Year: 2014

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.)