The Delhi High Court has held that the Income Tax Department cannot deny an assessee credit or refund of excess tax deducted at source (TDS) merely because the return of income was filed in response to a notice issued under Section 148 of the Income Tax Act, 1961.

The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta directed that the return filed by the deceased assessee be treated akin to a regular return under Section 139 and ordered the Assessing Officer to undertake a fresh assessment after granting TDS credit in accordance with law. It further directed that any unutilised or refundable TDS and prepaid taxes be refunded to the legal heir, along with applicable interest.

The case arose out of a dispute concerning the sale of a house property by deceased assessee. According to the Delhi High Court, the litigation had a “checkered history” spanning nearly twelve years and had travelled through multiple statutory and judicial proceedings.

Buy Now: 80+ Income Tax Judgments | E-Magazine July 2026

The dispute had involved an application before the Authority for Advance Ruling (AAR), reassessment proceedings under Section 147, multiple rectification proceedings relating to refund, revisionary proceedings under Section 263, penalty proceedings under Section 271(1)(c), appeals before the Income Tax Appellate Tribunal and several writ petitions before the High Court.

The present proceedings comprised an appeal filed by the Income Tax Department against an ITAT order dated June 28, 2023, which had set aside the Commissioner’s order under Section 263, and a writ petition filed by Sagarika Ghosh, the legal heir and widow of the assessee, challenging a penalty order and consequential demand notice.

Income Assessed at Over ₹59 Crore

The controversy became particularly significant after the assessment order dated October 28, 2022, passed under Section 147, was revived. Following subsequent rectification proceedings, the income arising from the sale of the property stood assessed at ₹59.05 crore.

One of the principal grievances of the assessee was the denial of credit for prepaid taxes, including advance tax and TDS, apart from disputes relating to valuation and other issues concerning the assessment.

The Department had denied the full benefit of prepaid taxes on the ground that the assessee had not originally filed a return under Section 139 and had filed the return only after receiving a notice under Section 148. The Revenue relied upon the Supreme Court’s decision in Commissioner of Income-tax v. Sun Engineering Works (P.) Limited in support of its stand.

Sumit Lalchandani, the counsel appearing for the legal heir argued that the return had not been filed earlier because the assessee was awaiting a ruling from the AAR on the taxability of the transaction.

The High Court accepted the bona fide circumstances surrounding the delay. It observed that the assessee had approached the AAR for adjudication of the very issue that subsequently resulted in the tax demand. The Court noted that the assessee was awaiting the outcome of the proceedings before the AAR and found that there was no intention to avoid payment of tax.

The Court also took note of the fact that a substantial amount had already been deducted at source and observed that the assessee would, in any event, have needed to file a return to claim refund of taxes deducted in excess of the ultimate tax liability.

A major issue before the Court concerned prepaid taxes and TDS amounting to ₹16.58 crore.

Even according to the Assessing Officer’s position, prepaid taxes could be adjusted against the outstanding demand of ₹12.15 crore. However, the Department maintained that the balance amount of ₹5.15 crore was not refundable.

The High Court rejected this distinction and held that the Department could not retain the excess amount indefinitely. It observed that if the balance prepaid taxes were not refunded, the money would remain with the Union of India indefinitely even though it could not be treated as tax revenue.

The Court further noted that the Revenue had failed to demonstrate any statutory provision, justification or plausible logic explaining why an assessee could receive adjustment of prepaid taxes against a demand but could not receive a refund of the excess amount.

In an important direction, the Delhi High Court held that, considering the facts of the case, the return filed pursuant to the notice under Section 148 should be treated akin to a regular return of income.

The Court specifically observed that the assessee had bona fide reasons for awaiting the determination of the taxability issue by the AAR. It therefore directed that the return filed in response to reassessment proceedings should receive treatment equivalent to a regular return for the purpose of the fresh assessment and grant of tax credit.

The Court also distinguished the Revenue’s reliance on the Supreme Court ruling in Sun Engineering Works. According to the High Court, that judgment dealt with substantive computation issues that had already been adjudicated in an earlier assessment and did not concern the grant of credit for prepaid taxes.

The assessee agreed to the Department’s appeal being allowed and sought a remand of the matter to the Assessing Officer, subject to a direction that appropriate TDS credit be granted.

Accepting this course, the High Court allowed the Department’s appeal without answering the substantial questions of law and remanded the matter for a fresh assessment.

The Court set aside the ITAT order dated June 28, 2023, as well as the earlier assessment order dated February 26, 2018, and restored the matter to the Assessing Officer. The return filed on December 2, 2015, has been directed to be treated as a return under Section 139, with TDS credit to be granted after due verification and in accordance with law.

As the ITAT order was set aside, the High Court also quashed the penalty order dated April 28, 2023, passed under Section 271(1)(c).

However, the Court clarified that the Assessing Officer would remain free to initiate penalty proceedings afresh, should circumstances warrant such action following the fresh assessment.

The High Court directed the Assessing Officer to complete the fresh assessment within two months.

Any TDS or prepaid tax remaining unutilised after determining the final tax liability, or otherwise found refundable, must be paid to the assessee’s widow within two months from the date of the fresh assessment order, along with applicable interest under Sections 244A and 244A(1A) of the Income Tax Act.

Significantly, the Court imposed a further consequence for delay. If the refund and interest exercise is not completed by December 31, 2026, the amount will carry additional interest at the rate of 0.5% per month from January 1, 2027.

The Court also permitted the Assessing Officer to approach the High Court for clarification if any practical difficulty arises in transmitting the refund, including issues relating to PAN-Aadhaar linking or other administrative obstacles.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Suspicion Can’t Replace Proof: CESTAT Quashes Penalty in Alleged Gold-Smuggling Operation