Income Tax refund cannot be withheld without assigning any reason

Last updated: 11 August 2021

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Quick Summary

The Calcutta High Court ruled that the Income Tax Department cannot withhold a taxpayer's refund without providing a valid reason. In this case, the department had withheld a significant refund without properly invoking the relevant section of the Income Tax Act. The court emphasised that if a law specifies a procedure, it must be followed precisely, and arbitrary actions are not permissible.

Court :
Calcutta High Court

Brief :
In Mcnally Bharat Engineering Company Limited and Anr. V Assistant Commissioner of The Income Tax, Circle 1(1) Kolkata And 6 Others [WPO 80 of 2020 decided on August 8, 2021], Mcnally Bharat Engineering Company Limited ('the Petitioner') filed a writ petition seeking refund of Rs. 20,14,56,936/- from Assistant Commissioner of The Income Tax ('the Respondent') who withheld the refund determined under Section 143(1) of the Income Tax Act, 1961 ('the IT Act') of the Petitioner for assessment year 2018-19 computed in accordance with provisions of Section 244A of the IT Act.

Citation :
Mcnally Bharat Engineering Company Limited and Anr. V Assistant Commissioner of The Income Tax, Circle 1(1) Kolkata And 6 Others [WPO 80 of 2020 decided on August 8, 2021]

In Mcnally Bharat Engineering Company Limited and Anr. V Assistant Commissioner of The Income Tax, Circle 1(1) Kolkata And 6 Others [WPO 80 of 2020 decided on August 8, 2021], Mcnally Bharat Engineering Company Limited ('the Petitioner') filed a writ petition seeking refund of Rs. 20,14,56,936/- from Assistant Commissioner of The Income Tax ('the Respondent') who withheld the refund determined under Section 143(1) of the Income Tax Act, 1961 ('the IT Act') of the Petitioner for assessment year 2018-19 computed in accordance with provisions of Section 244A of the IT Act.

The Petitioner contended that the Respondent withheld the refund as per provision of Section 241A of the IT Act, however, in order to invoke the same, the Respondent had to form an opinion that the grant of refund is likely to adversely affect the revenue which it failed to do so.

The Hon'ble High Court of Calcutta relying on a principle laid down in the judgment of Nazir Ahmad vs. King Emperor [AIR 1936 PC 253], which provided that 'if a statute provides an act to be done by a particular authority and in a particular manner, it should only be done by that authority and in that manner or not at all' noted that the Respondent acted arbitrarily by withholding the refund without assigning any reason though the statute mandates for recording the same.

Further, directed the Respondent to refund the amount of Rs. 20,14,56,936/- within a period of four weeks from date along with interest on the principal sum of Rs. 18,31,42,676 as per the provisions of the IT Act.

FAQ :

No, the Income Tax Department cannot withhold a refund without assigning a reason. The law requires them to follow a specific procedure and form an opinion that granting the refund might adversely affect revenue.

The main issue was that the Assistant Commissioner of Income Tax withheld a refund without properly invoking Section 241A of the Income Tax Act and without providing any reasons for doing so.

The court relied on the principle that if a statute provides for an act to be done in a particular manner, it must be done only in that manner, or not at all.

The court directed the Income Tax Department to refund the amount of Rs. 20,14,56,936/- to Mcnally Bharat Engineering Company Limited within four weeks, along with applicable interest.