Interest component will partake the character of the “amount due’ u/S 244A becomes an integral part of principal which is not paid. Interest on Interest is payable on income tax refund: HP High Court

Interest on interest is an interesting issue, often in income tax. More particularly, interest after becoming due becomes the part of the principal part in various provisions of the Act.

There was an interesting issue before Himachal Pradesh High Court in PCIT Vs Solan District Truck Operators Transport Co-op. Society  wherein he issue involved was as to whether the delayed payment of interest on delayed refund becomes part of the principal amount will be eligible for interest under Section 244A?

It may be noted that there is no provision under Section 244A of the Act in respect of payment of interest on delayed refund is concerned. The question before the court in the present question was regarding the meaning of the words “refund of any amount becomes due to the assessee” in Section 244A.

Revenue contended that the works “any amount” will not include the interest which accrued to the respondent for not refunding the amount for 57 months.

However, HC didn’t find any merit in this argument. It observed that the interest component will partake the character of the “amount due’ under Section 244A & it becomes an integral part of principal which is not paid for 57 months after the said amount became due and payable.

Here is a complete order:

COMPLETE ORDER

PCIT Vs Solan District Truck Operators Transport Co-op. Society (Himachal Pradesh High Court)

ITA No. 03 of 2020

Order Dated 27/08/2020

This appeal is directed by the appellant against the order dated 7.08.2019, passed in Miscellenous Application No. 10/CHD/2019 in ITA No. 277/CHD/2017, dated 31.10.2017-A.Y. 1996-97 by the Income Tax Appellate Tribunal Division Bench, Chandigarh, (for short, ‘the ITAT’).

2. The case of the appellant is that the respondent Society-assessee filed return of income for the assessment year 1996-97 on 25.6.1997, which was processed under Section 143 (1) of the Income Tax Act, (for short ‘the Act’). The further case of the appellant is that for the assessment years 1996-97 to 1999-2000, certain refunds arising out of excess TDS were issued in favour of the assessee. However, interest under Section 244-A of the Act was not paid in respect of some of the refunds, while in the case of some other refunds, interest was paid for a shorter period than what was claimed by the assessee. It is averred in the appeal that the interest was refused on the ground that the delay in issuing refund was attributable to the assessee. Against the order of the Assessing Officer refusing to grant interest under Section 244-A of the Act, the assessee filed an appeal before the CIT(A) Solan. The CIT (A), Solan dismissed the appeal on the ground that the question as to whether any part of the delay was attributable to the assessee is a question to be decided by the Chief Commissioner or Commissioner of Income Tax under Section 244-A(2) of the Act. Then, the matter was referred to the Commissioner of Income Tax, Railway Board Building, the Mall, Shimla (hereinafter to be referred as ‘the CIT’). The CIT vide its order dated 24.10.2008, dismissed the appeal while exercising its powers under Section 244 of the Act and the Assessing Officer was directed to pay interest to the assessee from July 1997 to February 1999 on refund of RS. 2,85,658/-. Thereafter, the Assessing Officer issued refund of Rs. 1,82,165/- on 31.01.2009. It is further averred in the appeal that subsequently, the assessee filed an application under Section 154 of the Act on 15.02.2010, requesting therein to allow interest on delayed interest on the refund. The Assessing Officer vide its order dated 30.06.2011 (Annexure P-2) rejected the application of the assessee.
3. Being aggrieved by the aforesaid order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), (hereinafter to be referred as ‘the CIT(A)’, Faridabad, and the CIT (A) vide its order dated 05.10.2016 (Annexure P-3) dismissed the appeal of the assessee, while relying upon the judgment of the Hon’ble Supreme Court in case titled as Commissioner of Income Tax, Gujrat vs. Gujrat Fluoro Chemicals, reported in (2014) 1 SCC 126. It is further averred that the aforesaid order of CIT(A) was again challenged by the assessee before the ITAT, by way of ITA No. 277 to 279/CHD/2017. The appeal of the assessee was allowed by the ITAT vide its order dated 31.10.2017 (Annexure P-4) directing the revenue to pay compensation in the shape of simple interest on the amount due at the rate at which the assessee otherwise would have been entitled to, on the delayed payment of excess tax paid.
4. Being aggrieved by the aforesaid order, Revenue challenged the same by way of Miscellaneous Application before the ITAT, Chandigarh, which came to be dismissed by the ITAT vide its order dated 7.08.2019 (Annexure P-A) being misconceived and not maintainable and also on the ground that there is no error apparent on the record. Hence, by way of this appeal, the appellant/Revenue has approached this Court against the aforesaid order dated 7.08.2019, as aforesaid.
5. The following substantial questions of law arise for consideration in this appeal:
6. Whether the Hon’ble ITAT was right in law in directing the department to pay compensation in the shape of simple interest on the amount due at the rate at which the assessee otherwise would have been entitled to without appreciating the fact that assessee was duly paid interest u/s 244A on delayed refund upto the date of issue of refund?
7. Whether the Hon’ble ITAT was right in law in ignoring the fact that there is no provision under the Income Tax Act for payment of compensation on delayed refund and interest paid and hence against the Statute?

iii. Whether the circumstances of the case the Hon’ble ITAT on Misc. Application filed by the Department erred in holding that the issue cannot be decided u/s 254(2) of the Act and the only remedy is to file appeal before Hon’ble High Court?

6. Learned Senior Counsel for the appellant submits that there is no provision under Section 244-A of the Act in respect of payment of interest on delayed refund. To substantiate his submission, he has placed reliance upon the judgment dated 18th September, 2013, passed by the Hon’ble Supreme Court in case titled as Commissioner of Income Tax, Gujarat vs. Gujarat Fluoro Chemicals, reported in (2014) 1 SCC 126, wherein it has been held that in a case of inordinate delay in the payment of compensation by way of interest, 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 can be claimed. He further submits that the direction issued by the ITAT in the impugned order is contrary to the ratio laid down by the Hon’ble Supreme Court in the aforesaid judgment. He
   prays that the impugned order passed by the ITAT may be set aside.
7. We have heard learned Counsel for the appellant and have carefully perused the material placed on record.
8. As far as the submission of the learned Senior Counsel for the appellant to the effect that there is no provision under Section 244-A of the Act in respect of payment of interest on delayed refund is concerned, the Hon’ble Supreme Court in judgment cited by the learned Counsel for the respondent in case titled as Commissioner of income Tax Vs. HEG Ltd, supra, has elaborated the words ‘any amount’. It is apt to reproduce to reproduce the relevant portion of the aforesaid judgment herein:-

“The next question which we are required to answer is-what is the meaning of the words “refund of any amount becomes due to the assessee” in Section 244A? In the present case, as stated above, there are two components of the tax paid by the assessee for which the assessee was granted refund, namely TDS of Rs. 45,73,528 and tax paid after original assessment of Rs. 1,71,00,320. The Department contends that the works “any amount” will not include the interest which accrued to the respondent for not refunding Rs. 45,73,528 for 57 months. We see no merit in this argument. The interest component will partake the character of the “amount due’ under Section 244A. It becomes an integral part of Rs. 45,73,528 which is not paid for 57 months after the said amount became due and payable. As can be seen from the facts narrated above, this is the case of short payment by the Department and it is in this way that the assessee claims interest under Section 244A of the Income-tax Act. Therefore, on both the aforestated grounds, we are of the view that the assessee was entitled to interest for 57 months on Rs. 45,73,528. The principal amount of Rs. 45,73,528 has been paid on December 31, 1997 but net of interest which, as stated above partook the
character of “amount due” under Section 244 A.”

9. In view of the ratio laid down by the Hon’ble Supreme Court in the judgment supra, the interest on the delayed refund becomes part of the principle amount and the delayed interest includes the interest for not refunding the principle amount. Accordingly, it also includes the
   interest on the delayed refund.
10. We find that the Revenue Authorities have been directed vide Notification dated 08.08.2019 to file appeals in income tax cases before the High Court where the monetary limit is less than Rs. 1.00 crore and where it is above the said amount, that shall not be a subject matter of appeal before the High Court. But in the Notification dated 11th July, 2018, there is an exception to the effect that in certain circumstances, an appeal should be contested on merits notwithstanding the fact that the tax effect entailed is less than Rs. 1.00 crore. It is apt to reproduce para-10 of the said Notification herein, which reads as follows:

“10 Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above or there is no tax effect.

(a) Where the Constitutional validity of the provisions of an Act or Rule is under challenge, or

(b) Where Board’s order, Notification, Instruction or Circular has been held to be illegal or ultra vires or

(c) Where Revenue Audit objection in the case has been accepted by the Department, or”\

11. In light of the above, it can be said that though, the monetary limit to prefer an appeal before High Court is less than Rs.1.00 crore, but if there is a valid question, where an Order, Notification, Instruction or Circular is to be challenged as illegal or ultra vires, an appeal could be filed before the High Court. In the present case, no such exception is available to the appellant.
12. Similar question of law has already been determined by this Court while adjudicating ITA No. 20/2019, titled as Pr. Commissioner of Income Tax vs. M/s Ambuja Darla Kashlog Mangoo Transport Co-operative Society, decided on 25.11.2019 and we have not been persuaded to take a different view.
13. In view of the aforesaid observations, we find no merit in the appeal. Hence, the same is dismissed.
14. It is made clear that observations made herein above shall not be treated as a precedent. However, liberty is reserved to the appellant to seek appropriate remedy.
15. Pending application(s), if any, stands disposed of.