Conduct of party key to determining interest on refund of excess tax
April, 14th 2015
THE Interest payable to a taxpayer after excess self-assessment tax has been subject to intense litigation Just when everyone thought the matter had been settled in favour of taxpayers by the Delhi High Court in the Sutlej Industries case and the Bombay High Court in the Stock Holding Corporation case, the recent Delhi HC judgment in the Engineers India case has brought progress to a grinding halt.
The court has held that interest can be claimed by a taxpayer only in respect of prepaid taxes in the form of advance tax, TDS, etc and, upon any excess tax paid in pursuance to a demand raised by the authorities. In other words, the court held that the claim of interest on self-assessment tax paid voluntarily cannot be sustained. The ruling has come in an Engineers India (EIL) case. EIL had paid a self-assessment tax of R82 crore and, in return of income, claimed a sum of R8 crore as refund. The assessing officer didn’t grant any interest under section 244A on the refund. On an appeal filed by the company, the Commissioner (Appeals) as well as the ITAT held that it was entitled to interest.
The tax authorities filed an appeal with the HC challenging the ITAT order. The authorities contended that interest would be payable by them only to the extent it was specified in the I-t Act, and that the statute did not provide for payment of interest on a refund arising out of excess self-assessment tax.
The court opined that there cannot be a general rule that whenever a tax refund has to be made by tax authorities, interest must be paid on the refunded amount. The letter and the spirit of the law on the subject is that the party that committed the error in calculation (or delays in assessment) must bear the burden. If the assessee is to blamed for the miscalculation (or for delay), the revenue does not owe any interest even if the excess payment of tax is liable to be refunded.
The court held that EIL had voluntarily paid excess self-assessment tax. As such, section 244A didn’t contemplate grant of interest as the payment was not pursuant to a notice of demand issued.
The ruling marks a departure from the settled position that if any amount is wrongly detained by tax authorities, the necessary interest follows automatically. It contemplates that a refund should not normally arise when self-assessment tax is paid and if a refund so arises, the taxpayer commits an error leading to a denial of interest based on the interpretation of law.
The question of whether interest under section 244A is compensatory has been left open. In mandating that in such cases, the conduct of the parties needs to be looked into, the court has left a window of opportunity for scenarios where the refund arises because of faults attributable to tax authorities.
Problems, though, will arise in cases where from past experience, taxpayers anticipate that claims made in the return will be disputed by the authorities and pay excess self-assessment tax to avoid levy of interest. In such cases, it can be said that excess was paid only on at the insistence of the authorities, though not in pursuance of a notice of demand under section 156. The ruling makes it clear that grant of interest in such cases will be depend on the conduct of the parties which caused the refund to arise.