Interest – Refund of excess of payment of tax paid u/s. 195(2) to the depositor – the assessee/ depositor is entitled to interest from the date of payment of such tax.

The respondent, a company, engaged in the manufacture of nitrogenous fertilizer had during the assessment year 1997-98, commissioned its naptha desulphurisation plant and to oversee the operation of the said plant it had sought the assistance of two technicians from M/s. Haldor Topsoe, Denmark. M/s. Haldor Topsoe had raised an invoice aggregating to $ 43,290/- as service charges for services of the technicians ($ 38,500/-) and reimbursements of expenses ($ 4,790/-).

The resident/deductor had approached the Incometax Officer u/s. 195 (2) of the Act, inter alia, requesting him determine as to what percentage of tax should be withheld from the amounts payable to the foreign company, namely, M/s. Haldor Topsoe, Denmark. The Assessing Officer/Income-tax Officer passed order u/s. 195 (2) of the Act directing the resident/deductor to deduct/withhold tax at the rate of 20% before remitting aforesaid amounts to M/s.Haldor Topsoe. Accordingly, the resident/deductor had deducted tax of Rs.1,98,878/- on the entire amount of $ 43,290/- and credited the same in favour of the Revenue.

After such deposit, the resident/deductor had preferred an appeal before the Commissioner of Income-tax (Appeals) against the aforesaid order passed by the Assessing Officer/Income-tax Officer u/s. 195 (2) of the Act. The appellate authority, while allowing the appeal so filed by the resident/deductor, had concluded that the reimbursement of expenses is not a part of the income for deduction of tax at source u/s. 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid over to the revenue on the amount of $ 4,790/- representing reimbursement of expenses. After disposal of the appeal, the resident/deductor had claimed the refund of tax on $ 4,790/- (amounting to Rs. 22,005/-) with the interest thereon as provided u/s. 244A(1) of the Act.

The Assessing Officer/Income-tax Officer, while declining the claim made for interest, has observed that section 244A provides for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case is in view of the circulars viz. Circular No. 769 and 790 issued by the Central Board of Direct Taxes (for short, ‘the Board’) and not under the statutory provisions of the Act, no interest would accrue on the refunds u/s. 244A of the Act. Therefore, the Assessing Officer/Income-tax Officer while granting refund of the tax paid on the aforesaid amount refused to entertain the claim for interest on the amount so refunded.

Since the Assessing Officer/Income-tax Officer had declined to grant the interest on the amount so refunded, the resident/deductor had carried the matter by way of an appeal before the Commissioner of Income-tax (Appeals). The First Appellate Authority approved the orders passed by the Assessing Officer/Income-tax Officer and declined the claim of the deductor/resident on two counts: (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provide that the benefit of interest u/s. 244A of the Act on such refunds would not be available to the deductor/resident and (b) that a conjoint reading of section 156 and the Explanation appended to section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged u/s. 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made u/s. 156 of the Act pursuant to a notice of demand issued on account of post assessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case.

The deductor/resident, aggrieved by the aforesaid order, had carried the matter before the Income-tax Appellate Tribunal (for short, ‘the Tribunal’). The Tribunal while reversing the judgment and order passed by the Commissioner of Income-tax (Appeals) has opined that the tax was paid by the deductor/resident pursuant to an order passed u/s. 195 (2) of the Act and the refund was ordered u/s. 240 of the Act. Therefore, the provisions of section 244A(1)(b) were clearly attracted and the revenue was accountable for payment of interest on the aforesaid refund amount. Accordingly, the Tribunal allowed the appeal of the deductor/resident and directed the Assessing Officer/Income-tax Officer to acknowledge the claim and allow the interest as provided u/s. 244A(1) (b) of the Act on the aforesaid amount of refund. The

Revenue being of the view that they were treated unfairly by the Tribunal had carried the matter by way of Income-tax Appeal before the High Court. The High Court refused to accept the appeal filed by the Revenue.

On further appeal by the Revenue, the Supreme Court held that the refund becomes due when tax deducted at source, advance tax paid, self-assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10% of tax determined u/s. 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the assessee. In tune with the aforesaid general principle, section 244A was drafted and enacted. The language employed in section 244A of the Act is clear and plain. It grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of section 244 applicable to assessments before 01-04-1989, albeit with clarity of application as contained in section 244A.

The Supreme Court further held that a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section, an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to an order passed by the Assessing Officer/Income-tax Officer. In the appeal filed against the said order, the assessee had succeeded and a direction was issued by the Appellate Authority to refund the tax paid. The amount paid by the resident/deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount was refunded it should have carried interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and unauthorised retention of the money collected by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of section 244A, as that an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There was no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who had deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.

According to the Supreme Court, providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery  provided  in  a  taxing  Statute.  refund  due and payable to the assessee is debtowed and payable by   the   revenue.   The   Government,   there   being   no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The  obligation  to  refund  money  received  and  retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.

The Supreme Court held that in the present case, it was not in doubt that the payment of tax made by resident/ depositor was in excess and the department chose to refund the excess payment of tax to the depositor. The interest is required to be paid on such refunds. The catch however was from what date interest was payable, since the present case did not fall either under clause (a) or
(b)    of section 244a of the act. the Supreme Court held that in the absence of an express provision as contained in Clause (a), it could not be said that the interest was payable from the 1st of april of the assessment year. Simultaneously, since the said payment was not made pursuant to a notice issued u/s. 156 of the Act, Explanation to Clause(b) had no application. In such cases, as the opening words of Clause(b) specifically referred to “as in any other case,” the interest was payable from the date of  payment  of  tax. the  sequel  of  the  above  discussion according to the Supreme Court was that the resident/ deductor is entitled not only the refund of tax deposited u/s. 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

Note:     In  the  context  of  the  liability  of  the  revenue  to  pay interest u/s. 244A, reference may also be made to the judgment of the Apex Court (Larger Bench of 3 Judges) in the case of Gujarat Fluoro Chemicals [358 ITR 291] in which the Court has held that the assessee can claim only that interest which is provided under the act and no other interest can be claimed by the assessee on statutory interest for delay in payment thereof. We have analysed this judgment in our column ‘Closements’ in the november and december issues of this journal.