Facts of the Case

The appeals were filed by various assessees including The Motor & General Finance Ltd., MGF India Ltd., Goodwill (India) Ltd., and MGM (India) Ltd. The common issue involved was whether an assessee is entitled to receive interest on the interest component of a tax refund.

The assessees had filed their income-tax returns and were initially granted refunds together with statutory interest under Section 244A. Subsequently, assessments were completed under Section 143(3), resulting in additional tax demands. The assessees challenged those additions before the appellate authorities.

The Commissioner of Income Tax (Appeals) and later the Income Tax Appellate Tribunal granted substantial relief, resulting in refund becoming due to the assessees. The Department refunded the excess tax together with interest as prescribed under Section 244A within the statutory period.

Thereafter, the assessees filed applications under Section 154 claiming that they were also entitled to “interest on interest”, contending that the Revenue had wrongfully retained amounts collected pursuant to assessment orders that were subsequently set aside or reduced. While the CIT(A) accepted the claim, the Tribunal reversed the decision and held that no such interest was payable. The assessees challenged the Tribunal’s order before the Delhi High Court.

Issues Involved

  1. Whether an assessee is entitled to receive interest on the statutory interest component payable on income-tax refunds.
  2. Whether the principle laid down by the Supreme Court in Sandvik Asia Ltd. v. Commissioner of Income Tax permits payment of “interest on interest” in every case of delayed refund.
  3. Whether compensation in the nature of interest on interest can be claimed when refund and statutory interest have already been granted within the time prescribed by law.

Petitioner’s Arguments

The assessees contended that:

  • The Department had retained monies collected pursuant to assessment orders that were subsequently reduced or set aside by appellate authorities.
  • Once the tax paid became refundable, the Revenue was obliged not only to refund the principal amount but also compensate the assessee for deprivation of use of money.
  • Reliance was placed on the Supreme Court judgment in Sandvik Asia Ltd. v. Commissioner of Income Tax, wherein compensation was awarded for inordinate delay in payment of amounts lawfully due to the assessee.
  • It was argued that since the Revenue had enjoyed the benefit of money belonging to the assessee, equity and justice demanded payment of interest upon the interest amount as well.
  • The assessees submitted that the expression “any amount” appearing in the refund provisions was wide enough to include unpaid interest.

Respondent’s Arguments

The Revenue contended that:

  • The statutory scheme under Sections 240, 243 and 244A only provides for payment of interest on refundable tax amounts and does not contemplate payment of interest on interest.
  • The assessees had already been granted refund together with statutory interest calculated under Section 244A.
  • The facts of the present cases were materially different from those considered by the Supreme Court in Sandvik Asia Ltd.
  • In Sandvik Asia Ltd., the Revenue had withheld statutory interest itself for an extraordinarily long period ranging from 12 to 17 years, thereby justifying compensatory relief.
  • In the present matters, the Department had refunded both tax and interest within the statutory time limits and therefore no further compensation was legally payable.

Court Findings / Order

The Delhi High Court dismissed all the appeals and decided the issue in favour of the Revenue.

The Court held that the decision of the Supreme Court in Sandvik Asia Ltd. cannot be interpreted as laying down a universal rule that interest on interest must be paid in every refund case.

The Court observed that in Sandvik Asia Ltd. the Revenue had not merely delayed the refund of tax but had withheld the statutory interest component itself for an extraordinarily long period of 12 to 17 years. It was in those exceptional circumstances that compensation was granted.

In the present cases, however:

  • Refunds became due only after appellate orders.
  • The Revenue granted refund along with interest under Section 244A.
  • Such payments were made within the statutory period prescribed under the Income-tax Act.
  • There was no wrongful withholding of statutory interest after it became due.

The Court held that where interest is paid along with the refundable tax amount in accordance with Section 244A, no further liability to pay interest on such interest arises.

Accordingly, the Tribunal was correct in holding that the assessees were not entitled to claim interest on interest.

All appeals were dismissed with costs quantified at Rs. 5,000 per appeal.

Important Clarification

The Delhi High Court clarified that the ruling of the Supreme Court in Sandvik Asia Ltd. is confined to exceptional cases involving unjustified and prolonged withholding of statutory interest itself.

The judgment does not create a general principle that every refund carrying interest under Section 244A automatically attracts a further claim for interest on interest.

Interest on interest may arise only where the statutory interest due to the assessee is itself wrongfully withheld for an unreasonable period. Where refund and statutory interest are paid in accordance with the statutory provisions and within prescribed timelines, no further compensation is payable.

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
  • Section 214 of the Income-tax Act, 1961
  • Section 244(1A) of the Income-tax Act, 1961

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9375-DB/AKS30102009ITA292009_150752.pdf

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