Facts of the Case

The petitioners had been notified under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, resulting in attachment of their assets. Due to consequential income-tax assessments, substantial tax and interest liabilities arose against them.

The Income Tax Department recovered the outstanding tax and interest liabilities by adjusting refunds due for other assessment years and by debiting attached accounts.

Subsequently, the petitioners filed applications under Section 220(2A) seeking waiver of interest charged for delayed payment. After considerable delay of nearly seven years, the Chief Commissioner of Income Tax allowed waiver of the eligible interest amounts.

Upon such waiver, the refunded amounts were released to the petitioners. However, when the petitioners sought statutory interest under Section 244A on those refunded sums, the Assessing Officer rejected the claim, compelling them to approach the Delhi High Court.

 Issues Involved

  1. Whether refund arising from waiver of interest under Section 220(2A) qualifies as “refund of any amount” under Section 244A?
  2. Whether the phrase “in any other case” in Section 244A(1)(b) includes refund of waived interest?
  3. Whether payment of interest on such refund amounts to payment of “interest on interest”?
  4. Whether the Revenue is liable to compensate for wrongful retention of amounts subsequently held refundable?

 Petitioner’s Arguments

  • The petitioners argued that Section 244A uses the broad expression “refund of any amount”, which is not restricted only to tax or penalty.
  • It was submitted that the phrase “in any other case” under Section 244A(1)(b) must include amounts refunded due to waiver of interest.
  • The refunded amount represented money wrongfully retained by the Revenue and therefore attracted compensatory interest.
  • The petitioners relied on judicial precedents holding that lawful monies retained by the Government carry an obligation to pay interest upon refund.
  • It was contended that grant of interest on refund of waived interest does not amount to “interest on interest” because the refunded sum itself becomes a principal refundable amount.

 Respondent’s Arguments

  • The Revenue contended that Section 244A applies only to refund of tax and penalty and not to refund of interest waived under Section 220(2A).
  • It was argued that waiver under Section 220(2A) is discretionary and therefore the refund arising therefrom does not carry statutory interest.
  • The Department maintained that refund was promptly issued after the waiver order and no further liability arose.
  • It was argued that granting interest would amount to “interest on interest,” which is not contemplated by the statute.

 Court Findings

The Delhi High Court held that the expression “refund of any amount” in Section 244A(1) is wide and comprehensive and cannot be narrowly interpreted.

The Court observed that the phrase “in any other case” under Section 244A(1)(b) includes cases beyond refund of tax and penalty.

It clarified that the explanation to Section 244A(1)(b) only explains the period for computation and does not restrict the scope of refund.

The Court further held that once an amount is found refundable due to waiver of interest, such amount becomes a definite refundable sum and the assessee is entitled to statutory interest thereon.

The Court rejected the Department’s contention regarding “interest on interest” and held that what is being refunded is a principal amount wrongly retained.

 Court Order / Final Decision

The Delhi High Court allowed the writ petitions.

The impugned orders of the Assessing Officer rejecting the claim for interest were set aside.

The Court directed the Income Tax Department to pay interest under Section 244A(1)(b) on the refunded amounts from the date of recovery till the date of actual payment, within four weeks.

 Important Clarification

This judgment clarifies that:

  • Refund under Section 244A is not confined only to tax or penalty.
  • Refund arising due to waiver of interest under Section 220(2A) is covered by Section 244A(1)(b).
  • Such interest is compensatory in nature.
  • Payment of interest on refunded waived interest is not “interest on interest.”
  • The Revenue cannot retain taxpayer’s money without compensating for the period of wrongful retention.

 Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:2293-DB/SMD01052017CW10112016.pdf

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