1993 (8) TMI 47 - HC - Income Tax

Summary

Issues:
1. Taxability of interest under section 214 in the hands of a non-resident company.
2. Interpretation of the agreement clauses related to tax liabilities and refunds.
3. Determination of whether interest under section 214 constitutes a refund.
4. Analysis of the legal implications of interest awarded under section 214.

Analysis:
The case involved the taxability of interest under section 214 in the hands of a non-resident company for the assessment years 1979-80 and 1981-82. The Income-tax Officer included the interest under section 214 in the company's income, which was upheld by the Commissioner of Income-tax (Appeals). However, the Appellate Tribunal held that the interest was not taxable based on clause 5(c) of the agreement dated September 17, 1976, between the company and the purchaser. The Tribunal's decision was based on the interpretation of the agreement clauses related to tax liabilities and refunds.

The key issue was whether the interest awarded under section 214 could be considered a refund as specified in the agreement. The Tribunal accepted the company's argument that the purchaser became entitled to receive all refunds from the tax authorities, including interest. However, the High Court disagreed with this interpretation. The Court cited a previous judgment to emphasize that interest on a refund is a form of compensation for the deprivation of money and does not automatically belong to the recipient of the refund.

The Court concluded that interest payable under section 214 does not constitute a refund of tax paid. While such interest may be assessed as income from other sources, it does not fall under the definition of a refund in tax law. Therefore, the interest awarded to the company cannot be claimed by the purchaser as per the agreement clauses. The Court held that the Tribunal erred in ruling that the interest was not taxable in the hands of the company.

In response to the question referred, the Court ruled against the company and in favor of the Revenue, stating that the interest under section 214 is indeed taxable in the hands of the company. The judgment was to be forwarded to the Income-tax Appellate Tribunal for further action.