Refund – Interest on refund – Section 244A of ITA, 1961 – Amount seized from assessee in search proceedings shown as advance tax in return – Return accepted and assessment made – Assessee entitled to interest u/s 244A on such amount

Refund – Interest on refund – Section 244A
of ITA, 1961 – Amount seized from assessee in search proceedings shown as
advance tax in return – Return accepted and assessment made – Assessee entitled
to interest u/s 244A on such amount

In the course of
the search proceedings u/s 132 of the Income-tax Act, 1961 conducted in the
office premises of the assessee on 9^th October, 2014 cash of Rs. 35
lakhs was seized. The assessee applied for release of the seized cash after
adjusting tax liability due on the amount but the same was not accepted by the
AO. The assessee filed its return of income for the A.Y. 2015-16, declaring
total income of Rs. 39.15 lakhs, which included the cash of Rs. 35 lakhs seized
during the course of the search. The assessee showed the seized cash of Rs. 35
lakhs as advance tax and claimed a refund of Rs. 27.50 lakhs. The AO passed an
assessment order u/s 143(3) of the Act including the said cash of Rs. 35 lakhs
in the total income. However, the amount of Rs. 35 lakhs which was shown as
advance tax was not accepted and an independent demand of Rs. 9.18 lakhs was
raised on the assessee u/s 156 of the Act. The demand was paid by the assessee.
Subsequently, on application for refund of seized cash of Rs. 35 lakhs, the AO
refunded Rs. 31.5 lakhs after deducting the outstanding penalty demand of Rs.
3.5 lakhs. However, the AO refused to pay interest on the refunded amount.

The assessee filed
a writ petition and challenged the order. The Bombay High Court allowed the
writ petition and held as under:

‘(i)   It was an undisputed position that Rs. 35
lakhs was seized when the officers of the Revenue searched the assessee’s
premises. It was also undisputed position that consequent to the seizure of Rs.
35 lakhs, the assessment was done not u/s 153A of the Act, but u/s 143(3) of
the Act in respect of the A.Y. 2015-16.

(ii) The assessee in its return of income filed on 22/09/2015 had shown
Rs. 35 lakhs being the seized cash, as advance tax. While passing the
assessment order, the Assessing Officer did not adjust the seized cash as
advance tax paid on behalf of the assessee. This non-adjustment by the
Assessing Officer of the amount being offered as advance tax by the assessee
was unjustified and without reasons. Under the circumstances, the character of
the seized cash underwent a change and became advance tax. This was more
particularly so as for the subject assessment year, it had been accepted as
income. Though the Revenue did not accept the declaration made by the assessee
in its return of advance tax, the fact was that the assessee claimed it to be
tax.

(iii) Therefore, on the date the demand notice u/s 156 of the Act was
issued, there was an excess amount with the Revenue which the assessee was
claiming to be tax. Therefore, in terms of the Explanation to section
244A(1)(b) the amount of Rs. 35 lakhs was excess tax (on change of its character
from seized amount to tax paid) and the assessee was entitled to interest on
Rs. 35 lakhs w.e.f. 16/12/2016 on the passing of the assessment order. The
Assessing Officer had to give interest at 6% per annum from 16/12/2016 up to
31/05/2017 on Rs. 35 lakhs (i.e. before the adjustment of penalty of Rs. 3.5
lakhs of Rs. 35 lakhs) and on Rs. 31.50 lakhs from 01/06/2017 to 07/03/2018
when the sum of Rs. 31.5 lakhs was paid to the assessee.’