PROPER ACCOUNTING FOR INTEREST ON INCOME TAX REFUND IS REQUIRED TO AVOID PENALTY- Analysis of judgment of Madras high Court and related issues.

[DEV KUMAR KOTHARI]

Interest u/s 244A

The assessee is entitled to claim and get refund of excess taxes paid with interest thereon under section 244A.  Thus the claim of interest and right to receive it is a statutory right of the assessee. The interest u/s 244A (or any other provision of I.T. Act prior to insertion of section 244A) is paid by your own A.O., therefore it is always in his knowledge, and one should not try to avoid disclosure of the same as income. The accountants and tax return preparers should also take reasonable care to reconcile the account of TDS and other advance taxes, orders and intimations received, refund received etc. to check that tax paid and  interest paid is properly adjusted, the amount of refund received against advance tax and TDS is adjusted properly and interest received on refunds is taken as income.  

Practical aspects

In practice we find that many times, the returns are processed, refund is allowed but without any interest.  Sometimes refund is granted and interest is calculated up to that date.  However, refund is actually given to the assessee quite late.  Sometimes we find that cheques are written but they are not dispatched and the cheques are sent to assessee when assessee approaches or complains about non-receipt of refund and in such circumstances though actually refund is quite late, the amount of interest is not updated.  Therefore, in respect of interest receivable from the Income-tax Department mostly people account for the same on actual receipt basis.  This is because in spite of assessee's right to receive a refund with interest, the assessee is not sure to the period up to which interest will be allowed and the amount on which refund will be allowed.  The variation in amount of refund claimed and refund actually granted may take place for several reasons like( a) Variation in the amount of income returned and the income assessed ( b) Variation in amount of tax and interest payable (c) Variation in amount of income tax, interest, penalty etc. which the assessing officer may impose in some other years and adjust the demand against the refund receivable by the assessee.  Therefore, the assessee cannot always be sure about the amount of interest receivable.  Accordingly, many of assessees consider the amount of interest actually received as income.

In some cases it is noticed that the cheque for refund is sent by the A.O. however the amount of refund is not as per claim. It is lesser but no reason is  given, no computation or intimation of computation has been provide- the assessee has got only cheque. In such a case it may not be possible for the assessee to ascertain whether only principal amount against some TDS certificates has been allowed and  refunded or some interest has also been granted. For example suppose assessee submitted TDS certificates of Rs.80000/- and claim for refund was of Rs.40000/-. The A.O. sends only cheque of Rs.25000/- that is lesser by Rs.15000/- than amount of claim. No computation is provided. It may be that the A.O. has denied credit for some TDS certificate for Rs.15000/- and did not allow any interest. Or it may be that credit for TDS certificate is denied for Rs.20000/- and interest is allowed Rs.5000/- in respect of credit allowed. Or there may be a case that tax liability is ascertained at a higher amount. Therefore, unless the A.O. provides details, the assessee will not be in a position to ascertained, whether, any interest has been allowed or not? In such a case the assessee may approach the A.O. and obtain the intimation / calculation sheet. In case of need application for rectification and further refund of principal amount and / or interest can be made. Amount of interest actually received should be shown as income.

Failure to account for / disclose the interest actually received is really very serious - and is in nature of concealment of income:

In case the assessees do not disclose the amount of interest received from Income-tax Department, this will amount to concealment of income and the assessee should not take a risk of even mistake in this regard because the Income-tax Department had paid the interest and if it is not disclosed by the assessee, the department has its own information and can assess the income without there being any need of annual return or other information from other sources.  Therefore, one must be very careful to properly account for and disclose the interest received as income.

Recent case before Madras High Court

In the case of CIT v. Thirupathy Kumar Khemka and another, 2007 -TMI - 13363 - (MADRAS High Court), the assessee did not disclose the amount of interest in the income of a.y. 1996-97. In respect of interest u/s 244A of the Income-tax Act, 1961 granted for the assessment year 1993-94 and certain credits in a savings bank account. The assessing officer made addition for both the sums and consequently penalty u/s 271(1)(c) was also imposed for concealment of income and furnishing of inaccurate particulars of income. On appeal the Commissioner (A) confirmed the penalty in relation to addition of interest u/s 244A granted by the Department but deleted the penalty in respect of addition relating to unexplained credit in savings bank account.  The order of the CIT(A) was upheld by the Tribunal.

It appears that  the department did not prefer appeal in respect of penalty deleted in respect of savings bank account otherwise that appeal most probably would have been heard together with the assessee's appeal in respect of the penalty confirmed by the Tribunal in relation to Interest u/s 244A.

From the judgment reported, it appears that the department granted the interest u/s 244A.  However, it is not clear whether the amount of interest was actually received by the assessee or not and what are the reasons that the entry of interest received (which was substantial amount) from income tax department was omitted or wrongly accounted for and income was also not included in computation sheet of income. The assessee has not offered any explanation for the mistake or omission in accounting and computation. The explanation offered by the assessee's counsel, as per reported judgment is:

"the explanation offered by the assessee's representative that they had no intention to conceal the above-mentioned income but the omissions were due to oversight."

Naturally this is very vague and general explanation which could not be accepted by the revenue and therefore, the penalty was levied.  It appears that even before the High Court any further reason or circumstances causing mistake or omission in accounting of interest income or including the same in income statement were  not pointed out. Merely pleading that there was no intention to avoid tax is not enough. The assessee could have improved his case by:

a. pointing out facts, circumstances, and reasons for omission,

b. pointing out the persons on whom assessee relied, and who failed in performing their duty in properly preparing accounts, reconciling advance tax  lying in assets side, refund received, interest received etc.

c. Steps taken to properly disclose income when the mistake came to notice. At the time of hearing for assessment, what stand was taken by the assessee to rectify clerical mistake.

d. Whether the cheque for refund was received without any intimation about calculations of refund granted and interest allowed.

However, unfortunately it appears that no submission was made on the above aspects.

Therefore, in absence of any cognate reason for the omission the high Court also confirmed penalty. The high court also held that in such a case mens rea is not necessary. The fact is that an income was earned and it was not disclosed without any possible reason for failure to disclose the same.

It seems that there is some lacking in the factual position and arguments before the Tribunal and high Courts, as to the non-inclusion of substantial amount of interest amounting to Rs.10.53 lakhs in one case and Rs.7.65 lakhs in another case. It may be due to credit in wrong head - may be in the account of TDS itself because may be  the refund was lower than claim of refund or the amount lying in advance tax and TDS accounts and assessee's accountant acted carelessly and credited full amount of income tax department's cheque in advance tax account, considering  that it is entirely towards TDS and other taxes paid, or due to non receipt of calculation with  refund voucher/ cheque. The facts are not clear, and therefore, it is up to the assessee to find out real reason for such omission and the person responsible for such omission, so that a case of appeal or review can be made out.

Whether, accrued interest on refund claimed should be accounted for:

As per present provisions of section 145 the assessee can adopt either mercantile system or cash system of accounting. In case of cash basis, interest actually received will be offered to tax. However, in case of mercantile system of accounting the question arises is whether the assessee should estimate amount of interest accrued till the last day of the previous year and include it in income? In this regard we need to refer to section 145 relevant portion of which reads as follows:

Method of accounting.

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) xxxx

 (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.

The provisions of section 145 will be applicable to interest earned on income tax refund either under the head income from business or profession (if TDS is from such income) or under the head 'other sources' if refund arises from TDS on income falling under the head income from house property, income from other sources etc. Therefore, in all situations interest on income tax refunds needs to be accounted for as per accrual unless cash system of accounting is followed.

The general rule is that interest accrues from day to day. However, can we say that in case of refund on excess income tax paid, this rule will not apply? Can we say that interest on income tax refund is dependent on several factors and conclusion of the order by the A.O. Therefore before that there is no accrual of income?

Applying the general rule, and particularly in view  of judgment of Madras High Court ,discussed in this write-up, it will be safer to calculate interest receivable as per law based on claim for refund made and account for the same as income to avoid chances of addition being made by the A.O and  penalty for non discloser of interest on income tax refund claimed.

Contingencies:

There are several contingencies in respect of  refund and interest like the A.O. may disallow interest even on some flimsy grounds which assessee cannot perceive, additions and disallowance can be made, even on flimsy grounds - which are usual in case of scrutiny assessment, AO may reject some TDS certificates even on flimsy grounds or without giving any reason, the A.O. may not at all allow interest ( this is general practice particularly in small refunds because the I.T. Department is almost sure that for small amount of interest the assessee would not start proceedings.

In view of contingencies, in case a policy to account for interest on income tax refund on receipt basis is adopted, then a disclosure should be made.