The issue before the Apex Court was whether the revenue is legally responsible under Section 244A of the Income Tax Act, 1961 (Act) for payment of interest on the refund of tax made to the resident/deductor under Section 240 of the Act.
The relevant provision in reference to above issue i.e. Section 244A of the Act was inserted in the Act with effect from 01.04.1989 and the assessment years in the present matters pertained to on or after the date mentioned before.
In the present case, the resident/ deductor had approached the assessing authority to determine the tax to be deducted at source before payment is made to a non-resident/foreign company. An order was accordingly passed by the Assessing Officer (AO) under Section 195(2) of the Act directing the resident/ deductor to deduct tax at a particular rate. Though an appeal was filed by the resident/ deductor against the order passed by AO, the tax was deposited tax as directed by the AO. Subsequently, the appellate authority in the appeal directed for refund of tax paid. The Refund as directed was made but without interest.
The Court observed that refund becomes due when tax deducted at source, advance tax paid, self assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10 percent of tax determined under Section 143(1) of the Act or on regular assessment and no interest would be payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the Assessee whether wholly or partly.
The Department had also issued a Circular clarifying the purpose and object of introducing Section 244A of the Act clarifying therein, that, since there was some lacunae in the earlier provisions with regard to non-payment of interest by the revenue to the assessee for the money remaining with the Government, the said section is introduced for payment of interest by the Department for delay in grant of refunds. The circular issued by Central Board of Direct Taxes is binding on the department.
A general right exists in the State to refund any tax collected for its purpose, and a corresponding right exists to refund to individuals any sum paid by them as taxes, found to have been wrongfully exacted or are believed to be, for any reason, unjust. The statutory obligation to refund carried with it the right to interest also. This is true in the case of assessee under the Act.
The Court clarified that a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. The deductor/assessee had paid taxes after AO’s special order and in appeal there was specific order to the effect of refund of the tax paid. The amount paid by the resident/ deductor was retained by the Government till a direction of refund was passed and when the amount in question is refunded it should carry interest in the matter of course. More so, when the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. An assessee is entitled to payment of interest for money remaining with the Government which would be refunded. The obligation to refund money received and retained without right implies and carries with it the right to interest.
In the present case, the payment of tax made by resident/ depositor was in excess and the department chose to refund the excess payment of tax to the depositor and on this amount the interest requires to be paid on such refunds from the date of payment of such tax.
[UOI through Director of Income Tax vs. M/s Tata Chemicals Ltd.]