2009 (10) TMI 51 - HC - Income Tax

Interest u/s 244A(1)(b) interest on interest - every month or part of the month refund of wrongful retention of interest held that - It is only when the excess amount of tax is refunded but the interest is not refunded along therewith, the retention of interest amount would become unjustified and interest on interest would also become payable. The reason is simple. It is the tax which was paid in excess by the assessee which became refundable. The assessee would be compensated by paying interest thereupon. It is only when the interest is not refunded along with excess tax that the withholding of the said interest becomes unjustified and it becomes an amount due to the assessee on which the assessee can claim further interest. Such a situation has not happened in the present case as the amount of interest is calculated and refunded along with the refundable tax amount. interest on interest not allowed.

Issues Involved:
1. Entitlement to interest by way of compensation under Section 244A(1)(b) of the Income Tax Act, 1961.
2. Claim for interest on interest based on wrongful retention of tax payments.
3. Applicability of the Supreme Court judgment in Sandvik Asia Ltd. v. Commissioner of Income Tax I, Pune & Ors.

Detailed Analysis:

1. Entitlement to Interest by Way of Compensation:
The primary issue in these appeals is whether the Income Tax Appellate Tribunal (Tribunal) was correct in law in holding that the appellant was not entitled to interest by way of compensation calculated for "every month or part of the month" on the amounts of taxes paid from the date of actual payment as provided in Section 244A(1)(b) of the Income Tax Act, 1961. The appellants argue that they are entitled to such interest for the entire period of wrongful retention, as defined in the Supreme Court judgment in Sandvik Asia Ltd. v. Commissioner of Income Tax I, Pune & Ors. The Tribunal, however, held that no such interest is payable.

2. Claim for Interest on Interest:
The appellants claim interest on interest on the premise that the interest amount was wrongfully withheld by the respondent. The appellants assert that when almost all additions and disallowances made by the Assessing Officer (AO) were ultimately deleted by the Tribunal, the tax paid based on the assessment order was wrongly demanded and retained by the Income Tax department without justification. Consequently, the interest accrued upon the wrongfully retained tax should also be compensated by interest on interest.

3. Applicability of the Supreme Court Judgment in Sandvik Asia Ltd.:
Counsel for both parties agree that the principles laid down in the Supreme Court judgment in Sandvik Asia Ltd. would govern the outcome. The Supreme Court in Sandvik Asia Ltd. held that the withholding of monies/interest was unjustified and wrongful, and interest on interest in case of delayed payment was admissible. The Supreme Court recognized the principle that a person should only be taxed in accordance with law, and hence, whether excess amounts of tax are collected from the assessee or any amounts are wrongfully withheld from the assessee without the authority of law, the Revenue must compensate the assessee.

Analysis of Facts and Judgment:

Facts of the Case:
The appeals concern different assessment years, and the facts are illustrated using ITA No. 35/2009, filed by Motor & General Finance Ltd. for the assessment year 1994-95. The assessee filed its return of income tax, showing a particular income, and claimed a refund as the tax payable was less than what was already paid in the form of TDS and advance tax. The refund, along with interest under Section 244A of the Act, was issued within the prescribed time. Subsequently, the assessment was completed under Section 143(3) of the Act, resulting in various additions and a raised demand, which the assessee paid in installments. The CIT(A) and the Tribunal granted reliefs, leading to refunds with interest, which were paid within the statutory period.

Application Under Section 154:
The assessee filed an application under Section 154 of the Act, claiming interest on interest based on the Supreme Court's decision in Sandvik Asia Ltd. The AO dismissed the application, but the CIT(A) allowed it. The Tribunal reversed the CIT(A)'s decision, holding that no such interest is payable.

Supreme Court Judgment in Sandvik Asia Ltd.:
In Sandvik Asia Ltd., the Supreme Court addressed the issue of delayed payment of interest on refunds. The Court held that the withholding of interest was unjustified and wrongful, and interest on interest was payable even if there was no specific provision in the Act. The Court emphasized that the assessee should be compensated for the deprivation of its funds due to the Department's wrongful actions.

Tribunal's Findings:
The Tribunal found that in the present case, the refunds, along with interest, were paid within the statutory period. The Tribunal distinguished the facts from Sandvik Asia Ltd., where the interest was withheld for 12 to 17 years. In the present case, the interest was paid along with the refunded tax amount, and there was no unjustified retention of interest.

Conclusion:
The High Court concluded that the principle laid down in Sandvik Asia Ltd. does not apply to the present fact situation. The Court held that when the refund of tax is made along with interest within the statutory period, no further payment of interest on interest is required. The Court answered the question of law in favor of the revenue and dismissed all the appeals with costs quantified at Rs. 5000/- per appeal.

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