2012 (8) TMI 158 - HC - Income Tax

Interest paid on income-tax refund - does it bears the character of income and is exigible to tax ?- Held that - Unless there is an exact indication in the Income Tax Act itself, that interest payable on income tax refund amounts fulfill the basic character as income (defined under Section 2(24) of the Income Tax Act) cannot be ignored - It is no doubt true that this amount cannot be treated as interest income since the assessee did not earn it through conscious choice or voluntarily, nor was it engaged in the activity of investing its amount and earning interest but the basic characteristic of income being what it is, the amount received towards statutory interest has to be subject to tax under the head income from other sources & and is exigible to tax - in favour of revenue.

Summary

Issues:
1. Whether interest paid on income-tax refund is exigible to tax?

Analysis:
1. The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the taxability of interest on income tax refund received by the assessee. The Tribunal allowed the appeal of the assessee, holding that the interest amount does not require assessment for tax purposes.

2. The primary question of law that arose was whether interest paid on income-tax refund bears the character of income and is, therefore, subject to tax. The assessee, an undertaking of the Government of NCT of Delhi, received grants, paid income tax, claimed a refund, and received interest on the refund.

3. The assessing officer included the interest amount in the computation of income, which was confirmed by the appellate commissioner. The commissioner held that the interest on income tax refund is chargeable to tax as it is not directly earned from specific schemes but is interest on the tax refund.

4. However, the Tribunal reasoned in favor of the assessee, stating that when the interest itself is not taxable, the consequential refund should also not be taxable. The Tribunal directed the Assessing Officer to verify whether the entire amount was paid to the Delhi Government before making a tax assessment.

5. The Revenue argued that the interest on the refunded tax amount constitutes "income from other sources" and is taxable. It contended that in the absence of any statutory exemption, the interest on the refunded amount cannot be exempted from tax.

6. The Court agreed with the assessing officer and the appellate commissioner, stating that unless there is a specific indication in the Income Tax Act exempting interest on income tax refund from tax, it must be considered as income and taxed under the head "income from other sources."

7. The Court held that even though the interest was not earned through voluntary actions or investments, the basic characteristic of income mandates its taxation. Therefore, the interest received on income tax refund is subject to tax, and the order of the assessing officer was restored, allowing the Revenue's appeal.

8. In conclusion, the Court answered the question in favor of the Revenue, affirming that interest on income tax refund is exigible to tax. The order of the assessing officer, including the interest amount in the income computation, was upheld, and the appeal was allowed in favor of the Revenue.