(Last Updated On: July 17, 2018)

Taxability of Interest on Income Tax Refund

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Question:Whether the Interest on Income Tax Refund is chargeable to tax? if yes under which head ?

The amount received towards statutory interest i.e Interest on Income tax refund has to be subject to tax under the head ‘Income from Other Sources’.

Question :Whether interest on Income tax Refund is taxable in the year in which refund is granted or in the respective years in which it has accrued ?

According to the charging provisions of section 4 and section 5 of the Act, the income is chargeable in the year in which it either accrues or is received, as the case may be. The tax department generally takes a position that interest under section 244A of the Act accrues to the assessee only when it is granted to the assessee along with refund order issued under section 240 of the Act.

However in the following case it has been decided that Interest on Income tax refund has to be spread over respective assessment years to which it belongs and is chargeable to tax in respective years

It has been heald that once income has legally accrued to assessee, i.e. assessee has acquired a right to receive same, though its valuation may be postponed to future date, determination or quantification of amount does not postpone accrual.In other words, if the right has legally accrued to the assessee, the right should be deemed to have accrued in the relevant year even though the dispute as to right is settled in the later year, by the one or the other of the authorities in the hierarchy.

Example: Assessee received refund along with interest for period from 30-10-1985 to 31-8-1989 on 18.09.1989 (AY 1990-1991)

Interest on Income tax refund has to be spread over for the assessment years starting with assessment years 1985-86 to 1988-89.

HIGH COURT OF ANDHRA PRADESH

M. Jaffer Saheb

Commissioner of Income-tax, Vijayawada

G. CHANDRAIAH AND CHALLA KODANDA RAM, JJ.

R.C. NO. 127 OF 1997

DECEMBER 19, 2013

FACTS

■ For the assessment year 1982-83, assessment of the assessee was completed with substantial additions raising a huge demand.

■ The assessee paid the demanded tax and thereafter availed the appellate remedies and in that process the Appellate Tribunal had finally passed an order granting substantial relief to the assessee on 16-6-1989.

■ Thereafter, the Assessing Officer gave effect to the order of the Tribunal by order dated 18.9.1989, thereby refunding the excess amount paid along with interest. In that process, the assessee received interest for the period 30.10.1985 to 31.08.1989. The Assessing Officer brought to tax the entire amount in the assessment year 1990-91 ignoring the claim of the assessee to spread over the said amount for the assessment years starting with assessment years 1985-86 to 1988-89.

■ On appeal, the Commissioner (Appeals) allowed the claim of the assessee.

■ On revenue’s appeal the Tribunal reversed the order of the Commissioner (Appeals) and restored the assessment order passed by the Assessing Officer.

■ On appeal to the High Court:

HELD

■ A close scrutiny of sections 237 and 240 would reveal that the statutory right is conferred on the assessee to get refund of the excess tax paid and such refund shall be made to the assessee even without his making any claim in that behalf. Section 244A entitles the assessee to get interest on the refund amount and such interest is payable from the date of payment of tax or payment of penalty till refund is granted. It is clear from the statutory provisions as applicable to the relevant assessment years that there is no requirement of assessee making a claim either for refund or for interest. [Para 13]

■ Once the income has legally accrued to the assessee, i.e., the assessee has acquired a right to receive the same, though its valuation may be postponed to future date, the determination or quantification of the amount does not postpone the accrual. In other words, if the right has legally accrued to the assessee, the right should be deemed to have accrued in the relevant year even though the dispute as to right is settled in the later year, by the one or the other of the authorities in the hierarchy. [Para 16]

■ The reading of sections 237, 240 and 244(1A) casts a duty on the Assessing Officer to charge that much of tax which the assessee is liable to pay and mandates the refund of the excess amount along with interest. The hierarchy of appeals provided are only to ensure that the tax authorities adhere to strict rules of taxation and the statutory provisions. Even the final order, that may be passed by the higher authority in the hierarchy of authorities provided under statute, is also an order of assessment only for the simple reason that the final order passed by the appellate authorities is nothing but correction of the original assessment order, which was erroneous. [Para 17]

■ Thus, the Tribunal was not correct in law in refusing to accept the contention of the assessee that interest on the refund accrued from the previous year relevant to the assessment year 1982-83 and was chargeable to tax in the respective years for which same was paid. [Para 22]

Question Whether the Assessee can Claim interest on such interest due to the delay in grant of Income tax refund ?

No ,The assessee would not be entitled to further compensation by way of interest on such interest, which is awarded as compensation .

It is only that interest provided for under the statute which may be claimed by an assessee from the Revenue and no other interest on such statutory interest.

HIGH COURT OF GUJARAT

Gujarat Flourochemicals Ltd.

Commissioner of Income-tax

SPECIAL CIVIL APPLICATION NO.12855 OF 1994

JANUARY 30, 2015

Case relied : SUPREME COURT OF INDIA, Commissioner of Income-tax, Gujarat, v. Gujarat Fluoro Chemicals ,SPECIAL LEAVE PETITION (C) NOS. 11406 OF 2008 AND OTHERS

Question Whether the Assessee is entitled interest on Income tax Refund when refund has arisen on account of excess self-assessment tax paid by the Assessee ?

Where the self-assessment tax paid by the assessee under section 140A is refunded, the assessee would be entitled to interest thereon, since the self-assessment tax falls within the expression ‘refund of any amount’ as appearing in Section 244A

Madras High Court in case of Cholamandalam Investment & Finance Co. Ltd,TAX CASE (APPEAL) NO. 430 OF 2007

SUPREME COURT OF INDIA, Commissioner of Income-tax , Bhopal v. H.E.G. Ltd.CIVIL APPEAL NOS. 8176, 8177 AND 8178 OF 2009,DECEMBER 3, 2009

Question : Whether the Assessee is always entitled to Interest on Income tax Refund even if delay is on account of the Assessee ?

The assessee can certainly be denied interest if delay is attributable to him. Section 244A(2) provides that delay in refund proceedings on account of reasons attributable to the assessee, wholly or partly, such period of delay shall be excluded from the period for which interest is payable.

Question: What are the situations in which Interest on Income Tax Refund can not be denied by the department ?

Kerala High Court in case of State Bank of Travancore, (IT APPEAL NO. 226 OF 2012 DECEMBER 4, 2013 ) where it was held that interest under section 244A of the Act cannot be denied for time taken by the assessee to cure defects in the TDS certificate, since no amounts were due from the assessee and amount was remaining with the revenue.

Mumbai High Court in the case of Larsen & Toubro Ltd (IT APPEAL (L) NO. 3013, JUNE 21, 2010 OF 2009) in case where tax was deducted and deposited with the exchequer in time, section 244A(2) of the Act could not be invoked on the ground that TDS certificates were not furnished with the return of income but during the assessment proceedings.