Facts of the Case

The present batch of appeals was filed by various assessees including The Motor & General Finance Ltd., MGF India Ltd., Goodwill (India) Ltd., and MGM (India) Ltd. before the Delhi High Court.

The common issue involved in all appeals was whether the assessees were entitled to receive “interest on interest” where income-tax refunds, together with statutory interest, had already been granted by the Income Tax Department.

In the lead case of The Motor & General Finance Ltd. relating to Assessment Year 1994-95, the assessee had filed its return of income and had paid taxes through TDS and advance tax. Since the tax paid exceeded the assessed liability, a refund along with interest under Section 244A was granted.

Subsequently, the assessment was completed under Section 143(3), resulting in additions and tax demands. The assessee challenged the assessment before appellate authorities. The Commissioner of Income Tax (Appeals) and later the Tribunal granted substantial reliefs, leading to further refunds along with statutory interest.

The assessee thereafter filed an application under Section 154 seeking payment of “interest on interest”, contending that the Department had wrongfully retained amounts that ultimately became refundable and therefore compensation should also be paid on the delayed payment of interest.

While the CIT(A) accepted the claim, the Income Tax Appellate Tribunal reversed the decision and held that no such interest on interest was payable. Aggrieved by the Tribunal’s order, the assessees approached the Delhi High Court.

Issues Involved

  1. Whether an assessee is entitled to interest on the statutory interest component forming part of an income-tax refund.
  2. Whether the Supreme Court judgment in Sandvik Asia Ltd. v. Commissioner of Income Tax permits payment of interest on interest in every refund case.
  3. Whether Sections 240, 243 and 244A of the Income-tax Act authorize payment of compound interest or interest upon interest.

Petitioner’s Arguments

The assessees contended that:

  • The Department had retained amounts which were ultimately found refundable after appellate proceedings.
  • Once the principal refund became payable, any delay in releasing the same caused deprivation of money belonging to the assessee.
  • The Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax had recognized the principle that an assessee must be compensated for wrongful withholding of amounts legally due.
  • Interest which had accrued on the refund amount formed part of the amount payable and therefore further delay in payment entitled the assessee to claim interest on such interest.
  • The Department should compensate the assessee for deprivation of funds, especially where tax demands were ultimately deleted.

Respondent’s Arguments

The Revenue argued that:

  • The decision of the Supreme Court in Sandvik Asia Ltd. was rendered in exceptional circumstances involving extraordinary delays of 12 to 17 years in granting statutory interest.
  • The Income-tax Act provides only for statutory interest under Sections 243 and 244A and nowhere authorizes payment of compound interest.
  • In the present cases, refunds together with statutory interest had been granted within the prescribed statutory periods.
  • Since interest payable under Section 244A had already been calculated and released, no further amount remained due.
  • Therefore, the claim for interest on interest had no statutory basis and was rightly rejected by the Tribunal.

Court Findings

The Delhi High Court carefully examined the Supreme Court judgment in Sandvik Asia Ltd. and observed that the facts of that case were entirely different.

The Court noted that in Sandvik Asia Ltd., although refund of tax had been granted, the statutory interest payable on such refund had itself been withheld by the Department for an extraordinarily long period ranging from 12 to 17 years. It was under those exceptional circumstances that the Supreme Court granted compensation in the nature of interest on interest.

The Court emphasized that the present appeals did not involve any such situation. The assessees had received refunds along with statutory interest under Section 244A within the time contemplated by law.

The Court further held that:

  • Sections 240, 243 and 244A provide only for statutory interest on refundable tax amounts.
  • The provisions do not contemplate payment of compound interest.
  • Interest on interest becomes payable only where the statutory interest itself is wrongfully withheld and becomes an independent amount due to the assessee.
  • Where refund and statutory interest are simultaneously granted in accordance with law, no further claim for interest on interest can arise.

The Court observed that in the present cases the Department had refunded the excess tax together with interest payable under Section 244A and therefore there was no wrongful retention of statutory interest.

Court Order

The Delhi High Court answered the question of law in favour of the Revenue and against the assessees.

All the appeals were dismissed and the Court upheld the order of the Income Tax Appellate Tribunal. The Court further imposed costs quantified at Rs. 5,000 per appeal.

Important Clarification by the Court

The Delhi High Court clarified that the judgment of the Supreme Court in Sandvik Asia Ltd. cannot be interpreted as laying down a universal principle that interest on interest is payable in every refund matter.

The Court distinguished Sandvik Asia Ltd. on facts and held that:

  • Interest on interest is not an automatic statutory entitlement.
  • Such relief may arise only where the Department unjustifiably withholds statutory interest that has already become due and payable.
  • Mere grant of refund after appellate relief does not entitle an assessee to claim compound interest.
  • Sections 240, 243 and 244A provide only simple statutory interest as prescribed under the Act.

Relevant 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 244A of the Income-tax Act, 1961

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9396-DB/AKS30102009ITA392009_151406.pdf

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