Purshottam Dayal Varshney and anr. Vs. Commissioner of Income-tax and ors. - Court Judgment

Gulati, J.

1. The petitioner No. 1, Sri Purshottam Dayal Varshney, was at the material time the karta of a Hindu undivided family known as ' P. D. Varshney & Brothers' which is the petitioner No. 2. On December 29, 1956, a sum of Rs. 30,000 was gifted to Smt. Ganga Devi, the widowed mother of Sri P. D. Varshney, out of the funds of the Hindu undivided family and with this amount she purchased 30 ordinary shares of Rs. 1,000 each of M/s. S. K. Glass Works Ltd., Kandra. She received a dividend of Rs. 15,000 on October 14, 1957, and the second dividend of Rs. 18,000 was received by her in the year 1958. She filed her return lor the year 1959-60, showing therein dividend income of Rs. 18,000. The Hindu undivided family also filed its return for that year and the dividendincome received by Smt. Ganga Devi was not included in that return. On March 9, 1960, the Income-tax Officer passed an assessment order against the Hindu undivided family for the year 1959-60, clubbing the income of Smt. Ganga Devi with that of the Hindu undivided family on the ground that she held the shares benami for the Hindu undivided family. The Hindu undivided family filed an appeal against the assessment order objecting to the inclusion in its income of the dividends received by Smt. Ganga Devi. The appeal was rejected by the Appellate Assistant Commissioner of Income-tax. There was a second appeal to the Income-tax Appellate Tribunal which was allowed on May 17, 1962. The Tribunal came to the conclusion that the approach of the Income-tax Officer was not correct, inasmuch as the onus lay upon the department which the Income-tax Officer made no attempt to discharge by placing relevant material on the record, to show that Smt. Ganga Devi was benamidar for the Hindu undivided family with regard to the shares held by her. The Tribunal, therefore, remanded the case to the Income-tax Officer in the following words :

' We, therefore, set aside the order passed by the Income-tax Officer and restore the case to his file with the direction to make a fresh assessment from the return stage.'

2. The Income-tax Officer passed a fresh assessment order after about six years on April 27, 1968. This time the dividend income was excluded from the assessment of the Hindu undivided family. After the completion of the assessment order a sum of Rs. 14,556 was refunded to the Hindu undivided family on July 9, 1968. Thereupon, the petitioner by an application dated January 30, 1970, requested the Income-tax Officer to pay interest under Section 244 of the Income-tax Act, 1961.

3. In the meantime there was a complete partition of the Hindu undivided family on December 29, 1958. For the assessment year 1960-61, accordingly separate returns were filed by the members of the erstwhile family along with an application under Section 25A of the Indian Income-tax Act, 1922, requesting the Income-tax Officer to recognise the partition. Separate returns were also filed for the assessment year 1961-62, by the separating members of the family. The Income-tax Officer rejected the application under Section 25A by his order, dated January 25, 1962, and passed two assessment orders both dated January 25, 1962, for the years 1960-61 and 1961-62, treating the income of the separating members as belonging to the Hindu undivided family. There was an appeal on behalf of the Hindu undivided family which was rejected by the Appellate Assistant Commissioner of Income-tax. On second appeal, however, the claim of the partition was upheld by the Tribunal with effect from September 7, 1959. This order was passed by the Tribunal on July 28,1959. The department did not challenge the order of the Tribunal and the same became final. The petitioner filed appeals against the assessment orders passed against the Hindu undivided family, dated 25th January, 1962, in respect of the assessment years 1960-61 and 1961-62. Both these appeals were allowed by the Appellate Assistant Commissioner of Income-tax by his order, dated October 9, 1963, and the cases were remanded to the Income-tax Officer for a fresh assessment. The Income-tax Officer completed the fresh assessment against the Hindu undivided family for the assessment years 1960-61 and 1961-62 by his order dated 27th April, 1968, and 14th November, 1968, respectively, and allowed refund of Rs. 25,456 and Rs. 26,260, respectively. The petitioner applied for payment of interest on the ground that the refund had been delayed. The Income-tax Officer rejected this application by his order, dated April 17, 1971. Thereafter, the petitioners applied to the Commissioner of Income-tax, Lucknow. The Commissioner by his order dated 15th September, 1972, disposed of the petitioners' claim for interest for the assessment years 1959-60, 1960-61 and 1961-62. With regard to the assessment year 1959-60, the Commissioner held that no interest was due to the petitioners. With regard to the remaining two years, the Commissioner held that the petitioners were entitled to interest, but not to the extent claimed by them. The petitioners have now approached this court under Article 226 of the Constitution.

4. The contention of the petitioners is that with regard to the assessment year 1959-60, they are entitled to interest for the period between the expiry of six months from the date of the order of the Tribunal setting aside the assessment order to the date of refund and similarly with regard to the assessment years 1960-61 and 1961-62, they are entitled to interest for the period between the expiry of six months from the date of the order of the Appellate Assistant Commissioner setting aside the assessment orders to the date of the refund. The department's contention is that interest became due to the petitioners only after the expiry of six months from the date of the orders passed by the Income-tax Officer on remand.

5. Chapter XIX of the Income-tax Act, 1961, deals with refunds. Section 240 provides :

' Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Income-tax Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf.'

6. Section 244 with which we are concerned as it stood at the material time read :

' (1) Where a refund is due to the assessee in pursuance of an order referred to in Section 240 and the Income-tax Officer does not grant the refund within a period of six months from the date of such order, the Central Government shall pay to the assessee simple interest at four per cent. per annum on the amount of refund due from the date immediately following the expiry of the period of six months aforesaid to the date on which the refund is granted. '

7. Under the Income-tax Act, although the liability to pay tax is cast upon an assessee each year in accordance with the Finance Act of that year, yet the tax becomes due and payable only when an assessment order is passed and a notice of demand under Section 29 of the Indian Income-tax Act, 1922, and Section 156 of the Income-tax Act, 1961, is served upon the assessee. If there is no assessment order, the assessee is not liable to pay any tax. If follows, therefore, that if an assessment order is set aside, the notice of demand becomes ineffective and the tax already paid under such a notice of demand becomes refundable. If a fresh assessment is made, the tax determined as a result of the fresh assessment order again becomes due and payable only after a fresh notice of demand is served upon the assessee.

8. The contention of the learned counsel for the department is that the refund becomes due only if the assessment is annulled and not when it is merely set aside and the matter is remanded to the lower authorities. The learned counsel has not cited any provision or a decided case in support of his contention. It is true that in majority of gases when an assessment order is set aside and the matter is remanded the assessee would be found liable to some tax and the department might be prejudiced if the amount already deposited by the assessee is refunded to him. But the law has made ample provision to safeguard the interest of the revenue in such a situation.. Under Section 241, the Income-tax Officer has been given power to withhold refund when the order giving rise to the refund is the subject-matter of appeal or other proceedings. This is how Section 241 reads :

'Where an order giving rise to a refund is the subject-matter of an appeal or further proceeding or where any other proceeding under this Act is pending, and the Income-tax Officer is of the opinion that the grant of the refund is likely to adversely affect the revenue, the Income-tax Officer may, with the previous approval of the Commissioner, withhold the refund till such time as the Commissioner may determine.''

9. This provision fully covers the cases where remand proceedings are pending after the assessment order is set aside. In such cases the Income-tax Officer can, with the approval of the Commissioner of Income-tax, withhold the refund till the remand proceedings are over. The legislature has takea care that if the refund is withheld the assessee is not deprivedof the interest on such refund to which he may be ultimately found entitled. Sub-section (2) of Section 244 provides :

'(2) Where a refund is withheld under the provisions of Section 241, the Central Government shall pay interest at the aforesaid rate on the amount of refund ultimately determined to be due as a result of the appeal or further proceeding for the period commencing after the expiry of six months from the date of the order referred to in Section 241 to the date the refund is granted. '

10. This provision very clearly shows that as soon as an assessment order is set aside, the tax paid by the assessee under the assessment order becomes refundable to him. But the Income-tax Officer can withhold the refund during the pendency of the remand proceedings and in such a situation the assessee will not be prejudiced.

11. Now, turning to the facts of the instant case, the assessment order for the year 1959-60 was set aside by the Tribunal on 17th of May, 1962, The Income-tax Officer took six years to pass a fresh order ultimately holding that the tax had wrongly been collected from the petitioners. We find no rational reason why the petitioners should be deprived of the interest for the period of six years during which the Income-tax Officer kept the proceedings pending. If he wanted to withhold the refund, he should have passed an order under Section 241 and in that event the petitioners would not have been deprived of the interest. If we accepted the stand taken by the department, an assessee can be deprived of the refund for an indefinite period at the will of the Income-tax Officer, because there is no period of limitation prescribed for passing a fresh assessment order on remand. We find no reason in law or in equity to accept such a preposterous proposition.

12. We, accordingly, allow this petition. The order of the Commissioner dated September 15, 1972 (annexure ' 4 ') as also the order of the Income-tax Officer, dated April 17, 3971 (annexure ' 10 ') are quashed. The Income-tax Officer is directed to work out the proper amount of interest in accordance with the law as clarified by us and to grant the necessary refund to the petitioner. The petitioner is entitled to the costs.