Section 234D is applicable only when refund was allowed under S.143(1) - Madras High Court

[C.A. DEV KUMAR KOTHARI]

Relevant links:

S. 234D of IT Act.

The Commissioner of Income-tax, Madurai. Versus M/s. Ramco Industries Ltd., Rajapalayam. 2010 -TMI - 35383 - MADRAS HIGH COURT

NEW PROVISION:

A new section namely S. 234D was inserted in the income tax Act, 1961 by the Finance Act, 2003, w.e.f. 1-6-2003. The section as inserted and then amended and as it stands now read as follows (with highlights for purpose of analysis added by author):

234D. Interest on excess refund

(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and—

(a) no refund is due on regular assessment; or

(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment,

the assessee shall be liable to pay simple interest at the rate of [one-half 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.

(2) Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.

Explanation.- Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section.]

From the above provision we can make the following analysis:

This section is applicable only when a refund is allowed u/s 143(1) and not in other situation. For example if refund was allowed in terms of any order passed under any provisions other than S. 143 (1) and refund was allowed vide order u/s 143(3) / 154 /251 /254 or order u/s 143(3) and / or 154 read with any order u/s 250, 263, 264, 254 etc. then in case subsequently refund is reduced, by any other proceedings then S. 234D will not apply.

The section will apply in both situations namely - when no refund is found on regular assessment or it is found that refund allowed u/s 143(1) was excessive.

Where for the first time assessment is made u/s 147 or 153A then also the provision will apply.

The assessee will be liable to pay interest at prescribe rate (for relevant period) on excess refund received by him.

In case in any subsequent proceedings refundable amount is increased, then interest charged u/s 234D will be reversed.

Case before Madras High Court:

In CIT Vs. M/s. Ramco Industries Ltd., 2010 -TMI - 35383 before the- MADRAS HIGH COURT matter on provisions of S. 143(1) and 234D came before the high Court.

The facts in the case as far relevant for the purpose of this article are summarized below:

Assessee filed its return of income on 29.11.2000 declaring total income of Rs.6,78,42,400/- for the assessment year 2001-01.

The assessment was completed under section 143(3) of the Act on 07.03.2003 determining the total income at Rs.10,96,71,500/- allowing Rs.4,88,20,435/- as depreciation and Rs.2,45,59,438/- by way of deduction under section 10B.

Subsequently, re-assessment under section 143(3) read with section 147 was completed on 28.12.2007 determining the total income of Rs.11,26,02,970/-.

The assessee carried the matter on appeal and the Commissioner of Income Tax (Appeals), allowed certain relief against additions and disallowances made in reassessment.

On revenue's appeal ITAT upheld the order of the Commissioner of Income Tax (Appeals) and dismissed the revenue's appeal.

On behalf of the revenue before high Court the following substantial questions of law was placed, as Q. no. 2, in appeal on the issues of interest u/s 234D:

2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest under section 234-D of the Act cannot be levied for the period prior to 01.06.2003 is valid?

After hearing the learned counsel for the revenue and on perused of the materials available on record the High Court, in relation to second question on S. 234D observed and noted as follows:

The Commissioner of Income tax (Appeals) has observed that section 234D of the Act is applicable only where any refund is granted to the assessee under section 143(1) of the Act and the same is payable back to the department on completion of the assessment under section 143(3) of the Act.

In this case the assessing officer has not granted refund under section 143(1) of the Act but in order u/s 143(3).

In the circumstances section 234D is not applicable.

The reading of section, makes it clear that section 234D would apply only in respect of refund made under section 143(1) of the Act.

There is no illegality or irregularity in the order passed by the Commissioner of Income Tax (Appeals), which has been confirmed by the Tribunal.

Thus with regard to the second question of law, High Court held that section 234-D of the Act could be invoked only for the refund granted under section 143(1) of the Act.

Therefore, the second question of law was answered against the revenue and in favor of the assessee.

Therefore, the appeal of revenue was dismissed holding that first question was not a substantial question of law and answering the second question (relating to S. 234D) in favor of assessee and against the revenue.

Conclusion:

Interest u/s 234D is applicable only when refund was allowed u/s 143(1) and then it was found on regular assessment that refund allowed was excessive. Once an order u/s 143(3) is passed, and interest is allowed, then this section shall no longer be applicable irrespective of fact that in order u/s 143(3) the same interest was allowed as allowed in order u/s 143(1) (if there was such order) or it was reduced or that interest was allowed for the first time in order u/s 143(3). Any further reduction of refund in any proceeding will not attract S. 234D. Therefore, if interest has been allowed in any order other than order u/s 143(1), then S. 234 D is not applicable.