Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Where, as a result of any order in appeal or other proceeding under the Act, a refund becomes due to the assessee, the Assessing Officer must refund the amount without the assessee having to make any claim, subject to the two provisos governing set-aside/fresh assessment (proviso (a)) and annulment (proviso (b)).
FA 2026: No amendment by the Finance Act, 2026.
A. SECTION COMMENTARY
Section 240 deals with the subsequent stages of proceedings, in contrast to section 237 which governs the initial stage. Where a refund becomes due to the assessee "as a result of any order passed in appeal or other proceeding under this Act", the Assessing Officer must grant it suo motu, without the assessee having to make any claim. The phrase "any amount" is used deliberately and is of wide amplitude, in contrast to the "excess" language of section 237.
The expression "other proceeding under this Act" has been read broadly to include orders under section 154 (rectification), orders of the High Court or Supreme Court on a reference under section 260, orders of the Commissioner in revision under section 263 or 264, and orders of the Settlement Commission under section 245D(4). Thus a refund flowing from any such order is payable under section 240 without a separate claim.
The two provisos are central. Proviso (a): where the order sets aside or cancels an assessment and directs a fresh assessment, the refund becomes due only on the making of the fresh assessment — so that while the matter is at large no refund (and no interest on it) can be said to be due. Proviso (b): where the assessment is annulled, the refund becomes due only of the amount, if any, of tax paid in excess of the tax chargeable on the total income returned by the assessee — i.e. the wrongly-collected excess, not the tax the assessee himself admitted and paid on his returned income.
The Supreme Court in Shelly Products held the provisos to be declaratory and retrospective, and drew the decisive distinction between tax wrongly collected (refundable) and tax voluntarily paid on returned income (not refundable on annulment). Chittoor Electric Supply explains proviso (a): pending a directed fresh assessment, no refund is "due". Modi Industries supplies the architecture of refund and interest, and K. Lakshmanya confirms both that section 245D(4) orders fall within "other proceeding" and that "refund of any amount" is wide enough to include refundable interest.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025).
240. Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf:
Provided that where, by the order aforesaid,—
(a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment;
(b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee.
C. AUTHORITIES
Section 240 is among the most litigated provisions of the Chapter. The authorities below settle (1) what is refundable on annulment, (2) the effect of a directed fresh assessment, and (3) the breadth of "other proceeding" and "any amount".
1. Provisos (a) and (b) declaratory; excess over tax on returned income refundable; voluntary tax not
Held: (i) Provisos (a) and (b) to section 240 are declaratory and clarificatory, and therefore operate retrospectively; the CBDT Circular dated 23 January 1990 is likewise only clarificatory. (ii) The liability to pay income-tax arises by force of the charging provisions read with the Finance Act, not from the making of an assessment; Article 265 is not breached merely because no fresh assessment is framed after an annulment. (iii) Where an assessment is annulled and the Revenue does not (or cannot) make a fresh assessment, the assessee is entitled to a refund only of the amount paid in excess of the tax chargeable on, and paid in respect of, the income returned — i.e. tax paid pursuant to the annulled order over and above the tax on the returned income. (iv) Taxes paid voluntarily and on the assessee's own admission of liability, such as advance tax and self-assessment tax referable to the returned income, are not refundable merely because the assessment is annulled; conversely, if the assessee has wrongly paid excess tax (e.g. by misreading an exemption), it may bring the fact to the AO's notice for refund.
Significance: The cornerstone decision on proviso (b) to section 240. It draws the crucial line between (a) tax wrongly collected under an annulled order, which is refundable, and (b) tax voluntarily paid on returned income, which is not. Applied by the Supreme Court in CIT v. Micro Nova Pharmaceuticals (P) Ltd. to block-period self-assessment tax.
CIT v. Micro Nova Pharmaceuticals (P) Ltd. (SC) — applying Shelly Products
Court: Supreme Court of India, following CIT v. Shelly Products (2003) 261 ITR 367 (SC).
Held: Tax paid by the assessee mandatorily along with the return of income filed for the block period under Chapter XIV-B is not liable to be refunded merely on annulment, the decision in Shelly Products being squarely applicable; only the excess over the tax chargeable on, and paid in respect of, the returned (block) income can be refunded.
Significance: Confirms the reach of the Shelly Products principle to taxes voluntarily paid with a return, in the search-assessment setting; cited for the proposition that section 240 (and section 237) refund the wrongly-collected excess, not the assessee's own admitted tax.
2. Directed fresh assessment — no refund "due" until it is made (proviso (a))
CIT v. Chittoor Electric Supply Corporation (SC)
Court: Supreme Court of India (as reported).
Facts: On appeal the matter was restored to the Assessing Officer to frame a fresh assessment; thereafter a refund was determined. The assessee claimed interest from the date of the first appellate order to the date of refund.
Held: No refund can be said to have become "due" while assessment proceedings are still pending; "when the assessment proceedings are still pending, it is idle to talk of any amount or any refund becoming due to the assessee in respect of that assessment year, particularly in the light of section 237." Where a fresh assessment has been directed (proviso (a) to section 240), the refund — and hence interest on it — becomes due only on the making of the fresh assessment, not from the date of the appellate order.
Significance: Establishes that the refund must first be "due" before any refund or interest can arise; it is the textual companion to proviso (a) of section 240 and to the "amount becomes due" language of sections 243, 244 and 244A.
3. "Other proceeding" and "refund of any amount" — breadth of section 240
K. Lakshmanya & Co. v. CIT (2017) 399 ITR 657 (SC)
Held: (i) An order of the Settlement Commission under section 245D(4) is an order passed in "other proceeding under this Act", so that a refund flowing from it falls within section 240. (ii) The words "refund of any amount" in section 240 are of wide import and include a refund of any amount of whatever character, including interest earlier paid under sections 234A to 234C. (iii) Where, consequent on a waiver of interest under sections 234A-234C by the Settlement Commission, interest already paid becomes refundable, that refund carries statutory interest under section 244A(1)(b) — the case being one of refund of interest paid, not of interest on interest. Section 244A is wider than the former section 244, it being sufficient that any amount of refund becomes due.
Significance: Settles that refundable interest (paid under sections 234A-C) is itself an "amount" that attracts section 244A interest, and that section 245D(4) orders engage section 240; it carefully distinguishes the impermissible interest-on-interest of Gujarat Fluoro Chemicals.
Modi Industries Ltd. v. CIT (1995) 216 ITR 759 (SC)
Court: Supreme Court of India; three-Judge Bench; judgment dated 15 September 1995 (1995) 216 ITR 759 / 82 Taxman 377.
Held: A leading exposition of the pre-1989 interest-on-refund scheme (sections 214, 243 and 244) and the meaning of "regular assessment". The Court worked out the periods for which, and the amounts on which, interest on advance tax and on excess tax was payable, and held that the right to a refund of tax realised in excess of the tax ultimately found payable arises, and interest runs, with reference to the relevant statutory dates rather than from each successive appellate order.
Significance: The foundational authority on the architecture of refund interest under the old sections 214/243/244; though those sections do not apply from assessment year 1989-90 (section 244A having replaced them), Modi Industries remains the reference point for the principles later carried into section 244A and for assessments up to 1988-89.
4. Refund flowing from an order — it becomes "due" under section 240; "refund of any amount" includes interest
Union of India v. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
Facts: The assessee-deductor, on a reference under section 195(2), was directed to deduct tax on remittances to a non-resident. In appeal the CIT(A) held that reimbursement of expenses was not chargeable in the non-resident's hands; the tax deducted and deposited on that component thus became refundable to the deductor, which claimed interest on it.
Held: A tax refund due to a resident/deductor on excess tax deducted and deposited under section 195 must be refunded with interest under section 244A from the date of payment. The obligation to refund money received and retained without right carries with it the right to interest; "refund becomes due" the moment the State has no lawful authority to retain the sum. The Department's reliance on the absence of an express provision was rejected — section 244A is wide enough to cover the deductor's refund (the matter being governed by section 244A(1)(b) read with section 240).
Significance: The leading modern authority on the State's duty to pay interest on unauthorisedly retained tax. It anchors both the refund right (section 237/240) and the interest right (section 244A) and has been followed repeatedly, including by the Supreme Court in Universal Cables Ltd. v. CIT.
Held: On a reading of section 240, the words refund of any amount are of wide import and take in a refund of any amount of whatever character, including interest; the provision is not confined to a refund of tax alone.
Significance: Relied upon by the Supreme Court in the section 244A line (and in K. Lakshmanya) for the breadth of refund of any amount under section 240 — interest is comprehended within it.
5. Effect of an appellate/annulment order on the demand and on retention of tax
ITO v. Seghu Buchiah Setty (1964) 52 ITR 538 (SC) — effect of reduction in appeal
Court: Supreme Court of India (1964) 52 ITR 538.
Held: Where the tax demanded is substantially reduced as a result of an appellate order, the original notice of demand does not survive for the reduced figure; a fresh notice of demand must be served before the assessee can be treated as in default. (The recovery-side difficulty thrown up by this ruling was later addressed by the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.)
Significance: Illustrates the consequence of an appellate order on the original demand — the foundation for the section 240 principle that a refund/recomputation flows from the appellate order and the demand must be reworked to give effect to it.
Deep Chand Jain v. ITO (1984) 145 ITR 676 (Punjab & Haryana) — refund where no assessment made
Court: High Court of Punjab & Haryana (1984) 145 ITR 676.
Held: The retention of advance tax becomes without authority of law where no final assessment is made within the period of limitation; in such a case the amount collected is liable to be refunded to the assessee, the State having no lawful authority to retain it.
Significance: An early High Court statement of the refund principle later affirmed in Shelly Products — that tax cannot be retained where the assessment that would justify it is not (or cannot be) made.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the local Act (base text amended up to the Finance Act, 2025); the publisher's footnote apparatus and amendment-marker brackets have been removed, and three asterisks (***) denote words or a sub-section omitted by amendment and retained only to mark the omission. Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported. Where a section has not been the subject of a direct reported decision, that is stated candidly and the nearest governing authority or circular is given. This digest is for professional reference and is not legal advice.
CHAPTER XIX — REFUNDS
Section 240 — Refund on Appeal, etc.
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Where, as a result of any order in appeal or other proceeding under the Act, a refund becomes due to the assessee, the Assessing Officer must refund the amount without the assessee having to make any claim, subject to the two provisos governing set-aside/fresh assessment (proviso (a)) and annulment (proviso (b)).
FA 2026: No amendment by the Finance Act, 2026.
A. SECTION COMMENTARY
Section 240 deals with the subsequent stages of proceedings, in contrast to section 237 which governs the initial stage. Where a refund becomes due to the assessee "as a result of any order passed in appeal or other proceeding under this Act", the Assessing Officer must grant it suo motu, without the assessee having to make any claim. The phrase "any amount" is used deliberately and is of wide amplitude, in contrast to the "excess" language of section 237.
The expression "other proceeding under this Act" has been read broadly to include orders under section 154 (rectification), orders of the High Court or Supreme Court on a reference under section 260, orders of the Commissioner in revision under section 263 or 264, and orders of the Settlement Commission under section 245D(4). Thus a refund flowing from any such order is payable under section 240 without a separate claim.
The two provisos are central. Proviso (a): where the order sets aside or cancels an assessment and directs a fresh assessment, the refund becomes due only on the making of the fresh assessment — so that while the matter is at large no refund (and no interest on it) can be said to be due. Proviso (b): where the assessment is annulled, the refund becomes due only of the amount, if any, of tax paid in excess of the tax chargeable on the total income returned by the assessee — i.e. the wrongly-collected excess, not the tax the assessee himself admitted and paid on his returned income.
The Supreme Court in Shelly Products held the provisos to be declaratory and retrospective, and drew the decisive distinction between tax wrongly collected (refundable) and tax voluntarily paid on returned income (not refundable on annulment). Chittoor Electric Supply explains proviso (a): pending a directed fresh assessment, no refund is "due". Modi Industries supplies the architecture of refund and interest, and K. Lakshmanya confirms both that section 245D(4) orders fall within "other proceeding" and that "refund of any amount" is wide enough to include refundable interest.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025).
240. Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf:
Provided that where, by the order aforesaid,—
(a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment;
(b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee.
C. AUTHORITIES
Section 240 is among the most litigated provisions of the Chapter. The authorities below settle (1) what is refundable on annulment, (2) the effect of a directed fresh assessment, and (3) the breadth of "other proceeding" and "any amount".
1. Provisos (a) and (b) declaratory; excess over tax on returned income refundable; voluntary tax not
CIT v. Shelly Products (2003) 261 ITR 367 (SC)
Court: Supreme Court of India; (2003) 261 ITR 367 / 129 Taxman 271.
Held: (i) Provisos (a) and (b) to section 240 are declaratory and clarificatory, and therefore operate retrospectively; the CBDT Circular dated 23 January 1990 is likewise only clarificatory. (ii) The liability to pay income-tax arises by force of the charging provisions read with the Finance Act, not from the making of an assessment; Article 265 is not breached merely because no fresh assessment is framed after an annulment. (iii) Where an assessment is annulled and the Revenue does not (or cannot) make a fresh assessment, the assessee is entitled to a refund only of the amount paid in excess of the tax chargeable on, and paid in respect of, the income returned — i.e. tax paid pursuant to the annulled order over and above the tax on the returned income. (iv) Taxes paid voluntarily and on the assessee's own admission of liability, such as advance tax and self-assessment tax referable to the returned income, are not refundable merely because the assessment is annulled; conversely, if the assessee has wrongly paid excess tax (e.g. by misreading an exemption), it may bring the fact to the AO's notice for refund.
Significance: The cornerstone decision on proviso (b) to section 240. It draws the crucial line between (a) tax wrongly collected under an annulled order, which is refundable, and (b) tax voluntarily paid on returned income, which is not. Applied by the Supreme Court in CIT v. Micro Nova Pharmaceuticals (P) Ltd. to block-period self-assessment tax.
CIT v. Micro Nova Pharmaceuticals (P) Ltd. (SC) — applying Shelly Products
Court: Supreme Court of India, following CIT v. Shelly Products (2003) 261 ITR 367 (SC).
Held: Tax paid by the assessee mandatorily along with the return of income filed for the block period under Chapter XIV-B is not liable to be refunded merely on annulment, the decision in Shelly Products being squarely applicable; only the excess over the tax chargeable on, and paid in respect of, the returned (block) income can be refunded.
Significance: Confirms the reach of the Shelly Products principle to taxes voluntarily paid with a return, in the search-assessment setting; cited for the proposition that section 240 (and section 237) refund the wrongly-collected excess, not the assessee's own admitted tax.
2. Directed fresh assessment — no refund "due" until it is made (proviso (a))
CIT v. Chittoor Electric Supply Corporation (SC)
Court: Supreme Court of India (as reported).
Facts: On appeal the matter was restored to the Assessing Officer to frame a fresh assessment; thereafter a refund was determined. The assessee claimed interest from the date of the first appellate order to the date of refund.
Held: No refund can be said to have become "due" while assessment proceedings are still pending; "when the assessment proceedings are still pending, it is idle to talk of any amount or any refund becoming due to the assessee in respect of that assessment year, particularly in the light of section 237." Where a fresh assessment has been directed (proviso (a) to section 240), the refund — and hence interest on it — becomes due only on the making of the fresh assessment, not from the date of the appellate order.
Significance: Establishes that the refund must first be "due" before any refund or interest can arise; it is the textual companion to proviso (a) of section 240 and to the "amount becomes due" language of sections 243, 244 and 244A.
3. "Other proceeding" and "refund of any amount" — breadth of section 240
K. Lakshmanya & Co. v. CIT (2017) 399 ITR 657 (SC)
Court: Supreme Court of India; (2017) 399 ITR 657 / 248 Taxman 99.
Held: (i) An order of the Settlement Commission under section 245D(4) is an order passed in "other proceeding under this Act", so that a refund flowing from it falls within section 240. (ii) The words "refund of any amount" in section 240 are of wide import and include a refund of any amount of whatever character, including interest earlier paid under sections 234A to 234C. (iii) Where, consequent on a waiver of interest under sections 234A-234C by the Settlement Commission, interest already paid becomes refundable, that refund carries statutory interest under section 244A(1)(b) — the case being one of refund of interest paid, not of interest on interest. Section 244A is wider than the former section 244, it being sufficient that any amount of refund becomes due.
Significance: Settles that refundable interest (paid under sections 234A-C) is itself an "amount" that attracts section 244A interest, and that section 245D(4) orders engage section 240; it carefully distinguishes the impermissible interest-on-interest of Gujarat Fluoro Chemicals.
Modi Industries Ltd. v. CIT (1995) 216 ITR 759 (SC)
Court: Supreme Court of India; three-Judge Bench; judgment dated 15 September 1995 (1995) 216 ITR 759 / 82 Taxman 377.
Held: A leading exposition of the pre-1989 interest-on-refund scheme (sections 214, 243 and 244) and the meaning of "regular assessment". The Court worked out the periods for which, and the amounts on which, interest on advance tax and on excess tax was payable, and held that the right to a refund of tax realised in excess of the tax ultimately found payable arises, and interest runs, with reference to the relevant statutory dates rather than from each successive appellate order.
Significance: The foundational authority on the architecture of refund interest under the old sections 214/243/244; though those sections do not apply from assessment year 1989-90 (section 244A having replaced them), Modi Industries remains the reference point for the principles later carried into section 244A and for assessments up to 1988-89.
4. Refund flowing from an order — it becomes "due" under section 240; "refund of any amount" includes interest
Union of India v. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
Court: Supreme Court of India; judgment dated 26 February 2014 (2014) 363 ITR 658 / 363 ITR 658 (SC) (also 222 Taxman 225 / 267 CTR 89).
Facts: The assessee-deductor, on a reference under section 195(2), was directed to deduct tax on remittances to a non-resident. In appeal the CIT(A) held that reimbursement of expenses was not chargeable in the non-resident's hands; the tax deducted and deposited on that component thus became refundable to the deductor, which claimed interest on it.
Held: A tax refund due to a resident/deductor on excess tax deducted and deposited under section 195 must be refunded with interest under section 244A from the date of payment. The obligation to refund money received and retained without right carries with it the right to interest; "refund becomes due" the moment the State has no lawful authority to retain the sum. The Department's reliance on the absence of an express provision was rejected — section 244A is wide enough to cover the deductor's refund (the matter being governed by section 244A(1)(b) read with section 240).
Significance: The leading modern authority on the State's duty to pay interest on unauthorisedly retained tax. It anchors both the refund right (section 237/240) and the interest right (section 244A) and has been followed repeatedly, including by the Supreme Court in Universal Cables Ltd. v. CIT.
CIT v. Needle Industries (P) Ltd. (1998) 233 ITR 370 (Madras) — section 240
Court: High Court of Madras (1998) 233 ITR 370.
Held: On a reading of section 240, the words refund of any amount are of wide import and take in a refund of any amount of whatever character, including interest; the provision is not confined to a refund of tax alone.
Significance: Relied upon by the Supreme Court in the section 244A line (and in K. Lakshmanya) for the breadth of refund of any amount under section 240 — interest is comprehended within it.
5. Effect of an appellate/annulment order on the demand and on retention of tax
ITO v. Seghu Buchiah Setty (1964) 52 ITR 538 (SC) — effect of reduction in appeal
Court: Supreme Court of India (1964) 52 ITR 538.
Held: Where the tax demanded is substantially reduced as a result of an appellate order, the original notice of demand does not survive for the reduced figure; a fresh notice of demand must be served before the assessee can be treated as in default. (The recovery-side difficulty thrown up by this ruling was later addressed by the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.)
Significance: Illustrates the consequence of an appellate order on the original demand — the foundation for the section 240 principle that a refund/recomputation flows from the appellate order and the demand must be reworked to give effect to it.
Deep Chand Jain v. ITO (1984) 145 ITR 676 (Punjab & Haryana) — refund where no assessment made
Court: High Court of Punjab & Haryana (1984) 145 ITR 676.
Held: The retention of advance tax becomes without authority of law where no final assessment is made within the period of limitation; in such a case the amount collected is liable to be refunded to the assessee, the State having no lawful authority to retain it.
Significance: An early High Court statement of the refund principle later affirmed in Shelly Products — that tax cannot be retained where the assessment that would justify it is not (or cannot be) made.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the local Act (base text amended up to the Finance Act, 2025); the publisher's footnote apparatus and amendment-marker brackets have been removed, and three asterisks (***) denote words or a sub-section omitted by amendment and retained only to mark the omission. Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported. Where a section has not been the subject of a direct reported decision, that is stated candidly and the nearest governing authority or circular is given. This digest is for professional reference and is not legal advice.