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,
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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;
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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;
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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;
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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 [2001] 4 SCC 534);
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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.
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