2007 (7) TMI 221 - HC - Income Tax

Interest on refund - Order passed by Commissioner Chief commissioner refusing to pay interest on the excess amount of tax deducted at source on the ground that the excess amount of tax deducted at source was not as a result of any order passed by the authority under the Income Tax Act is liable to be set aside - respondents are directed to grant compensation by way of interest for delay in payment of amounts lawfully due to assessee

Summary

Issues Involved:
1. Entitlement to interest on the refund of excess tax deducted at source (TDS).
2. Applicability of Sections 243(1)(b), 244(1A), 214(2), and 244A(1) of the Income Tax Act, 1961.
3. Compensation for the delay in payment of amounts lawfully due.

Issue-wise Detailed Analysis:

1. Entitlement to Interest on Refund of Excess TDS:
The petitioner, a company, claimed a refund of excess tax deducted at source (TDS) and sought interest on this refund. The Income Tax Officer initially directed the petitioner to deduct and pay taxes at a 30% rate on the amount remitted to a foreign collaborator. Subsequently, the petitioner claimed a refund of Rs. 10,26,868/- as no grossing was required under the amended provisions of Section 6(10) of the Act. The Income Tax Officer, Ward-2(1), Baroda, granted the refund but did not award interest on the excess amount. The petitioner's subsequent requests for interest were rejected by the Commissioner of Income Tax, Baroda, the Chief Commissioner of Income Tax, Gujarat, and the Government of India, leading to the filing of this petition.

2. Applicability of Sections 243(1)(b), 244(1A), 214(2), and 244A(1) of the Income Tax Act, 1961:
The Commissioner of Income Tax, Baroda, rejected the petitioner's claim for interest on the refund under Sections 243(1)(b), 244(1A), and 214(2) of the Act. The Chief Commissioner of Income Tax, Gujarat, also refused the claim, stating that the excess amount of TDS was not due to any order passed by an authority under the Act, and Section 244A(1) was not applicable as it was effective from the assessment year 1989-90. The Government of India further refused the claim, stating that the refund was not issued pursuant to an assessment or penalty order, making Section 244(1A) inapplicable.

3. Compensation for Delay in Payment of Amounts Lawfully Due:
The petitioner argued that they were entitled to interest as compensation for the delayed refund, asserting that the excess amount was wrongfully detained by the respondents. The Supreme Court's judgment in Sandvik Asia Limited vs. Commissioner of Income-Tax & Ors. was cited, which established that an assessee is entitled to compensation by way of interest for delays in payment of amounts lawfully due. The Supreme Court had held that interest on refunds must be paid promptly and any delay would entitle the assessee to compensation.

Judgment:
The High Court referred to the Supreme Court's decision in Sandvik Asia Limited, which emphasized that interest on delayed refunds is a form of compensation for the use of another's money. The Court noted that the Central Board of Direct Taxes (CBDT) had issued Instruction No.2 of 2007, reinforcing the obligation to grant interest on refunds simultaneously. Consequently, the High Court set aside the three orders rejecting the petitioner's claim for interest and directed the respondents to grant compensation by way of interest at 9% per annum on the refunded amount from July 1, 1987, to November 13, 1990. Additionally, the respondents were ordered to pay running interest at the same rate on the amount of interest granted.

Conclusion:
The petition was accepted, and the respondents were instructed to compensate the petitioner for the delay in refunding the excess TDS by awarding interest at 9% per annum. The orders of the Commissioner of Income Tax, Chief Commissioner of Income Tax, and the Government of India, which had denied the interest, were set aside. The judgment underscored the principle that taxpayers are entitled to compensation for delays in receiving refunds lawfully due to them.