2004 (7) TMI 87 - HC - Income Tax

Interest on excess advance tax - mere fact that the assessee challenged the order of assessment for the year 1981-82 would not have any bearing as to the nature of receipt of interest on excess advance tax paid and even if the appeal filed by the assessee for the assessment year 1981-82 fails there would not be any liability on the part of the assessee to refund any part of the amount received by the assessee. We therefore hold that the Appellate Tribunal was correct in holding that the amount received by the assessee as interest under section 214 of the Act is of income nature and assessable in the year in which the right to the income has accrued - We are of the view that it would be better to introduce a provision empowering the officer to suitably amend the order of assessment in case the assessee is required to pay back the refund amount within a specific period from the date of repayment of excess interest refunded by the assessee which will obviate the difficulty faced by the assessee and which will bring in fairness in the administration of tax law.

Summary

Issues:
Assessment of interest income under section 214 of the Income-tax Act, 1961 for the assessment year 1985-86.

Detailed Analysis:
The High Court of Madras heard an appeal by the assessee against the order of the Income-tax Appellate Tribunal, Madras "A" Bench regarding the assessment year 1985-86. The Assessing Officer found that the appellant received interest under section 214 of the Act for the assessment year 1981-82, which was not included in the assessment. The Commissioner of Income-tax (Appeals) held that the interest constituted income and should be assessed for the relevant year. However, a difference of opinion arose at the Appellate Tribunal regarding the taxation of the interest. The Third Member of the Tribunal held that the interest was assessable as revenue receipt for the year of payment and should be taxed. The court admitted the appeal on the substantial question of law whether the interest received was taxable for the assessment year 1985-86.

The court considered the arguments presented by both parties. The counsel for the assessee contended that since the assessment for 1981-82 was not final when the interest was granted, it should not be considered income until finality was reached. On the other hand, the Department's counsel argued that the interest was of income nature and accrued during the relevant year, making it taxable. The court referred to relevant case laws and held that the interest paid under section 214 was a revenue receipt and should be taxed as income of the assessee. The court further determined that the interest income was assessable for the year in which the right to income accrued, which was the assessment year 1985-86.

Regarding the finality of the assessment for 1981-82, the court found that even if the appeal for that year failed, there was no liability for the assessee to refund the interest received. The court emphasized that the nature of the receipt remained unchanged regardless of the appeal outcome. The court upheld the Tribunal's decision that the interest received was income nature and assessable in the year of accrual. Additionally, the court noted the Tribunal's direction that any repayment of excess interest would be allowed as a deduction under section 37 of the Act.

In conclusion, the court dismissed the tax case appeal against the assessee, upholding the taxation of the interest income under section 214 for the assessment year 1985-86. The court suggested legislative amendments to address potential complexities in similar cases, emphasizing fairness in tax administration.