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Author/s : Pradip Kapasi
Gautam Nayak
Chartered Accountants
Topic : Return of income filed beyond time

1. Issue for consideration :

1.1 Every person, being a person specified in S. 139(1), is required to furnish a return of his income on or before the due date. The ‘due date’ is defined by Explanation 2 of S. 139(1).

1.2 A person who has not furnished a return within the time allowed to him u/s.139(1) may furnish the return, at any time before the expiry of one year from the end of the relevant assessment year as per the provisions of S. 139(4) of the Act.

1.3 S. 143 provides for an assessment of income in pursuance of a return filed u/s.139. It further provides for the manner in which an assessment should be made and stipulates the time limit for issue of notice for the assessment of an income.

1.4 S. 147 provides for assessment of an income, where no return u/s.139 is filed, by issue of notice u/s.148 within the time stipulated u/s.149 of the Act.

1.5 S. 153 provides for the time limit for completion of an assessment u/s.143 or reassessment u/s.147, as the case may be.

1.6 S. 156 provides for issue of a demand notice for recovery of tax determined on order of assessment or reassessment of income. Likewise excess tax, if any, paid is refunded on assessment.

1.7 A provision has been made by the CBDT for an application to the CIT, in terms of S. 119(2)(b), for condonation of delay in filing return of income by the due date or the extended due date. Such an application is possible in cases of refund of taxes paid or deducted, and is subject to fulfilment of other conditions.

1.8 It is common to come across cases of persons who have failed to file a return of income within the time stipulated u/s.139, and that the Income-tax Department has also not issued any notice u/s.148 in such cases. It is also common that in some of such cases, excess tax is paid and a refund is otherwise due.

1.9 In the backdrop of the above stated facts and discussion, it is desired to determine (a) whether it is possible for a person to file a return at any point of time, beyond the time specified in S. 139, (b) whether such a person can insist on refund of taxes paid as a matter of right, without filing an application to the CIT for condonation of delay and without fulfilling the conditions for processing such an application u/s.119(2)(b) and further, (c) whether an AO can be compelled to process such a return and issue a refund.

1.10 Recently, the Karnataka High Court had an occasion to address these issues, which for a long time were believed to be settled against the assessee.

2. A. Balakrishnan’s case :

2.1 In A. Balakrishnan v. CIT, 208 CTR 337 (Kar.), the petitioner, an employee of HMT Ltd., availed of a voluntary retirement scheme as on 31st March 2003 that was mooted by his employer. On retirement, he received an amount of Rs.6,01,270. A sum of Rs.29,331 was deducted at source u/s.192 of the Act and a certificate in Form 16A was issued, confirming the payment of tax to the Government.

2.2 In a petition filed before the Karnataka High Court, the assessee claimed, in terms of the provisions of S. 10(10C), S. 17(3)(i) and S. 89 of the Income-tax Act, 1961 r.w.r. 2A(a), that he was not liable for payment of any tax on the amount received on voluntary retirement, and that the amount of Rs.29,331 deducted at source was liable to be refunded in terms of law laid down by the Court in the case of CIT & Anr. v. P. Surendra Prabhu, 198 CTR 209 (Kar.).

2.3 The assessee had filed a return in Form No. 2D seeking refund of the tax deducted at source. The Income-tax authorities did not respond to the return filed. The assessee, as a consequence, pressed into service the provisions of the Right to Information Act, 2005 by filing an application on 18th July 2006. In response to the application, the CIT, Bangalore-5 intimated the petitioner that the return of income was not a valid return and could not be processed, as it had been filed beyond the time limit prescribed u/s.139 of the Act. Aggrieved by the action of the CIT, the petitioner filed a writ petition, inter alia, seeking for direction to refund the excess tax of Rs.29,331 deducted by his employer and remitted to the Government.

2.4 On behalf of the Revenue, it was urged in the statement of objections; that the assessee having filed the return on 18th May 2006, beyond the permitted time in terms of S. 139(1) of the Act, which return should have been filed by 31st July 2003; that the return filed being even beyond the extended period permitted in terms of S. 139(4) of the Act, was invalid and was treated as non est; that the action was fortified by the judgement of the Division Bench of the Calcutta High Court in the case of CIT v. Smt. Minabati Agarwalla, 79 ITR 278 (Cal.). Accordingly a prayer for dismissal of the writ petition was made by the Revenue.

2.5 The petitioner contended that the return filed in Form No. 2D was not an application for refund, but a return of the factual position of the receipts of the petitioner from his salary income, etc. It was not open to the Income-tax Department to decline to process the return; that non-filing of the return within the time stipulated u/s.139(1) of the Act or the extended time u/s.139(4) of the Act would only result in the consequential liability for interest, etc. and possible penalty also. There was no provision which placed an embargo on the Income-tax Department from processing the return and passing the orders on the same. In the circumstances, the order refusing refund should be quashed, if not, directions for processing the return at least should be issued.

2.6 The Revenue, in the Court, agreed to consider the return provided an application in terms of S. 119(2)(b) of the Act was filed, as the return which was filed on 18th May 2006, on the face of it, was a belated return. It was explained that unless the CIT, in exercise of the power delegated by the Board under the said provision, condoned the delay in filing such return, it was not possible for the AO to process the return; that unless this procedure was gone through, it was not open to the AO to assess the return as the return was a void return or was non est in law.

2.7 In support of the submissions, reliance was placed on the decisions in cases of CIT v. Smt. Minabati Agarwalla (supra) and Auto & Metal Engineers v. Union of India & Anr., 111 ITR 161 (P&H).

2.8 The Court noted that the decision in the case of CIT v. Smt. Minabati Agarwalla (supra) was rendered in the context of the provisions of S. 22(2), S. 22(3) and S. 34(3) of the Indian Income-tax Act, 1922, wherein it was held by the Calcutta High Court that as returns filed by the assessee in that case for the years 1953-54 to 1956-57, on 9th August 1961, were invalid, no fresh assessment could have been made on the basis of an order passed by the CIT u/s.33B of that Act; that such returns were invalid and the CIT by issue of directions u/s.33B of that Act could not have directed for passing fresh assessment orders on such returns. The Karnataka High Court further observed that the actual question that arose in that case before the Calcutta High Court was about the competence of the CIT to issue directions u/s.33B of that Act to direct the AO to process a return otherwise invalid.

2.9 The filing of the returns under the Income-tax Act, 1961, the Karnataka High Court observed, was now governed by the provisions of S. 139 of the Act; that a perusal of the provisions of S. 139 did not indicate that the authorities were barred from processing a return filed under the Act just because it was not filed within the time stipulated either u/s.139(1) or S. 139(4) of the Act; that while it may not be open to the Income-tax Department to bring to tax any income beyond the period permitted in terms of S. 147 of the Act, if within that time either a return was filed whether within the time stipulated u/s.139(1) or u/s.139(4) or otherwise, it could be looked into and there was no embargo as such; that in the present case, the petitioner having filed the return though beyond the time permitted, it was not as though the return was one which was per se prohibited to be processed by the Income-tax authorities under the statutory provisions. With great respect, the Court declined to follow the decision rendered by the Calcutta High Court in Minabati Agarwalla’s case (supra).

2.10 The Court observed that Auto & Metal Engineers’ case was a case where the assessing authority declined to process a return filed by the assessee within the permitted time u/s.139 and on the other hand, the assessing authority had issued a notice u/s.147 of the Act calling upon the assessee to make a return. The assessee had questioned the legality of the notice issued u/s.147 of the Act before the Court in the said case. The Court therein took the view that notice u/s.147 was not invalid as the assessee had not filed the return within the time permitted u/s.139(1) of the Act; that it could not be automatically taken that there was an extension of time permitted u/s.139(2) of the Act.

2.11 The Court concurred with the fact that the assessee could have invoked the provisions of S. 119(2(b), but not invoking the said provisions did not come in the way of the duty of the Income-tax Department to process the return filed by the petitioner; that a reference to S. 119(2)(b) of the Act could not have relieved the AO from the obligation of examining a return filed by the assessee and that S. 119(2)(b) could not be used as an excuse for inaction on the part of the AO.

2.12 The test according to the Court was to examine whether a return pursuant to the notice u/s.147 of the Act could be processed, and if it was found that there was no reason as to why the return filed otherwise could not be processed, the refund could not be denied. The Court noted that the defense put up by the AO for not processing the return filed by the assessee in Form No. 2D was not supported by any provisions of the statute and amounted to an inaction on his part. It further held that the time prescribed for filing return of income in terms of S. 139 of the Act was operative on a person who was compelled to file a return in terms of S. 139(1) of the Act and who had income over and above the exempted limit and whose income was taxable under the Act and was bound to follow the period, and not in the case of a person who had no taxable income.

2.13 Likewise, the notice in terms of S. 147 and the time stipulation for an issue of notice, etc., the Court noted, were also in respect of a person who had taxable income and whose taxable income had either not been offered to assessment at all or who had not declared full particulars of his income; that for a person like the petitioner, if his taxable income was Nil, in the sense that he had no obligation to file a return, the time stipulations also equally could not apply; therefore, to say that the authorities were disabled from scrutinising the return filed by the petitioner, in view of time stipulation in terms of S. 153 for processing such return might not correctly apply at all.

2.14 For the very reason, according to the Court, the reference to provisions of S. 119(2)(b) of the Act and on which reliance was placed by the Revenue was also not tenable, as it was applicable only to such an assessee who was seeking an extension of time or a condonation of delay in compliance, by invoking the provisions of S. 119(2)(a) of the Act. If no time stipulation was in the first instance applicable to the return that was filed by the petitioner, the provisions S. 119(2)(b) were also not needed at all.

2.15 Viewed from another angle also, the authorities could not decline to process the return, the Court observed, as the claim for an exemption of terminal benefit receipt exceeding a sum of Rs.5 lakhs u/s.10(10C) could be tested only on a return filed by the assessee and not elsewhere; that if the assessee was found to be not entitled for the benefit of S. 10(10C), then the income became taxable and it could be brought to tax by the AO by invoking the provisions of S. 147 of the Act; that at least for determination of this position, it was necessary for the AO to process the return and finalise the same and if need be by invoking the provisions of S. 147 also; that even without looking into the return, it was not possible for the AO to conclude that there was no taxable income and that there was no need to process the return; therefore, in either view of the matter, it was necessary for the AO to process the return and to pass orders in accordance with the provisions of the Act and not to justify the inaction.

2.16 It was the duty of the functionaries under the IT Act, the Court observed, to implement the provisions of the Act in accordance with law. A return filed was bound to be processed by the Income-tax authorities, for which purpose they were meant, unless there was an embargo placed; that it was rather unfortunate that the Income-tax Department had taken such an adamant and stubborn stand only to deny a possible refund to the petitioner. An amount which would have been otherwise due to the assessee, if retained by the Income-tax Department without any justification, then inaction could not be put up as a defence for retention of an amount.

2.17 The Court felt it proper to issue a mandamus directing the AO to ensure that the return filed by the assessee was duly processed in accordance with law and appropriate orders passed on the same within three months from the date of order of the Court.

2.18 The petitioner having been put to the ordeal of not processing his return, decline of an amount which he would have earned by his toil, the Court held that the authorities were bound to compensate and the Court was of the view that it called for commensurate cost to be paid to the petitioner. The cost was also increased to make the authorities realise the effect of it, as the Court could appreciate an inaction on the part of a public authority being put forth as a defence for not performing the duty and that in turn resulting in harassment and hardship to a hapless citizen like the assessee who was compelled to approach the Court for relief. The petition was allowed with a cost of Rs.10,000 to be paid within eight weeks from the date of the order.

3. Smt. Minabati Agarwalla’s case :

3.1 The issue, in the past, had arisen in the case of CIT v. Smt. Minabati Agarwalla, 79 ITR 278 (Cal.), under the Indian Income-tax Act, 1922. In that case, on 9th August 1961, the assessee filed returns of income suo motu for the A.Ys. 1953-54 to 1961-62 before the Income-tax Officer, ‘D’ Ward, Howrah. The assessee filed a declaration along with these returns in which she tried to explain the source of her income during all these years. The assessments for the years 1953-54 to 1960-61 were completed on 16th August 1961, and the assessment for the A.Y. 1961-62 was completed on 19th August 1961. While making the assessments, the Income-tax Officer accepted the declaration of the assessee regarding the source of her income.

3.2 The Commissioner of Income-tax issued a combined notice for revision of the said orders u/s.33B of the Act and, after considering the contentions of the assessee, passed a consolidated order. The Commissioner, in that order, cancelled all the assessments and directed the Income-tax Officer "to do fresh assessments according to law after making proper enquiries and investigation with regard to the jurisdiction, possession of initial capital, carrying on of business and the investments made in the name of the assessee."

3.3 The assessee appealed against the order of the Commissioner to the Tribunal. The Tribunal held that the Commissioner was justified in initiating proceedings u/s.33B for the A.Ys. 1957-58 to 1961-62, but in so far as the returns for the A.Ys. 1953-54 to 1956-57 were concerned, since they had been filed on 9th August 1961, i.e., beyond the period of four years from the end of the relevant assessment years, those returns were not valid returns u/s.22(3) of the Act and the assessments made thereon were bad and invalid. The Tribunal modified the Commissioner’s order by cancelling the assessments altogether for the said years.

3.4 The Tribunal at the instance of the Commis-sioner, referred the following question to this High Court for opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the returns filed by the assessee for the A.Ys. 1953-54 to 1956-57 on 9th August 1961, were invalid and that no fresh assessments could be made on the basis of the Commissioner’s order u/s.33B of the Indian Income-tax Act, 1922 ?"

3.5 The Revenue contended that the liability of an assessee to be assessed to income-tax arose u/s.3 and u/s.4 and, though there were various sections providing for the machinery to assess and to collect taxes, the assessee could waive the machinery and submit to assessment without recourse to the machinery sections. It was contended that S. 22 was not the only Section under which returns were or could be made and that an assessee might file returns independent of S. 22. Three different situations were brought before the Court for explaining the issue under consideration. In the first situation, an assessee filed his return of income-tax and assessment was made on the basis of that return within four years from the end of the relevant assessment year. In such a case, no difficulty arose at all. In the second situation, though the return was filed in time, the Income-tax Officer concerned did not bring it to assessment within four years from the expiry of the relevant assessment year. In such a case, S. 34(3) was a fetter on the jurisdiction of the Income-tax Officer to make an assessment on the basis of that return. There was, however, a third possible situation in which the assessee voluntarily submitted his return beyond time. The question here was whether assessment could be made on such a return at a point of time which was beyond the limits laid down in S. 34(3) i.e., beyond four years from the end of the relevant assessment year. According to the Revenue, in the third situation, the Income-tax Officer could assess an assessee as the liability to be assessed in that situation arose independently of machinery section under the charging provisions of S. 3 and S. 4 and it was quite within the competence of the assessee to waive the machinery section of the Income-tax Act and submit his returns voluntarily to the Income-tax Officer and ask him to assess on the basis of those returns.

3.6 It was finally contended that so long as the liability was there, nothing could prevent an assessee from submitting to the jurisdiction of the Income-tax Officer for assessment of that liability without taking recourse to the machinery sections; that the time limit provided in S. 34(3) of the Act was not like a period of limitation and that an assessment proceeding was not in the nature of a suit for adjudication of a civil dispute and therefore, if an individual submitted himself to the jurisdiction of the Income-tax Officer, there was no reason why that officer, in exercise of his power and function as a limb of the administrative authorities, who were required by the statute to ascertain the taxable income of individuals and to assess tax on the same, should not be able to assess and recover taxes, provided, of course, the assessee concerned was liable to taxation.

3.7 The Calcutta High Court did not accept the contentions of the Revenue by holding that there were statutory fetters imposing time limits upon the income-tax authorities to bring to tax escaped income within the prescribed time, which fetters could not be relaxed. It was not for the assessee to relax or waive them.

3.8 It was quite clear to the Court that whatever might be the nature of the jurisdiction exercised by the Income-tax authorities, their power to make assessments lapsed completely upon the expiry of the periods prescribed in the Income-tax Act. The Court noted that the observations of the Supreme Court, relied upon by the Revenue, that the Sections prescribing the periods "do not create an exemption in favour of the assessee or grant an absolution on the expiry of the period" and that "the liability may again be exigible" must be read with the words that followed immediately, viz., "if the bar is removed and the taxpayer is brought within the jurisdiction of the said machinery by reason of a new power".

4. Observations :

4.1 The moot issues that emerge out of an interesting controversy are; whether it is possible to issue a refund without processing a return or assessing an income; whether it is possible to assess an income or process a return after the time for completion of assessment or processing of a return prescribed by the Act is over, because the assessee is otherwise entitled to a refund of taxes; whether an assessee can waive the time limit provided for assessment and submit himself to assessment by the authorities by filing a return beyond the statutory time.

4.2 In one case, it was the Revenue that contended that a return filed outside the prescribed time was a valid return, while in another case, it was the assessee who pleaded the same. It appears that in both the cases, the Courts agree that the authorities should process a return even if filed beyond the time prescribed u/s.139, as long as the same was within the time prescribed for assessment u/s.147. This aspect of the issue has been noted by the Karnataka High Court by observing that the authorities could have issued a notice u/s.147 for regularising the return, thereby indicating that the return was filed within the reopening limits. In fact, the only issue that the Calcutta High Court adjudicated was that the return outside the limitation of S. 149 r.w. S. 147 was an invalid return and could not have been revised. In the circumstances, in our respectful opinion, there was no need for the Karnataka High Court to have dissented from the decision of the Calcutta High Court after having confirmed that the return, in the case before them, was filed within such time that permitted assessment u/s.147. However, the Karnataka High Court’s decision assumes a great relevance inasmuch as the Court has held that the returns, whenever filed, should be processed. This opens an interesting issue as to whether the authorities can process a delayed return, without resorting to S. 147, at least in cases where there is a refund.

4.3 The issue, in our respectful opinion, cannot be addressed by reference to S. 139 in isolation. It is true, like the Karnataka High Court noted in A. Balakrishnan’s case, that there is no prohibition contained in S. 139 to prevent an AO from processing a return filed beyond the time prescribed u/s.139. However, it is also true that in deciding the issue on hand, the Court was not invited to examine the provisions of S. 143 and S. 153 which provide for determination of refund on assessment to be completed within the prescribed time. Had these provisions been pressed into service, the decision of the Court could have been different.

4.4 Howsoever much one likes the decision of the Karnataka High Court, it is difficult to accept a proposition that a refund can be issued without the due process of law, including an assessment, and that too within the prescribed time, unless one invests an AO with an inherent power to process a return outside the framework of the Income-tax Act in the cases where a refund is due.

4.5 While the 1922 Act provided that a return or revised return could be made ‘at any time before the assessment is made’, no assessment could have been made on the basis of a return filed after the expiry of four years from the end of the year in which the income was first assessable, in view of the fetters providing for time limit for assessment. The filing of a return after the expiry of four years from the year in which the income was first assessable prevented an assessment of that income or made such reassessment illegal. As noted earlier, S. 139 of the 1961 Act does not leave any room for doubt by omitting the above-quoted words.

4.6 At the same time, the Karnataka High Court rightly considered the provisions of S. 147 to observe that the said provisions should not be invoked only in cases where an income otherwise taxable had escaped assessment. The provision of S. 147 may come in handy where the return is filed outside the time prescribed by S. 139. In such a case, the AO can issue a notice u/s.148 for regularising the return and, on such regularisation, proceed to assess the income u/s.147 r.w. S. 143, and on assessment, determine the taxes payable on assessed income and grant the refund. This in our respectful opinion is the lawful recourse in case of a delayed return.

4.7 Even while following the course suggested above, it has to be ensured that the time limit prescribed by S. 149 for issue of notice u/s.148 has been satisfied, so also the time for completion of assessment u/s.147 as prescribed by S. 153 is observed. An assessee still has to overcome the ratio of the decision of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd., 198 ITR 297, wherein the Court held that provisions of S. 147 could be invoked for the benefit of the Revenue only. The said decision was rendered in the context of a fresh claim made by the assessee in reassessment proceedings and its ratio, in our opinion, cannot cover the case of an assessee claiming refund of taxes paid by him. Granting a refund of taxes paid is neither a benefit conferred on an assessee, nor a relief provided to him. It simply is returning an amount paid by an assessee.

4.8 The alternative suggested by the Revenue in A. Balakrishnan’s case, surely provides a litigation-free recourse to an assessee claiming refund. It was suggested that the assessee should approach the CIT for condoning of delay in filing the return u/s.139, as had been prescribed by the CBDT in exercise of its powers u/s.119(2)(b). The said provision empowers the Board to issue a general or special order authorising refund, etc. after the expiry of the period specified by the Act, for avoiding genuine hardship. In exercise of this power, the Board has issued an order dated 26-10-1993 bearing no. 225/208/93-IT (A-II) r.w. Circular No. 670, dated 12-10-1993. Further clarifications also have been issued on the subject order from time to time. The power of the Board to relax the time for an application for refund has been upheld by the Punjab & Haryana High Court in the case of Jagdev Singh Bambha v. CBDT, 142 Taxman 528, wherein the Court overruled its own decision in the case of Niranjan Das v. CBDT, 135 Taxman 422.

4.9 The refund under the above Circulars is granted on compliance of provisions of S. 237 and is subject to terms and conditions stipulated in the aforesaid Circulars and also u/s.237. In cases where it is not possible to comply with these conditions, an assessee may seek a relief under the said decision in A. Balakrishnan’s case, delivered by a Single Judge by dissenting from the decision of a Division Bench.

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