Interest on Delayed Tax Refund: The Saga Continues

Collect taxes from the citizens as honeybees collect nectar from the flowers,
gently and without inflicting pain…

…..Chanakya

A. Executive Summary

The article deals with the recent judgement of Hon’ble Karnataka High Court in the case of Wipro Limited. In the said decision, the court has discussed in detail the purpose of introduction of section 244A(1A) under the Income Tax Act 1961 and the purpose cannot be defeated because of the whims of the erring officials. The court has taken the cognizance of the arguments contended by the department and has brought a thin line of distinction between assessment, reassessment and assessment order. Additional interest u/s 244A(1A) cannot be denied to the assessee when there is a delay beyond the prescribed period in giving of the order by the Assessing Authority.

B. Introduction

1. As the Department of Income Tax charges interest on delayed payment of taxes from the taxpayer, it is its ethical responsibility to pay interest to the assessees on delayed payment of refund as well.

2. However in practical world, though department take coercive steps for recovery of the taxes from the taxpayer but at the time of issuance of refund, the exchequer generally resorts to usual tactics of holding the refund, making unusual delay in issuing the refund or even denying paying the refund. As a result, taxpayer is left with no option other than to knock the doors of the Courts by filing writ petition against the department.

3. The courts on multiple occasions have even penalised the department for making extraordinary delays in issuing refunds to the taxpayer. In order to compensate the assessee for delayed or non-payment of refund, the courts have also order department to pay hefty penal interest.

4. To avoid any injustice to tax payers, though the government has introduced section 244A for payment of interest on refund, to compensate the assessee for delay but the department again resorts to new tactics for denying or holding the amount of interest.

5. Long story short, in spite of all the judicial pronouncements and orders the fight for refund and interest on refund continues.

C. Few Judicial Pronouncements on interest on refund

6. Hon’ble Apex Court in the case of Sandvik Asia Ltd. -vs.- CIT (2006) 280 ITR 643 (SC) has held that the assessee was entitled to compensation by way of interest on the delay in the payment of amounts lawfully due to the assessee, which were withheld wrongly and contrary to the law by the department for an inordinate long period of up to 17 years.

Further, the court in the aforesaid decision has also held that while charging interest from the assessee, the department has first adjusted the amount paid towards interest so that the principal amount of tax payable remained outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance is adjusted towards interest. That stand taken by the revenue was discriminatory in nature and thereby causing great prejudice to the assessees.

7. Similarly, in CIT -vs.- HEG Ltd. (2010) 324 ITR 331 (SC) the Hon’ble Supreme Court has held that meaning of the word ‘any amount’ as used in section 244A is not limited to principal amount of tax but includes within its ambit the interest component which accrued to the assessee for refunding the principal tax.

8. Thereafter, Hon’ble Apex Court in the case of CIT -vs.- Gujarat Fluoro Chemicals (2014) 42 taxmann.com 1 (SC) has held that in the event of extraordinary delay for refund of taxes owing to the department, revenue is liable to pay the compensation for the same. However, revenue is not liable for payment of interest on interest. The court has also reviewed its earlier decision in the case of Sandvik Asia (supra) and has held that in the said case there was extraordinary delay in refund of interest which caused great prejudice caused. The same was compensated by way of penal interest. Therefore, revenue was directed to pay compensation for the same not an interest on interest.

9. Also, Supreme Court in Union of India -vs.- Tata Chemicals Ltd. (2014) 363 ITR 568 (SC) has clarified the reasons for granting interest on refund. The court held that refund due and payable to the assessee is a debt owed and payable by the Revenue. The State having received the money without right, and having retained and used it, is bound to make the party good. The obligation to refund money received and retained without right implies and carries with it the right to interest.

10. In India Trade Promotion Organisation -vs.- CIT (2014) 361 ITR 646 (Delhi) it was held that the assessee is eligible for refund of any amount due which could include not only the tax paid but also the interest element which has accrued and which is payable on the date of refund. It made reference to the Apex Court decision in the case of HEG Ltd. (supra) where it was clarified if the refund granted does not include interest due and payable on the amount refunded, the Revenue is liable to pay interest on the short-fall.

D. Introduction of new section 244A(1A) by Finance Act, 2016

11. Before moving on the recent decision of Hon’ble Karnataka High Court in the case of Wipro Limited -vs.- JCIT (WP. No. 20040/2019), it better have a small discussion about the genesis of section 244A(1A).

12. In order to provide fairness and equity to the taxpayer, a new section 244A(1A) was introduced by the Finance Act 2016. The subsection provides that where a refund arises out of appeal effect being delayed beyond the time prescribed under section 153(5), the assessee shall be entitled to receive, in addition to the interest payable under section 244A(1), an additional interest on such refund amount calculated at the rate of 3% p.a., for the period beginning from the date following the date of expiry of the time allowed under section 153(5) to the date on which the refund is granted.

13. Section 153(5) prescribes the time period for the AO for giving effect of the order of judicial authority or order u/s 263 and 264. In case where the AO is not directed for reassessment or fresh assessment, the time period for the AO is three months from the end of the month in which the order of the appellate authority is received.

14. It may be said that the objective behind the introduction of section 244A(1A) is to compensate the taxpayer for unjust delay in the payment of refund amount because of delay in order effect. In a nutshell, if there is a delay in giving refund beyond the period prescribed in section 153(5), then instead of 6%, assessee shall be entitled for interest at the rate of 9%.

E. Decision of Karnataka High Court in Case of Wipro Limited (supra)

Brief Facts

15. The assessee files return of income for AY 2008-09 declaring a total income of Rs. 588.08 Crs which was subsequently assessed at Rs. 2,389.89 Crs as per the direction of DRP. Against, the said order both assessee and the department preferred an appeal before ITAT wherein the tribunal vide order u/s 254 dated 04-01-2017 partly favored the assessee and remitted the case to TPO with a direction for re-computation of the transfer pricing adjustment.

16. Thereafter, JCIT vide order effect dated 28-12-2017 determined the total income of Rs. 693.88 Crs. and tax payable thereon at Rs. 206.69 Crs under normal provisions. However, the tax on book profit was higher at Rs. 316.85 Crs., resulting in a refund of Rs. 1057.45 Crs. including interest u/s 244A amounting Rs. 267.54 Crs.

17. Thereafter, file was transferred to DCIT before whom rectification petition was filed on various dates by the assessee which was kept pending for a while. Finally, rectification order was passed on 04-05-2019 enhancing the refund amount to Rs. 1380.13 Crs. including interest u/s 244A of Rs. 397.56 Crs.

18. Besides, interest of Rs. 397.56 Crs., the assessee envisaged for additional interest u/s 244A(1A) for the period between 28-12-2017 and 04-05-2019, amounting to Rs. 59.65 Crs.

Contentions of the Assessee

19. The contentions of the assessee are hereunder:-

• Holding the entire refund on the pretext of a transfer pricing adjustment which would account for a masculine refund of Rs. 3.88 Crs. offends the sense of fairness and proportionality.
• Further, transfer pricing adjustment was not determinative of refund since the assessee was liable to pay tax on book profit and not on normal income.
• The orders subjected to section 244A(1A) can be classified into two categories viz.

(i) the ones where a fresh assessment/re-assessment needs to be made, &

(ii) the others where only effect is to be given to the appellate orders straightway without any fresh assessment/reassessment;

Even if the direction of the ITAT to recompute the transfer pricing adjustment falls within the former category, effect had to be given expeditiously to rest of the ITAT order which has attained finality, regardless of contemplated transfer pricing assessment;

Contentions of the Department

20. The contentions of the department are hereunder:-

• Assessment or re-assessment cannot be done in piecemeal or in a truncated way; the total income of an assessee can be determined only after the fresh assessment or re-assessment is accomplished.
• Section 244A(1A) envisages interest only in cases where there is no requirement of fresh assessment or reassessment in terms of appellate order. In the instant case, since the matter was remitted to the TPO for fresh assessment, case of the assessee does not fit into section 244A(1A).
• Section 240 provides that the refund on appeal would arise where an order in appeal on assessment is set aside or cancelled with a direction to undertake a fresh assessment/re-assessment and such a direction is accomplished.

Held by the High Court

21. There is a difference between assessment and assessment order. Assessment, inter alia, includes preparation of assessment order, computation of income, declaration, and imposition of tax liability. Passing of an assessment order is only an integral part of the process of assessment.

22. Further, section 153(3) uses the term ‘fresh assessment’, which mean that the entire exercise of assessment is to be done afresh. And since the term is used along with the terminology “setting aside or cancelling” it means that the whole order of assessment being set aside and not some issues comprised in the assessment order.

23. Therefore, if the orders to be given effect are to be made by following the principles already laid down by the higher forum, it would not be a case of fresh assessment in terms of section 153(3).

24. Interest u/s 244A(1A) would not accrue in cases of fresh assessment or reassessment but would extend to the concluded issues that give rise to refund u/s 153(5). Thus, where in respect of certain issues, time limit for order giving effect u/s 153(5) has expired, interest u/s 244A(1A) has to be granted in respect of refund arising on such issues that are concluded. The pendency of consideration on remitted issues which are subjected to section 153(3) does not interdict the statutory accrual of interest.

25. Further, in the instant case, since the assessee is subjected to tax on book profit, therefore, it can be safely stated that no part of the refund payable arose because of the reduction in the TPA. Further, the demand attributable to the TPA as finally made is miniscule i.e., Rs. 25 lakh or so, as compared to the total refund including interest of over Rs.1,380/-.

26. The contention of the Revenue that any order giving effect to the order of the ITAT will result in redetermination of the assessee’s total income and therefore will constitute a fresh assessment, is absurd. If the same is accepted, it would inexorably lead to the result that the Revenue can invariably retain the refund determined, without the liability to pay the additional interest in terms of Sec.244A(1A) for the delayed period. This would defeat the very object for which this provision has been brought on the statute book.

F. Conclusion

27. The case of Wipro Ltd is another example that the tussle between department and the taxpayer for refund and interest of refund is not going to end. Taxpayers have to knock the doors of judicial forum for getting their hard-earned money back.

28. In fact, the current experience of faceless assessment does not seem to help much. As although the physical interface between the department and the taxpayer has been eliminated but for getting rectification orders, order effects judicial AO has to be approached.

29. In my view, modality of issuing refund needs to be transformed. Instead of seeing the assessee with suspicion department needs to trust the assessee. Although, taxpayer’s charter has been issued but its important to implement the principals of tax payer’s charter in reality.

30. Further, department needs to take huge penal action on the officers who unnecessarily hold the refund or harassed the assessee. If the department sets various mechanism for collection of taxes then better and fast mechanism should also be set for paying the right amount of refund alongwith interest.

31. Holding of refund not only creates financial burden on assessee but on top of that it leads to unnecessary litigations and disputes. It creates a problem for both the department and the assessee. Such problems may be avoided by implementation of better and assessee friendly refund mechanism.

(The Author can be contacted at [email protected])