2006 (3) TMI 221 - AT - Income Tax

Issues Involved:
1. Non-allowance of interest under Section 214 on the total amount of refund.
2. Non-allowance of interest on refund of interest under Section 244(1).
3. Entitlement to interest on interest due to delay in granting interest on refunds.

Detailed Analysis:

1. Non-allowance of Interest under Section 214 on the Total Amount of Refund:
The first issue raised is that the CIT(A) upheld the AO's decision not to allow interest under Section 214 of the Income Tax Act on the total refund amount of Rs. 77,20,772 from April 1, 1988, to the date of the actual refund. The assessee filed a return on November 1, 1988, declaring an income of Rs. 1,47,10,762, with advance tax and TDS aggregating to Rs. 1,27,66,667. A revised return disclosed an income of Rs. 72,22,415. The AO granted a provisional refund of Rs. 46,26,243 under Section 141A on April 27, 1989, without interest. Regular assessment on March 11, 1991, resulted in a further refund of Rs. 85,208, again without interest. The assessee appealed, and the CIT(A) reduced the income to Rs. 94,51,601, resulting in a further refund of Rs. 30,09,321 on August 26, 1993. No interest was granted on the total refund of Rs. 77,20,772. The AO later allowed interest of Rs. 11,58,105 under Section 214 but only for the period from April 1, 1988, to April 27, 1989. The CIT(A) upheld this decision, stating that interest was rightly granted only up to the date of provisional assessment under Section 141A.

2. Non-allowance of Interest on Refund of Interest under Section 244(1):
The second grievance is the non-allowance of interest on the refund of interest of Rs. 11,58,105 under Section 244(1). The AO denied this on the ground that the refund of Rs. 30,09,321 did not become due as a result of payment made by the assessee in pursuance of the assessment order, thus, Section 244(1A) was not applicable. The CIT(A) dismissed this ground as it was withdrawn by the assessee's counsel, who clarified it was related to Section 214(1A). The CIT(A) directed the AO to decide the claim of interest on interest, relying on the Tribunal's decision in A.K. Jain & Bros (HUF) vs. ITO. However, the AO, while giving effect to the CIT(A)'s order, noted that the decision in A.K. Jain & Bros was under appeal in the High Court and denied interest on interest. The CIT(A) later held that the issue was debatable and beyond the scope of Section 154, thus rejecting the assessee's claim.

3. Entitlement to Interest on Interest Due to Delay in Granting Interest on Refunds:
The assessee claimed interest on interest due to the delay in granting interest on refunds, citing the Supreme Court's judgment in Sandvik Asia Ltd. vs. CIT. The Department conceded that interest of Rs. 10,90,879 under Section 214 was due to the assessee. The Tribunal examined whether the assessee was entitled to interest on interest on the amounts of refund granted. The Tribunal referred to various High Court judgments and the Supreme Court's ruling in Sandvik Asia Ltd., which upheld the principle that the Revenue must compensate the assessee for delays in granting refunds, including interest on interest. The Tribunal concluded that the assessee was entitled to simple interest on the interest due from the date it became payable until the date of actual payment, as per the rates specified in the Act, but not compound interest. The Tribunal set aside the CIT(A)'s orders and directed the AO to grant interest on the interest due, allowing the assessee's appeals.

Conclusion:
The Tribunal allowed the assessee's appeals, directing the AO to grant interest on the interest due from the dates when the refund of interest became due until the date of granting the refund of interest, as per the rates specified in the Act. The Tribunal emphasized the principle established by the Supreme Court in Sandvik Asia Ltd. vs. CIT, ensuring that the assessee is compensated for delays in granting refunds, including interest on interest.

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