Synopsis
Section 244A of the Income Tax Act,
entitles an assessee to receive interest on amount of refund of tax due
to him. For an assessee, following the mercantile system of accounting,
the issue arises on the year of accrual of such interest and taxability
thereon.
The issue being whether such interest is accrued in each year
and hence to be taxed by spreading it over the number of years for which
it is granted or should it be taxed in the year in which it is granted.
This issue had been a subject matter of adjudication before various
courts. Here, the author has analysed various judicial pronouncements in
this regard.
Issue for Consideration:
An assessee is entitled to
receive simple interest, on the amount of refund of tax that becomes due
to him, at the specified rate, for the period commencing from the date
of payment of tax to the date on which the refund is granted, as per the
provisions of section 244A of the Income-tax Act.
Such interest is
usually chargeable to tax under the head “Income From Other Sources” and
is computed in accordance with the method of accounting regularly
employed by the assessee. This interest is taxed in the year of receipt,
in case of an assessee following the cash system of accounting, and in
case of an assessee following the mercantile system of accounting, is
taxed in the year of the accrual of such interest.
The period for which
such interest is granted usually exceeds 12 months. The quantum of
interest also varies in many cases on passing of orders from time to
time, subsequent to the intimation or the first order, ranging from
assessment orders to appellate orders. Again, in many cases, the
assessees are forced to pay taxes towards demands raised in pursuance of
orders that finally do not stand the scrutiny of the appellate
authorities. In all these cases, barring a few cases, the assessee
receives interest only on the final settlement of the disputes
concerning computation of the total income by the highest appellate
authority.
The issue that arises, for consideration, in all such cases
of receipt of interest, is about the year or years of taxation of such
interest, for the period exceeding 12 months, in the hands of the
assessees following the mercantile system of accounting. The issue in a
nutshell is about ascertaining the year of accrual of such interest.
Does such interest, under the mercantile system, accrue from year to
year from the date of payment of tax till the date of the receipt of
such interest or does it accrue only when the refund is ordered by an
authority and interest thereon is granted to the assessee? In the first
case, the interest so received is taxable in more than 1 year, on the
understanding that the interest accrues on a daily basis and is taxable
in more than 1 assessment year while in the later case, it is taxed only
in the year of the passing of an order grating interest.
The courts
have been asked to adjudicate as to whether such interest accrued form
year to year and is therefore to be taxed by spreading it over the
number of years for which it is granted or should it be taxed in the
year in which it is granted. Recently, the Andhra Pradesh High Court has
held that such interest accrued from year to year and for taxation, it
should be spread over the number of years for which interest is granted
dissenting from the decisions of the Kerala, Orissa and Allahabad High
Court.
Smt. K. Devayani Amma’s case
The issue of years of accrual of
interest on refund, granted u/s. 244, was examined by the Kerala High
Court in the case of Smt. K. Devayani Amma vs. DCIT, 328 ITR 10. In that
case, the Court was asked, by the assessee, to decide whether the
Tribunal was justified in holding that interest received by the assessee
on refund was assessable in the assessment year in which such interest
was granted. In that case, the Assessing Officer granted an amount of
interest of Rs. 2,87,537, u/s. 244, on refund of tax computed in
pursuance of the order passed to give effect to an appellate order for
A.Y. 1983-84, that was decided in favour of the assessee. The order of
refund was passed in the previous year relevant to A.Y. 1994-95 and the
refund together with interest was also received in the said year. The
Assessing Officer taxed the entire interest of Rs. 2,87,537 in the A.Y.
1994-95, by treating such interest as the income of A.Y. 1994-95, on the
ground that interest had accrued during that year.
The assessee
however, contested the liability for tax on the entire interest in one
assessment year on the ground that the interest in question accrued from
year to year, from the date of payment of excess tax till the date of
refund. The contention of the assessee was upheld by the CIT(A), but the
Tribunal agreed with the Assessing Officer by holding that the said
interest accrued in A.Y. 1994-95, only, following the decisions in the
case of CIT vs. Sri Popsingh Rice Mill, 212 ITR 385 (Orissa) and J.K.
Spinning and Weaving Mills Co. vs. Addl. CIT, 104 ITR 695 (All.). The
assessee, in the appeal before the High Court, contended that interest
income was assessable on a year to year basis, spread over the period
commencing from the year in which the tax was paid and ending with the
year in which it was refunded together with interest thereon, by relying
on the decision of the Supreme Court in the case of Rama Bai vs. CIT,
181 ITR 400.
In reply, the standing counsel for the Income-tax
Department submitted that the interest income accrued only on passing of
the order for granting refund. He also submitted that the decision in
Rama Bai’s case (supra) was delivered in respect of an interest received
under the Land Acquisition Act and was not relevant for determining the
year of taxation of interest received under the Income-tax Act. He also
pointed out that the decision in the case of Sri Popsingh Rice Mill
(supra), delivered by the Orissa High Court, had followed the subsequent
decision of the Supreme Court in preference to its decision in Rama
Bai’s case to hold that the interest was taxable in the year of grant
thereon.
The Kerala High Court noted that the decision in Rama Bai’s
case(supra) concerned itself with taxation of interest under the Land
Acquisition Act and was not binding for deciding an issue of taxation of
interest, granted under the Income-tax Act and that the issue therefore
was required to be considered in light of the statutory provisionsof
the Income-tax Act. The court also observed that the law declared by the
Supreme Court was neutralised by the amendments in section 145A(b) and
section 56(viii) by the Finance (no.2) Act, 2009 concerning the year of
taxation of interest received on compensation or enhanced compensation
for compulsory acquisition .
The Kerala High Court found that the
assessee’s eligibility for interest arose only when the effect was given
to the appellate order and till such time the assessee was not entitled
to any refund at all; that the right to interest on refund arose only
when the refund was ordered in favour of the assessee. Accordingly, in
view of the Court, interest accrued only when the assessee was found to
be eligible for refund of the excess tax, based on the revision of the
assessment order. The Court took notice of the fact that not only the
interest was granted during A.Y. 1994-95, but was also paid during the
said assessment year. The assessee’s appeal was dismissed and the order
of the Tribunal was confirmed by the Court by holding that interest on
refund of tax accrued in the year of passing the order granting refund .
M. Jaffersaheb (Decd.)’s case
The issue once again arose recently, before the Andhra Pradesh High Court, in the case of Shri M. Jaffer Saheb (Decd.) vs. CIT, 43 taxmann.com,123. The facts in this case were that for the assessment year 1982-1983, an assessment was completed with substantial additions resulting into a huge demand for payment of taxes. The assessee paid the de- manded tax and thereafter availed the appellate remedies and in that process the appellate tribunal finally passed an order granting substantial relief to the assessee on 16-06-1989. The AO gave effect to the order of the Tribunal by an order dated 18-09- 1989, refunding the excess amount paid along with interest of Rs. 79,950/- for the period 30-10-1985 to 31-08-1989 which was received thereafter. The AO brought to the tax the amount of interest in the assessment year 1990-1991, ignoring the claim of the assessee to spread over the said amount for the assessment years starting with assessment orders 1985-1986 to 1988-1989. The Appellate Commissioner allowed the claim of the assessee and directed that the interest, other than the part pertaining to the assessment year 1990-91, be taxed in the preceding previous years. The Tribunal, on further appeal by the Revenue, reversed the order of the Appellate Commissioner and restored the assessment order passed by the A.O.
At the instance of the assessee, the following two questions of law for the assessment year 1990-1991 were referred to the Andhra Pradesh High Court :
1) “Whether on the facts and in the circumstances of the case, is the Appellate Tribunal correct in law in holding that interest U/S.244(1A) of the Income-tax Act on the refund due accrues on the date when the Appellate Tribunal passed order and did not accrue on any day anterior to the date of the Tribunal order?”
2) “Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law; in refusing to accept the contention of the applicant that interest on the refund accrued from the previous year relevant to the assessment year 1982-1983 and interest is chargeable to tax in the respective years for which interest is paid?”
The assessee submitted before the High Court that he was entitled to the refund from the date of payment of the tax till the date of granting of the refund and that such interest accrued on day to day basis on the excess amount paid. He submitted that the entitlement of the interest was a right conferred by the statute that did not depend on the order for the refund being made which was only consequential and in law was required to be made more in the nature of complying with the procedural requirement, but his right to claim interest was a statutory right conferred by the Act and in that view of the matter, it was but fair to spread the interest amount in the respective years in issue. He relied on the judgment of the Calcutta High Court in the case of CIT vs. Hindustan Motors Ltd., 202 ITR 839 for the proposition that “Accrual of interest takes place normally on day to day basis. Where there is no due date fixed for payment of interest, interest accrues on the last day of the previous year. Accrual of interest does not depend upon making up of the accounts.” He also relied on the judgment of the Kerala High Court in the case of Peter John vs. CIT, 157 ITR 711 (Ker)(FB) for the proposition that “Interest is separate from refund. Interest whether statutory or contractual represents profit the creditor might have made if he had used that money or loss he suffered because he had not that use. It is something in addition to the refund (capital amount) though it arises out of it.” He also relied on the judgment of the Supreme Court in the case of Ramabai vs. CIT, 181 ITR 401 (SC).
On the other hand, the Income-tax Department submitted that the right to claim interest by the assessee was dependent on an orders being passed u/s. 240 and section 244 of the Income-tax Act and in that view of the matter, the right to claim interest accrued to the assessee only on the date of consequential order passed pursuant to the order of the Appellate Authority and as such, the interest income was assessable in the assessment year 1990- 1991. Reliance was placed on the judgments of the Orissa, Kerala and Allahabad High Courts in the cases of Commissioner of Income-Tax vs. Sri Popsingh Rice Mill, 212 ITR 385 (Orissa), Smt. K. Devayani Amma vs. Deputy Commissioner of Income-Tax and Another 328 ITR 10 (Ker),)and J.K. Spinning and Weaving Mills Co., vs. Additional Commissioner of Income-Tax, Kanpur104 ITR 695 (Allahabad).
The Andhra Pradesh High Court examined the provisions of sections 237, 240, 244 and 244A for ascertaining the statutory position relating to grant of refund and interest thereon. A close scrutiny of the sections 237 and 240, revealed to the Court that the statutory right was conferred on the assessee to get refund of the excess tax paid and such refund was made available to the asssessee even without his having to make any claim in that behalf in as much as section 244A of the Act entitled the assessee to get interest on the refund amount and such interest was payable from the date of payment of tax or payment of penalty from the date till refund was granted.
It was clear to the High Court, from the statutory provisions as applicable to the relevant assessment years, that there was no requirement of the assessee for making a claim either for refund or for interest. As a matter of fact, the Court noticed that sections 243 and 244, were made inapplicable in respect of any assessment for the assessment year commenc- ing on the first day of April, 1989 or any subsequent assessment years.
On a detailed analysis of the decisions of the various Courts in the cases of Rama Bai vs. CIT, 181 ITR 401 (SC), CIT vs. Sankari Manickyamma 105 ITR 172 (AP).
Mrs. Khorshed Shapoor Chinai vs. ACED 90 ITR 47 (AP), CIT vs. Govindarajulu Chetty (T.N.K.) 165 ITR 231 (SC),T.N.K. Govindarajulu Chetty vs. CIT 87 ITR 22 (Mad.), CIT vs.Dr. Sham Lal Narula, 84 ITR 625 (P&H), and CIT, Mysore vs. V.Sampangiramaiah, 69 ITR 159 (Kar), the court significantly noted that the principle which could be culled out was that once the income had legally accrued to the assessee, i.e., the assessee had acquired a right to receive the same, though its valuation might be postponed to a future date, the determination or quantification of the amount did not postpone the accrual. In other words, if the right had legally accrued to the assessee, then the right should be deemed to have accrued in the relevant year, even though the dispute as to the right was settled in the later year, by the one or the other of the authorities in the hierarchy.
The Andhra Pradesh High Court expressly dissented with the decision of the Kerala High Court in the case of Smt. K. Devayani Amma (supra) by observing that;
• though the Kerala High Court, in the said judge- ment, referred the case of Rama Bai (supra), there was no discussion about the principles that were approved in the judgment of the Supreme Court;
• though the provisions of sections 240 and 244(1A) of the Act were referred to, the Kerala High Court held that interest on refund arose only on passing an order in favour of the assessee;
• the eligibility of interest u/s. 244(1A) of the Act arose on an order of revision of assessment passed pursuant to the appellate order which led to grant of refund of excess tax paid by the assessee;
• the reading of sections 237, 240 and 244(1A) cast a duty on the AO to charge that much of tax which the assessee was liable to pay and mandated the refund of the excess amount along with interest;
• the hierarchy of appeals provided were only to ensure that the tax authorities adhere to strict rules of taxation and the statutory provisions. Even the final order that might be passed by the higher authority in the hierarchy of authorities provided under statue was also an order of assessment only for the simple reason that the final order passed was nothing but a correction of the original assessment order, which was erroneous.
• the opinion expressed by the Kerala High Court that interest u/s. 244(1A) of the Act accrued to the assessee only, when it was granted to the assessee along with the refund order issued u/s. 240 of the Act was not correct, especially, in view of the law laid down by the Supreme Court as quoted in the judgment of the Madras High Court in T. N. K. Govindarajulu Chetty’s case (supra).
• The court was unable to accept the judgment of Kerala High Court reported in K. Devayani Amma’s case (supra) on the issue.
The judgment of the Allahabad High Court in J.K. Spinning and Weaving Mills Co. (supra) was found to be distinguishable and not applicable in view of the variance in the statutory scheme contained in the provisions contained in Indian Income-tax Act, 1922, with the statutory scheme under the Income-tax Act, 1961 and the Allahabad High Court had taken into consideration that interest became payable to the assessee only when the assessments for the years in dispute were made which were in fact made in 1956, though the assessments were 1951-1952 and 1952-1953.
The Andhra Pradesh High Court was unable to agree with the reasoning of the judgment of the Orissa High Court in Sri Popsingh Rice Mill case (supra), as the question considered by the Orissa High Court was in relation to section 244 of the Act and not in relation to section 244A of the Act and the Orissa High Court had failed to notice the judgments of the Supreme Court and instead relied on three judgments which were not dealing with interest. Likewise, the other two judgments referred to in the said judgment also were found to be not relevant for the purpose of deciding the issue.
The court accordingly answered the questions referred to it in favour of the assessee and against the revenue by holding that the interest on refund accrued from year to year and was not to be taxed in the year of the order granting refund.
Observations
An assessee, following the mercantile system of accounting, is taxed on his income, including interest income, in the year in which the income accrues or arises. An income, in ordinary circumstances, is said to have been accrued on vesting of a legal right to receive such income irrespective of whether it is received or not. Such accrual, based on a right to receive, is independent of the order of any Court or an authority passed for confirming such right to receive, for the reason that such right to receive arises to a person on the basis of the terms of the agreement or the statutory provisions of any law.
It is an accepted position in law that interest accrues from day to day, in case of a person maintaining books of account and accrues on yearly basis in case of a person not maintaining the books of account. In both the cases, the interest income is spread over number of years and is taxed on year to year basis.
The Supreme Court in E.D. Sassoon Company Ltd. vs. CIT, 26 ITR 51, observed that the computation of the profits, whenever it may take place, cannot possi- bly be allowed to suspend its accrual. The accrual happens irrespective of the quantification of the profits, and is not always linked to computation. For attracting the charge of taxation, what has however got to be determined is whether the income, profits or gains accrued to the assessee; before it can be said to have accrued to him, it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or its material station depends on some contingency.
The Supreme Court in Rama Bai (supra)’s case was concerned with the taxability of interest received on account of enhanced compensation, where the assessee’s lands were acquired and not being satis- fied with the compensation awarded by the Land Acquisition Officer, the assessee appealed to the higher Courts and finally received enhanced com- pensation along with interest payable u/s. 28 and 34 of the Land Acquisition Act. The said amounts were received in the year 1967 and were sought to be assessed in the year 1968-1969. The assessee claimed that interest was allocable and assessable in different assessment years as it accrued from year to year and only that portion of the interest relating to the period April, 1967 to March, 1968 was assessable for the assessment year 1968-1969. The Tribunal referred the following question to the Supreme Court: “Whether, on the facts and in the circumstances of the case, the interest received by the assesses as per the City Civil Court’s award for the period commencing from the date of possession till 31st March, 1968, was entirely assessable for the assessment year 1968-1969?” The Supreme Court answered the question in favour of assessee and against the revenue by following its earlier judgment in the case of CIT vs. Govindarajulu Chetty (T.N.K.) 165 ITR 231 (SC) wherein in a short judgment, the Apex Court approved the judgment of the Madras High Court in the case of T. N. K. Govindarajulu Chetty vs. CIT, 87 ITR 22 (Mad.). The Madras High Court held that; “11. In this case the liability to pay interest would arise when the compensation amount due to the assessee had not been paid, in each of the relevant years. Therefore, the accrual of interest has to be spread over the years between the date of acquisition till it was actually paid. We are not in a position to accept the contention of the revenue that …………… basis for assessing the income. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time.”
The Supreme Court has pointed out in Laxmipat Singhania vs. CIT,72 ITR 291, that: “Again, it is not open to the Income-tax Officer, if income has accrued to the assessee, and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt.” Similar view was taken by the Panjab & Haryana High Court in the case of CIT vs. Dr. Sham Lal Narula, 84 ITR 625 and by the Karnataka High Court in the case of CIT, Mysore vs. V. Sampangiramaiah, 69 ITR 159 where under the question which was considered was “Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the entire interest amount of Rs. 87,265/- was not assessable in the assessment year 1962-63 and that only the proportionate interest referable to the assessment year 1962-63 was assessable in that year?” The Karnataka High Court answered the question in the affirmative and in favour of the assessee and against the revenue.
The right to receive interest u/s. 244A is entirely based on the right to refund u/s. 240 of the Act. Unless an assessee is entitled to a refund of taxes, no right to receive an interest arises in his favour. The key consideration therefore is the right to a refund of excess taxes paid. Whether such a right to refund arises on passing of an order by an Income-tax Authority, for granting a refund, or that such a right arises with payment of taxes and is independent of the order of the authority. The fact that interest u/s. 244A, whenever granted and paid, is paid for the period commencing with the date of payment of tax, apparently conveys that such a right is associated with the payment of excess taxes and only its (interest) payment is deferred to the year of grant by an authority. This prima facie understanding is, further confirmed by the amendments in section 145A(2)(B) and section 56(2)(Viii) of the Act by the Finance (NO.2) Act, 2009, that expressly provide that interest on compensation shall be taxed in the year of receipt only. In other words, in the absence of any provision for taxing the interest income in the year of receipt, interest will be taxed in the year of accrual and when such interest pertains to a period exceeding 12 months, its accrual happens on year to year basis in more than 1 assessment year.
On a conspectus reading of the scheme of refund, contained in Chapter XIX u/s. 237 to 245, it is gathered that the right to refund of excess taxes paid is independent of any requirement to claim such refund. While it is true that an assessee is entitled to a refund of the excess taxes paid, only on satisfaction of the A.O that the taxes paid by him exceeds the amount of tax payable by him, it none the less is independent of any order section 237 does not require an Assessing Officer to pass an order of refund, it rather requires an Assessing Officer to refund the excess taxes. Likewise, section 244A entitles an assessee to simple interest on the amount of refund that becomes due to him.
An assessee is entitled to receive interest u/s. 244A(1) where refund of any amount becomes due to him. The language of section 244A (1) may convey that unless an assessee becomes entitled to a refund, he is not entitled to interest and as a consequence of such an understanding, entitlement to interest is postponed to the time when a refund becomes due to him; no interest therefore accrues to him till such time an order of refund is passed. Such an understanding, we feel, is not supported by the scheme of the Act and in particular by the scheme of the refund and the grant of interest thereon. Under the scheme, the moment an excess tax is paid, the refund thereof becomes due to him and the entitlement to interest runs with the right to receive refund which right arises with payment of taxes, irrespective of an order of refund. This understanding is fortified with the decision of the Andhra Pradesh High Court in Jaffersaheb’s case, in as much as the issue therein concerned taxation of interest received u/s. 244A in assessment year 1990-91 and the Court while deciding the issue of the year of taxation, examined the implications of the provisions of section 244A w.r.t to the scheme of refund and applied the ratio of the decision of the Supreme Court in Rama Bai’s case. In our considered view, no material difference exists between the interest that was granted u/s. 244 r.w.s 240 and the one now being granted u/s. 244A r.w.s 240 of the Act as regards the time of entitlement. In conclusion, it is safe to hold that the right to refund and the right to interest thereon are statutory rights which rights arise on payment of excess taxes.
The case for the taxation of interest, received under the Income-tax Act, on the year to year basis, by yearly spread over, is greater as compared to the interest received under the Land Acquisition Act for the reason under the scheme of taxation, an amount of refund becomes due, the moment an assessee pays excess tax which is neither dependent on the claim for refund nor on the order of the authorities. Accordingly the decisions of the courts, holding that the interest under the Land Acquisition Act is taxable on the year to year basis, shall apply with greater force, to the cases of receipt of interest, under the Income-tax Act.
Having so concluded that interest is taxable on year to year basis, an assessee is placed in an unenviable position in a case where an Assessing Officer makes substantial additions to the returned income and demands additional tax instead of granting refund. The issue that is required to be considered is about the liability to pay tax on interest that could be said to have accrued, even though the eligibility to refund and consequent interest thereon depends on the outcome of the appeal filed to contest the aforesaid additions to the returned income. While the assessee may not be asked to make the payment of regular taxes but may be required to pay taxes on the accrued interest, which is included in the assessed income, in the hope that he will suc- ceed in the appeal and will be entitled to refund and interest thereon. Nothing could be more confusing than this in as much as, it leads to an inference that interest on refund accrues, even before the finality of refund itself. This confusion is aptly conveyed by Palkhivala’s words when he states that ‘one of the delights of income tax law is occasional incongruities’. The Bombay High Court noticing the confusion in the case of CIT vs. Abbasbhoy, 195 ITR 28, arising on account of the contrasting decisions of the Supreme Court in the case of Govindarajulu Chetty (supra) and the earlier decision in the case of CIT vs. Hindustan Housing , 161 ITR 524, with the hope that the Su- preme Court will resolve the controversy observed that “the incongruity does not end here. Despite the conclusion that interest in such cases accrues from year to year, it is doubtful whether it will be possible to hold the assessee responsible for not disclosing interest income in the past on accrual basis.” Kanga & Palkhivala in the 4th edition of their book titled The Law and Practice of Income tax have commented on the assessee’s obligation to return income, on account of accrued interest, where the refund is in dispute in the following words ,”the assessee can always take a stand that the amount of compensation including enhanced compensation or damages having been determined subsequently, he could not possibly anticipate accrual of interest”. Kindly also see, pg. 1085 of volume 1 of the 10th edition of Sampath Iyengar’s Law of Income Tax.
This unenviable situation may however be remitted by resorting to rectification proceedings u/s. 154 for amending the order where such interest on disputed refund is taxed on accrual basis. Please see Garden Silk Mills Ltd., 221 ITR 861(Guj.)
