Refund of tax on brought-forward loss allowed only if KVSS did not settle income tax: Rajasthan HC

Jodhpur: The Rajasthan High Court has held that tax on a brought-forward loss is refundable only if the taxpayer’s KVSS settlement certificate did not cover income tax. A division bench of Justice Arun Monga and Justice Sunil Beniwal delivered the ruling on 18 April 2026. It was passed in two connected income tax appeals filed by the Revenue against Hindustan Zinc Limited.

The Court split the outcome. It dismissed the Revenue’s appeal for assessment year 1993-94, where the Kar Vivad Samadhan Scheme (KVSS) certificate had settled only interest. But it allowed the Revenue’s appeal for assessment year 1995-96, where the certificate had settled income tax itself. The distinction, the bench held, flows from the “conclusiveness” clause in Section 90(3) of the Finance (No. 2) Act, 1998.

Hindustan Zinc had tax disputes for assessment years 1993-94 and 1995-96. It chose to close both under the Kar Vivad Samadhan Scheme, 1998 — a one-time scheme that let taxpayers settle pending tax disputes at a reduced amount, in full and final settlement.

The Commissioner of Income Tax, Udaipur, issued two KVSS certificates. For AY 1993-94, the outstanding demand was Rs. 20.30 crore — made up entirely of interest under Section 234B and Section 220(2) of the Income Tax Act. No income tax was part of this demand. Hindustan Zinc paid Rs. 10.15 crore and the matter was closed. For AY 1995-96, the outstanding demand was Rs. 50.30 crore. This included Rs. 22.13 crore of income tax; the rest was interest. Hindustan Zinc paid Rs. 16.84 crore in full and final settlement.

Separately, the Income Tax Appellate Tribunal (ITAT) had ruled in the company’s favour for earlier years, leaving Hindustan Zinc with carry-forward losses. On 30 December 2002, the Assessing Officer gave effect to those ITAT orders. A Rs. 5.53 crore loss from AY 1992-93 was set off against AY 1993-94 income. A Rs. 4.03 crore residual loss from AY 1994-95 was set off against AY 1995-96 income. Hindustan Zinc then claimed refund of the tax already paid on the amounts now absorbed by the set-off.

The Assessing Officer refused, reasoning that the underlying income was “covered by KVSS” and could not be reopened. The Commissioner of Income Tax (Appeals) agreed. The ITAT, however, ruled for the company — holding that opting for KVSS on the interest demand did not strip the taxpayer of a statutory set-off right. The Revenue took both orders in appeal.

Counsel for the Revenue argued that tax and interest cannot be separated — both flow from the same disputed income. By accepting KVSS, the assessee had accepted the income determination for those years. Section 93 of the Finance (No. 2) Act, 1998 bars refund of any amount paid pursuant to a KVSS declaration. That bar, the Revenue said, stood in the way of the refund.

Counsel for Hindustan Zinc contended that the brought-forward losses, and the refund flowing from them, were never the subject of the KVSS declaration. They arose later, from ITAT orders for earlier years. Being outside the scheme’s scope, the Tribunal had rightly granted relief.

The Court took the two assessment years separately. The reasoning produced opposite results.

For AY 1993-94, the bench examined the KVSS certificate. The entire Rs. 20.30 crore outstanding demand was on account of interest alone. No income tax was part of the settled demand. The Revenue’s argument that tax and interest cannot be segregated was, the Court held, “against record”. Since the KVSS certificate did not cover any income tax for that year, a refund of tax attributable to a carry-forward loss sat outside the scheme. The Court agreed with the Tribunal’s reasoning. A taxpayer’s right of set-off cannot be taken away merely because it used KVSS to close an interest demand.

For AY 1995-96, the conclusion flipped. The certificate for that year recorded Rs. 22.13 crore of income tax within the settled demand of Rs. 50.30 crore. The Court held that the Tribunal had contradicted itself. It rightly acknowledged that a KVSS certificate is “conclusive”. But it then directed a refund that would necessarily reduce the very income tax figure the certificate had settled. That reduction, the bench held, would reopen the settlement. It was therefore barred by Section 90(3) of the Finance (No. 2) Act, 1998. That provision makes every order determining the sum payable under KVSS conclusive, and forbids reopening any matter covered by such an order in any later proceeding.

The bench was unusually blunt. It observed: “Any reduction of the settled demand would undermine the finality and integrity of the KVSS settlement. It would also confer an undue and unfair benefit upon the assessee, over and above the substantial benefit already obtained by settling an outstanding demand of Rs. 50,30,76,207/- on payment of only Rs. 16,84,14,519/-.” In plain terms, a taxpayer who has already paid a discounted amount to close a tax demand cannot, years later, chip away at that settled demand through a refund claim routed through a later loss set-off.

D.B. Income Tax Appeal No. 96/2008 (AY 1993-94) was dismissed. The Tribunal’s direction to refund tax attributable to the Rs. 5.53 crore brought-forward loss was upheld. The Assessing Officer will work out the refund after giving Hindustan Zinc a hearing. D.B. Income Tax Appeal No. 161/2008 (AY 1995-96) was allowed. The Tribunal’s direction to refund tax on the Rs. 4.03 crore brought-forward loss was set aside. All pending applications were disposed of.

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