2014 (2) TMI 1218 - HC - Income Tax

Interest charged under section 234D - Retrospectivity - ITAT cancelling the interest charged - Held that - Explanation (2) to section 234D of the Act has been made applicable to even the assessment year commencing before June 01, 2003. The only requirement in such a case would be that the assessment has to be completed after June 01, 2003. Therefore, after insertion of Explanation 2, the operation of section 234D of charging interest on the excess refund paid to the assessee is not restricted, making operation of such section effective from June 01, 2003. This very issue came up for scrutiny before the Bombay High Court in the case of CIT v. Indian Oil Corpn. Ltd. 2012 (9) TMI 517 - BOMBAY HIGH COURT has held that addition of explanation (2) to section 234D of the Act by Finance Act, 2012, with retrospective effect from June 01, 2003, is made applicable even to the period under assessment year 2004-2005. In respect of excess refund granted to the assessee under section 143(1) of the Act, the interest was payable by the assessee even if it was received prior to June 01, 2003, so long as the proceedings of the concerned assessment year for which the refund was granted was completed after June 01, 2003. We have respectfully chosen to follow the aforesaid decision of the Bombay High Court and, therefore, the order of the Tribunal in the instant case following the decision the case of Ekta Promoters (P.) Ltd. (2008 (7) TMI 452 - ITAT DELHI-E ) holding the provision of section 234D of the Act applicable only with effect from 2004-2005 and further holding that the interest under this section is not chargeable for earlier assessment years, even though the assessment has been framed after June 01, 2003, is not held to be a correct law and, accordingly, the Revenue s appeal deserves to be allowed. Answering the substantial question of law in favour of the Revenue that in all those matters where excess refund has been granted by the Revenue, the provision of section 234D of the Act will apply and even in the case of earlier assessment years where the assessments were framed after June 01, 2003, the interest will be chargeable in accordance with law - Decided against assessee

Summary

Issues Involved:
1. Applicability of Section 234D of the Income Tax Act.
2. Retrospective effect of Section 234D.
3. Levy of interest on excess refund under Section 234D.

Issue-wise Detailed Analysis:

1. Applicability of Section 234D of the Income Tax Act:
The primary issue in these Tax Appeals is whether the Appellate Tribunal was correct in cancelling the interest charged under Section 234D of the Income Tax Act. The assessee, a non-banking financial company, filed its return of income for the assessment year 2002-2003, which was processed, and a refund was issued. Subsequently, a revised return was filed, and upon scrutiny, the Assessing Officer charged interest under Section 234D. The Commissioner of Income-tax (Appeals) upheld this, citing the Supreme Court's decision in CIT v. Anjum M.H. Ghaswala, which mandates the levy of interest. The Tribunal, however, cancelled the interest, leading to the present appeals.

2. Retrospective Effect of Section 234D:
Section 234D, introduced by the Finance Act, 2003, effective from June 01, 2003, mandates interest on excess refunds. Explanation 2, added later, clarifies that this section applies to assessment years before June 01, 2003, if proceedings are completed after this date. The Kerala High Court in CIT v. Kerala Chemicals & Proteins Ltd. ruled that interest under Section 234D applies only from June 01, 2003, and not retrospectively. The Karnataka High Court in CIT v. Fanuc India Ltd. echoed this, stating that interest could not be levied retrospectively, even if the assessment order was passed after June 01, 2003.

3. Levy of Interest on Excess Refund under Section 234D:
The Bombay High Court in CIT v. Indian Oil Corp. Ltd. held that Explanation 2 to Section 234D is declaratory and clarificatory, thus applicable retrospectively. This means that interest on excess refunds is payable even if the refund was granted before June 01, 2003, provided the assessment was completed after this date. The Bombay High Court emphasized that the provision is substantive and not arbitrary, and its retrospective application is valid for all pending assessments as of June 01, 2003.

Conclusion:
The Gujarat High Court, aligning with the Bombay High Court's interpretation, concluded that the Tribunal's reliance on the decision in ITO v. Ekta Promoters (P.) Ltd., which limited the applicability of Section 234D to assessment years from 2004-2005, was incorrect. The High Court ruled in favor of the Revenue, stating that Section 234D applies to all cases where excess refunds were granted, regardless of the assessment year, as long as the assessment was completed after June 01, 2003. Consequently, the Tribunal's order was quashed, and the Revenue's appeal was allowed, affirming the charge of interest under Section 234D for earlier assessment years with assessments completed post-June 01, 2003. There was no order as to costs.