2005 (10) TMI 212 - AT - Income Tax

Interest Chargeable u/s 234D - Interpretations of the provisions of section 234D - Retrospective or Prospective effect - Whether interest u/s 234D should be charged from assessment year 2004-05 or with reference to regular assessment framed after 1-6-2003 irrespective of the assessment years involved or irrespective of the date when refund was granted? - HELD THAT - In a case where an assessee claims refund of a substantial portion of advance tax or TDS treated as paid by him on the basis of the total income as declared in his return of income furnished u/s 139, such refund has to be granted to him at the time of processing of the return u/s 143(1). Subsequently, if regular assessment is made on a total income much higher than the returned income, the refund earlier granted to the assessee or a substantial portion of it is treated as tax payable. But while the assessee pays interest for shortfall in payment of advance tax with effect from the 1st day of the assessment year, nothing is charged from the assessee for having utilized the refund amount till the date of regular assessment. Section 234D now provides in the Income-tax Act to charge interest on excess refund granted at the time of summary assessment. Sub-section (1) of section 234D provides that where any refund is granted to the assessee under sub-section (1) of section 143 and no refund is due on regular assessment, or the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, then, the assessee shall be liable to pay simple interest at the rate of two-third per cent on the whole or the excess amount so refunded for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. Thus, section 234D is to be construed as in operation with effect from 1-6-2003 i.e., any regular assessment made on or after 1-6-2003, interest u/s 234D if chargeable is to be levied irrespective of the assessment year or irrespective of the date when the refund was granted. Interest u/s 234D is not levied for any default on the part of the assessee. It is levied merely because the assessee who claimed refund which was granted though not legally due to him. Thus, it is neither for non/delayed filing of return nor non/short demand of taxes etc. but merely to compensate the utilization of any sum during the period which the assessee was not legally entitled to use. There is no merit in the argument that interest even if chargeable should be only for the period commencing from 1-6-2003. What is to be seen is whether interest is chargeable when regular assessment is made on or after 1-6-2003. If the same is found chargeable, the period has to be seen from the date of granting refund till the date of regular assessment. The simple reason is that interest is chargeable for enjoying the refund which the assessee was not legally entitled in the case of Union Home Products 1995 (2) TMI 52 - KARNATAKA HIGH COURT categorically held that interest is compensatory in character. Hon'ble Supreme Court in the case of CIT v. Anjum M.H. Ghaswala 2001 (10) TMI 4 - SUPREME COURT held that interest is mandatory in nature. We accordingly hold that interest was rightly levied under the provisions of section 234D as the regular assessment is made on or after 1-6-2003. In the result, the appeal is dismissed.

Issues Involved:
1. Retrospective application of Section 234D of the Income-tax Act.
2. Nature of Section 234D as a substantive or procedural law.
3. Contradictions in the CIT(A)'s order regarding the applicability of Section 234D.
4. Period for which interest under Section 234D can be levied.

Detailed Analysis:

1. Retrospective Application of Section 234D:
The primary issue raised by the assessee was the retrospective application of Section 234D. The assessee argued that Section 234D, inserted by the Finance Act, 2003, effective from 1-6-2003, should not apply retrospectively to the assessment year 1998-99. The assessee contended that the interest under Section 234D could only be levied for periods commencing from 1-6-2003, as the section is prospective in nature.

2. Nature of Section 234D as Substantive or Procedural Law:
The assessee argued that Section 234D is a substantive law, which should be applied prospectively unless otherwise specified. The argument was supported by several judicial precedents, including the Supreme Court's decisions in CIT v. Isthmian Steamship Lines and Reliance Jute & Industries Ltd. The assessee also cited the Madras High Court decision in Sree Karpagambal Mills Ltd., which held that amendments to substantive law are applicable only from the next succeeding assessment year.

3. Contradictions in the CIT(A)'s Order:
The assessee pointed out contradictions in the CIT(A)'s order, where the CIT(A) upheld the levy of interest under Section 234D while also stating that the section does not apply to refunds granted before 1-6-2003. This contradiction was argued to show non-application of mind, warranting the quashing of the order.

4. Period for Levy of Interest:
The assessee contended that even if Section 234D were applicable, the interest should be levied only from 1-6-2003. The assessee's refund was granted on 5-12-2000 and canceled on 6-6-2003, making it a case where the refund was granted before the section's effective date and canceled after.

Tribunal's Analysis and Judgment:

Retrospective Application:
The Tribunal held that Section 234D is a machinery provision and not a charging provision. Machinery provisions are generally construed to apply from the date they are brought on the statute book. The Tribunal cited the Supreme Court's decision in Associated Cement Co. Ltd. v. CTO, which distinguished between charging provisions and machinery provisions, stating that machinery sections should be construed to give effect to the charge to tax.

Nature of Section 234D:
The Tribunal rejected the assessee's argument that Section 234D is a substantive law. It was held that the section is procedural, dealing with the recovery and collection of tax, not the declaration of liability. The Tribunal referred to the Karnataka High Court's decision in Union Home Products Ltd. v. UOI, which held that interest is compensatory and mandatory in nature.

Contradictions in CIT(A)'s Order:
The Tribunal did not find merit in the argument regarding contradictions in the CIT(A)'s order. It focused on the applicability of Section 234D based on the date of regular assessment.

Period for Levy of Interest:
The Tribunal held that interest under Section 234D is chargeable from the date of granting the refund to the date of regular assessment if the regular assessment is made on or after 1-6-2003. The Tribunal emphasized that the interest is compensatory for the utilization of the refund amount, which the assessee was not legally entitled to.

Conclusion:
The Tribunal dismissed the appeal, upholding the levy of interest under Section 234D as the regular assessment was made on or after 1-6-2003. The Tribunal concluded that Section 234D is procedural and applicable to all pending matters from its effective date, irrespective of the assessment year or the date when the refund was granted.

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