2006 (1) TMI 465 - AT - Income Tax

Refunds - Whether interest u/s 244A granted to assessee in the proceedings u/s 143(1)(a) of the Act is taxable in the year of its receipt or in the year in which proceedings u/s 143(1)(a) attains finality ? - HELD THAT - In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest on the date of granting refund. Subsequently, u/s 244A(3), it is reduced by virtue of assessment u/s 143(3). In our opinion, the right of interest came into existence on the date of refund by virtue of section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment. The view of ours is justified by the judgment of the Hon ble Supreme Court in the case of Kedarnath Jute Mfg. Ltd. Co. Ltd. v. CIT 1971 (8) TMI 10 - SUPREME COURT , approving the judgment of the Hon ble Madras High Court in the case of Pope the King Match Factory v. CIT 1962 (3) TMI 81 - MADRAS HIGH COURT . It has been apprehended by assessee s counsel that assessee would be without remedy if the interest is reduced by virtue of assessment u/s 143(3). This apprehension, in our opinion, is unfounded. If interest is reduced by virtue of sub-section (3) of section 244A on account of assessment u/s 143(3), the interest granted in earlier year gets substituted and it is the reduced amount of interest that would form part of income of that year. Thus, it would amount to mistake rectifiable u/s 154 of the Act. In our opinion, if the basis, on which income was assessed is varied or ceases to exist, then such assessment would become erroneous and can be rectified. This can be explained with an example. Similarly, any income assessed may become non-taxable by virtue of retrospective amendment and consequently, erroneous assessment can be rectified. Therefore, in our humble opinion, if the interest granted u/s 244A(1) is varied under sub-section (3) of such section, then the interest originally granted would be substituted by the reduced/increased amount as the case may be. Thus, income on account of interest if assessed can be rectified u/s 154. Thus, we are of the view that interest on refund u/s 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings u/s 143(1)( a ) attain finality. The matter will now go to the regular Bench for decision on merits.

Issues Involved:
1. Accrual of interest under section 244A of the Income-tax Act, 1961.
2. Taxability of interest under section 244A in the year of receipt or in the year when proceedings under section 143(1)(a) attain finality.
3. Contingency and enforceability of the right to interest under section 244A.
4. Rectification under section 154 of the Act if interest is varied under section 244A(3).

Issue-wise Detailed Analysis:

1. Accrual of Interest Under Section 244A of the Income-tax Act, 1961:
The core issue is whether the interest payable to the assessee under section 244A of the Income-tax Act, 1961, accrues in the year of receipt or in the year when the proceedings under section 143(1)(a) attain finality. The Tribunal examined the relevant provisions of sections 4 and 5 of the Act, which state that income is chargeable in the year it is either accrued or received. The judgment of the Hon'ble Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 was cited, which held that income accrues when the right to receive it is acquired, and such a right is established when an enforceable debt is created in favor of the assessee.

2. Taxability of Interest Under Section 244A in the Year of Receipt or in the Year When Proceedings Under Section 143(1)(a) Attain Finality:
The Tribunal analyzed the provisions of section 244A, which entitle the assessee to receive simple interest on any refund due under the Act. The Tribunal concluded that the moment a refund is granted, an enforceable debt is created in favor of the assessee for the interest due on such a refund. Therefore, income can be said to accrue on the date of the refund itself. Consequently, the interest is taxable in the year of receipt, satisfying the requirements of sections 4 and 5 of the Act.

3. Contingency and Enforceability of the Right to Interest Under Section 244A:
The Tribunal rejected the contention that the right to interest is contingent until the assessment under section 143(3) is made. According to the Tribunal, the right to interest under section 244A is absolute and not dependent on any event except the issuance of a refund. The quantification of interest may vary under section 244A(3) due to subsequent assessments, but this does not affect the initial right to interest. The Tribunal referred to the Supreme Court's judgment in CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675, which stated that a debt's liability is not contingent merely because it is to be quantified at a later date.

4. Rectification Under Section 154 of the Act if Interest is Varied Under Section 244A(3):
The Tribunal addressed the concern that the assessee would be without remedy if the interest is reduced under section 244A(3) due to an assessment under section 143(3). It was concluded that if the interest is varied, the interest originally granted would be substituted by the revised amount. This would amount to a mistake rectifiable under section 154 of the Act. The Tribunal provided examples to illustrate that if the basis on which income was assessed is varied or ceases to exist, the assessment would become erroneous and could be rectified under section 154.

Conclusion:
The Tribunal concluded that the interest on refund under section 244A(1) is assessable in the year it is granted and not in the year when proceedings under section 143(1)(a) attain finality. The matter was directed to the regular Bench for a decision on merits.

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