Income tax - Whether interest obligation arises for the Revenue in every case where excess tax paid by assessee has been retained by the State for its own enjoyment - YES: Supreme Court
THE issues before the Apex Court are - Whether the statutory obligation to refund carries with it the right to interest also; Whether when the assessee deposits tax as per an order passed u/s 195(2), the Revenue is under obligation to pay interest on refund processed as per the appellate order and Whether interest obligation arises for the Revenue in every case where excess tax paid has been retained by the State for its own enjoyment. And the verdict goes against the Revenue.
Facts of the case
The assessee company is engaged in the manufacture of nitrogenous fertilizer. During the assessment year 1997-98, the assessee had commissioned its naptha desulphurization plant and to oversee the operation of the said plant it had sought the assistance of two technicians from M/s. Haldor Topsoe, Denmark. M/s. Haldor Topsoe had raised an invoice aggregating to US$ 43,290,06/- as service charges for services of the technicians (US$ 38,500/-) and reimbursements of expenses (US$ 4,790/-). The assessee had filed an application u/s 195(2) seeking direction as to what percentage of tax should be withheld from the amounts payable to the foreign company. The AO passed an order directing the assessee to withhold tax at the rate of 20% before remitting the sum to the non-resident company. Accordingly, the assessee had deducted tax of Rs.1,98,878/- on the entire amount of US$ 43,290.00/- and credited the same in favour of the Revenue.
On appeal, the CIT(A) while allowing the appeal, had concluded that the reimbursement of expenses was not a part of the income for deduction of tax at source under Section 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid on the amount of US$ 4790.06/- representing reimbursement of expenses. The assessee accordingly filed refund claim with interest as per Section 244A(1) of the Act.
The AO while declining the claim made, observed, that, Section 244A provided for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case was in view of the circulars viz. Circular No. 769 and 790 issued by the Central Board of Direct Taxes and not under the statutory provisions of the Act, no interest would accrue on the refunds under Section 244A of the Act. Therefore, the Assessing Officer while granting refund of the tax paid, refused to entertain the claim for interest on the amount so refunded.
The aggrieved assessee again filed an appeal, and the CIT(A) approved the orders passed by the AO and declined the claim on two counts : (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provided that the benefit of interest under Section 244A of the Act on such refunds would not be available to the assessee and (b) that a conjoint reading of Section 156 and the explanation appended to Section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged under Section 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made under Section 156 of the Act pursuant to a notice of demand issued on account of postassessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case.
On appeal, the Tribunal while reversing the order passed by the Commissioner of Income Tax (Appeals) opined, that, the tax was paid by the assessee pursuant to an order passed under Section 195 (2) of the Act and the refund was ordered under Section 240 of the Act, therefore, the provisions of Section 244A(1) (b) were clearly attracted and the revenue was accountable for payment of interest on the aforesaid refund amount.
The HC refused to accept the appeal filed by the Revenue and the issue was taken to the Supreme Court by filing an SLP.
Having heard the parties, the Bench held that,
++ to appreciate the view point of the counsel for the Revenue, we require to notice certain provisions of the Act prior to the insertion of Section 244A of the Act. The sections that require to be noticed are - Sections 156, 195(2), 240 and 244 of the Act. A perusal of these sections essentially would indicate the procedure whereby the tax amount is paid and the refund of excess amount is claimed by the assessee;
++ Section 244 of the Act provides for interest on refunds where no claim is made or required to be made by the assessee. The said section envisages that where a refund is due to the assessee in pursuance of an order passed under Section 240 of the Act, and the assessing officer does not grant the refund within a period of three months from the end of the month in which such order is passed, the Central Government shall pay to the assessee a simple interest of 15% per annum on the amount of refund due from the date immediately following the expiry of the period of three months as aforesaid to the date on which the refund is granted;
++ since there was disconcert in the minds of both the assessee and the Revenue regarding the cases where payment of interest was required to be made to the assessee by the Revenue, the Parliament has thought it fit to insert a new Section 244A in the place of Sections 214, 243 and 244 in respect of assessments for the assessment year 1989-90 and onwards;
++ the objects and reasons for introduction of the aforesaid Section is clarified by the Board in its Circular No. 549, dated 31.10.1989;
++ it is cardinal principle of interpretation of Statutes that the words of a Statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning unless such construction leads to some absurdity or unless there is something in the context or in the object of the Statute to the contrary. The golden rule is that the words of a Statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of a Statute are clear, plain and unambiguous, then the Courts are bound to give effect to that meaning irrespective of the consequences. It is said that the words themselves best declare the intention of the law giver. The Courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the legislature and it is not a sound principle of construction to brush aside words in a Statute as being inapposite surpluses, if they can have proper application in circumstances conceivable within the contemplation of the Statute (See Gurudevdatta VKSSS Maryadit v. State of Maharashtra  4 SCC 534);
++ before the insertion of Section 244A as a composite Section by the Direct Tax Laws (Amendment) Act, 1987, the liability to pay interest on refund of pre-paid taxes was contained in Sections 214, 243 read with Section 244 (1A) of the Act. The Parliament has introduced a new Section in the place of Sections 214, 243 and 244 in respect of assessment for the assessment year 1989-90 and onwards;
++ the language of the Section is precise, clear and unambiguous. Sub-Section (1) of Section 244A speaks of interest on refund of the amounts due to an assessee under the Act. The assessee is entitled for the said amount of refund with interest thereon as calculated in accordance with clause (a) & (b) of sub-Section (1) of Section 244A. In calculating the interest payable, the section provides for different dates from which the interest is to be calculated;
++ Clause(a) of sub-Section(1) of Section 244A talks of payment of interest on the amount of tax paid under Section 155WJ, tax collected at source under section 206C, taxes paid by way of advance tax, taxes treated as paid under Section 199 during the financial year immediately preceding the assessment year. Under this clause, the interest shall be payable for the period starting from the first day of the assessment year to the date of the grant of refund. No interest is payable if the excess payment is less than 10% of the tax determined under Section 143(1) of the Act or on regular assessment. Clause(b) of Sub- Section(1) of Section 244A opens with the words "in any other case" that means in any case other than the amounts paid under Clause(a) of Subsection( 1) of Section 244A. Under this clause, the rate of interest is to be calculated at the rate of one and a half per cent per month or a part of a month comprised in the period or the periods from the date or, as the case may be, either the dates of payment of the tax or the penalty to the date on which the refund is granted. An explanation is appended to clause(b) of the aforesaid sub-Section to explain the meaning of the expression "date of payment of tax or penalty". It clarifies that the “date of payment of tax or penalty” would mean the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand;
++ in the present case, the assessee had approached the assessing authority inter alia requesting him to determine the tax that requires to be deducted at source before the payment is made to a non-resident/foreign company. On such a request the assessing officer had passed an order under Section 195(2) of the Act directing the assessee to deduct tax at a particular rate. The assessee had appealed against the said order, but had deposited the tax as directed by the AO by the aforesaid order in accordance with the provisions of Section 200 of the Act. When the assessee succeeded in the appeal, a direction was issued by the appellate authority for refund of tax so paid. In observance of the same, the assessing authority had granted the refund of the tax amount under Section 240 of the Act, but declined to grant interest on the said refund amount. The conclusion arrived at by the assessing officer was accepted by the first appellate authority on the ground, inter alia, that the conjoint reading of Section 156 and the explanation appended to Section 244A(1)(b) of the Act would indicate that the amount refunded to the assessee cannot be equated to the refund contemplated under Section 244A(1)(b) of the Act, whereunder only the interest on refund of excess payment made under Section 156 of the Act on account of post-assessment tax is contemplated and not the interest on refund of tax deposited under selfassessment. However, the Tribunal has rejected the aforesaid rationale of the assessing authority as well as the first appellate authority and granted the claim of the assessee. The High Court has endorsed the view of the Tribunal and dismissed the appeals filed the Revenue;
++ the refund becomes due when tax deducted at source, advance tax paid, self assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10 percent of tax determined under Section 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the assessee. In tune with the aforesaid general principle, Section 244A is drafted and enacted. The language employed in Section 244A of the Act is clear and plain. It grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of Section 244 applicable to assessments before 01.04.1989, albeit with clarity of application as contained in Section 244A;
++ the Department has also issued Circular clarifying the purpose and object of introducing Section 244A of the Act to replace Sections 214, 243 and 244 of the Act. It is clarified therein, that, since there was some lacunae in the earlier provisions with regard to non-payment of interest by the Revenue to the assessee for the money remaining with the Government, the said section is introduced for payment of interest by the Department for delay in grant of refunds. A general right exists in the State to refund any tax collected for its purpose, and a corresponding right exists to refund to individuals any sum paid by them as taxes which are found to have been wrongfully exacted or are believed to be, for any reason, inequitable. The statutory obligation to refund carried with it the right to interest also. This is true in the case of assessee under the Act;
++ the question before us is, whether the assessee is also entitled to interest on refund of excess deduction or erroneous deduction of tax at source under Section 195 of the Act;
++ what the assessee primarily contend is that, what has been deposited by him is a tax, may be for and on behalf of non-resident and when the beneficial circular provides for refund of tax to the deductor under certain circumstances, the refund of tax should carry interest;
++ the circular issued by Central Board of Direct Taxes is binding on the department. Binding nature of the circular is explained by this Court in the case of UCO Bank v. CIT (2002-TIOL-697-SC-IT-LB), wherein this Court has observed that the circulars issued by the Board in exercise of its powers under Section 119 of the Act would be binding on the income tax authorities even if they deviate from the provisions of the Act, so long as they seek to mitigate the rigour of a particular Section for the benefit of the assessee. Therefore, we cannot be taking exception to the reasoning and conclusion reached by the authorities under the Act. However, the Tribunal and the High Court, have granted interest on the amount of tax deposited by the assessee from the date of payment on the ground, firstly, the refund of tax is directed by the first appellate authority in the appeal filed by the assessee under Section 240 of the Act and secondly, the Revenue for having retained the sum by way of tax has to compensate the person who had deposited the tax;
++ Section 240 of the Act provides for refund of any amount that becomes due to an assessee as a result of an order in appeal or any other proceedings under the Act. The phrase “other proceedings under the Act” is of wide amplitude. This Court has observed, that, the other proceedings under the Act would include orders passed under Section 154 (rectification proceedings), orders passed by the High Court or Supreme Court under Section 260 (in reference), or order passed by the Commissioner in revision applications under Section 263 or in an application under Section 273A;
++ a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the assessee had paid taxes pursuant to a special order passed by the AO. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid. The amount paid by the assessee was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a company who has deducted tax at source and deposited the same before remitting the amount payable to a foreign company;
++ providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course;
++ in the present case, it is not in doubt that the payment of tax made by company is in excess and the department chooses to refund the excess payment of tax to the depositor. We have held the interest requires to be paid on such refunds. The catch is from what date interest is payable, since the present case does not fall either under clause (a) or (b) of Section 244A of the Act. In the absence of an express provision as contained in clause (a), it cannot be said that the interest is payable from the 1st of April of the assessment year. Simultaneously, since the said payment is not made pursuant to a notice issued under Section 156 of the Act, Explanation to clause (b) has no application. In such cases, as the opening words of clause (b) specifically referred to “as in any other case”, the interest is payable from the date of payment of tax. The sequel of our discussion is the company is entitled not only the refund of tax deposited under Section 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.
tax 'N' accounts people
Tarun Kumar Gupta
Life style Post