Refund Can’t Be Withheld On The Ground That Assessee Is Selected For Scrutiny Assessment; Delhi High Court Sets Aside Order Withholding Refund Due To OYO

The bench of Justices Rajiv Shakdher and Tara Vitasta Ganju remarked that despite OYO receiving a refund intimation under Section 143(1) of the Income Tax Act, it was wholly unjust and inequitable for the Assessing Officer to withhold the refund amount due to it, merely on the ground that a scrutiny notice had been issued to OYO.

The Court ruled that a refund cannot simply be withheld on the ground that an assessee has been selected for scrutiny assessment or that a scrutiny notice has been issued to it under Section 143(2) of the Income Tax Act.

The bench further remarked that OYO is a well reputed company with a large net-worth running into several billion dollars, and not a “fly-by-night” operator. Also, it is a tax assessee for the last several years and its credit worthiness is not in dispute, it held.

The petitioner, OYO, received a refund intimation under Section 143(1) of the Income Tax Act, intimating that a refund of over Rs. 33 Crores was due to it.

Despite the lapse of several months after the passing of the Refund Intimation, no refund was received by OYO. After OYO filed online complaints on the Income Tax Portal seeking disbursal of the refund amount, it was informed by the Revenue Department that its refund had been withheld.

Subsequently, OYO filed a writ petition before the Delhi High Court seeking directions for disbursal of the refund amount.

OYO pleaded that despite its refund being determined and an intimation being given to it, the refund was not remitted to it. It further contended that the Revenue Department had not provided any substantive reasons to defend its decision to withhold the refund under the provisions of Section 241A.

As per Section 241A of the Income Tax Act, where the Assessing Officer is of the opinion that grant of the refund due to the assessee is likely to adversely affect the revenue, having regard to the fact that a notice under Section 143(2) has been issued to the assessee, it may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, withhold the refund up to the date on which the assessment is made.

Perusing Section 241A of the Income Tax Act, the Court observed that the power to withhold a refund may be exercised by the Assessing Officer (AO) subject to the following conditions: Firstly, the AO must record reasons in writing for withholding the refund; Secondly, the AO must record, how the grant of the refund is, in his opinion, likely to adversely affect the interest of the Revenue Department. Thirdly, the approval of the Appropriate Authority must be taken prior to the issue of such order.

Referring to the facts of the case, the Court took note that as per the Revenue Department, the reason for withholding the refund was simply that OYO’s case was selected under Computer Aided Scrutiny Selection (CASS), and there were a large number of issues to be examined in its case, including Transfer Pricing.

The Regional Faceless Assessment Centre (Assessment Unit) (ReFAC(AU)) had opined that since scrutiny assessment was in progress, which might lead to raising of demand, the grant of refund was likely to adversely affect the revenue department, the Court noted

Referring to the communication received by OYO from the ReFAC(AU), which contained the reasons for withholding the refund due to it, the Court concluded that the revenue department had failed to satisfy the conditions set forth in Section 241A for withholding the refund amount.

“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,” the bench said.

“There are no worthwhile reasons recorded in writing. 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,” said the Court.

The Court added: “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 Department, the Court added.

The Court further held that a refund cannot be withheld only on the ground that an assessee has been selected for scrutiny assessment or that a notice has been issued to it under Section 143(2) of the Income Tax Act.

“…it would be wholly unjust and inequitable for the AO to withhold a refund by citing the reason that a scrutiny notice has been issued and such an interpretation of the provision would be contrary to the intent of the legislature. The ReFAC(AU) has been completely swayed by the fact that the case of the Assessee has been selected by CASS for scrutiny assessment,” it added.

The bench concluded that the Principal Commissioner of Income Tax (ReFAC)(AU) had mechanically accorded permission to withhold the refund till the date of finalization of assessment, without any application of mind. The Court thus set aside the order containing an intimation regarding withholding of the refund amount due to OYO.

“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,” the bench held.

Case Title: OYO Hotels and Homes Private Limited vs Deputy Assistant Commissioner of Income Tax & Anr.

Citation: 2023 LiveLaw (Del) 279

Counsel for the Petitioner: Mr Sujit Ghosh with Ms Mannat Waraich and Ms Anshika Agarwal, Advs

Counsel for the Respondents: Mr Puneet Rai, Sr Standing Counsel

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