When Does A Tax Liability Accrue?
Article 265 of the Constitution of India provides that no tax shall be levied or
collected except by the authority of law. Such tax does not depend upon an
assessment to be made by the assessing officer. Section 4 of the Indian Income
Tax Act, 1961, which is the charging section, charges tax on income at the rate
or rates prescribed under the Act. The Finance Act prescribes such rate. Section
4 taxes such income and requires tax either to be deducted or paid in advance
under any provisions of the Act.
Hence, advance tax, which is also paid during the financial year, is a tax on
income, which is chargeable under the Act. So is self-assessment tax to be paid
under section 140A of the Act. It is true that the income may get crystallized
or quantified in a regular assessment, but that does not make advance tax, tax
deducted at source or self-assessment tax any the less valid.
Where regular assessment is made, further tax may be either required to be paid
or excess tax, if any paid, will be refunded. Interest for any short payment or
refund is also part of the exercise in determination of final tax. But where no
regular assessment is made after return is filed, it tantamount to acceptance of
the return of income, so that the tax paid in excess would require to be
refunded. A return of income binds the assessee to the income returned in cases,
where no assessment is made, unless he files a revised return within the time
prescribed under the law.
The law on the subject on the above lines was made clear by the Apex Court in CIT
v. Shelly Product
s  261 ITR 367 (SC) in the context of an assessment
made without jurisdiction as found by the Tax Tribunal. The question, that arose
was, whether the assessment should be treated as one which is annulled, so as to
entitle the assessee to the refund of the entire amount paid by the way of
advance tax or self-assessment tax.
Though the assessment got annulled, the Assessing officer was willing to refund
only the tax paid by the way of advance tax and self-assessment tax. The first
appellate authority, the ITAT and the High Court felt that in such cases, the
entire amount would required to be refunded in the absence of a valid
assessment for the respective assessment year 1976-77, which did not have a
provision, as from assessment year 1989-90 dispensing with the need for either
an intimation or assessment.
Even so, the Apex Court found that the tax paid either as advance tax or
self-assessment tax is also tax, which is validly chargeable and that the effect
of annulment was only cancellation of the demand in excess of such admitted tax,
which is also a tax statutorily payable. There is nothing in section 240
requiring the refund of the entire tax payable by an assessee.
After an elaborated review of the case law on the subject, the Supreme Court
endorsed the full bench of the Gujrat High Court in Saurashtra Cement and
Chemical Industries Ltd. v.ITO
 194 ITR 659 (Guj.), where it was held
that the amount by the way of advance tax or self-assessment tax is also tax
under the Article 265 of the Constitution and that where an assessment is not
made or assessment made is found to be without any jurisdiction, what is
refundable is only the excess over the admitted tax. An amendment by the way of
proviso to section 240 of the Act authorizing retention of the tax paid on
admitted income was also found to be satisfactory. The law on the subject,
therefore, gets settled.
It is not unusual that the assessment gets annulled for various reasons. But
such annulment puts back the legal position to a stage, where no assessment has
been made. The position of law under the present scheme, of the assessment would
not give rise to any doubt, though the use of the word ďannulí in such context
would probably be more properly vacated or set aside, even where it is void ab
Now, that the first appellate authority does not have the right to set aside an
assessment, he may have to make it clear that the assessment is declared void,
bringing out the weakness of the unnecessary bar on the power of the first
appellate authority to set aside an assessment.
Another offshoot of the case is a problem arising in a situation in an ex-parte order,
where no return is filed, but the assessment is found to be invalid for the lack
of jurisdiction. In such a case, probably it must be inferred that advance tax
is the admitted tax, because the Apex Courtís decision in CIT v. Shelly
(Supra) would assume that any tax paid by the way of advance tax
would be treated as validly paid. Now, the next question that comes to my mind
is that whether the same thing be said for TDS also?
The answer according to my view, would be probably yes, because the assessee has
to blame himself, if he has not filed a return in a case where the TDS is in
excess of the tax payable. An assessee, who has not paid either the advance tax
nor is there any TDS, but the courts passes an ex-parte order, is an a happier
position, if such order is ab initio void in law.
Thus, the remedy lies in tax authorities avoiding mistakes giving rise to bad
assessment, which requires annulment.
Written By: Adv Ashish Parashar
- Delhi High Court
E-mail: [email protected]