Payment of Interest on Refund of Tax (s.240, Income Tax Act, 1961)

Issue: The issue in this case was whether the revenue is legally responsible under Section 244A of the Income Tax Act, 1961 for payment of interest on the refund of tax made to the resident/deductor under Section 240 of the Act. (Section 244A was included by Direct Tax Laws (Amendment) Act, 1987 (4 of 1988) with effect from 01.04.1989, whereby provision for interest on refunds on any amount due to the assessee under the Act was introduced.)

Facts: The respondent is a company incorporated under the provisions of Companies Act, 1956. During the assessment year 1997-98, the respondent-company had  commissioned a plant and to oversee the operation of the said plant it had sought the assistance of two technicians from a foreign company which raised an invoice comprising of service charges for services of the technicians and reimbursements of expenses.

The resident/ deductor had approached the assessing authority (Income Tax Officer) inter alia requesting him to determine the tax that requires to be deducted at source before the payment is made to a non-resident/foreign company. On such a request the assessing officer had passed an order under Section 195(2) of the Act directing the resident/deductor to deduct tax at a particular rate. The resident/ deductor had appealed against the said order (before the Commissioner of Income Tax (Appeals)), but had deposited the tax as directed by the assessing officer/Income Tax Officer by the aforesaid order in accordance with the provisions of Section 200 of the Act. The appellate authority concluded, that, the reimbursement of expenses is not a part of the income for deduction of tax at source under Section 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid over to the Revenue on the amount representing reimbursement of expenses. When the resident/deductor succeeded in the appeal, a direction was issued by the appellate authority for refund of tax so paid. In observance of the same, the assessing authority had granted the refund of the tax amount under Section 240 of the Act, but declined to grant interest on the said refund amount stating that, Section 244A provides for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case is in view of the circulars issued by the Central Board of Direct Taxes and not under the statutory provisions of the Act, no interest would accrue on the refunds under Section 244A of the Act. The conclusion arrived at by the assessing officer was accepted by the first appellate authority (Commissioner of Income Tax (Appeals)) on the following grounds: (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provide that the benefit of interest under Section 244A of the Act on such refunds would not be available to the deductor/ resident and (b) that a conjoint reading of Section 156 and the explanation appended to Section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged under Section 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made under Section 156 of the Act pursuant to a notice of demand issued on account of post-assessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case. However, the Income Tax Appellate Tribunal has rejected the aforesaid rationale of the assessing authority as well as the first appellate authority and granted the claim of the resident/deductor. The Tribunal opined, that, the tax was paid by the deductor/ resident pursuant to an order passed under Section 195 (2) of the Act and the refund was ordered under Section 240 of the Act, therefore, the provisions of Section 244A(1)(b) are clearly attracted and the revenue is accountable for payment of interest on the aforesaid refund amount. The High Court has endorsed the view of the Tribunal and dismissed the appeals filed by the Revenue.

Law: Certain provisions of the Act prior to the insertion of Section 244A of the Act are elaborated upon thus in the judgment: Section 156 of the Act deals with payment of tax, interest, penalty, fine or any other sum payable in consequence of any order passed under the Act on service of notice of demand issued by the assessing officer to the assessee specifying the said amounts.

Section 195(1) casts an obligation upon every person in this Country to deduct tax at the prevailing rates from out of any sum which is remitted to a non resident/Foreign Company. Sub Section (2) of Section 195 provides that where a person responsible for paying any such sum chargeable under the Act to a non resident/Foreign Company considers that the whole of such sum would not be the income chargeable in the case of recipient, he may make an application to the assessing officer/income tax officer to determine, by general or special order, the appropriate proportion of such sum so chargeable. The assessing officer is expected to determine such sum/tax which are deductible out of remittance to be sent to the recipient and only after deduction and payment of such sum/tax, the balance amount is to be remitted to the non-resident. The Court clarified that it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment, if such application is not filed.

Section 240 of the Act provides for refund on appeal etc. The Section envisages that if an amount becomes due to the assessee by virtue of an order passed in appeal, reference, revision, rectification or amendment proceedings, the assessing officer is bound to refund the amount to the assessee without the assessee being required to make any claim in that behalf. The expression ‘other proceedings under the Act’ used in Section 240 of the Act, are wide enough to include any order passed in proceedings other than the appeals under the Act.

Section 244 of the Act provides for interest on refunds where no claim is made or required to be made by the assessee. The said section envisages that where a refund is due to the assessee in pursuance of an order passed under Section 240 of the Act, and the assessing officer does not grant the refund within a period of three months from the end of the month in which such order is passed, the Central Government shall pay to the assessee a simple interest of 15% per annum on the amount of refund due from the date immediately following the expiry of the period of three months as aforesaid to the date on which the refund is granted.

Amendment: Since there was disconcert in the minds of both the assessee and the Revenue regarding the cases where payment of interest was required to be made to the assessee by the Revenue, the Parliament inserted a new Section 244A in the place of Sections 214, 243 and 244 in respect of assessments for the assessment year 1989-90 and onwards.

Sub-Section (1) of Section 244A speaks of interest on refund of the amounts due to an assessee under the Act. The assessee is entitled for the said amount of refund with interest thereon as calculated in accordance with clause (a) & (b) of sub-Section (1) of Section 244A. In calculating the interest payable, the section provides for different dates from which the interest is to be calculated.

Clause(a) of sub-Section(1) of Section 244A talks of payment of interest on the amount of tax paid under Section 155WJ, tax collected at source under section 206C, taxes paid by way of advance tax, taxes treated as paid under Section 199 during the financial year immediately preceding the assessment year. Under this clause, the interest shall be payable for the period starting from the first day of the assessment year to the date of the grant of refund. No interest is payable if the excess payment is less than 10% of the tax determined under Section 143(1) of the Act or on regular assessment. Clause(b) of Sub-Section(1) of Section 244A opens with the words “in any other case” that means in any case other than the amounts paid under Clause(a) of Sub-section(1) of Section 244A. Under this clause, the rate of interest is to be calculated at the rate of one and a half per cent per month or a part of a month comprised in the period or the periods from the date or, as the case may be, either the dates of payment of the tax or the penalty to the date on which the refund is granted. An explanation is appended to clause(b) of the aforesaid sub-Section to explain the meaning of the expression “date of payment of tax or penalty”. It clarifies that the “date of payment of tax or penalty” would mean the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand.

Held:
1. A “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to a special order passed by the assessing officer/Income Tax Officer. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid. The amount paid by the resident/ deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a resident/ deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company.

2. Providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, therebeing no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course.

3. In the present case, it is not in doubt that the payment of tax made by resident/ depositor is in excess and the department chooses to refund the excess payment of tax to the depositor. We have held the interest requires to be paid on such refunds. The catechize is from what date interest is payable, since the present case does not fall either under clause (a) or (b) of Section 244A of the Act. In the absence of an express provision as contained in clause (a), it cannot be said that the interest is payable from the 1st of April of the assessment year. Simultaneously, since the said payment is not made pursuant to a notice issued under Section 156 of the Act, Explanation to clause (b) has no application. In such cases, as the opening words of clause (b) specifically referred to “as in any other case”, the interest is payable from the date of payment of tax. The sequel of our discussion is the resident/deductor is entitled not only the refund of tax deposited under Section 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

See: Union of India Through Director of Income Tax v. M/s Tata Chemicals Ltd. (Supreme Court of India, 2014)


Author: Vikrant Narayan Vasudeva
Photo by eFile989/ CC BY-SA 2.0

Advertisements