Supreme Court clarifies the interplay of Section 143(1) and 143(2) of the Income Tax Act, 1961 in refund processing: Vodafone Idea Ltd. vs. Assistant Commissioner of Income Tax (29 April 2020)

Introduction

Date of the Judgment: 29 April 2020

Citation: 2020 INSC 341

Judges: Uday Umesh Lalit J, Vineet Saran J.

Can the Income Tax Department withhold a refund if a taxpayer’s return is under scrutiny? The Supreme Court of India recently addressed this question in a case involving Vodafone Idea Ltd. The core issue was whether the Income Tax Department must process a tax refund under Section 143(1) of the Income Tax Act, 1961, when a scrutiny notice has been issued under Section 143(2) of the same Act. The Supreme Court clarified the relationship between these two sections, providing guidance on when refunds can be withheld. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Vineet Saran.

Case Background

Vodafone Idea Ltd., previously known as Vodafone Mobile Services Limited (VMSL), is a telecommunications service provider. Over time, VMSL underwent several amalgamations, merging with Vodafone Cellular Ltd., Vodafone Digilink Ltd., Vodafone East Ltd., and Vodafone South Ltd. on April 1, 2011, and later with Vodafone Spacetel Ltd. and Vodafone West Ltd. on April 1, 2012. Subsequently, VMSL merged with Idea Cellular Ltd., forming Vodafone Idea Ltd., which assumed all the rights and liabilities of the previous entities.

For the Assessment Year (AY) 2014-15, the appellant filed an Income Tax Return (ITR) on September 30, 2014, claiming a refund of Rs. 1532.09 Crores. A notice under Section 143(2) of the Income Tax Act, 1961, was issued on August 31, 2015. Similarly, for AY 2015-16, the appellant filed an ITR on November 1, 2015, claiming a refund of Rs. 1355.51 Crores, with a notice under Section 143(2) issued on March 16, 2016. Revised returns were filed for both years, and the appellant also entered into an Advanced Pricing Agreement with the Central Board of Direct Taxes (CBDT). For AY 2016-17 and 2017-18, the appellant filed returns on November 30, 2016, and November 25, 2017, respectively, claiming refunds of Rs. 1128.47 Crores and Rs. 743 Crores.

The appellant filed a Writ Petition in the High Court of Delhi, seeking a direction to process the refunds for AY 2014-15 to 2017-18, citing inaction by the Income Tax Department. In response, the department stated that the returns raised multiple issues requiring scrutiny, including transfer pricing adjustments, capitalization of license fees, and the effect of the amalgamations. The department also invoked Section 143(1D) of the Income Tax Act, 1961, to justify not processing the returns, stating that scrutiny notices had been issued and that processing the returns would be prejudicial to revenue interests.

Timeline:

Legal Framework

The case primarily revolves around the interpretation of Section 143 of the Income Tax Act, 1961, which deals with the assessment of income tax returns. Specifically, the court examined the interplay between Section 143(1), which provides for a summary assessment of returns, and Section 143(2), which allows for a detailed scrutiny of returns. The court also considered Section 143(1D), which states that processing of a return is not necessary if a notice has been issued under Section 143(2). Additionally, Section 241A, which allows for withholding of refunds under certain conditions, was also discussed.

Section 143(1) of the Income Tax Act, 1961, mandates that when a return is filed, it should be processed to compute the total income or loss, tax, and interest. It also specifies that an intimation should be sent to the assessee specifying the payable sum or refund due. The proviso to Section 143(1) states that this intimation should be issued within one year from the end of the financial year in which the return was made.

Section 143(2) of the Income Tax Act, 1961, empowers the Assessing Officer to issue a notice to the assessee if they deem it necessary to ensure that the assessee has not understated income, computed excessive loss, or underpaid tax. This notice requires the assessee to produce evidence supporting their return.

Section 143(1D) of the Income Tax Act, 1961, states that, “Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2)“. This provision essentially means that if a scrutiny notice has been issued under Section 143(2), the processing of the return under Section 143(1) is not required.

Section 241A of the Income Tax Act, 1961, allows the Assessing Officer to withhold a refund if they believe that granting the refund would adversely affect revenue. This can be done if a notice has been issued under Section 143(2), and the Assessing Officer has recorded reasons and obtained prior approval from the Principal Commissioner or Commissioner. This section applies to assessment years commencing on or after April 1, 2017.

The interplay of these provisions is central to the case, as the appellant argued that the Income Tax Department should have processed the refunds under Section 143(1) within the stipulated time, while the department contended that the issuance of notices under Section 143(2) justified withholding the refunds under Section 143(1D) and Section 241A.

Arguments

Appellant’s Arguments (Vodafone Idea Ltd.):

• The appellant argued that the Income Tax Department failed to process their returns for AY 2014-15 to 2016-17 within the prescribed time limit, which was March 31, 2018. They contended that the department did not exercise its discretion under Section 143(1D) of the Income Tax Act, 1961, within this period, and the subsequent order issued on July 23, 2018, was beyond the limitation period and therefore invalid.
• For AY 2017-18, the appellant submitted that the department’s order dated July 23, 2018, was without jurisdiction because neither the return was processed nor a notice under Section 143(2) was issued at that time. They argued that the subsequent order dated March 14, 2019, was also invalid as the processing of the return was completed only on April 9, 2019.
• The appellant relied on previous court decisions, such as Tata Teleservices Limited vs. CBDT, 386 ITR 30 and Group M Media India (P) vs. Union of India, 2016 SCC OnLine Bom 13624, to support their argument that returns should be processed within a year, and the discretion under Section 143(1D) should only be invoked if the refund would be detrimental to revenue collection.
• The appellant argued that after the one-year period mentioned in the second proviso to Section 143(1) ends, the right to claim a refund vests in the assessee, independent of the department’s power to issue a scrutiny notice under Section 143(2).
• The appellant contended that the orders withholding refunds did not disclose any valid grounds for invoking powers under Section 143(1D) or Section 241A of the Income Tax Act.

Respondents’ Arguments (Income Tax Department):

• The respondents argued that once a notice under Section 143(2) is issued within the prescribed time limit, there is no requirement to process the return under Section 143(1). They contended that the discretion under Section 143(1D) can be exercised at any point before the final assessment order.
• The department stated that the objective of not processing a return after issuing a scrutiny notice is to avoid issuing refunds in cases where there is a likelihood of substantial demands. They argued that Section 143(1D) has a non-obstante clause, giving it overriding effect over Section 143(1).
• The respondents submitted that the Assessing Officer had valid reasons to withhold the refund, citing pending special audits, scrutiny, and demands exceeding Rs. 5000 crores. They argued that the scope of judicial review against such discretionary orders is limited.
• The department relied on the order dated July 23, 2018, which stated that processing the returns would be prejudicial to the revenue’s interest due to pending scrutiny and demands. They also referred to Section 241A of the Income Tax Act, 1961, to justify withholding the refund for AY 2017-18.
• The respondents emphasized that the High Court had correctly held that Section 143(1D) overrides the limitation period in the second proviso to Section 143(1).

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the Income Tax Department is obligated to process a tax refund under Section 143(1) of the Income Tax Act, 1961, when a scrutiny notice has been issued under Section 143(2) of the same Act.
2. Whether the intimation dated 23.07.2018 was valid, considering it was issued after the period within which the return was required to be processed under Section 143(1) of the Income Tax Act, 1961.
3. Whether the order dated 14.03.2019, withholding refund for AY 2017-18, satisfies the requirements of Section 241A of the Act.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities in its judgment:

Cases:

• CIT v. Gujarat Electricity Board, (2003) 260 ITR 84 (Supreme Court of India): This case discussed the inter-relation between sub-sections of Section 143 of the Income Tax Act, 1961, and noted that once regular assessment proceedings have commenced under Section 143(2), it limits the jurisdiction of the assessing officer to commence proceedings under Section 143(1)(a).
• Gujarat Poly Avx Electronics Ltd. v. Dy. Commissioner of Income Tax (Asstt.), (1996) 222 ITR 140 (Gujarat High Court): This case was referred to in CIT v. Gujarat Electricity Board and discussed the options available to the Assessing Officer under Section 143 of the Act. It held that once the Assessing Officer issues a notice under Section 143(2), they cannot then proceed under Section 143(1).
• Mohd. Ibrahim v. The State Transport Appellate Tribunal, Madras, (1970) 2 SCC 233 (Supreme Court of India): This case was cited to interpret the expression “shall not be necessary,” as used in various statutes.
• Sohanlal and others v. Amir Chand and sons and others, (1973) 2 SCC 608 (Supreme Court of India): This case was cited to interpret the expression “shall not be necessary,” as used in various statutes.
• Upper India Cable Co. and others v. Bal Kishan, (1984) 3 SCC 462 (Supreme Court of India): This case was cited to interpret the expression “shall not be necessary,” as used in various statutes.
• Brij Kishore Sharma and others v. Ram Singh and sons and others, (1996) 11 SCC 480 (Supreme Court of India): This case was cited to interpret the expression “shall not be necessary,” as used in various statutes.
• Rasammal Issetheerammal Fernandez etc. v. Joosa Mariyam Fernandez and others, (2000) 7 SCC 189 (Supreme Court of India): This case was cited to interpret the expression “shall not be necessary,” as used in various statutes.
• Vaishali Abhimanyu Joshi v. Nanasaheb Gopal Joshi, (2017) 14 SCC 373 (Supreme Court of India): This case discussed the interpretation of a non-obstante clause in Section 26(1) of the Provincial Small Cause Courts Act, 1887, and its overriding effect.
• Union of India v. G.M. Kokil, (1984) Supp. SCC 196 (Supreme Court of India): This case was cited to explain the function and effect of a non-obstante clause.
• Tata Teleservices Limited vs. CBDT, 386 ITR 30 (Delhi High Court): The appellant relied on this case, which held that returns should be processed within a year, and Section 143(1D) should only be used if a refund would harm revenue collection.
• Group M Media India (P) vs. Union of India, 2016 SCC OnLine Bom 13624 (Bombay High Court): The appellant also cited this case, which held that returns should be processed within a year, and Section 143(1D) should only be used if a refund would harm revenue collection.

Legal Provisions:

• Section 143 of the Income Tax Act, 1961: This section deals with the assessment of income tax returns. The court analyzed sub-sections (1), (2), and (1D) of this section.
• Section 241A of the Income Tax Act, 1961: This section allows for the withholding of refunds under certain conditions.
• Article 311(2) of the Constitution of India: This article was cited to interpret the expression “shall not be necessary.”
• Article 320(3) of the Constitution of India: This article was cited to interpret the expression “shall not be necessary.”
• Section 63(3) of the Motor Vehicles Act, 1939: This section was cited to interpret the expression “shall not be necessary.”
• Order XXX Rule 4 of the Code of Civil Procedure: This provision was cited to interpret the expression “shall not be necessary.”
• Section 68 of the Indian Evidence Act, 1872: This section was cited to interpret the expression “shall not be necessary.”

Authorities Considered by the Court

Judgment

The Supreme Court held that when a notice is issued under Section 143(2) of the Income Tax Act, 1961, the processing of a return under Section 143(1) is not required due to the non-obstante clause in Section 143(1D). The court emphasized that the nature of the exercise under Section 143(1) is summary, while the exercise under Section 143(2) is a detailed scrutiny. Therefore, once a scrutiny notice is issued, the return cannot be processed under Section 143(1) until the scrutiny is complete. The court also noted that the objective of Section 143(1D) is to prevent the issuance of refunds when a scrutiny is pending and the possibility of a substantial demand exists.

Regarding the intimation dated July 23, 2018, the court held that it was valid. The court clarified that Section 143(1D) does not require a separate intimation; the issuance of a notice under Section 143(2) is sufficient to trigger the provision. Therefore, the department’s action of not processing the returns was justified.

For the order dated March 14, 2019, withholding the refund for AY 2017-18, the court found it to be valid. The court noted that the order was issued after due satisfaction and within the period contemplated by Section 143(1), fulfilling the requirements of Section 241A of the Act. The court also observed that the Assessing Officer had valid reasons to believe that granting the refund would adversely affect the revenue, which justified withholding the refund.

The court distinguished the facts of the present case from the cases relied upon by the appellant, such as Tata Teleservices Limited vs. CBDT and Group M Media India (P) vs. Union of India. The court clarified that the facts in those cases were different, and the interpretation of Section 143(1D) was not directly addressed in those cases.

Ratio Decidendi

The ratio decidendi of the judgment can be summarized as follows:

1. Overriding Effect of Section 143(1D): The non-obstante clause in Section 143(1D) of the Income Tax Act, 1961, gives it an overriding effect over Section 143(1). Therefore, if a notice has been issued under Section 143(2), the processing of a return under Section 143(1) is not required.
2. No Separate Intimation Required: Section 143(1D) does not mandate a separate intimation; the issuance of a notice under Section 143(2) is sufficient to invoke the provision and prevent the processing of a return under Section 143(1).
3. Validity of Withholding Refund: The Assessing Officer can withhold a refund if a notice under Section 143(2) is issued, and if there is a valid reason to believe that granting the refund would adversely affect the revenue. This is further supported by Section 241A.
4. Purpose of Section 143(1D): The purpose of Section 143(1D) is to avoid issuing refunds when a scrutiny is pending and there is a possibility of a substantial demand, ensuring the protection of revenue interests.
5. Distinction between Summary and Scrutiny Assessment: The court emphasized the distinction between the summary assessment under Section 143(1) and the detailed scrutiny under Section 143(2). Once a scrutiny notice is issued, the summary assessment process is halted.

Flowchart: Refund Processing When Scrutiny Notice Issued

Ratio Table

Conclusion

In conclusion, the Supreme Court’s judgment in the case of Vodafone Idea Ltd. vs. Assistant Commissioner of Income Tax clarifies the interplay between Section 143(1) and Section 143(2) of the Income Tax Act, 1961. The court has firmly established that when a scrutiny notice is issued under Section 143(2), the processing of a tax return under Section 143(1) is not mandatory. This is due to the non-obstante clause in Section 143(1D), which gives it an overriding effect. The judgment also clarifies that the Income Tax Department does not need to issue a separate intimation under Section 143(1D); the issuance of a notice under Section 143(2) is sufficient.

The court’s ruling emphasizes the importance of the scrutiny process and the need to protect revenue interests. By allowing the department to withhold refunds when a scrutiny notice has been issued, the court has ensured that refunds are not issued prematurely in cases where substantial demands may arise after a detailed assessment. This judgment provides valuable guidance to both taxpayers and the Income Tax Department on the procedures for processing returns and refunds when a scrutiny notice is issued.