Interest on income tax refund not taxable if at the time of regular assessment demand has been raised against the assessee and refund u/s 143(1) is wiped off.

 

 

Very often there are interesting ruling and judgments which are delivered by ITAT. The case is not only of academic importance but also of high practical relevance as well.

Here was one case before Pune ITAT wherein it has been held that Interest on income tax refund not taxable if at the time of regular assessment demand has been raised against the assessee and refund u/s 143(1) is wiped off.

The case is as under:

DCIT vs. Honeywell Automation India Ltd – Pune ITAT – ITA No. 332/Pun/2021 – order dated 24-11-2021

Short Overview of the case:

the assessee was granted refund of Rs.11,47,73,740/- (inclusive of interest component of Rs.1,18,37,651/-) pertaining to the assessment year 2012- 13 on 12-03-2014 in AY 2014-15. During the course of the assessment

proceedings, the AO observed that interest amounting to Rs.1.18 crore on income tax refund was not offered by the assessee for taxation.

On being called upon to explain the reasons for non-inclusion, the assessee submitted that the interest on refund was suo motu adjusted by the Revenue against the demand for the assessment year 2009-10 without any intimation to the assessee and as such, the factum of receipt of interest on income tax refund was not in its notice.

It was further submitted that assessment for the assessment year 2012-13 was finally concluded u/s.143(3) of the Act converting the amount of refund into a notice of demand u/s.156 of the Act.

The AO remained unconvinced with the assessee’s stand point and included the interest on refund granted for the assessment year 2012-13 in the total income for AY 2014-15. CIT(A) deleted this addition. Against this, Revenue preferred appeal before Tribunal.

Tribunal observed that the amount of interest of Rs.1.18 crore given to the assessee during financial year 2013-14 relevant to the assessment year under consideration was eventually recovered by the Revenue on the completion of assessment for the assessment year  2012-13  in  January, 2017 and further that interest u/s.234D  of  the  Act  was  also  charged  on the amount of refund including interest.

Tribunal referred to  section 244A(3) and also referred to section 234D. It held that conjoint reading of section 244A and 234D suggest that where the AO serves a  notice  of demand u/s 244A(3), the amount of interest on  income  tax  already received at the time of processing of return u/s  143(1)  gets  substituted with the reduced amount of interest and the order earlier passed charging tax on such interest  becomes amenable to rectification  pro tan to.

It also held that it will be a sheer two way traffic, if, in the  first  instance,  the amount of interest on income tax refund is included because of its receipt in the year and then it is reduced by  rectification  because  of  the obliteration of the income of interest on refund in a later year.

The cumulative net effect of the both the events is that nothing  remains includible in the total income of the assessee for the year under consideration.

Tribunal held that interest on income-tax refund amounting to Rs.1.18 crore cannot be charged to tax on the processing of return u/s.143(1) AY 2014-15 for the reason that the regular assessment made in the year 2017 resulted into creation of demand and wiping out the refund already granted to the assessee along with recovery of interest