Timeline for refund u/s 38(3) of Delhi VAT Act must be mandatorily followed while recovering dues: Supreme Court dismisses appeal filed by Department of Trade & Taxes
Justices Pamidighantam Sri Narasimha & Prasanna B. Varale [03-04-2024]

Read Order: COMMISSIONER OF TRADE AND TAXES v. FEMC PRATIBHA JOINT VENTURE [ SC- CIVIL APPEAL NO. 3940 OF 2024]

Tulip Kanth

New Delhi, May 6, 2024: While upholding an order directing refund of excess tax credit, the Supreme Court has asserted that the Department of Trade & Taxesmust adhere to the timeline stipulated in Section 38(3) of the Delhi Value Added Tax Act, 2004 in order to ensure that refunds are processed and issued in a timely manner.

The issue for consideration, before the Division Bench of Justice Pamidighantam Sri Narasimha and Justice Prasanna B. Varale, was whether the timeline for refund under Section 38(3) of the Delhi Value Added Tax Act, 2004 (Act) must be mandatorily followed while recovering dues under the Act by adjusting them against the refund amount.

In this case, the respondent Company, engaged in the execution of works contracts for the Delhi Metro Rail Corporation, claimed refund of excess tax credit amounting to Rs. 17,10,15,285 for the 4th quarter of 2015-16 through revised return filed on 31.03.2017 and Rs. 5,44,39,148 for the 1st quarter of 2017-18 through return filed on 29.03.2019, along with applicable interest under Section 42 of the Act. The appellant did not pay the refund even until 2022, pursuant to which the respondent sent a letter for the consideration of their refund. 

The Value Added Tax Officer passed an adjustment order to adjust the respondents claims for refund against dues under default notices dated 30.03.2020, 23.03.2021, 30.03.2021, and 26.03.2022. The respondent then filed a writ petition before the Delhi High Court for quashing the adjustment order and the default notices. The appeal was restricted to the issue of quashing the adjustment order. 

The Bench noted that the language of Section 38(3) is mandatory and the department must adhere to the timeline stipulated therein to fulfil the object of the provision, which is to ensure that refunds are processed and issued in a timely manner.

As per Section 38(3)(a)(ii), the refund should have been processed within two months from when the returns were filed (31.03.2017 and 29.03.2019), and this comes up to 31.05.2017 and 29.05.2019. The default notices were dated 30.03.2020, 23.03.2021, 30.03.2021, and 26.03.2022. 

The Bench noticed that the default notices were issued after the period within which the refund should have been processed. 

“Sub-section (2) only permits adjusting amounts towards recovery that are due under the Act. By the time when the refund should have been processed as per the provisions of the Act, the dues under the default notices had not crystallised and the respondent was not liable to pay the same at the time. The appellant-department is therefore not justified in retaining the refund amount beyond the stipulated period and then adjusting the refund amount against the amounts due under default notices that were issued subsequent to the refund period”, it held.

The Bench further rejected the ASG’s contention that the purpose of the timeline provided under sub-section (3) is only for calculation of interest under Section 42. As per the Bench, such an interpretation would effectively enable the department to retain refundable amounts for long durations for the purpose of adjusting them on a future date which would go against the object and purpose of the provision. 

Thus, dismissing the appeal, the Bench affirmed the impugned judgment directing the refund of amounts along with interest as provided under Section 42 of the Act.