Facts of the Case

  • The assessees had filed their returns and paid taxes through advance tax and TDS.
  • Refunds became due upon processing of returns and subsequent appellate orders.
  • Refunds along with statutory interest under Section 244A were granted by the Department.
  • The assessees subsequently sought additional interest by filing applications under Section 154, claiming “interest on interest”.
  • The Commissioner of Income Tax (Appeals) allowed the claim in certain cases.
  • The Income Tax Appellate Tribunal reversed the orders and held that no further 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 the interest component of an income-tax refund.
  2. Whether the principle laid down by the Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax applies where refund along with statutory interest under Section 244A has already been paid within the prescribed period.
  3. Whether the Revenue can be directed to pay compensation in the nature of compound interest in such circumstances.

Petitioner’s Arguments

The assessees contended that:

  • The Department had wrongfully retained amounts that ultimately became refundable after appellate proceedings.
  • Such retention deprived the assessees of the use of their money and therefore warranted compensation.
  • The Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax recognized the principle of compensation where the Revenue unjustifiably withholds amounts due to taxpayers.
  • Since the refund had become payable after deletion of additions and disallowances, the assessees were entitled not only to statutory interest but also to interest on the delayed payment of such interest.
  • The claim was based on equitable principles as well as the ratio of Sandvik Asia.

Respondent’s Arguments

The Revenue submitted that:

  • The Income-tax Act specifically provides for payment of interest on refunds under Section 244A.
  • Refunds along with statutory interest had already been granted to the assessees.
  • The Act does not provide for payment of compound interest or interest on interest.
  • The judgment in Sandvik Asia Ltd. was rendered in exceptional circumstances involving an extraordinary delay of 12 to 17 years in payment of statutory interest.
  • The facts of the present cases were entirely different because the statutory interest payable under Section 244A had already been calculated and paid in accordance with law.

Court Findings / Order

The Delhi High Court dismissed all the appeals and held that:

  • The principle laid down in Sandvik Asia Ltd. v. Commissioner of Income Tax was not applicable to the facts of the present cases.
  • In Sandvik Asia, the Revenue had withheld the statutory interest itself for an inordinately long period, thereby justifying compensation.
  • In the present cases, refunds were granted together with the interest payable under Section 244A.
  • Once statutory interest has been calculated and paid on the refundable tax amount, no further liability arises for payment of interest on that interest component.
  • Interest on interest becomes payable only where the interest amount itself is wrongfully withheld after becoming due.
  • The Income Tax Appellate Tribunal correctly concluded that the assessees were not entitled to any additional amount by way of interest on interest.

Final Order

The Delhi High Court answered the question of law in favour of the Revenue and against the assessees and dismissed all the appeals with costs quantified at Rs. 5,000 per appeal.

Important Clarification

The Court clarified that the decision of the Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax does not create a general right to claim interest on interest in every refund case.

The ruling applies only where the Department unjustifiably withholds the statutory interest itself for an extraordinarily long period. Where refund and statutory interest under Section 244A are paid in accordance with the Act, no further claim for compound interest or interest on interest can be maintained.

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:9408-DB/AKS30102009ITA382009_151640.pdf

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