Facts of the Case

The appeals before the Delhi High Court 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 in all appeals was whether the assessees were entitled to receive interest on the interest component of income-tax refunds.

In the lead matter concerning The Motor & General Finance Ltd., the assessee had filed its return for Assessment Year 1994-95 and claimed refund of excess taxes paid through TDS and advance tax. Refund along with statutory interest under Section 244A was granted within the prescribed period.

Subsequently, assessments were completed under Section 143(3), resulting in additions and tax demands. The assessee challenged these additions before appellate authorities. The Commissioner of Income Tax (Appeals) and thereafter the Income Tax Appellate Tribunal granted substantial relief, resulting in further refunds becoming due.

The Department granted refunds together with interest calculated under Section 244A. However, the assessee later filed an application under Section 154 contending that it was also entitled to interest on the interest amount, arguing that the Revenue had wrongfully retained money that ultimately became refundable after appellate proceedings.

While the Commissioner (Appeals) accepted the assessee’s contention, the Tribunal reversed the decision and held that no interest on interest was payable. The matter ultimately reached the Delhi High Court.

Issues Involved

  1. Whether an assessee is entitled to interest on the interest component of income-tax refund under the Income-tax Act, 1961?
  2. Whether the principle laid down by the Supreme Court in Sandvik Asia Ltd. vs Commissioner of Income Tax applies where the Department has already paid statutory interest along with the refund within the prescribed period?
  3. Whether delayed appellate refunds carrying statutory interest under Section 244A can further generate a claim for “interest on interest”?

Petitioner’s Arguments (Assessees)

The assessees contended that:

  • The tax amounts recovered pursuant to assessment orders were ultimately found to be unsustainable after appellate proceedings.
  • The Revenue had retained amounts that were not legally due and therefore the assessee should be compensated for the entire period during which such amounts remained with the Department.
  • Reliance was placed upon the Supreme Court judgment in Sandvik Asia Ltd. vs Commissioner of Income Tax, where compensation by way of interest on delayed payment of statutory interest was recognized.
  • It was argued that once interest accrued on the refund amount, such interest itself became due and payable, and any delay in its payment entitled the assessee to further compensation.
  • The Department had enjoyed the benefit of funds belonging to the assessee and therefore equitable principles required payment of interest on interest.

Respondent’s Arguments (Revenue Department)

The Revenue argued that:

  • The statutory scheme under Sections 240, 243 and 244A provides only for payment of interest on refundable tax amounts and not for payment of interest upon such interest.
  • The facts of the present case were materially different from those in Sandvik Asia Ltd.
  • In the present matters, whenever refunds became due pursuant to appellate orders, the Department paid the refund together with statutory interest under Section 244A within the time prescribed by law.
  • Since interest had already been granted in accordance with the statute, there was no wrongful withholding of interest that could justify an additional claim for interest on interest.
  • The Tribunal correctly distinguished the Supreme Court decision in Sandvik Asia Ltd.

Court Findings

The Delhi High Court examined the ratio of the Supreme Court decision in Sandvik Asia Ltd. vs Commissioner of Income Tax & Others (2006) 2 SCC 508.

The Court observed that in Sandvik Asia, the Department had withheld not only the refundable tax but also the statutory interest payable thereon for extraordinarily long periods ranging from 12 to 17 years. It was in those exceptional circumstances that the Supreme Court awarded compensation by directing payment of interest on the delayed interest component.

The Court distinguished the present cases on facts and held that:

  • The assessees had received refunds together with statutory interest under Section 244A.
  • Such payments had been made within the statutory framework.
  • There was no separate or independent withholding of interest by the Department.
  • The Income-tax Act does not contemplate payment of interest upon interest merely because tax refund became due after appellate proceedings.
  • Interest on interest can arise only where the statutory interest itself has been wrongfully withheld despite having become payable.

The Court further observed that once refund and interest are granted together in accordance with Section 244A, no further claim survives.

Important Clarification

The Delhi High Court clarified that the Supreme Court decision in Sandvik Asia Ltd. does not lay down a universal principle that interest on interest is payable in every refund case.

The judgment applies only in extraordinary situations where statutory interest itself is wrongfully retained by the Revenue for prolonged periods after becoming due.

Where refund and statutory interest are granted together as required under Section 244A, the assessee cannot claim an additional layer of interest on such 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 244A of the Income-tax Act, 1961

Court Order

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

All appeals filed by the assessees were dismissed.

The Court held that the principle laid down in Sandvik Asia Ltd. was not applicable to the facts of the present cases since statutory interest had already been calculated and paid along with the refundable tax amount.

Costs were quantified at ₹5,000 per appeal.

Link to download the order –https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9405-DB/AKS30102009ITA302009_151559.pdf

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