Interest – Whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance tax/TDS paid exceed the assessed tax is a question of law – Correctness of the judgement in Sandvik Asia Ltd. v. CIT doubted.

The question that was before the Supreme Court was – whether interest is payable by the Revenue to the assessee, if the aggregate of installments of Advance Tax/TDS paid exceeds the assessed tax? The Supreme Court observed that advance tax is leviable in the very year in which income accrues or arises. It is normally paid in three installments. A similar situation arises in the case of TDS. It is Tax Deductible at source which is also called as ‘withholding tax’ u/s. 195 of the Act. Broadly, both Advance Tax as well as TDS are based on estimation of income by the assessee.

Before the Supreme Court, the assessee relied upon the decision in Sandvik Asia Ltd. v. CIT (2006)280 ITR 643(SC). The Supreme Court noted that it was a case relating to payment of advance tax. The main issue which arose for determination in Sandvik Asia was; whether the assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The Supreme Court observed that the argument in Sandvik Asia on behalf of the assessee was that, it was entitled to compensation by way of interest for the delay in payments of the amounts lawfully due to it which were wrongly withheld for a long period of seventeen years and that the Division Bench of the Supreme Court vide Para 23 had held that in view of the express provisions of the Act, the assessee was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to the assessee, which were withheld wrongly by the Revenue.

The Supreme Court, with due respect to the decision in Sandvik Asia, was of the view that section 214 of the Act does not provide for payment of compensation by revenue to the assessee in whose favour a refund order has been passed. According to the Supreme Court, in Sandvik Asia, interest was ordered on the basis of equity and also on the basis of Article 265 of the Constitution.

The Supreme Court however, expressed serious doubts about the correctness of the judgment in Sandvik Asia. According to the Supreme Court, its judgment in Modi Industries Ltd. v. CIT [1995 (6) SCC 396] has correctly held that advance tax or TDS loses its identity as soon as it is adjusted against the liability created by the Assessment order and becomes tax paid pursuant to the Assessment order. The Supreme Court questioned that – if advance tax or TDS loses its identity and becomes tax paid on the passing of the assessment order then, is the assessee not entitled to interest under the relevant provisions of the Act? The Supreme Court referred to the provisions of sections 195(1), 195A, 214, 219, 237, and 244, which stood at the relevant time and were of the view that Sandvik Asia has not been correctly decided. The Supreme Court directed the Registry to place the matter before the Hon’ble Chief Justice on the administrative side for appropriate orders.