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Does the expression tax include interest?
May, 17th 2008

In the anxiety to complete the process of getting tax refund one may ignore the interest part which in some situations would be substantial.

Managing the cash flow of tax payments is one of the crucial elements of treasury management. Estimation of advance tax in four instalments for a corporate assessee, particularly in an uncertain business atmosphere, is a tall order. Finance managers and tax managers cross swords at least once a quarter over what should be the optimum advance tax to be paid balancing the risk and return on such payment.

Most of the corporate finance managers today seem to adhere to the dictum when in doubt overpay advance tax, and claim refund by filing return of income. The aggressive tax manger would like to test out an interpretation of law and boldly experiment it at the advance tax stage itself.

The only problem in overpaying is that an alarmingly high refund exposes the company to assessment risks. One of the contentious issues often debated is that how does one reckon interest on refund, particularly when refunds are obtained over a period of time.

An interesting issue came up for discussion in Assistant Commissioner of Income-tax, Circle 1(1), Baroda vs Alembic Glass Industries Ltd (2008 111 ITD 320 Ahmedabad).

Facts and the decision

The assessing officer (AO) observed that the assessee claimed interest under Section 244A of Rs 15,85,352 instead of Rs 9,35,807 and the difference was because of the interest claimed on refund out of interest payment under Sections 234B and 234C.

He held that under Section 244A, interest was payable only on the excess payment of tax and penalty and, therefore, rejected the claim of the assessee regarding interest claimed on refund of interest payment under Sections 234B and 234C.

On appeal, the Commissioner (Appeals) held that the assessee was entitled to interest on refund of interest payment under Section 234B. The matter reached the Tribunal and the decision point was about interest of refund which an assessee in entitled under Section 244A, which is currently at 6 per cent per annum.

The language employed in the section refers to refund of any amount due and where the assessee had paid interest charged under Sections 234B and 234C of the Act and the said interest forms part of the refund, whether he is entitled to interest on the interest forming part of the refund?

The Ahmedabad Bench of the Tribunal held that for calculating interest on refund tax paid would include interest also and the assessee is entitled to interest on the interest component paid.

The Tribunal opined that in the context of Section 244A(1)(b) of the Act, the expression tax would include interest also and the definition of tax in Section 2(43) meaning income-tax may not be applicable in the context of Section 244A(1) of the Act. Consequently, the interest paid in pursuance of an order under Section 234B has to be regarded as forming part of tax or an adjunct to income-tax. The issue was considered in depth in CIT vs Needles Industries Ltd (1998 233 ITR 370) and the Madras High Court held that interest levied under the erstwhile Sections 215 and 139(8) of the Act which were paid along with the tax and refunded would form part of the amount refunded and entitled to interest under Section 244(1A) of the Act.


The term refund came up for detailed examination in the decision and the analysis throws interesting definitions. The dictionary meaning thereof, as appearing in the Advanced Law Lexicon is: To repay to give back; to restore; make return or restitution of a sum received or taken; to hand back, repay, restore. In New Lexicon Webster Dictionary it is to pay back (money spent): to reimburse (some one): to make repayment. Whereas the Shorter Oxford English Dictionary, defines it as to give, restore, to make return or restitution of (sum received or taken), to hand back, retake, restore, to reimburse.

Considering these dictionary meanings and the use of the words any amount due in Section 244A would in normal situations lead to the conclusion that the dispute raised above is a non-issue.

But then the definition of tax in Section 2(43) of the Act has no reference to interest and Section 244A(1)(a) does use the expression refund is out of any tax and, hence, the confusion.

On the same subject, there is Instruction No. 2/2007 of March 28, 2007, issued by the CBDT stating that the Board has reminded all assessing officers (AOs) that while granting refund to the assessees there should be no omission of delay in granting of interest on such refunds.

The instruction is categorical in its intent and goes on to add that failure to do so would be viewed adversely and the officer concerned will be personally held accountable inviting appropriate action. These are indeed strong words by the top echelons of tax administration.

Chasing refunds is as important a function as paying the tax itself. In the process, the application of the law on interest on refunds is equally important.

In the anxiety to complete the process of getting the refund one may ignore the interest part which in some situations would be substantial. As the saying goes and which is always true, Little drops of water make a mighty ocean.

R. Anand
(The author is Partner, Global Tax and Advisory Services, Ernst & Young.)

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