Facts of the Case

  • The petitioner, M/s Genpact India, is engaged in rendering IT-enabled services and had established undertakings under the Software Technology Park Scheme (STPS).
  • For the Assessment Year (AY) 2003–04, the Assessing Officer (AO) initially granted a deduction to the petitioner under Section 10A of the Income Tax Act, 1961.
  • The AO later reopened the assessment under Section 148, asserting that telecommunication expenses incurred in foreign currency should be excluded from the "export turnover" when calculating the Section 10A deduction.
  • Consequent to the recalculation, the AO raised a total demand of Rs. 17,46,25,334 (comprising tax and interest). The petitioner challenged this before the CIT(A) and filed a stay application.
  • While the appeal was pending, the petitioner's tax return for AY 2010–11 was processed under Section 143(1), resulting in a substantial tax refund due to the petitioner.
  • Without issuing any prior notice or granting an opportunity of being heard, the AO adjusted a sum of Rs. 17,98,64,094 (arising from the AY 2003–04 dispute) against the refund due for AY 2010–11.

Issues Involved

  1. Whether the unilateral adjustment of a tax refund due for AY 2010–11 against a disputed tax demand for AY 2003–04 without prior advance intimation is legally sustainable under Section 245 of the Income Tax Act, 1961.
  2. Whether telecommunication expenses excluded from "export turnover" must also be excluded from the "total turnover" for computing deductions under Section 10A of the Act.
  3. Whether the Revenue can recover or adjust a demand on an issue that has already been adjudicated in favor of the assessee by an appellate authority/court in their own case for a subsequent year.

Petitioner’s Arguments

  • Violation of Natural Justice: The petitioner argued that the adjustment of the refund was illegal because it was executed without serving any prior notice or affording an opportunity of a hearing, which is a mandatory statutory prerequisite under Section 245 of the Act.
  • Issue Covered by Precedents: On merits, the petitioner contended that the issue of deducting telecommunication charges stood covered in their favor for AY 2004–05. Since telecommunication charges are a component of the total turnover, if they are excluded from the export turnover, they must logically be excluded from the total turnover as well.

Respondent’s Arguments

  • Mandatory Procedure Conceded: During the hearing, the learned counsel for the Revenue conceded that the procedure prescribed under Section 245 of the Act—requiring advance intimation and a fair opportunity of hearing—is mandatory.

Court Findings & Order

  • Breach of Section 245: The Delhi High Court held that the impugned adjustment was clearly made in violation of Section 245 of the Act and was liable to be quashed on this ground alone.
  • Demand Rendered Invalid on Merits: The Court observed that the Revenue's appeal (ITA No.1076/2011) against the ITAT order for AY 2004–05 on the exact same issue had already been dismissed by the High Court on November 16, 2011.
  • Adherence to CBDT Circulars: The Court emphasized that recovering a demand on an issue already decided in favor of the assessee directly violates CBDT Circular No. 1914 of 1993, as well as established legal precedents.
  • Final Verdict: Since the re-assessment demand for AY 2003–04 itself became invalid under the law, the Court ruled that remitting the matter back to the AO would serve no purpose. The Court allowed the writ petition and directed the AO to release the adjusted refund amount to the petitioner within four weeks.

Important Clarification

Recovery or adjustment of a tax demand cannot be made if the underlying dispute involves a point of law that has already been settled in favor of the assessee by a jurisdictional High Court or Court of higher hierarchy, as reinforced by CBDT Circular No. 1914 of 1993. Furthermore, a compliance notice under Section 245 is not a mere technicality; it is a mandatory statutory requirement that embodies the principle of natural justice.

Sections Involved

  • Section 10A of the Income Tax Act, 1961 (Special provisions in respect of newly established undertakings in free trade zone, etc.)
  • Section 143(1) of the Income Tax Act, 1961 (Assessment/Processing of Return)
  • Section 148 of the Income Tax Act, 1961 (Issue of notice where income has escaped assessment)
  • Section 245 of the Income Tax Act, 1961 (Set off of refunds against tax remaining payable)

Link to download the order –https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:6303-DB/AKS08122011CW69152011.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.