Refund Cannot Be Adjusted Against Settled Dues Under 2023 Settlement Act: Bombay High Court

The Bombay High Court on Thursday, 12 March, held that once a taxpayer opts for settlement under the Maharashtra Settlement of Arrears of Tax, Interest, Penalty or Late Fee Act, 2023 (Settlement Act), the State cannot adjust a refund from another assessment year against the settled dues.

A Division Bench of Justice G. S. Kulkarni and Justice Aarti Sathe, while allowing a petition filed by President Trade and Exim Corporation, observed that the Settlement Act is a self-contained code, and its operation cannot be altered by invoking provisions of the Maharashtra Value Added Tax Act, 2002 (MVAT Act).

The judges held:

“If we were to accept the submission made on behalf of the Revenue, then the assessee would never be able to achieve quietus of litigation insofar as tax disputes are concerned and this, to our mind, would only add to further disputes between the assessee and the department and also consequently result in hampering businesses, and making the provisions tax-unfriendly. This can never be the intention of an amnesty scheme. The Department cannot make an assessee pay for its tax dues under the amnesty scheme and at the same time deny legitimate benefit of refund which is due to the assessee.”

The petitioner, a dealer engaged in the wholesale trade of paper products and registered under the MVAT Act, faced investigations over alleged ineligible Input Tax Credit for multiple tax periods. Subsequent assessments resulted in a refund for 2007–08, while separate demands arose for later years.

When the Maharashtra Settlement Act was introduced to resolve legacy tax disputes, the petitioner opted for the One-Time Payment option, which allowed settlement by paying 20% of the disputed amount where arrears were below Rs. 50 lakh. The petitioner paid the requisite amount for the tax periods 2008–09 and 2009–10 under the scheme.

Despite this, the State Tax Department passed a settlement order adjusting the refund for 2007–08 against the dues for 2008–09, prompting the petitioner to approach the High Court.

The Court observed that the Settlement Act was enacted specifically to bring quietus to old tax disputes and unlock revenue tied up in litigation. It noted that in such circumstances, allowing refund adjustment would defeat the objective of the scheme.

The Bench also emphasised that the Settlement Act operates independently and authorities exercising powers under it cannot import provisions from other statutes, such as Section 50 of the MVAT Act, unless expressly permitted.

Further, the Court held that each financial year is treated independently for settlement purposes, requiring separate applications and calculations of arrears. Apart from statutory interpretation, the Court also found that the refund adjustment was carried out without giving the petitioner an opportunity of hearing, violating principles of natural justice.

The Bench directed the authorities to accept the petitioner's settlement application for 2008–09 without adjusting the refund for 2007–08, and ordered the State Tax Department to refund Rs. 33.29 lakh along with applicable interest within two weeks.

Accordingly, the Court allowed the petition and quashed the settlement order dated 18 April 2024.

Appearance for the Petitioner: Mr. Manohar Samal a/w. Ms. Ruchi Rathod and Ms. Aishwarya Jain i/b. Mr. Ratan Samal, for Petitioner.

Appearance for the Respondent: Ms. Naira Jeejeebhoy, Spl.Counsel a/w. Ms. Jyoti Chavan, Addl.G.P. and Mr. Amar Mishra, AGP