Supreme Court: Refund Can Be Withheld During Scrutiny under Income Tax Act—Section 143(1D) Overrides Summary Processing Under Section 143(1)

Case Name: Vodafone Idea Ltd. (earlier known as Vodafone Mobile Services Ltd.) v. Assistant Commissioner of Income Tax, Circle 26(2) & Anr.

Citation: Civil Appeal No. 2377 of 2020 (Arising out of SLP (C) No. 1169 of 2019)

Date of Judgment: 29 April 2020

Bench: Justice U.U. Lalit and Justice Vineet Saran

Held: The Supreme Court held that once a notice is issued under Section 143(2) of the Income Tax Act, the Assessing Officer is not obliged to process the return under Section 143(1). Section 143(1D), which begins with a non-obstante clause, has an overriding effect and authorizes the Department to withhold refund pending scrutiny assessment. The Court clarified that the power to withhold refunds must, however, be exercised by recording written reasons and obtaining prior approval under Section 241A. For Assessment Year 2017–18, the order dated 23 July 2018 issued under Section 143(1D) was declared invalid as no scrutiny notice had been issued at that time; nevertheless, the subsequent order dated 14 March 2019 was found valid as it complied with statutory procedure.

Summary: Vodafone Idea Ltd. had filed income tax returns for Assessment Years 2014–15 to 2017–18 claiming aggregate refunds exceeding ₹4,700 crores. The Assessing Officer declined to process the returns and withheld refunds on the ground that scrutiny proceedings, special audits, and substantial outstanding demands exceeding ₹5,000 crores were pending. The Delhi High Court upheld this action under Sections 143(1D) and 241A. On appeal, the Supreme Court examined the interplay between Sections 143(1), 143(2), and 143(3), reiterating that the initiation of scrutiny under Section 143(2) excludes the necessity of processing under Section 143(1). The Court accepted that the Department’s reasons protecting revenue interest during pending assessments were legitimate, and that the statutory scheme intends to prevent premature refunds in such circumstances.

Decision: The appeal was dismissed. The Supreme Court affirmed the validity of the Department’s action withholding refunds under Sections 143(1D) and 241A, except noting that the earlier order dated 23 July 2018 was without jurisdiction. The subsequent order dated 14 March 2019 was upheld as lawful. No direction was issued for release of refunds.