AO must pass speaking order culling out reasons as to how grant of refund is likely to affect revenue, before withholding it u/s 241A: Calcutta HC

Read Judgement: MCNALLY BHARAT ENGINEERING COMPANY LIMITED & ANR vs. ASSISTANT COMMISSIONER OF THE INCOME TAX, CIRCLE 1(1) KOLKATA & 6 OTHERS

Pankaj Bajpai

Kolkata, August 25, 2021: The Calcutta High Court has ruled that the power of the Assessing Officer (AO) under section 241A of the Income Tax Act can be exercised not only after he forms an opinion that the refund is likely to adversely affect the revenue, but after receiving prior approval of the Chief Commissioner or Commissioner.

The High Court held that an order for refund after assessment u/s 143(3) of the said Act pursuant to a notice u/s 143(2) is subject to appeal or further proceeding.

While allowing the assessee’s petition on the claim of refund, the Single Bench of Justice Arindam Mukherjee observed that the very essence of passing of order u/s 241A is application of mind by AO to issues which are germane for withholding refund on the basis of statutory prescription contained in such section. 

The dispute in the case arose on account of denial of refund by the Central Processing Centre even though the assessment was completed on returned income. 

The refund of the entire tax deducted at source claimed by the assessee was assessed under the provisions of Section 244A. However, the assessee on checking the refund status at the TIN-NSDL website, found a message displaying the thereat, “Your Assessing Officer has not sent the refund to the refund banker, please contact your Assessing Officer.” 

The assessed refund was, thus, not refunded to the assessee, and was rather withheld as per provision of Section 241A. 

In the instant case, Justice Mukherjee found that after notice for refund was issued, the refund was withheld with no reasons given. 

On a combined reading of Section 143 with Section 241A, it can be discerned that by virtue of the new proviso, it is now mandatory to process the return u/s 143(1), and proceed with grant of the refund determined therein, unless sufficient reasons exist u/s 241A prima facie demonstrating that the grant of refund is likely to adversely affect the revenue, opined Justice Mukherjee. 

The High Court went on to reiterate that the scope of the power u/s 241A is narrow, making it clear that a speaking order is required to be passed culling out the reasons as to how the grant of refund is likely to affect the revenue. 

Observing that recording of reasons to substantiate why such withholding is necessary, the High Court said that the powers under this revenue friendly provision of Sec 241A cannot be used in a mechanical manner without application of mind. 

Since refund can be withheld only after recording reasons and obtaining approval of Principal Commissioner or Commissioner, the High Court directed the AO to issue refund to the assessee.