Article 265 of the Constitution provides that no tax shall be levied or collected except by the authority of law. The Article provides that not only levy but also the collection of a tax by the Government must be under the authority of law. In pursuance of such law, the refund claims are regulated under the provisions of Chapter XIX of the Income-tax Act, 1961 (the Act). Section 237 effectively provides for refund of excess tax paid by the assessee. This is a general provision for claim of refund. A provision is also made in section 240 which effectively provides for refund of any amount that becomes due to the assessee as a result of any order passed in appeal or other proceedings under the Act. This is a special provision dealing with refund which imposes an obligation on the Assessing Officer (AO) to refund such amount for which the assessee is not required to make any claim. All the above provisions relating to payment of interest on refund provide for payment of simple interest at the specified rate and for the period specified therein. Section 241 authorising the AO to withheld refund in certain cases has been omitted from 1st June, 2001. Section 245 provides for adjustment of the amount of refund or part thereof against any sum remaining payable under the Act after giving an intimation in writing to the assessee for the proposal of such adjustment.
The Act also provided for payment of interest on refund due to the assessee under various provisions such as section 214 (excess payment of advance tax), section 243 (interest on delayed refunds), section 244 (interest on refund where no claim is needed) etc. Section becomes due to the assessee in pursuance of an order referred to in section 240. Certain amendments were made from time to time in these provisions with which we are not concerned in this write-up and hence the same are not referred to. Only relevant broad provisions dealing with interest on refunds are noted for this purpose. These provisions relating to interest on refunds are applicable in respect of assessment year 1988-89 and earlier years (old provisions of interest).
The interest u/s. 214 was payable on the excess payment of advance tax for the period from the first day of the assessment year upto the date of regular assessment. The regular assessment is defined in section 2(40) to mean the assessment made in section 143(3) or section 144. In this context, the issue had come up before the Apex Court in the case of Modi Industries Ltd. [216 ITR 759] to decide the meaning of the expression ‘regular assessment’ as High Courts had taken different views on the same. In a detailed judgment analysing various relevant provisions providing for interest on refund, and the views expressed by various High courts in that respect, the Apex Court approved the view expressed by certain High courts such as Bombay, Allahabad, Andhra Pradesh etc. which effectively held that the expression ‘regular assessment’ in section 214 means the original assessment. In the process of deciding the above issue and the impact of the provisions of section 214 as well as section 244 dealing with interest to be granted on refund, the Court also expressed the view that there is no right to get interest on refund except as provided by the statute. The Court also stated that interpretation of section 214 or any other section of the Act should not be made on the assumption that interest has to be paid whenever an amount which has been retained by the Revenue in exercise of the statutory power becomes refundable as a result of any subsequent proceeding.
Accordingly, the interest on excess payment of advance tax u/s. 214 is not payable from the date of payment of tax but from the first day of relevant assessment year nor it is payable till the date of refund but it is payable upto the date of ‘regular assessment’. Interest u/s. 243 or section 244(1) was payable upto the date of refund but only in cases where the refund was not made within the stipulated period. Interest u/s. 244 (1A) was payable in cases where the amount paid by the assessee is found in excess of his liability as result of appeal or other proceedings under the Act and such interest was payable on the excess amount from the date of payment of such amount to the date of the grant of refund. The Court also held that for the purpose of section 244(1A), the amount of advance payment of tax and the amount of tax deducted at source (TDS) must be treated as payment of income-tax pursuant to an order of assessment on and from the date when these amounts were set off against the tax demand raised in the assessment order, in other words the date of the assessment order. The Court also dealt with the other aspects of granting interest on refund with which we are not concerned in this write-up.
From the assessment year 1989-90, the provisions for interest on refund are made in section 244AA. This section effectively provides for payment of interest on any amount of refund that becomes due to the assessee under the Act to be calculated in the manner provided therein which effectively provides for payment of interest upto the date on which the refund is granted.
All the provisions relating to interest provide for the simple interest on refund amount at the specified rate which has undergone change from time to time.
In practice, in many cases, the payment of refund gets delayed for one or the other reasons and the refunds are made to the assessee without payment of interest on such delayed payment of refunds and in such cases, the payment of such interest gets delayed and the period of such delayed payment of interest sometime runs into years. In such cases, the issue has come up in the past as to whether the assessee can claim interest on such delayed payment of interest or any compensation for unjustified delay in payment of such interest.
The issue referred to in para above has been considered by the Courts in the past with different set of facts but with a common factor of inordinate delay in payment of interest that becomes due to the assessee under the provisions of the Act. In large number of cases, the Courts had found their way to compensate the assessee for the unjustified delay in payment of interest. It seems that Courts have attempted to decide such cases bearing in mind the principle of equity and fairness. In fact, the Gauhati High Court in the case of Jwala Prasad Sikaria [175 ITR 535] has gone to the extent of clearly stating that the assessee is entitled to payment of such interest due to delay even if there is no statutory provision in this regard.
1.4.1 In this context, the judgment of the Gujarat High Court in the case of D. J. Works [195 ITR 227] is worth noting. In this case, while giving effect to the appellate orders for the assessment years 1983-84 to 1985-86, the refunds were granted without interest to the assessee on different dates. The assessee had filed writ petition before the Gujarat High Court for non-payment of interest and pending this petition, the interest for all the three years was paid with some difference in the amount which is not relevant for the issue under consideration. The assessee had contended before the Court that the AO illegally withheld the payment of interest and since the retention or withholding of interest was without the authority of law, the Revenue is liable to pay interest on the amounts of interest wrongfully withheld. The Revenue had contended that there is no provision in the Act for payment of interest on interest. On these facts, the Court took the view that section 214(1) itself recognises in principle the liability of the Government to pay interest on excess tax paid by the assessee. The Court noted that the legislature itself has considered it fair and reasonable to avoid interest on excess tax paid by the assessee and retained by the Government. According to the Court, the same principle should be extended to the payment of interest, which has been wrongfully withheld by the AO or the Government. It is the duty of the AO to pay interest while granting refund of excess amount paid by the assessee. If the excess tax paid cannot be retained without payment of interest, so also the interest which is payable thereon cannot be retained without payment of interest. Though there is no specific provision for payment of interest on such interest, on general principle, the Government is liable to pay interest which had been due to the assessee u/s. 244(1) at the same rate at which the refund amount carries the interest. It seems that this judgment of the Gujarat High Court was followed by the Tribunal in the case of Narendra Doshi and this decision was affirmed by the M.P. High Court (Indore Bench). The question raised before the M.P. High Court was `Whether Appellate Tribunal was justified in law in directing to allow interest on interest, when the law points for grant of simple interest only?’ This was answered in affirmative and in favour of the assessee. This judgment of the M. P. High Court (dated 3rd May, 1999 in ITR No. 5 of 1996) has been affirmed by the Apex Court [254 ITR 606] stating that the said judgment of the Gujarat High Court had been followed by the same High Court in the case of Chimanlal S. Patel [210 ITR 419] and both these decisions held that “the Revenue is liable to pay interest on the amount of interest which it should have paid to the assessee but has unjustifiably failed to do so.” Having noted these facts, the Apex Court held that “The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered in the affirmative and in favour of the assessee.” Based on this, the appeal of the Revenue against the judgment of the M. P. High Court was dismissed. As such, the judgments of the Gujarat High Court in this respect were impliedly approved.
1.4.2 The issue referred to in para 1.3 also came up before the Apex Court in the case of Sandvik Asia Ltd. [280 ITR 643] in which the Court dealt with the issue in detail and in a reasoned order, decided the issue in favour of the assessee. In this case, the Court also took the view that even assuming that there is no provision in the Act for payment of compensation, the compensation for delay is required to be paid in view of the decision of this Court viz, Narendra Doshi (supra). The similar view also emerges from the observation of the Apex Court in the case of H.E.G Ltd. [324 ITR 331].The High Courts and the Tribunal have followed these judgments in many cases and the position on this regard was largely getting settled.
1.5 In the last year, the division bench of the Apex Court in the case of Gujarat Flouro Chemicals [252 CTR 237] doubted the correctness of the judgment of the Apex Court in the case of Sandvik Asia Ltd. (supra). Accordingly, the Court recommended that the issue should be referred to a larger bench. Recently, the Apex Court in the case of Gujarat Flouro Chemicals Ltd., has, in principle, decided the issue referred to it and considering its impact, it is thought fit to consider the same in this column.
Sandvik Asia Ltd. vs. CIT – 280 ITR 643 (SC)
2.1 In the above case, the relevant facts were : the assessee was entitled to certain refunds for the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. After receiving the refund, the issue for non/ short grant of interest remained for which the assessee had filed a revision petition u/s. 264 before the Commissioner of Income-tax (CIT) on 27th February, 1987 which was rejected by order dated 28th February, 1990. Against this order, it appears that the assessee had moved the Apex Court and common order dated 30th April, 1997 was passed by the Apex Court under which the matter was remanded to the CIT for considering the claim of interest in accordance with the principle laid down by the Apex Court in the case of Modi Industries Ltd. (supra). Under these circumstances, the interest u/s. 214/ 244 was determined by the Revenue at Rs. 40,84,906 vide order dated 27th March, 1998 which appears to have been paid. In this case, there was a delay in payment of interest for various periods ranging from 12 to 17 years.
2.1.1 As a result of the above, the assessee filed a revision petition dated 3rd July, 1998 before the CIT asking for interest on delayed payment of interest upto the date of payment thereof which was rejected against which he assessee had filed writ petitions before the Bombay High Court on 7th June, 2001 without any success. On these facts, the issue referred to in para 1.3 above came up for consideration before the Apex Court at the instance of the assessee.
2.2 For dealing with the appeals of the assessee, the Court noted that substantial and important questions of law of great general public importance as well as under the Act pertaining to those four assessment years have been raised. The Court then stated that [Page No. 646] :
“ The main issue raised in these appeals is whether an assessee is entitled to be compensated by the Income-tax Department for the delay in paying to the assessee amounts admittedly due to it? ”
2.3 On behalf of the assessee, it was, interalia, contended that the High Court ought to have held that the assessee is entitled to compensation by way of interest for the delay in payment of amounts lawfully due to it and which were withheld wrongly and contrary to the law for an inordinately long period. The interest u/s. 214/ 244 is also a refund as contemplated in section 240 and hence, the Revenue is liable to pay interest u/s. 244 in respect of delay in payment of such interest. The High Court has failed to appreciate that during this period, the Department has enjoyed the benefit of the funds while the assessee was deprived of the same. It was further contended that the High Court erred in the purporting to distinguish/explain the decision of the Apex Court in the case of Narendra Doshi (supra) based on various decisions which were neither cited in the course of hearing nor were put to the counsel appearing and as such, the assessee had no opportunity to deal with the same. It was also contended that the High Court’s decision was erroneous as it rejected assesses claim on the sole ground that as the ‘amount due’ to the assessee was of interest, no compensation could be paid to it even when gross delay in payment was admittedly made by the Revenue contrary to the law. The case of the assessee is covered by section 240 which refers to `any amount’ which becomes due to the assessee which should include interest payable under the Act. It was further contended that in the case of Narendra Doshi (supra), the Court had set out two issues before itself, viz., whether when Revenue had not challenged the correctness of the Gujarat High Court decisions it was bound by the principle laid down therein and whether the Gujarat High Court had rightly laid down the principle that assessee would be entitled to interest on interest. The Apex Court had decided both the issues in favour of the assessee. The Bombay High Court erred in distinguishing this decision based on various decisions which were never cited during the course of hearing and which were never put to the counsel appearing for the assessee.
2.4 On behalf of the Revenue, it was, interalia, contended that none of the provisions of the law contained in the Act provided for payment of interest on interest and certainly not section 244(1). In the matter of interpretation of taxing statute, there is no scope for considerations of equity or intendment and what is expected is strict interpretation. When the statute does not permit grant of interest, it would be inappropriate to grant interest in exercise of writ jurisdiction. Strongly relying on the judgment of the Apex Court in the case of Modi Industries Ltd. (supra), it was further contended that in that case the Court clarified two factors, namely, the amount on which the interest is to be granted and the time period for which it is to be granted u/s. 214/section 244. This decision does not refer to interest on interest. Considering the overall facts and in particular, the fact that the Apex Court in its earlier order passed on 30th April 1997 directed the Revenue to decide the revision petition in accordance with the law laid down by the Apex Court in the case of Modi Industries Ltd. (supra), the Revenue had not wrongfully withheld the assessee’s money without any authority of law. It was also contended that the interest payable on the refund amount u/s. 244 is a simple interest and neither compounded interest nor interest on interest is payable. It was also contended that in the case of Modi Industries Ltd. (supra), the scope of section 214 of the Act was discussed and it was held that there is no right to get interest on refund except as provided by the statute and as such, the Bombay High Court was justified in rejecting the alternative claim of the assessee on this basis.
2.5 After considering the contentions raised by both the sides, the Court noted the relevant provisions of the Act and observed as under [Page 658] :
“ We have given our anxious and thoughtful consideration to the elaborate submissions made by counsel appearing on either side. In our opinion, the High court has failed to notice that in view of the express provisions of the Act an assessee is entitled to compensation by way of interest for the delay in the payment of amounts lawfully due to the appellant which were withheld wrongly and contrary to the law by the Department for an inordinate long period of upto 17 years. “
2.6 The Court then noted the judgment of the Gujarat High Court in the case of D. J. Works (supra) referred to in para 1.4.1 above and noted the fact of the view taken therein. The Court then also noted the judgment of the M. P. High Court in the case of Narendra Doshi and the question referred to before the High Court in that case and the fact that the said judgment of the M. P. High Court is affirmed by the Apex Court. The Court also noted the relevant observations from the Apex Court referred to in para 1.4.1 in that regard. The Court then stated that in the case of Narendra Doshi (supra) the Apex Court has held as under [Page No. 660]:
“The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered (by the Madhya Pradesh High Court) in the affirmative and in favour of the assessee.
The civil appeal is dismissed. No order as to costs.”
2.7 Dealing with the contention of the Revenue that section 244 provides for a simple interest and there is no provision in the Act for payment of interest on interest, the Court stated as under [Pages 663/ 664]:
“This contention, in our opinion, has no merit. Learned counsel for the assessee cited the decision Jwala Prasad Sikaria [1989] 175 ITR 535 (Gauhati) in support of his contention wherein the Gauhati High Court held that a citizen is entitled to payment of interest due to delay even if there is no statutory provision in this regard.
……… The High Court held that where an assessment is made under the Act of 1922 after the commencement of the 1961 Act and refund is granted to the assessee, interest is payable on such refund. The High Court has further held (head-note):
“The interest would, however, be deemed to have accrued after expiry of three months from the end of the month in which refund had become payable. The rate applicable would be that applicable to grant of refund under the Act of 1961 at the relevant time.”
The above decision was cited before the Bombay High Court. The High Court very conveniently omitted to consider the decision holding that the decision in Jwala Prasad Sikaria vs. CIT [1989] 175 ITR 535 (Gauhati) was in the peculiar facts of the case.”
2.8 The Court then dealt with the contentions of the Revenue that the High Court was right in law in rejecting the assesse’s claim on the sole ground that as the ‘amount due’ was of interest, no compensation could be made even when gross delay in payment was admittedly made by the Revenue. In this respect, the Court referred to the judgment of the Madras High Court in the case of Needle Industries Pvt. Ltd. [233 ITR 370] in which the Court held that the expression “amount” in section 244(1A) of the Act would include the amount of interest levied and paid u/s. 139(8) and 215 of the Act and collected in pursuance of an order of assessment which was refunded. For this, the Madras High Court agreed with the view taken by the M. P. High Court in the case of Sardar Balwant Singh Gujaral [86 CTR 64] wherein also the Court held that liability to pay interest is on the amount of refund due and the assessee would be entitled to interest on the amount of refund due which includes interest paid u/s. 139(8) and 215 of the Act.
2.9: The Court then further took the view that assuming there is no provision in the Act for payment of compensation, compensation for delay is required to be paid in view of the decision of this Court in the case of Narendra Doshi referred to in para 1.4.1 above. In this regard, the Court further stated as under [Page 669] :
“………This is clearly a decision of this court on the merits of the matter, albeit proceeding on the assumption that there was no provision in the Act granting interest on unpaid interest, in favour of the appellant’s contentions.
In the impugned order, the Bombay High Court has held that the Madhya Pradesh High Court was not on the point of payment of interest on interest, a view which is ex facie erroneous and clearly impossible to sustain as a plain reading of the question before the Madhya Pradesh High Court will show.”
2.10: Referring to the contentions of the Revenue that the delay in the present case was justified, the Court observed as under [Page 670] :
“ In our view, there is no question of the delay being “justifiable” as is argued and in any event if the Revenue takes an erroneous view of the law, that cannot mean that the withholding of monies is “justifiable” or “not wrongful”. There is no exception to the principle laid down for an allegedly “justifiable” withholding, and even if there was, 17 (or 12) years delay has not been and cannot in the circumstances be justified.”
2.11: Dealing with the issue as to whether the Act provides for payment of compensation for delayed payments of amounts due to an as-sessee in a case where these amounts include interest, the Court took the view as follows [Page 671] :
“In our view, the Act recognises the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without author-ity of law the Revenue must compensate the assessee.”
2.11.1: The Court also did not agree with the view of the Bombay High Court that the word “refund” must mean an amount previously paid by an assessee and does not relate to an amount payable by the Revenue by way of interest on such sums. The Court also dealt with the phrase ‘any amount becoming due to an assessee’ used in section 240 of the Act and stated that section 240 provides for refund by the Revenue on appeal etc. and accordingly deals with all subsequent stages of proceedings and therefore, this phrase is used. Referring to the judgment of the Delhi High Court in the case of Good Year India Ltd., [249 ITR 527], the Court stated that in this case the Delhi High Court has held that this phrase would include interest and hence the assessee was entitled to further interest on interest wrongfully withheld. The Delhi High Court also referred to the judgment of the Gujarat High Court in the case of D. J. Works (supra) and read it as taking the same view. Similar view is also taken by the Madras High Court in the case of Needle Industries Pvt. Ltd. ( supra) as well as by the Kerala High Court in the case of Ambat Echukutty Menon [173 ITR 581]. The Court then held as under [Page 672] :
“In our opinion, the appellant is entitled to interest u/s. 244 and/ or section 244A of the Act in accordance with the terms and provisions of the said sections. The interest previously granted to it has been computed upto March 27, 1981 and March 31, 1986 (under different sections of the Act) and its present claim is for compensation for periods of delay after these dates.”
2.11.2 The Court then further stated as under [Page 673] :
“In the present appeal, the respondents have argued that the compensation claimed by the appellant is for delay by the Revenue in paying of interest, and this does fall within the meaning of refund as set out in section 237 of the Act. The relevant provision is section 240 of the Act which clearly lays down that what is relevant is whether any amount has become due to an assessee, and further the phrase any amount will also encompass interest. This view has been accepted by various High Courts such as the Delhi, Madras, Kerala High Court, etc.”
2.12 Considering the observations in the case of Modi Industries Ltd. (supra) that there is no right to receive interest except as provided by the statute on which the Bombay High Court had relied to decide the issue against the assessee, the Court stated as under [Page 672] :
“…… The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC), has no bearing whatsoever on the issue in hand as the issue in that case was the correct meaning of the phrase “regular assessment” and as a consequence under which provision an assessee was entitled to interest for the period up to the date of regular assessment and thereafter. The matter of what was due to it in terms of the decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC) is over, concluded, no longer in dispute and was agreed/ accepted on March 27, 1998 when the second respondent gave effect to the previous order of this court dated April 30, 1997. The working of the respondents itself conclusively shows, further the interest received is admittedly in accordance with the Act. The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759(SC), in our view, has no bearing whatsoever on the matter in hand. The main issue now is whether an assessee is entitled to be compensated by the Revenue for the delay in paying to the assessee’s amounts admittedly due to it?”
2.13: The Court then also dealt with the issue as to whether on general principles the assessee ought to have been compensated for the inordinate delay in receiving monies properly due to it. In this context, the Court also referred to Circular dated 2nd January, 2002 issued by the Central Excise Department on the subject of refund of deposits and noted that the Revenue has decided to view cases of the delay beyond the period of three months in the cases referred to therein adversely and decided to initiate appropriate disciplinary ac-tion against the concerned defaulting officer. The Board has also decided to implement the order passed by the Tribunal for payment of interest and the interest payable shall be paid forthwith.
2.13.1: Referring to the facts of the case of the assessee the Court observed as under [Page 676] :
“Interest on refund was granted to the appellant after a substantial lapse of time and hence it should be entitled to compensation for this period of delay. The High court has failed to appreciate that while charging interest from the assesses, the Department first adjusts the amount paid towards interest so that the principal amount of tax payable remains outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence as per the stand that the Department takes they are liable to pay interest only up to the date of refund of tax while they take the benefit of the assesses funds by delaying the payment of interest on refunds without incurring any further liability to pay interest. This stand taken by the respondents is discriminatory in nature and thereby causing great prejudice to lakhs and lakhs of assesses. A very large number of assessees are adversely affected inasmuch as the Income-tax Department can now simply refuse to pay to the assesses amounts of interest lawfully and admittedly due to them as has happened in the instant case. …………. Such actions and consequences, in our opinion, seriously affect the administration of justice and the rule of law.”
2.13.2: The Court then referred to the dictionary meaning of the word ‘compensation’. The Court then stated as under [Page 677] :
“ There cannot be any doubt that the award of interest on the refunded amount is as per the statute provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the court has to take all relevant factors into consid-eration while awarding the rate of interest on the compensation.”
2.14: Considering a manner in which the mat-ter was handled by the Department, the Court found it necessary to send the copy of the judgment to the Finance Minister for taking appropriate action against the erring officers and in this context to the Court stated as under [Page 677] :
“ This is a fit and proper case in which action should be initiated against all the officers concerned who were all in charge of this case at the appropriate and relevant point of time and because of whose inaction the appellant was made to suffer both financially and mentally, even though the amount was liable to be refunded in the year 1986 and even prior thereto. A copy of this judgment will be forwarded to the hon’ble Minister for Finance for his perusal and further appropriate action against the erring officials on whose lethargic and adamant attitude the Department has to suffer financially.”
Apart from issuing general instruction (No.2, dated 28th March 2007) for granting interest alongwith refund , it is not known wheter any serious action is taken by the Government on the above recommendation of the Court.
2.15: Finally, the Court decided the appeals in favour of the assessee and reversed the judgment of the Bombay High Court and held as under [Page 678] :
“ The assessment years in question in the four appeals are the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. Already the matter was pending for more than two decades. We, therefore, direct the respondents herein to pay the interest on Rs. 40,84,906 (rounded off to Rs. 40,84,900) simple interest at 9 % per annum from March 31, 1986 to March 27, 1998 within one month from today failing which the Department shall pay the penal interest at 15 % per annum for the above said period. “
2.16: From the above judgment, it would appear that the Court has taken a view that the expression ‘amount’ appearing in setion 244(1A) refers not only to the tax but also to the interest and it cannot be limited to the tax paid in pursuance of the assessment order. As such, in view of the express provisions of the Act, an assessee is entitled to compensation by way of interest for delay in the payment of amounts lawfully due to the assessee which are withheld wrongfully and contrary to law. Even assuming that there is no provision for payment for compensation, compensation for delay is required to be paid as the Act itself recognizes the principle that the Revenue is liable to pay interest when excess tax was retained and the same principle should be extended to cases where interest was retained. The Court has also explained that Narendra Doshi’s case (supra) was clearly a decision on the merit though it proceeded on the assumption that there was no provision in the Act granting interest on unpaid interest.
[ To be Concluded]
