TAX DEDUCTOR IS ENTITLED FOR INTEREST ON TDS DEPOSITED WHICH IS FOUND REFUNDABLE

[CA DEV KUMAR KOTHARI]

Sections referred: 154, 156, 240, 244A, 263 and 273A of the Income-tax Act,1961

Union of India v. Tata Chemicals Ltd. 2014 (3) TMI 610 - SUPREME COURT   

Gurudevdatta VKSSS Maryadit v. State of Maharashtra 2001 (3) TMI 976 - SUPREME COURT

Shyam Sunder v. Ram Kumar 2001 (7) TMI 1243 - SUPREME COURT

Circular No. 769 and 790 issued by the Central Board of Direct Taxes (for short "the Board")

Why excess Tax Deduction at source(TDS)?:

Before we discuss the issue of interest refund of excess tax deducted and deposited, let us try to answer a primary question as to why excessive TDS takes place which is then refunded. There can be many reason for excessive TDS, for example:

1. Prior payment required before payment or remittance- in some cases tax has to be deducted, deposited and clearance or permission is to be obtained for making payment or remitting the sum. Many times authorities insist to deposit TDS, even though as per provisions it may not be deductible. In such situation tax is deposited and claim for refund is made.
2. Disputes about tax deductible or not- when on some issues revenue has taken view or may take a view that tax is deductible, the tax payer may choose to deduct and deposit tax and claim refund.
3. Different rates – disputes about applicable rate may be a reason for higher TDS and claim for refund.
4. TDS due to wrong demands- many times tax department wrongly demands TDS/ TCS and to avoid disruption which tax department may cause, tax payer may choose to deposit TDS/TCS and claim refund. We find many cases in which tax payers are forced to deposit TDS/TCS and then have to indulge into litigation to get refund. For example recently cases came to notice that tax department has issued notices and demanded to deposit TCS on private sale by traders or cotton spinning mills in relation to ‘inferior quality cotton’ / cotton waste. To which in fact provisions of S. 206C are not applicable. Inspite of judgments of High Court, department is insisting to deposit TCS not only on sales of current year but also of many earlier years. 
5. Play safe policy- many times tax payers adopt play safe policy and make TDS/TCS just to avoid consequences of allegations (real or highhanded) of not deducting and depositing tax which can be very costly due to disallowance of entire expenses, demand of tax and interest, penalty etc.    

Excess TDS/TCS is to be refunded:

When excess tax is deducted or collected, there may be situations when tax deductor/ tax collector is required to claim refund. Particularly so when the party from whom such tax is deducted or collected is not agreeing to TDS/TCS and not allowing such deduction or collection. In some situations it may not be permissible or possible to claim credit by concerned parties. Therefore, one may have to claim refund from Income-tax department.

Past experience:

In recent past we have noticed that after survey, scrutiny etc. tax authorities demand TDS/ TCS including for many past years with interest even when there is good case for non deduction/ non collection. As the tax authorities are more interested just to collect tax, many times they make frivolous orders and demand tax, and to avoid coercive measures, tax payer may have to deposit tax. There is no logical reason for such proceedings because TDS/TCS will have to be refunded by tax department to the party from whom tax is deducted or collected. Even when tax is not deducted or collected, the accused party may have to deposit tax which was deductible or collectible as per tax authorities, the other party may get refund. In such case when it is not possible to get money from concerned party, the deductor may decide to deposit alleged TDS/TCS under protest and not to issue TDS/TCS certificate and claim refund from tax department by filing appeal or pursuing some other proceedings like rectification u/s 154, revision u/s 264, appeal u/s 246A or by way of appropriate Writ Petitions before High Court.   

Case of Tata Chemicals Ltd:

Tata Chemicals had to deposit excessive withholding  tax u/s 195, as directed by tax authority, because otherwise it was not possible to remit money to concerned payee a foreign party.

Assessee preferred appeal and it was held by appellate authority that certain amount of  tax was not deductible and it must be refunded.

About interest payable on such refund, which is out of excessive tax deducted dispute arose and ultimately on appeal of tax department it reached the Supreme Court of India on question whether interest is payable by the Government, and if so payable from which date it should be paid. For answering this question, Courts have considered various related provisions.

The observations and decision of the Supreme Court are analyzed below:

Section 244A is intended to provide that an assessee is entitled to payment of interest for money remaining with the Government which would be refunded.

There is no reason to restrict the application of S.244A only to an assessee and not to a tax deductor who has erroneously deducted tax at source /deducted excess TDS and deposited the same before remitting the amount payable to a non-resident/ foreign company. ( Per author: this will be applicable in case of other TDS/TCS also)

The  phrase "other proceedings under the Act" is of wide amplitude. The other proceedings under the Act would include orders passed under section 154 (rectification proceedings), orders passed by the High Court or Supreme Court under section 260 (in reference), or order passed by the Commissioner in revision applications under section 263 or in an application under section 273A. (per author: other proceedings would also include some other proceedings as discussed earlier)

Section 240 of the Act provides for refund of any amount that becomes due to an assessee as a result of an order in appeal or any other proceedings under the Act.

In the case of Tata Chemicals, the deductor/assessee had paid taxes pursuant to a special order passed by the Tax  authority. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid.

When the said excessive amount is refunded it should carry interest in the matter of course. As held by the  Supreme Court in other cases, interest payable or awarded,  is a kind of compensation of use and retention of the money collected unauthorizedly by the  tax department.

When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited.

Even the Department has understood the object behind insertion of section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded.

The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances.

The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course.

 The deductor is entitled to interest under section 244A(b) from the date of payment of TDS i.e. date of deposit of TDS with Govt.  

Interpretation relating to interest u/s 244A:

The Supreme Court also observed and again held that  it is also well settled principle that the courts must interpret the provisions of the Statute upon ascertaining the object of the legislation through the medium or authoritative forms in which it is expressed. It is well settled that the Court should, while interpreting the provisions of the Statute, assign its ordinary meaning.

Observations of author:

The revenue must adopt purpose seeking approach and should not indulge into unnecessary litigation on TDS/ TCS matters. In any case raising demands for many earlier years is not at all justified because after all TDS/TCS will be treated as advance tax paid by person from whom such TDS or TCS is deducted or credited. Demands for many earlier years create administrative problems for tax payer and tax department without much gain for revenue. In fact there will be no gain to tax department, if tax credit is properly allowed to the concerned parties.

Another aspect is that government should not indulge into litigation about interest payable by government. This is for the reason that interest is compensatory and another important reason is that government charges interest at very high rate from tax payers and pays  interest at comparatively very low rate to tax payers. There should not be case of business like banking wherein banks takes deposits at low rate and lend capital at higher rate. The difference between rate of interest paid by government and that charged on tax payers must be reduced to say about 2-3 % as against 6-12% differential in some situations. For example, if government pays interest @ 6% per annum, then interest charged to tax payers should not exceed 8-9% per annum

Let us hope that after judgment in case of Tata Chemicals, the government will not amend the law regarding interest u/s 244A.