Whether interest is payable on refund of self assessment tax from date of assessment order till grant of refund - YES: HC

THE issues before the Bench are - Whether Self Assessment Tax has to be treated as tax paid pursuant to the order of Assessment; Whether interest is payable on refund of self assessment tax from date of assessment order till grant of refund and Whether in exercise of powers under Article 226 of the Constitution, Court can direct the statutory authorities to grant interest as outside the statute. And the verdict goes in favour of the assessee.

Facts of the case

The assessee, for the Assessment Year 1986-87, paid tax comprising of advance Tax, tax deducted at source and self Assessment Tax. The assessee filed its return of income declaring income. Assessing Officer passed order under Section 143(3) assessing assessee’s income and determined tax payable. The Assessment Order after giving credit for taxes paid demanded the balance tax along with interest from the assessee.

Assessee filed appeal against order of Assessing Officer and revenue filed revision. These challenges culminated in two orders of the Income Tax Appellate Tribunal (the Tribunal), disposing of the grievances of the Revenue and the assessee.

Consequent to the orders of the Tribunal, the Assessing Officer by two orders gave effect to the same and granted refund including interest. Assessee filed rectification application pointing out to the Assessing Officer that there was a short fall in payment of interest in view of interest payable on Self Assessment Tax. The Assessing Officer rejected the application on the ground that interest claimed was attributable to Self Assessment Tax paid and the same was inadmissible under Section 244(1A).

Assessee filed a Revision Application under Section 264 of the Act with the Commissioner of Income Tax. Commissioner of Income Tax rejected the Revision Application and held that no interest under Section 244(1A) of the Act was payable as there was no provision for payment of interest therein on excess amount paid as Self Assessment Tax.

Assessee contended that impugned refusing to grant interest on the refunded Self Assessment Tax paid by the assessee was covered by decision of Supreme Court in the matter of Modi Industries Ltd. & Others v/s. CIT 2002-TIOL-446-SC-IT allowing payment of interest on Advance Tax paid post the assessment order. It was contended that in Modi Industires, the phrase 'in pursuance of an order of assessment' found in Section 244(1A) of the Act, was construed to include Advance Tax and Tax Deducted at Source (TDS) which were paid prior to Assessment order. It was submitted on the same principle as above, interest was payable by the Revenue on the excess Self Assessment Tax paid. It was submitted that assessee was entitled to interest on refund of the tax paid on self assessment tax from the date of payment till the date of refund in terms of Section 244(1A) of the Act as the interest was payable on the refund due in pursuance of the order passed in appeal or other proceedings under Section 240 of the Act. It was further submitted that interest was compensatory in nature and the assessee was entitled to be compensated by payment of interest by the Revenue for the period of time the excess amount was retained by the Revenue till the same was refunded.

Revenue submitted that Section 244 (1A) would have no application in respect of refund of Self Assessment Tax as the Self Assessment Tax has not been paid in pursuance of an order of assessment but prior thereto. It was submitted that Self Assessment Tax which is paid by the assessee is a voluntary payment made after closure of accounts and to correct the shortfall in paying appropriate tax as Advance Tax. Therefore, this delayed payment of Self Assessment Tax is not entitled to any interest. It was also submitted that in view of the second proviso of Section 244(1A), no interest was payable till one month of passing of order in appeal, even if it is assumed that the amount attributable to Self Assessment Tax is entitled to interest when refunded. It was submitted that interest, if any, payable on refund of Self Assessment Tax would be covered under Section 244 (1) of the Act and not under Section 244 (1A) of the Act. It is submitted that if interest is paid on refund of all taxes including those paid before any demand under Section 156 of the Act is made, it would render Section 244(1) of the Act otiose. Therefore, to give a proper meaning to Section 244 of the Act, the interest payable on Self Assessment Tax has to be paid only from the end of three months on an order passed in appeal under Section 240 of the Act. In this case, the order in appeal under Section 240 of the Act was passed on 11th August 1997 and the refund was granted on 30th March 1998. Therefore, interest, if any, payable on the amount attributable to Self Assessment Tax would be for the period 1st December 1997 to 30th March 1998.

Having heard the parties, the court held that,

++ the scheme of the Act for payment of taxes is that all taxes have to be normally paid during the financial year relevant to the assessment year. These taxes are either in the form of credit attributable to the assessee on the TDS or in the form of Advance Tax as provided in the Act. However, where there has been short payment of tax payable for any reason i.e. incorrect estimate of income and/or large business income during the end of year, the said shortfall in payment of Advance Tax is payable as Self Assessment Tax under Section 140A of the Act. This Self Assessment Tax had to be paid by the assessee before filing its Return of Income under Sections 139 or 148 of the Act and the evidence of such payment has to accompany the Return of Income. Post 1st April 1989, such Self Assessment Tax has to be paid along with the interest payable for delay in payment of Advance Tax to the extent of its short fall. Under subsection (2) of Section 140A of the Act as existing prior to 1989 and even today, any amount which is paid as Self Assessment Tax would be deemed to have been paid towards regular assessment under the provisions of the Act. Section 243 of the Act at all times relevant to this Petition provides that on making an assessment order, if any amount found in excess of the tax payable, is not refunded within three months from the end of the month in which the assessment order is passed, then the Central Government would pay interest on the amount to be refunded from the date immediately following the expiry of the period of three months to the order granting refund. However, when the refund becomes payable to an assesee by virtue of an order in appeal or other proceedings, then in terms of Section 240 of the Act, the Assessing Officer is obliged to refund such amount to the assessee without the assessee even having to apply for such refund. Such refund of tax would carry interest in terms of Section 244 of the Act. Section 244(1) of the Act provides for interest consequent to the order passed in an appeal or other proceedings under Section 240 of the Act in case the Assessing Officer does not grant such refund within three months from the date of the order in appeal. Subsection (1A) of Section 244 of the Act which was introduced w.e.f. 1st October 1975 deals with the refund due under Section 244(1) of the Act in respect of any amounts paid by the assessee after 31st March 1975 in pursuance of an order of assessment which is thereafter found in appeal to be in excess. The second proviso to Section 244(1A) of the Act provides that no interest under this subsection shall be payable for a period of one month from the date of passing of order in appeal;

++ in the facts of Modi Industries, the Assessee sought refund of interest paid on the amount attributable to Advance Tax paid for the period from the date of the assessment order passed in its case. This demand for interest was under Section 244 (1A) of the Act. The Court held that the amount of Advance Tax on the passing of the Assessment order loses its character as Advance Tax and becomes Income Tax paid. It was also observed that any amount still standing to the credit of the assessee is to be refunded along with interest from the 1st day of April next following the Financial Year in which it is payable upto the date of Assessment order under Section 214 of the Act. The Assessee therein sought interest post the order of assessment on the refund of the excess amount paid as tax, consequent to order in appeal under Section 240 of the Act. The Apex Court held that the interest would be payable from the date of the order of assessment on the excess amount refunded consequent to order in appeal till the date of grant of refund under Section 244(1A) of the Act. The Apex Court while dealing with the words 'in pursuance of any order of assessment' in Section 244(1A) of the Act has observed as under:

“Therefore, the phrase ‘any amount having been paid.....after March 31, 1975’ occurring in subsection (1A) of Section 244 must be construed to mean not only the amount which has been paid directly pursuant to the order of assessment but will also include the amount of tax deducted at source and Advance Tax, which were lying to the credit of the assessee and were ultimately adjusted and set off against the tax demands raised in the assessment order. The excess amount of tax paid under subsection (1A) of Section 244 must be calculated by treating the amount of tax deducted at source and the amount of Advance Tax which were adjusted against the assessee’s liability to pay tax as well as the amount of tax paid directly upon the assessment under Chapter XVII of the Income Tax Act. In other words, so far as the amount of Advance Tax is concerned, it must be understood to have been paid "in pursuance of any order of assessment" only on the date of the original order of assessment and not on the date of actual payment. The reason is obvious: on the day the Advance Tax amount is paid there is no assessment and, hence, it cannot be said to have been paid "in pursuance of any order of assessment". This view was also taken by the Punjab High Court in the case of Leader Engineering Work [1989] 178 ITR 529.

Finally at page 808 it recorded a summary of its findings as under:

“(i) …. …. ….

(ii) If any tax is paid pursuant to an assessment order after March 31, 1975 (which will include tax deducted at source and Advance Tax to the extent the same has been retained and treated by the Income Tax Officer as payment of tax in discharge of the assessee’s tax liability in the assessment order) becomes refundable wholly or in part as a result of any appellate or other order passed, the Central Government will have to pay the assessee interest on the refundable amount under Section 244(1A). For the purpose of this section, the amount of Advance payment of tax and the amount of tax deducted at source must be treated as payment of income tax pursuant to an order of assessment on and from the date when these amounts were set off against the tax demand raised in the assessment order, in other words the date of the assessment order.

(iii) …. …. ….”

++ the above rationale in respect of interest on Advance Tax would in our view equally apply to Self Assessment Tax. This is for the reason that like payment of Advance Tax, the Self Assessment Tax under Section 140A of the Act would be treated as pursuant to the order of Assessment i.e. when the amounts already paid were set off against the demand raised in Assessment order. We are fortified in our above understanding by the decisions of Punjab & Haryana High Court in Hansa Agencies (I) Ltd., , Madras High Court in SIV Industries Ltd., Delhi High Court in Jyotsna Holdings (P) Ltd., , Gujarat High Court in Gujarat State Warehousing Corpn., and Karnataka High Court in NGEF Limited;

++ it is true that the facts involved in the case of Modi Industries Ltd. dealt with the interest payable on refund of amounts attributable to Advance Tax and TDS. However, the principle laid down therein, that any amounts paid even before the assessment order would be construed to have been paid in pursuance of an assessment order on the reasoning that the amounts paid as tax prior to assessment order were set off against the demand raised in the assessment order. Thus, the Court concluded in Modi Industries that payment of tax though paid as Advance Tax is to be considered as a payment made in pursuance of the Assessment order. To our mind, the distinction drawn by the Commissioner of Income Tax in the impugned order dated 28th May 2004 and before us by the Counsel for the Revenue is a pedantic distinction and not a distinction of substance. The ratio of the decision in Modi Industries Ltd. and in particular the interpretation and meaning given to the words 'in pursuance of order of assessment' is binding upon us to mean not only the amounts paid consequent to a notice of demand issued under Section 156 of the Act consequent to the order of assessment but would also include payments made as tax prior to the order of assessment, either in terms of Advance Tax or Self Assessment Tax;

++ the other objection/ distinction sought to be made by the Revenue is that Self Assessment Tax is voluntarily paid and therefore no interest can be granted. This submission overlooks the fact that Advance Tax is also voluntarily paid by an Assessee. The Self Assessment Tax is paid as much under the provisions of the Act as Advance Tax. Thus, this distinction is also of no substance;

++ submission of the Assessee's that the interest should be paid from the date when Self Assessment Tax was tendered under Section 140A of the Act and not from the date of assessment order, would negate the interpretation put by the Apex Court in 'Modi Industries Ltd. ' to the words 'in pursuance of the order of assessment'. If the Assessee's contention is accepted then the payment has been made to the Revenue by the Assessee not in pursuance of any order of assessment but prior thereto and therefore, Section 244(1A) of the Act will not be applicable. One more reason why the payment of interest on the amount of the refund attributable to the Self Assessment Tax is not payable from the date it was tendered is for the reason that the Self Assessment Tax under Section 140A of the Act is paid by the Assessee because there is shortfall in payment of Advance Tax. Section 140A of the Act does not provide for payment of interest from date of payment till the date of passing of the Assessment order. Contrast this with Advance Tax where the Act has specifically provided under Section 214 that the interest is payable on the Advance Tax paid from the 1st April of the Assessment year upto the date of the assessment order. No such provision has been made in respect of Self Assessment Tax paid by the assessee. Therefore, the statute itself does not provide for any interest to be paid on the amount attributable to the Self Assessment Tax till such time as the Assessment order is passed unlike in a case where the amount refunded is attributable to the payment of Advance Tax;

++ Section 244 (1A) of the Act provides for interest and the Assessees are also claiming interest thereunder. It is well settled that when there are specific provisions in the statute governing the grant of interest i.e. under Section 244 (1A) of the Act, then general principles of compensation for use and retention of money would not displace the statutory provision. The Apex Court in Modi Industries Ltd. has already dealt with the appropriate interpretation of the words 'in pursuance of order of assessment' to mean and include any tax paid earlier in point of time to the order of assessment would yet be considered as tax paid in pursuance of the order of assessment for the reasons that the tax assessed in the assessment order is set off with the amount of tax paid either as Advance Tax or Self Assessment Tax prior to the assessment order. In that view of the matter, following the decision of the Apex Court in Modi Industries Ltd. as well as the decision of the various High Court holding that interest is payable on refund of Self Assessment Tax consequent to the order in appeal from the date of assessment order till the grant of refund albeit excluding period of one month as provided in the Second proviso to Section 244(1A) of the Act;

++ it was contended by the Revenue that in any event in terms of the second proviso to Section 244 (1A) of the Act, no interest is payable till after the expiry of the month from the date of passing the order in appeal. This interpretation by the Revenue does violence to the language of the second proviso which only states that no interest will be payable for a period of one month from the date of passing of the order in appeal. It does not state that no interest will be payable till after one month of the order in appeal. The second proviso to Section 244 (1A) of the Act only excludes a period of one month for payment of interest. In fact, on almost identical facts, the Pubjab & Haryana High Court in Hansa Agencies (P) Ltd. while following the decision of the Supreme Court in Modi Industries Ltd. has held that the assessee is entitled to interest under Section 244 (1A) of the Act on the Self Assessment Tax paid by him from the date when the original assessment order was made with the rider in terms of second proviso to Section 244 A of the Act, a period of one month from the date of passing the order in appeal will not carry any interest and the same is to be excluded. Thus, we find no substance in the above submission of the Revenue;

++ we set aside the order dated 20th May, 2004 passed by the Commissioner of Income Tax under Section 264 of the Act for the Assessment Year 1986-87. We direct the respondent viz: the Commissioner of Income Tax, Mumbai to pay after verification to the Assessee the amount of Rs.6,76,002/- being the interest payable from 28th March 1989 to the date of grant of refund on 30th March 1998 after excluding a period of one month as provided in second proviso to Section 244(1A) of the Act;

++ in exercise of our powers under Article 226 of the Constitution we would be within our jurisdiction to direct the statutory authorities to grant interest as permissible under the statute and accordingly enforce the statutory rights of the assessee but not what is outside the statute. The assessee's claim for compensation is undisputedly outside the statutory provisions;

++ even if the principle of moulding of relief is to be applied by the High Court in exercise of its jurisdiction under Article 226 of the Constitution, the same can be done only within the statutory framework and not otherwise. Therefore, the assessee's submission that the reliefs be moulded to award compensation cannot be countenanced;

++ Revenue by not paying over the interest due to the Assessee, may have deprived the Assessee of its money for sixteen long years. However, on the other hand, it is the Revenue's contention that on interpretation of Section 244 (1A) of the Act, they were of the view that no interest can be paid on tax paid on Self Assessment Tax. Thus, according to Revenue, it was debatable issue. Be that as it may, we are bound by the decision of the Apex Court in Gujarat Fluoro Chemicals and cannot direct the statutory authority to pay interest on interest to the Assessee de hors the Act. This is in accordance with the decision of the Apex Court in U.O. I. v/s. Kirloskar Pneumatic Co. Ltd. 2002-TIOL-60-SC-CUS wherein it has been held that the High Court in exercise of its powers under Article 226/227 of the Constitution, cannot direct the authority under the Customs Act to ignore or act contrary to its Parent Act;

(i) The Commissioner of Income Tax – Respondent No.1 is directed to verify and pay the Assessee the amount of Rs.6,76,002/- being the interest payable from 28th March 1989 upto the grant of refund on 30th March 1998 after having excluded interest for one month in terms of second proviso to Section 244(1A) of the Act; and

(ii) We reject the Assessee's prayer to direct the Commissioner of Income Tax to grant interest on the interest of Rs.6,76,002/- from 28th March 1989 till payment.