SC: Adjustment of refundable amount against future demands not permissible

• The assessee while executing works contracts for Delhi Metro Rail Corporation made purchase of goods required for execution of the said contract.
• The assessee filed a refund application for the refund of excess tax paid for the tax periods 2015-16 and 2017-18 on 29.03.2019 under the Delhi Value Added Tax Act, 2004 (“DVAT Act”). As per section 38(3) of the DVAT Act, refund should be granted within 2 months of filing the application.
• The Value Added Tax Officer passed an adjustment order dated 18.11.2022 for adjustment of the assessee’s refund against the dues arising out of default notices dated 30.03.2020, 23.03.2021, 30.03.2021 and 26.03.2022.
• Consequently, the assessee filed a Writ Petion before Hon’ble Delhi High Court, wherein the Hon’ble Court quashed the adjustment order and directed the Petitioner to process refund stating that:
  • the Department must follow the time limit for processing and issuing the refunds under Section 38 of the DVAT
  • the refund amount can be adjusted only when an enforceable demand in the nature of tax or duty is pending against the assessee
  • the Department does not have any legal right or justification to retain the amount beyond the time limit prescribed under Section 38 of the DVAT Act.
•  Then the Department filed the Civil Appeal before the Hon’ble Supreme Court against the judgement of the Hon’ble High Court.

• Whether the timeline for refund under Section 38(3) of the DVAT Act must be mandatorily followed while recovering any dues under the DVAT Act by adjusting them against the refund amount?

• The language of Section 38(3) of the DVAT is clear and mandatory; the Department must adhere to the timeline stipulated therein to fulfil the object of the provision, to ensure that refunds are processed and issued in a timely manner.
• By the time when the refund should have been processed as per the provisions of the DVAT Act, the dues under the default notices had not crystallised and the assessee was not liable to pay the same.
• This interpretation would effectively enable the Department to retain refundable amounts for long durations for the purpose of adjusting them at a future date. This would go against the object and purpose of the relevant provision.