2014 (3) TMI 610 - SC - Income Tax

Payment of interest on refund u/s 244A - refund of excess tax deposited u/s 195(2) - Whether the revenue is legally responsible u/s 244A of the Act for payment of interest on the refund of tax made to the resident/deductor u/s 240 of the Act - Whether the resident/deductor is also entitled to interest on refund of excess deduction or erroneous deduction of tax at source u/s195 of the Act Held that - Interest on refund is a kind of compensation of use and retention of the money collected unauthorizedly by the Department - When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited - Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded - There is no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company. Refund due and payable to the assessee is debt-owed and payable by the Revenue - The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies - The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances - The obligation to refund money received and retained without right implies and carries with it the right to interest. The payment of tax made by resident/depositor is in excess and the department chooses to refund the excess payment of tax to the depositor the interest requires to be paid on such refunds - The catechize is from what date interest is payable, the present case does not fall either under clause (a) or (b) of Section 244A of the Act - In the absence of an express provision as contained in clause (a), it cannot be said that the interest is payable from the 1st of April of the assessment year - the payment is not made pursuant to a notice issued u/s 156 of the Act, Explanation to clause (b) has no application - as the opening words of clause (b) specifically referred to as in any other case , the interest is payable from the date of payment of tax - the resident/deductor is entitled not only the refund of tax deposited under Section 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax Decided against Revenue.

Summary

Issues Involved:
1. Whether the Revenue is legally responsible under Section 244A of the Income Tax Act, 1961, for payment of interest on the refund of tax made to the resident/deductor under Section 240 of the Act.

Issue-wise Detailed Analysis:

1. Legal Responsibility of Revenue for Interest on Refunds under Section 244A:
The primary issue in this batch of appeals is whether the Revenue is obligated under Section 244A of the Income Tax Act, 1961, to pay interest on the refund of tax made to the resident/deductor under Section 240 of the Act.

Facts:
- The respondent, a company, sought the assistance of technicians from a foreign company and paid service charges, deducting tax as directed by the Assessing Officer under Section 195(2).
- The appellate authority later directed a refund of the tax deducted on reimbursement of expenses, which the resident/deductor claimed with interest under Section 244A.
- The Assessing Officer denied interest, stating that Section 244A provides for interest only on refunds due to the assessee, not the deductor, and the refund was based on circulars, not statutory provisions.

Relevant Provisions:
- Section 156: Notice of demand for tax, interest, penalty, or any other sum payable.
- Section 195: Obligation to deduct tax at source for payments to non-residents.
- Section 240: Refund on appeal or other proceedings, without the need for a claim by the assessee.
- Section 244: Interest on refunds where no claim is needed.
- Section 244A: Comprehensive provision for interest on refunds due to the assessee, replacing Sections 214, 243, and 244 for assessments from 1989-90 onwards.

Submissions:
- Revenue's Argument: Interest under Section 244A is not payable on refunds to the deductor as it is not covered under statutory provisions but circulars. The explanation to Section 244A(1)(b) requires a notice of demand under Section 156, which was not issued in this case.
- Resident/Deductor's Argument: The payment made under Section 195(2) is pursuant to an order under the Act, thus covered under Section 156, and interest should be payable under Section 244A(1)(b).

Discussion:
- The Court emphasized the principle of statutory interpretation, giving words their ordinary meaning unless it leads to absurdity.
- Section 244A provides a substantive right to interest on refunds and is not merely procedural.
- The Tribunal and High Court concluded that the refund under Section 240 should carry interest, as the tax was retained by the Revenue and should be compensated.

Judgment:
- The Court held that the resident/deductor is entitled to interest on the refund of tax deposited under Section 195(2) from the date of payment, as the refund becomes due when tax deducted at source exceeds the tax chargeable.
- The obligation to refund includes the right to interest, and the Government must compensate for the undue retention of money.
- The appeals by the Revenue were dismissed, affirming the Tribunal and High Court's decision to grant interest on the refund.

Conclusion:
The Supreme Court concluded that the resident/deductor is entitled to interest on the refund of tax deposited under Section 195(2) of the Income Tax Act, 1961, from the date of payment, thereby dismissing the Revenue's appeals. The judgment reinforces the principle that refunds due under the Act should carry interest to compensate for the retention of money by the Revenue.