2009 (10) TMI 555 - HC - Income Tax

Interest income - interest received by the assessee on refund relating to previous year - Tribunal holding that income assessable to tax in the assessment year in which such interest is granted to the assessee along with the refund - Held that - assessee s eligibility for interest on refund arises only when the assessment is revised in terms of the appellate order by the Officer under section 143 of the Income-tax Act - interest accrues only when the assessee is found to be eligible for refund of excess tax on revision of assessment based on orders in appeal - refund voucher is also issued to the assessee in the year 1994-95 and so much so, interest under section 244(1A) in this case accrued to the assessee and was also paid to the assessee in the previous year relevant for the assessment year 1994-95 - uphold the order of the Tribunal and dismiss the appeal

Summary

Issues:
1. Taxability of interest received on refund in the assessment year.
2. Interpretation of statutory provisions regarding interest on refund under the Income-tax Act.

Issue 1: Taxability of interest received on refund in the assessment year
The appeal raised the question of whether the interest received by the assessee on a refund relating to a previous year is assessable to tax in the assessment year in which the interest is granted along with the refund. The Assessing Officer revised the assessment and treated the entire interest amount as income of the assessment year 1994-95, which was contested by the assessee. The Tribunal held that interest income is assessable on a receipt basis, following certain decisions, leading the appellant to approach the High Court.

Issue 2: Interpretation of statutory provisions regarding interest on refund under the Income-tax Act
The High Court analyzed the eligibility of interest on refund under section 244(1A) of the Income-tax Act. It was determined that interest on refund arises only when excess tax is found to have been paid by the assessee and refund is ordered in favor of the assessee. The liability of the Government to grant interest under section 244(1A) is mandatory and runs from the date of payment till the date of refund. However, the court emphasized that interest accrues only when the assessee is found eligible for a refund based on orders in appeal. The court also referred to the method of accounting under section 145 of the Act, stating that income should be assessed in the relevant assessment year in which it accrues or is received by the assessee. In this case, the interest under section 244(1A) accrued and was paid to the assessee in the previous year relevant to the assessment year 1994-95, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decision, ruling that interest on refund should be assessed in the relevant previous year when it accrues or is received by the assessee, based on the statutory provisions of the Income-tax Act.