Condonation of Delay in Refund Claims: Independent Satisfaction by PCIT Mandatory Under Section 119(2)(b)

1. Background and Core Question Before the Court

In Rajbir Singh Vs PCIT (Punjab and Haryana High Court), a batch of writ petitions was filed by former employees of HMT Limited’s Tractor Division at Pinjore, Haryana. All petitioners questioned the legality of a common order dated 19.01.2022 passed by the Principal Commissioner of Income Tax, Panchkula (PCIT), whereby their applications seeking condonation of delay under Section 119(2)(b) for filing revised returns and claiming refund were rejected.

The central legal issue was:

Whether the PCIT was justified in declining condonation under Section 119(2)(b) on the basis that (i) a favourable order in the case of a similarly placed employee had not been accepted by the Department on merits; (ii) no independent order had been passed in the assessee’s own case; and (iii) no genuine hardship was established – without undertaking an independent examination of:

  • the correctness and genuineness of the refund claim, and
  • the existence of genuine hardship,
    as explicitly required by CBDT Circular No. 9/2015 dated 09.06.2015.

The High Court held that the PCIT could not reject the condonation applications in a mechanical manner and must apply an independent mind to both the genuineness of the claim and the question of genuine hardship.

2. Facts in Brief: HMT Tractor Division VRS and Original Return

For convenience, the High Court considered in detail the facts from CWP No. 18800 of 2023 – Rajbir Singh Vs Principal Commissioner of Income Tax, Panchkula and others.

2.1 HMT Limited and Closure of Tractor Division

  • HMT Limited was established in 1953 as a Central Public Sector Enterprise under the Ministry of Heavy Industries and Public Enterprises, Government of India.
  • Its Tractor Division at Pinjore, Haryana was set up in 1971.
  • Over time, particularly from the 1990s, HMT’s performance declined significantly, and the Tractor Division became financially unviable.
  • Employees, including the petitioner, allegedly remained unpaid salary from July 2014, with some statutory dues pending from November 2013.
  • On 27.10.2016, the Union Cabinet approved the closure of HMT Limited’s Tractor Division at Pinjore and sanctioned budgetary support for settlement of pending wages and related dues through a Voluntary Retirement Scheme (VRS) / Voluntary Separation Scheme (VSS).

Pursuant to this decision, an office order dated 04.11.2016 was issued, intimating employees that VRS/VSS was being offered as a one-time benefit and that those not opting for it would face retrenchment under applicable provisions of the Industrial Disputes Act, 1947, as the division was proposed to be shut.

2.2 VRS Payment and Tax Treatment in Form 16

  • The petitioner, who was employed as a Senior Office Assistant at the Tractor Division, opted for VRS in 2016.
  • He received Rs. 29,14,500/- as VRS benefits.
  • In Form 16 issued under Section 203 of the Income Tax Act 1961 read with Rule 31(1A) of the Income Tax Rules 1962, HMT Limited:
    • treated Rs. 5,00,000/- as exempt under Section 10(10C), and
    • considered the balance Rs. 24,14,500/- as taxable.

On the strength of this Form 16, the assessee filed his return of income for AY 2017-18 on 03.08.2017. The return was processed and accepted as filed.

3. Subsequent Appellate Developments in Cases of Similarly Situated Employees

3.1 Order in Prempal’s Case

Another employee, Prempal, who was also a VRS beneficiary from the same division, initially filed his return claiming exemption under Section 10(10C) and was assessed accordingly. He then filed a revised return claiming exemption instead under Section 10(10B).

The Assessing Officer rejected his revised claim. Prempal appealed under Section 246(A).

  • By order dated 30.01.2020, CIT(A), Panchkula allowed Prempal’s appeal.
  • The CIT(A) accepted entitlement under Section 10(10B) and principally relied on the judgment of the Madras High Court in Hindustan Photo Film Workers Welfare Centre (CITU) Vs. Government of India, New Delhi, (2018) 400 ITR 299 (Madras).
  • The Supreme Court later dismissed the Revenue’s Special Leave Petition in Union of India Vs. Hindustan Photo Film Workers Welfare Centre and Others, Special Leave Petition (Civil) Diary No. 37247/2017, thereby allowing the Madras High Court decision to attain finality.

3.2 ITAT Decision in Favour of Other Employees

  • In the case of several other HMT Tractor Division employees, the CIT(A) initially dismissed their appeals and decided in favour of the Revenue by orders dated 12.07.2022, 19.07.2022, 30.11.2022, 06.12.2022 and 30.12.2022.
  • Those employees appealed to the ITAT, where their matters were clubbed.
  • By a common order dated 20.09.2023, the ITAT allowed all appeals in favour of the assessees, effectively accepting the position that exemption under Section 10(10B) was available in comparable circumstances.