In a recent ruling, the Delhi High Court has quashed Instruction No. 1 of 2015 issued by the Central Board of Direct Taxes (CBDT) holding it to be unsustainable in law.
Instruction No. 1 of 2015 dated 13 January 2015 was issued by the CBDT so as to clarify the ambiguous language used in section 143(1D) of the Income-tax Act, 1961 (‘Act’). The entire issue arose in 2012, when section 143(1D) of the Act was introduced giving the Assessing Officer discretionary power to decide if refund needs to be processed pending scrutiny. The exact words used in the provision are “the processing of a return shall not be necessary where a notice has been issued to the assessee under sub section (2)”. Accordingly, the section did not bar the processing of return. It was interpreted to mean that the assessing officer will decide if return pending scrutiny needs to be processed after examining facts of each case.
However, the CBDT issued the Instruction no. 1/2015 to tax officers interpreting section 143(1D) to mean that in cases where a scrutiny notice was issued, the assessing officer was debarred from processing the return and issuing consequent refund. Necessary directions to avoid such process and issue of refund were issued in the Instruction.
Aggrieved by the CBDT instruction, the taxpayer filed a writ with the High Court challenging the CBDT’s directions withdrawing the discretionary power given to the Assessing Officer. In its decision, the High Court concluded that the power conferred on the CBDT to issue orders, directions and clarifications is hedged by certain limitations, one of which is that the directions or instructions issued by CBDT should not be “prejudicial to assessee”. Accordingly, the High Court held that the when the language employed by the section was clear in allowing discretion to the assessing officer to process the return, the CBDT could not have issued an instruction to interpret or instruct the assessing officer to prevent the issue of refund. Quashing the Instruction, the Court has held effectively restored the discretionary power of the Assessing Officer to enable him decide if return can be processed, and refund issued pending scrutiny.
- The ruling comes as a welcome relief for the taxpayers who were unnecessarily suffering denial of refunds even in the most genuine of cases. Scrutiny proceedings take a long time to complete and if one considers the extended timeline allowed for transfer pricing cases, the refunds for a financial year can get stuck with the tax authorities for as long as 3-4 years. This ruling will certainly help taxpayers who have genuine refund claims pending with the authorities.
- Essentially the High Court has restored the discretion of the tax officer to process a tax return and issue refund in cases where a scrutiny notice has been issued. The tax officer is by far the best judge in estimating whether or not the taxpayer has a refund claim that is likely to be sustained or not. The CBDT instruction had painted everyone with the same brush which was unwarranted and as a result of which, genuine refund claims were also being denied.
- The ruling also reiterates the principle that where the language employed by the law is clear an unambiguous, CBDT instructions / circulars narrowing down the interpretation causing hardship to the taxpayer cannot prevail over the statute.