The Income Tax department will now add interest amount to a delayed refund made on excess TDS deductions and will also not litigate with the deductor on this issue in the future, a latest directive has said.

The Central Board of Direct Taxes has issued a directive in this regard to the assessing officers of the IT department based on a 2014 Supreme Court order where the apex court had made it clear that the taxman is "bound" to pay interest on refund made under the Tax Deducted at Source (TDS) category.

TDS is primarily deducted by the employer from the salary paid to an employee.

"In view of the judgement of the apex court it is settled that if a resident deductor is entitled for the refund of tax deposited under Section 195 (other sums) of the Act (Income Tax Act), then it has to be refunded with interest under section 244A (where refund of any amount a becomes due to the assessee they shall be entitled to receive simple interest), from the date of payment of such tax," the CBDT communication issued today said.

The CBDT has further directed that "accordingly, it is advised that no appeals may henceforth be filed on this ground by the officers of the department and appeals already filed on this issue may not be pressed upon."

The clarificatory note has been issued by the policy-making body (CBDT) of the IT department as it has been a subject matter of "controversy and litigation." "While the tax department duly gives interest in case an individual's refund is delayed, there was some grey area in the TDS category. This has been settled now. This is yet another area where the taxman is cutting don on litigation," a senior IT official said.

The basis of the latest communication is a Supreme Court order that had ruled in favour of the deductor of a company on February 26, 2014 stating that "refund due and payable to assessee is debt-owned and payable by the Revenue.

"The government, there being no express statutory provisions for payment of interest on the refund of excess amount/tax collected by the Revenue cannot shrug of its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies.

"The state having received the money without right and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carried with it the right to interest," the apex court had said in the 2014 order.