Refund granted should be adjusted first towards interest component – ITAT

Refund granted should be adjusted first towards interest component and balance left if any shall be adjusted towards the tax component – ITAT

 Refund granted should be adjusted first towards interest component

ABCAUS Case Law Citation:
ABCAUS 2113 (2017) (11) ITAT

The Challenge/Grievance:
The Revenue was aggrieved by the order of Commissioner of Income Tax Appeals (CIT-A/FAA). The only issue raised by the Revenue was against the order of CIT(A) directing the AO to adjust the refund granted first towards interest and consider the balance against tax amount refundable which according to the Revenue will lead to excess amount of interest.

Important Case Laws Cited/relied upon by the parties:
Union of India Vs. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
Trade Promotion Organization vs. CIT (2014) 361 ITR 646 (Del.)
Union Bank of India Vs. ACIT (2016) 72 348
CIT v. HEG Ltd. [2010] 324 ITR 331/189 Taxman 335
Union of India v. Tata Chemicals Ltd. [2014] 363 ITR 658/822 Taxman 225/43 240

Brief Facts of the Case:

The assessee was a bank. The original assessment for the relevant assessment year was completed under section 143(3) of the Income Tax Act,1961 (the Act). Subsequently, the assessee moved rectification application and requested for allowing rebate under section 88E of the Act and for grant of balance amount of refund. The AO rectified the mistake under section 154 of the Act but refund granted to the assessee was not adjusted first against interest.

The assessee carried the matter before CIT(A) and submitted that refund granted should be first adjusted against the interest refund due and thereafter against the tax refund due. Explaining the reason, the assessee submitted that when there is tax and interest due from the an assessee, the Department always adjusts the payments made first against the interest and thereafter against the tax due. Following the order of the Delhi High Court, the CIT-A allowed the appeal and directed AO to compute part of the refund granted first against the refund due and then tax due.

Observations made by the Tribunal:

The ITAT noted that the Co-ordinate Bench following the decisions of the Delhi High Court and Supreme Courts had held that while granting refund in pursuance to appeal effect order, the amount of refund granted earlier should be adjusted first against interest on earlier refund and thereafter balance amount should be adjusted against principal component of tax in refund granted earlier, on which assessee is entitled to get interest under section 244A of the Act.

The coordinate Bench had noted that in earlier years also the same issues was raised and decided in favour of the assessee by the Tribunal relying upon the judgment of Hon’ble Delhi High Court wherein it was inter-alia held that in a situation where only part amount is refunded by the department, then payment of interest on the balance amount due from the department to the assessee, on a particular date, does not amount to payment of interest on interest. The Bench opined that the reasoning for such action as offered by the Revenue on the pretext that no interest is payable on interest due would mean that ¬†even if there is substantial delay in interest payable, the assessee can be made to wait unendingly without payment of interest.

It was noted that the Delhi High Court, observed that the Hon’ble Supreme Court answered the question against the Revenue holding that the assessee was not claiming compound interest or interest on interest. Clarifying the meaning of the words “refund of any amount becomes due to the assessee” in Section 244A? the Supreme Court stated that the interest component will partake of the character of the “amount due” under Section 244A.

The Delhi High Court had explained that what had been elucidated and clarified by the Supreme Court was that when refund order is issued, the same should include the interest payable on the amount, which is refunded. If the refund does not include interest due and payable on the amount refunded, the Revenue would be liable to pay interest on the shortfall. This does not amount to payment of interest on interest

The Delhi High Court illustrated the above with following example:

Refund due Refund due from If the said amount is refunded along with interest on 31st March, 2013, If only Rs. 1 lac refunded on 31st March, 2013
Rs. 1 lacs Wef 01/04/2010 no further interest is payable Revenue would be liable to pay interest on the amount due and payable but not refunded. Interest will not be due and payable on the amount refunded but only on the amount which remains unpaid, i.e, the interest element, which should have been refunded but is not paid.

In another situation where part payment is made, Section 244A would be still applicable in the same manner;

Refund due Refund due from Rs. 60,000/- was paid on 31st March, 2013
Rs. 1 lacs Wef 01/04/2010 Interest is payable on Rs. 1 lac from 1st April, 2010 till 31st March, 2013 and thereafter on Rs. 40,000/-.

Further, interest payable on Rs. 60,000/-, which stands paid, will be quantified on 31st March, 2013 and on this amount, i.e., interest amount quantified, Revenue would be liable to pay interest under Section 244A till payment is made.

Thus the Coordinate Bench observed that when only part amount was refunded in the first phase by the department and when the balance amount was paid by the department in the second phase, the assessee was entitled for interest on the balance amount of refund due and following observations of Delhi High Court, it could say that it is not a case of payment of interest on interest.

The Coordinate Bench observed that where the amount of tax demanded is paid by the assessee then it shall first be adjusted towards interest payable and balance if any whatever tax payable. In section 244A no specific provision has been brought on the statute with respect to adjustment of refund issued earlier for computing the amount of interest payable by the revenue to the assessee on the amount of refund due to the assessee. Thus, the law is silent on this issue. Under these circumstances, fairness and justice remands that same principle should be applied while granting the refund as has been applied while collecting amount of tax. The revenue is not expected to follow double standards while dealing with the tax payers. The fundamental principle of fiscal legislation in any civilized society should be that the state should treat its citizens with the same respect, honesty and fairness as it expects from its citizens.

The Coordinate Bench had observed that the Supreme Court discussed about moral and legal obligation of the department to refund the amount of tax collected from the tax payers which was more than the amount actually due as per law, along with interest. The Supreme Court had observed that the Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off 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 carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.’

The Coordinate Bench noted that Supreme Court had observed that whatever money has been received by the department, it ought to be refunded ex aequo et bono. It is a Latin phrase which means ‘what is just and fair’ or ‘according to equity and good conscience’. Something to be decided ex aequo et bono is something that is to be decided by principles of what is fair and just. A decision-maker who is authorized to decide ex aequo et bono is not bound by legal rules but may take account of what is just and fair. Thus, if we decide the issue before us ex aequo et bono, then it would be decided by the principles of what is fair and just and not necessarily as per strict rule of law.

Thus, the Coordinate Bench had observed that since the statute itself has already prescribed a particular method ofjustice, fairness, equity and good conscience demands that same method should be followed while making adjustment for refund of taxes, especially when no contrary provision has been provided. Under these circumstances and aforesaid discussion, we find that the judicial proprietary demands that order of the Tribunal of earlier years must be followed.

Decision/ Conclusion/Held:
ITAT following the decision of the Coordinate Bench confirmed the order of CIT(A) allowing the claim of the assessee.

Refund granted should be adjusted first towards interest component

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