Facts of the Case

The assessees had originally filed their income-tax returns and paid taxes through TDS and advance tax. Upon processing of the returns under Section 143(1)(a), excess tax paid was refunded together with applicable interest.

Subsequently, assessments were completed under Section 143(3), resulting in additions and disallowances that created additional tax demands. The assessees paid such demands in instalments and challenged the assessment orders before the Commissioner of Income Tax (Appeals) and thereafter before the Income Tax Appellate Tribunal.

The appellate authorities substantially deleted the additions made by the Assessing Officer. Consequently, the assessees became entitled to refunds of the taxes paid pursuant to the assessment orders. These refunds were granted by the Department together with interest calculated under the statutory provisions.

The assessees thereafter filed applications under Section 154 seeking payment of further interest on the statutory interest already granted, claiming compensation for alleged wrongful retention of funds.

While the Commissioner (Appeals) accepted the claim, the Tribunal reversed the order and held that no such interest on interest was payable. Aggrieved by the Tribunal's decision, the assessees approached the Delhi High Court.

Issues Involved

  1. Whether an assessee is entitled to interest on interest merely because the tax demand raised by the Assessing Officer was subsequently deleted in appeal.
  2. Whether the principle laid down by the Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax permits grant of interest on statutory refund interest in every case where refund becomes payable after appellate proceedings.
  3. Whether the Revenue is liable to pay compensation by way of interest on interest when refund and statutory interest have been granted within the prescribed period.

Petitioner’s Arguments

The assessees contended that:

  • The additions and disallowances made by the Assessing Officer were ultimately deleted, rendering the collection and retention of taxes unjustified.
  • Since the Department had retained amounts that were not legally payable, the assessees were entitled to compensation.
  • Relying upon Sandvik Asia Ltd. v. Commissioner of Income Tax, it was argued that interest on interest should be awarded where amounts lawfully due to the assessee were wrongfully withheld.
  • The statutory interest paid did not adequately compensate the assessees for the prolonged deprivation of their funds.
  • Therefore, additional interest by way of compensation should be awarded on the interest component itself.

Respondent’s Arguments

The Revenue submitted that:

  • All refunds due to the assessees were granted together with statutory interest under the applicable provisions of the Income-tax Act.
  • There was no delay in payment of statutory interest after the refunds became due.
  • The decision in Sandvik Asia Ltd. was distinguishable on facts because that case involved extraordinary delay of 12 to 17 years in payment of the interest component itself.
  • Once refund and statutory interest are paid together within the prescribed period, no further liability survives for payment of interest on interest.
  • The Tribunal had correctly interpreted the law and denied the claim.

Court Findings

The Delhi High Court carefully examined the judgment of the Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax and observed that the said decision was rendered in exceptional circumstances where the Revenue had withheld the interest component itself for an inordinately long period ranging from 12 to 17 years.

The Court noted that in the present batch of appeals:

  • Excess TDS and advance tax were initially refunded together with interest.
  • After appellate reliefs were granted, consequential refunds were again issued along with statutory interest.
  • The Department had calculated and paid interest under the applicable provisions while granting the refunds.
  • There was no unjustified withholding of the interest component after it became due.

The Court held that the principle in Sandvik Asia Ltd. applies only where the Revenue retains the statutory interest payable to the assessee and fails to release it within a reasonable period.

The Court clarified that where refund of excess tax and statutory interest are paid together, the assessee stands compensated in accordance with the scheme of the Act. In such circumstances, no separate claim for interest on interest can be sustained.

 

Court Order

The Delhi High Court held that the Tribunal was correct in law in rejecting the assessees' claim for interest on interest.

The Court answered the substantial question of law in favour of the Revenue and against the assessees and dismissed all the appeals with costs of ₹5,000 per appeal.

A significant judgment dealing with the interpretation of statutory provisions relating to interest payable under the Income-tax Act and referred to in the Sandvik Asia litigation.

Important Clarification

The Court drew a clear distinction between:

Situation Where Interest on Interest May Be Payable

Where:

  • Refund is granted, but
  • Statutory interest payable on such refund is withheld or delayed for an unreasonable period,

the assessee may be entitled to compensation in terms of the principles recognized in Sandvik Asia Ltd.

Situation Where Interest on Interest Is Not Payable

Where:

  • Refund of tax is granted, and
  • Statutory interest on such refund is simultaneously paid within the prescribed period,

no further interest on interest can be claimed.

Thus, mere success in appellate proceedings does not automatically create a right to claim interest on interest.

Sections Involved

  • Section 143(1)(a) of the Income-tax Act, 1961
  • Section 143(3) of the Income-tax Act, 1961
  • Section 154 of the Income-tax Act, 1961
  • Section 240 of the Income-tax Act, 1961
  • Section 243 of the Income-tax Act, 1961
  • Section 244
  • Section 244A(1)(b)
  • Section 241 (referred)
  • Sections 214 and 244(1A) (as discussed in precedent cases)

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:4559-DB/AKS30102009ITA352009.pdf

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