Facts of the Case

The appellant-assessees, including M/s The Motor & General Finance Ltd. and Goodwill India Ltd., filed their returns of income tax and initially received refunds along with statutory interest on excess Tax Deducted at Source (TDS) and advance tax paid under Section 143(1)(a) of the Income Tax Act, 1961. Subsequently, the Assessing Officer (AO) completed regular assessments under Section 143(3), making multiple additions and raising fresh tax demands. The assessees paid these additional demands in installments.

Upon successive appeals, the Commissioner of Income Tax (Appeals) [CIT(A)] reduced the demands, and the Income Tax Appellate Tribunal (ITAT) ultimately deleted the additions, which wiped out the additional tax liability. Consequent to the ITAT’s orders, the Revenue calculated and granted the remaining refunds along with the statutory interest within the legally permissible time frame. The assessees then filed applications under Section 154 of the Act, claiming they were entitled to extra "interest on interest" as compensation, arguing that the tax was wrongfully demanded and the interest component was unjustifiably retained by the department.

Issues Involved

·         Whether the Income Tax Appellate Tribunal was correct in law by holding that the assessees were not entitled to interest by way of compensation (calculated for every month or part of a month) on the interest amounts component of refunds, where additions made by the AO were ultimately deleted.

·         Whether the landmark principle regarding interest on interest laid down by the Supreme Court of India in Sandvik Asia Ltd. v. Commissioner of Income Tax I, Pune & Ors. (2006) applies to cases where the Revenue pays the statutory interest alongside the principal refund amount within the prescribed time limit.

Petitioner’s Arguments

·         The assessees argued that because the additions and disallowances made by the AO were entirely wiped out by the appellate authorities, the original demand raised by the department was wrongful and without justification.

·         Relying heavily on the Supreme Court judgment in Sandvik Asia Ltd., the petitioners contended that they were entitled to compensation for the period during which their funds were retained by the department.

·         They asserted that once interest becomes due, it takes the same color as an excess tax collection, and any delay or retention of it should accumulate interest on interest.

Respondent’s Arguments

·         The Revenue contended that there was no delay in processing or releasing the refunds once the appellate orders attained finality.

·         The Department pointed out that, unlike the facts in the Sandvik Asia Ltd. case, the statutory interest under Section 244A had already been fully calculated and released to the assessees alongside the principal refund amount.

·         Therefore, the Revenue argued that no amounts or interest components were wrongfully withheld or retained without authority of law, making the demand for interest on interest legally untenable.

Court Order / Findings

The High Court of Delhi, presided over by Hon'ble Mr. Justice A.K. Sikri and Hon'ble Mr. Justice Siddharth Mridul, dismissed the appeals and ruled in favor of the Revenue. The Court found that:

·         The decision in Sandvik Asia Ltd. was distinct because, in that case, the Revenue had refunded the excess tax but elements of interest were wrongfully withheld for an inordinately long period of 12 to 17 years without rhyme or reason.

·         In the present case, the Revenue systematically paid the principal refund amount along with the statutory interest under Section 244A within the permissible periods following the appellate outcomes.

·         If statutory interest is paid concurrently with the excess tax refund, the question of payment of interest on interest does not arise. It only becomes an "amount due" eligible for further interest if the interest portion itself is withheld after the tax refund is made. Consequently, the Court answered the question of law against the assessees and dismissed the appeals with costs.

Important Clarification

The Court clarified that under the Income Tax Act, an assessee is adequately compensated for excess tax collections by receiving statutory interest alongside the refund. Interest on interest can only be claimed as a matter of right if the Revenue separates the two, releasing the principal tax refund but withholding the legally due interest component, thereby rendering the retention of that interest unjustified.

Section Involved

·         Section 143(1)(a) (Intimation of assessment)

·         Section 143(3) (Scrutiny assessment)

·         Section 154 (Rectification of mistake)

·         Section 240 (Refund on appeal)

·         Section 243 (Interest on delayed refunds)

·         Section 244 / 244A (Interest on refund where no claim is needed)


Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9410-DB/AKS30102009ITA342009_151742.pdf

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