Facts of the Case

The present appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2001–02. Initially, the assessee’s income was assessed at ₹73.17 crore. Subsequently, upon re-computation under Sections 154/250/143(3), the taxable income was reduced to ₹40.88 crore after adjusting carried forward losses.

As a result, the assessee became entitled to a refund of amounts earlier paid as interest under Sections 234D and 220(2), amounting to ₹1.66 crore and ₹1.99 lakh respectively. However, the Assessing Officer did not grant interest on this refund under Section 244A.

The assessee’s claim for such interest was rejected by the CIT(A) on the ground that it would amount to “interest on interest.” The ITAT, however, allowed the claim.

Issues Involved

  1. Whether interest under Section 244A is payable on refund of amounts earlier deposited as interest under Sections 234D and 220(2)?
  2. Whether granting such interest amounts to impermissible “interest on interest”?
  3. Whether the refund of statutory interest retains the character of “interest” in the hands of the assessee?

Petitioner’s (Revenue) Arguments

  • The Revenue contended that granting interest under Section 244A on refunded amounts would amount to “interest on interest”, which is not permissible under law.
  • Reliance was placed on:
    • CIT vs Gujarat Fluoro Chemicals Ltd. (SC)
  • It was argued that only statutory interest explicitly provided under Section 244A is allowable, and no additional interest can be granted.
  • The Revenue further argued that the issue should await decision of a larger bench in Sutlej Industries Ltd. case.

Respondent’s (Assessee) Arguments

  • The assessee argued that:
    • The refund arose due to excess recovery by Revenue, hence it is a debt owed by the Revenue.
    • Interest under Section 244A must be granted on such refund.
  • Reliance was placed on:
    • Preeti N. Aggarwala vs CCIT (Delhi HC)
    • Union of India vs Tata Chemicals Ltd. (SC)
    • Universal Cables Ltd. vs CIT (SC)
  • It was emphasized that denial of interest would result in unjust enrichment of the Revenue.

Court’s Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and upheld the ITAT order, holding that:

  • The refund of amounts paid under Sections 234D and 220(2) does not retain the character of “interest”.
  • Such refund constitutes a debt owed by the Revenue to the assessee.
  • Granting interest under Section 244A on such refund does not amount to “interest on interest.”
  • The Court relied on:
    • Preeti N. Aggarwala vs CCIT
    • Union of India vs Tata Chemicals Ltd.
  • It was clarified that:
    • Interest under Section 244A applies broadly to “any amount” refundable.
    • The phrase “in any other case” under Section 244A(1)(b) includes such situations.

Thus, the assessee is entitled to interest on refund even if the original payment was termed as ‘interest’.

Important Clarification by Court

  • Refund of statutory interest:
    • Is not “interest” in the hands of the assessee
    • Becomes a principal amount (debt) once refundable
  • Therefore:
    • Interest payable on such refund is legally valid
    • It does not violate the principle against “interest on interest”

Sections Involved

  • Section 244A – Interest on Refunds
  • Section 234D – Interest on Excess Refund
  • Section 220(2) – Interest on Demand
  • Section 154, 250, 143(3) – Assessment/Reassessment Provisions
  • Section 2(28A) – Definition of Interest

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3039-DB/58904082022ITA14472018_155104.pdf

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