for release of the refund. Various outcomes which may follow are:

1. JAO issues direction to CPC to hold back the refunds

2. JAO does not object to issuance of refunds

3. JAO does not act on the CPC request [viz. neither gives a go ahead for release of refund nor issues instruction to hold back refunds] - Consequently, CPC is unable to issue the tax refund.

In this entire process discussed above, the taxpayer faces hardship/challenges for various reasons:

1. The JAO does not take action on the pretext that the assessments lies with Faceless Assessing Officer (FAO). Ironically, FAO does not respond and thereby JAO does not grant go ahead to CPC for issuance of refunds

2. JAO mechanically obtains approval of the CIT under section 241A and holds back refund on the ground that since scrutiny assessment is pending, issuance of refunds would adversely affect the Revenue. In doing so, JAO usually cites disallowance in the latest assessment order to hold back refunds ignoring the fact that on the same issues the taxpayer may have obtained relief from the appellate forums

3. In case there is some pending demand reflected in the system (even if incorrect / under appeal), section 241A is invoked citing that issuance of refunds may adversely affect the Revenue

4. In few cases, refund is not granted/ delayed citing excuses of internal target pressure.

Outcome of judicial course taken by taxpayers

Considering the hardship in getting refunds as discussed above, many taxpayers knocked the Courts’ doors to seek relief. The Courts took due cognizance of the plight of the taxpayers and provided relief in following terms in the context of application of section 241A-

1. Refunds cannot be withheld merely because the assessment proceedings are in progress.

2. Consideration of other factors such as past records of the taxpayer, litigation history, cooperation by the taxpayer etc. also plays an equally important role while arriving at a conclusion if the refund would adversely affect the interests of the Revenue.

3. Mechanical withholding of refunds would cause additional cost to the Government exchequer in terms of statutory interest payable to the taxpayer for the period such refunds were withheld.

Considering the above Court directives, the tax officers started applying section 241A more objectively with more cautious approach and avoided holding back refunds on technical/ academic reasons like pendency of scrutiny assessment.

Very recently and just before the Budget 2023, the CBDT in December 2022 as a step towards streamlining the process for applying section 241A, prescribed a period of around 50 days (cumulative for JAO and FAO) to decide on withholding of refund [post processing of return under section 143(1) by the CPC]. The recent notification in December 2022 prescribing a strict timeline was a welcome measure and would have further helped the cause of the taxpayers.

However, the Finance Bill, 2023 has proposed to delete section 241A and merge the same with section 245. A closer reading of the amendment suggests that the scope of the provision has been much widened which may cause further hardship to the taxpayers in getting tax refunds as compared to the current situation.

Changes in Budget 2023 - Blockage of genuine refunds

Currently, the refund determined on processing of the tax return [say for Year 1 (Y1)] can be withheld in case the file is selected for scrutiny for the said Y1 [subject to provision of section 241A]. While the expectation was to alleviate the taxpayers from the refund conundrum, the Bill seems to have enlarged the scope with enhanced powers to the tax administration to withhold the refunds.

The reading of the revised integrated provisions brought in by the Finance Bill, 2023 suggest that the tax authorities have now been provided with wider powers to hold back refund arising from intimation/order giving effect of any year, if assessment/ reassessment is pending before him for any other assessment year.

In case of large corporate taxpayers, this may substantially delay the issuance of refunds considering that in their case, one or other assessment/reassessment proceedings are generally pending with the tax authorities and the revised provisions empowers the tax authority to hold back the refund of any year just because some assessment/reassessment is pending.

Concluding thoughts

We are reminded of the words of the Hon’ble Finance Minister in her post-budget 2023-24 interview, wherein she stated -

"We want to be realistic on our tax collection goals; We don't want harassment of taxpayers".

The above amendments being still at a proposal stage pending enactment of Finance Bill, 2023, we hope that the Government would consider the far-reaching implications and unintended hardship which may be caused if the amendments are allowed to be enacted in its current form, and we expect that it would take corrective actions. In absence of the same, the taxpayers would be forced to take the judicial route to seek relief which will result in increased litigation.

Disclaimer: The above views are strictly personal.