2015 (2) TMI 453 - HC - Income Tax

Interest on refund - principles for awarding compensation - Held that - From the conjoint reading of the decision of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others ( 2006 (1) TMI 55 - SUPREME Court) and the latter decision of the Larger Bench in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (2013 (10) TMI 117 - SUPREME COURT) it appears that the liability to pay interest on interest by the Revenue is not approved and to that extent the contention of the Revenue can be maintained. But the further contention of the Revenue that no interest whatsoever would be payable if the refund of the amount of tax or refund of the amount deposited towards tax is to be made, no interest whatsoever would be available by way of compensatory measure. The general principles for awarding compensation to the Assessee for the delay in receiving monies properly due to it is not disapproved by the Larger Bench of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra). Thus the petitioner - Assessee would be entitled to compensation and the interest can be awarded by way of compensation, but would not be entitled to further compensation by way of interest on such interest, which is awarded as compensation. Respondents are directed to grant compensation by way of interest at the rate of 9% p.a., to the petitioner on the amount refunded for the period from July 1, 1987 to November 13, 1990. - Decided in favour of assessee.

Issues Involved:
1. Entitlement to compensation by way of interest on delayed refund.
2. Applicability of interest on interest as compensation.
3. Interpretation of relevant Supreme Court decisions regarding compensation and interest.

Detailed Analysis:

1. Entitlement to Compensation by Way of Interest on Delayed Refund:
The petitioner filed a petition under Articles 226 and 227 of the Constitution of India seeking compensation by way of interest on the amount of refund for the period from July 1, 1987, to November 13, 1990. The High Court, in its earlier decision dated July 3, 2007, directed the respondents to grant compensation by way of interest at the rate of 9% per annum on the refunded amount. This decision was based on the Supreme Court's ruling in Sandvik Asia Limited vs. Commissioner of Income Tax & Others (2006) 280 ITR 643 (SC), which emphasized that compensation by way of interest should be awarded for the delay in payment of amounts lawfully due. The High Court set aside the orders of the Commissioner of Income Tax and the Chief Commissioner of Income Tax, which had declined the petitioner's claim for interest on the refund.

2. Applicability of Interest on Interest as Compensation:
The Supreme Court, in its decision dated February 26, 2014, remanded the matter back to the High Court for reconsideration in light of its observations in Commissioner of Income Tax, Gujarat vs. Gujarat Fluoro Chemicals (2014) 1 SCC 126. The High Court noted that the latter Supreme Court decision clarified that the Revenue is not obliged to pay interest on interest in the event of its failure to refund the interest payable within the statutory period. The Larger Bench of the Supreme Court in the Gujarat Fluoro Chemicals case held that the Sandvik Asia decision did not mandate interest on interest but rather compensation for the delay in refunding the statutory interest.

3. Interpretation of Relevant Supreme Court Decisions:
The High Court analyzed both the Sandvik Asia and Gujarat Fluoro Chemicals decisions to determine the scope of compensation by way of interest. The Sandvik Asia case established that the assessee should be compensated for the inordinate delay in receiving monies due, but the Gujarat Fluoro Chemicals case clarified that this compensation does not extend to interest on interest. The High Court concluded that while the petitioner is entitled to compensation by way of interest at the rate of 9% per annum for the period in question, they are not entitled to further compensation by way of interest on such interest.

Conclusion:
In conclusion, the High Court directed the respondents to grant compensation by way of interest at the rate of 9% per annum on the amount refunded for the period from July 1, 1987, to November 13, 1990. This decision aligns with the general principles for awarding compensation for delayed refunds, as established by the Supreme Court, but does not extend to awarding interest on interest. The rule was made absolute to the extent indicated, with no order as to costs.

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