2012 (9) TMI 517 - HC - Income Tax

Chargeability of interest u/s 234D - excess refund made on the assessee - assessee contested no interest apply to refunds granted prior to 1/06/2003 even in respect of assessments completed after the cut-off date of 1/06/2003 - Held that - As there was no provision of interest on the grant of refund under Section 143(1) it became necessary to provide for the same by having a charging provision. This was done by section 234D in respect of all pending assessments in which refund was given. Thus even if, a refund has already been granted the same would be subject to the provisions of section 234D A declaratory amendment in an Explanation 2 to section 234D which specifically provides that it shall also apply to an assessment year commencing before 1/06/2003. The only qualifying criterion is that proceedings in respect of such assessment is completed after 1/06/2003. Once the Explanation is held to be retrospective in relation to the assessment years commencing before 1/6/2003 it would not be open to restrict the operation of section 234D only with effect from 1/6/2003. Under the Act what is brought to tax is not the income of the assessee in the assessment year but the income of the assessee in the previous year. The liability to tax arises on account of the Finance Act which fixes the rate at which the tax is to be paid. The law to be applied is as existing on the 1st day of April of the previous year - in favour of revenue.

Issues Involved:
1. Applicability of Section 234D of the Income Tax Act, 1961 to refunds granted prior to 1st June 2003.
2. Retrospective effect of Explanation 2 to Section 234D introduced by the Finance Act, 2012.
3. Validity of interest charged on excess refunds under Section 234D for assessment years before 1st June 2003.

Issue-wise Detailed Analysis:

1. Applicability of Section 234D to Refunds Granted Prior to 1st June 2003:
The primary issue was whether interest under Section 234D is chargeable on refunds granted before 1st June 2003. The Tribunal ruled that no interest could be charged under Section 234D for refunds granted before this date, following the precedent set in CIT v. Bajaj Hindustan Limited. The Tribunal's decision was based on the interpretation that Section 234D, introduced on 1st June 2003, does not have retrospective effect.

2. Retrospective Effect of Explanation 2 to Section 234D:
The Finance Act, 2012 introduced Explanation 2 to Section 234D, clarifying that the provisions of this section apply to any assessment year if the proceedings are completed after 1st June 2003. The court held that Explanation 2 is declaratory/clarificatory and thus has retrospective effect. It was intended to clarify the legislative intent, which was to apply Section 234D to all pending assessments regardless of the assessment year.

3. Validity of Interest Charged on Excess Refunds for Assessment Years Before 1st June 2003:
The court examined whether the interest under Section 234D could be charged on refunds granted before 1st June 2003 if the assessment was completed after this date. The court concluded that Section 234D, as clarified by Explanation 2, applies retrospectively. Therefore, interest is chargeable on excess refunds even if granted before 1st June 2003, provided the assessment proceedings were completed after this date.

Detailed Analysis:

Facts Leading to the Appeal:
- The respondent filed a return of income for the assessment year 2002-03, claiming a refund.
- The return was processed, and a refund was issued. However, upon final assessment under Section 143(3), a demand for additional tax and interest under Section 234D was raised due to excess refund.
- The Commissioner of Income Tax (Appeals) upheld the demand for interest, but the Tribunal ruled in favor of the respondent, stating that Section 234D did not apply to refunds granted before 1st June 2003.

Arguments by Revenue:
- The revenue argued that Explanation 2 to Section 234D, introduced by the Finance Act, 2012, clarifies that interest is payable on excess refunds even if granted before 1st June 2003, as long as the assessment is completed after this date.
- The revenue contended that the Tribunal's reliance on Bajaj Hindustan Limited was misplaced as it did not consider Explanation 2.
- The revenue highlighted that the Act provides for interest on delayed tax payments and refunds, and fairness demands that excess refunds should also attract interest.

Arguments by Respondent:
- The respondent argued that Section 234D applies only to refunds granted after 1st June 2003, as indicated by the use of the present tense in the section.
- The respondent contended that even if Section 234D applies, interest should only be charged from 1st June 2003 onwards, not retrospectively.

Court's Analysis:
- The court noted that the decision in Bajaj Hindustan Limited was rendered before the introduction of Explanation 2 and did not address its implications.
- The court held that Explanation 2 is declaratory, clarifying that Section 234D applies retrospectively to all assessment years if the proceedings are completed after 1st June 2003.
- The court rejected the argument that the use of the present tense in Section 234D limits its application to future refunds, citing the Supreme Court's interpretation of similar language in other statutes.
- The court emphasized that the refund granted under Section 143(1) is provisional, subject to final assessment, and thus Section 234D applies to all pending assessments.

Conclusion:
The court concluded that Section 234D, as clarified by Explanation 2, applies retrospectively to all refunds granted before 1st June 2003, provided the assessment proceedings are completed after this date. The Tribunal's decision was overturned, and the appeal was disposed of in favor of the revenue. No order as to costs was made.

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