Income Tax Refund of OYO cannot be withheld simply because its case is selected for scrutiny

The Petitioner filed a return of Income Tax for AY 2020-2021 declaring a loss of Rs.16,13,83,22,476/- and claimed a refund of Rs.31,46,26,494/- on account of tax deducted at source under Section 139 of the Income Tax Act, 1961 [hereinafter “the Act”]. Pursuant to a de-merger and to give effect to the Scheme of Arrangement, the Petitioner filed a revised return of Income Tax for AY 2020-2021 on 27.03.2021 [hereinafter “Revised Return”] declaring a loss of Rs.16,70,16,05,998/- and claiming a refund of Rs.43,91,40,294/-.

The Petitioner was subjected to a scrutiny assessment under Section 143(2) of the Act by notice dated 29.06.2021 which was responded to by the Petitioner with all the necessary clarifications as sought for, on 29.07.2021.

Subsequently, a notice under Section 142(1) of the Act was sent to the Petitioner on 14.12.2021, wherein detailed information and documents were sought by the Revenue. The Petitioner submitted a response to the same on 27.12.2021. On the same day, the Petitioner received an intimation under Section 143(1) of the Act which stated that a refund of Rs.33,05,84,840/- (inclusive of interest) has been calculated as due to the Petitioner [hereinafter “Refund Intimation”]. The Refund Intimation also stated that the refund shall be credited within a period of 15 days from that date.

Despite the lapse of several months after the passing of the Refund Intimation, no refund was received by the Petitioner. Aggrieved by the inaction of the Respondents, the Petitioner filed online complaints on the Income Tax Portal on 14.05.2022 and 16.06.2022 seeking disbursal of the refund amount as determined under the Refund Intimation. This was followed by detailed letters dated 06.09.2022 and 21.09.2022 sent to the Respondents seeking disbursal of the refund amounts.

Since no response was received, the Petitioner requested an inspection of the file and records of AY 2020-2021 and asked for a copy thereof by its letter dated 11.11.2022. In response thereto, the Revenue by an email of even date, informed the Petitioner that its refund has been withheld in view of a letter dated 07.06.2022 received from the Faceless Assessment Unit of the Respondent. The letter dated 07.06.2022, however, did not contain any enclosures or reasons for the withholding of the refund of the Petitioner.

Refund withheld under the provisions of Section 241A of the Act

It was submitted that the refund has been withheld by the Revenue, under the provisions of Section 241A of the Act.

It was submitted by the learned counsel for the Petitioner, that where refund has been withheld by the Revenue, the provisions of Section 241A of the Act require that reasons be recorded in writing by the concerned Officer to withhold the refund and also that the approval of Principal Commissioner or Commissioner is to be taken.

It was further submitted that the letter dated 30.05.2022 which has been produced by the Respondents does not provide substantive reasons to defend their decision to withhold the refund under the provisions of Section 241A of the Act.

Learned counsel for the Respondents on the other hand submits that the requisite reasons for withholding the refund for AY 2020-2021 in the case of the Petitioner are as set forth in the letter dated 30.05.2022 and approval, therefore, was also granted by letter dated 31.05.2022. Thus, the necessary compliance as is required by the provisions of Section 241A of the Act has been undertaken by the Revenue.

Analysis of Court:

As stated hereinabove, an intimation under Section 143(1) of the Act was issued to the Petitioner on 27.12.2021 inter-alia setting forth that an amount of Rs.33,05,84,840/- (inclusive of interest) has been calculated by the Tax Departmenr as the refund due to the Petitioner. This amount has not been paid to the Petitioner despite repeated reminders.

Power to withhold a refund

A plain reading of the above Section envisages that the power to withhold a refund may be exercised by the Assessing Officer [hereinafter “the AO”] subject to these conditions:

(i) the reasons for withholding a refund are to be in writing;

(ii) the AO must record, how the grant of the refund is, in his opinion, likely to adversely affect the interest of the Revenue; and

(iii) the approval of the Appropriate Authority is to be taken prior to issue of such order.

Refund cannot withheld simply because Assessee’s case is selected for scrutiny assessment

The issue of withholding of refund under the provisions of Section 241A of the Act is no longer res integra. This Court in various decisions has inter-alia held that a refund may be withheld subject, however, to reasons being recorded in writing on how the grant of refund in the opinion is “likely to adversely affect revenue”. It is well settled that a refund cannot simply be withheld if an Assessee is selected for scrutiny assessment or where a notice has been issued under sub-section (2) of Section 143 of the Act.

Refund cannot be withheld giving sketchy and vague details

The reasons for withholding the refund are simply that the case was selected under CASS with a large number of “issues” to be examined. However, no details of any issue which requires examination has been set forth. There is then a passing mention of the fact that “it is also referred to transfer pricing”, however, what has been referred, is absent. No other details are given either.

While withholding a refund, the AO is required to look into various factors in relation to an Assessee, such as, the amount of tax liability which a scrutiny assessment may eventually lead to (as is underway in this case) vis-a-vis the amount of tax refund due; the financial standing or credit worthiness of the Assessee, and whether there would be any doubts in the Revenue recovering amounts from the Assessee.

The AO is also required to give detailed and compelling reasons as to how the release of the refund will adversely affect the interest of the Revenue.

The reasons as set forth in the communication of 30.05.2022 are bereft of any details and only reproduce the wordings of Section 241A of the Act with some additional sketchy and vague details. There is also a complete absence of reasoning.

Creditworthiness of Assessee not in dispute

The Petitioner is a well reputed company with a large net-worth running into several billion dollars and not a “fly-by-night” operator. It is a tax Assessee for the last several years and the credit worthiness of the Assessee is also not in dispute.

Court ordered to issue the refund:

12.1 We, accordingly, set aside the order(s) dated 07.06.2022/30.05.2022. The Respondents shall conduct a de novo exercise bearing in mind the provisions of Section 241A of the Act and principles articulated hereinabove, within six weeks of receipt of a copy of the Judgment. We have laid down the aforesaid time line considering the fact that the refund was found payable as early as on 27.12.2021.

Citation: OYO Hotels and Homes Private Limited vs DCIT (Delhi High Court); WP(C) 16698/2022; 23/03/2023; 2020-2021