2018 (4) TMI 713 - AT - Income Tax

Income tax refund and interest thereon adjusted towards demand - whether the interest on income tax refund is chargeable to tax in this year according to the above facts? - Held that - Claim of the assessee that it has not received any refund is devoid of any merit as the refund was not issued by issue of cheque to the assessee but was adjusted against the outstanding demand for assessment year 2004 05. Naturally, when the demand is outstanding for A Y 2004 05 there was no question of issuing any refund voucher to the assessee Whether the interest on income tax refund is chargeable to tax in this year? - Held that - Income tax refund is chargeable to tax under the head income from other sources on accrued or receipt basis according to the method of accounting employed by the assessee. Admittedly, the assessee is following the mercantile method of accounting. Therefore, the interest on income tax refund if the revenue has admitted it shall be chargeable to tax as and when it is determined and refund voucher thereof. In the present case the Ld. AO as well as the Ld. CIT (A) has already interest of ₹ 102537/ has been determined and refund voucher is been prepared by the revenue but instead of issuing the cheque same has been adjusted against the outstanding demand of the assessee for assessment year 2004 05. In the interest amount has already accrued to the assessee of ₹ 1 025237/ same is chargeable to tax in the year in which it is determined. In the present case, it has been determined on 1/3/2011 and therefore it is chargeable to tax in AY 2011 12. In view of above facts we do not find any infirmity in the order of Ld. CIT (A) in confirming the order of the Ld. assessing officer holding that interest to the extent of ₹ 1025237/ is correctly charged to the tax for the impugned assessment year. - Decided against assessee.

Summary

Issues:
1. Addition of interest on income tax refund to the returned income of the appellant without proper communication.
2. Accrual and taxation of interest on income tax refund under section 244(1A).

Analysis:

Issue 1:
The appeal was against the addition of interest on income tax refund to the returned income without proper communication. The assessing officer determined that the appellant received a refund which included interest, adjusted against an outstanding demand. The CIT (A) reduced the addition, considering the adjustment made. The appellant contended that no refund was received, supported by a letter and confirmation from its fund division. The departmental representative argued that the refund was adjusted against the demand, not directly paid to the appellant. The Tribunal noted that the refund was adjusted against the demand, concluding that the interest on the refund was chargeable to tax in the relevant year when determined, even if not directly received by the appellant. The Tribunal upheld the CIT (A)'s decision, dismissing the appeal.

Issue 2:
Regarding the accrual and taxation of interest on income tax refund under section 244(1A), it was found that the interest amount had accrued to the appellant and was determined by the assessing officer. The interest, though not directly paid to the appellant, was adjusted against the outstanding demand. As per the mercantile method of accounting followed by the appellant, the interest on the refund was chargeable to tax when determined, even if not physically received. The Tribunal affirmed that the interest amount was correctly charged to tax for the assessment year in which it was determined, in this case, AY 2011-12. The Tribunal dismissed the appeal, upholding the taxation of the interest on the income tax refund.

In conclusion, the Tribunal upheld the decision of the lower authorities, confirming that the interest on the income tax refund was chargeable to tax in the relevant assessment year, even if not directly received by the appellant but adjusted against an outstanding demand. The appeal was dismissed, and the taxation of the interest amount was upheld.