Provisions of Income Tax Act do not mandate interest on interest: HC

Provisions of Income Tax Act do not mandate interest on interest: HC


Provisions of Income Tax Act do not mandate interest on interest: HC

The issue before the bench is whether non-grant of interest on some amount claimed by assessee, is tantamount to withholding any amount payable to the assessee & therefore can an assessee claim compound interest or claim interest on interest, where the I-T Act only provides for simple interest. 
No was the verdict.

Facts of the case

The assessee is a bank which had amalgamated with State Bank of India. Subsequently, the assessment proceedings were completed. Thereafter, after completion of the assessment proceedings, there was a refund due to the assessee in all the AY’s under consideration. However, the refund was made with interest to the assessee, but, the assessee claimed interest on interest, which the AO disallowed. The CIT(A) confirmed the order of the AO. However, the ITAT allowed the claim of the assessee, by relying on the decision of Sandvik Asia Ltd. v. CIT.

On appeal, the High Court held that,

on careful interpretation of the provisions of sections 214 and 244(1A), it was observed that interest payable on the refund amount u/s 244(1) is a simple interest at the rate specified and neither compounding interest nor interest on interest is payable, and that there is no provision in the Act for payment of interest on interest. The Court relied on the decision of Commissioner of Income -tax v. Gujarat Fluoro Chemicals, in which it was stated that,..”As we have already noticed, in Sandvik case (supra) this court was considering the issue whether an assessee who is made to wait for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period. In the facts of that case, this court had come to the conclusion that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and, therefore, directed the Revenue to pay compensation for the same not an interest on interest”;

thus, the Court was of the opinion that the clarification of the law has put the proper perspective of the present case. Therefore, the facts in the present case did not commend such a drastic measure of interest on interest. Hence, the Court allowed the appeal of the Revenue and quashed the order of the ITAT on the sole issue of grant of interest on interest on the refunds.