PAC NO.2023

NINETY-SIXTH REPORT

PUBLIC ACCOUNTS COMMITTEE

(2013-14)

FIFTEENTH LOK SABHA

CONTRAVENTION OF CONSTITUTIONAL PROVISIONS BY MINISTRY OF FINANCE: EXPENDITURE INCURRED ON INTEREST ON REFUNDS WITHOUT PARLIAMENTARY APPROVAL

MINISTRY OF FINANCE

(Department of Revenue)

Presented to Lok Sabha on: 06.02.2014

Laid in Rajya Sabha on: 06.02.2014

LOK SABHA SECRETARIAT NEW DELHI

February, 2014/ Magha 1935 (Saka)

CONTENTS

PAGE

Composition of the Public Accounts Committee (2013-14) Introduction ………………………............……………………..

REPORT

PART – I

I. Introductory

II. Constitutional Provisions and Relevant Rules

III. Action taken by the Department of Revenue on the recommendations contained in 66th Report of PAC (15th Lok Sabha)

IV. Supplementary Grants

V. Charged and Voted disbursements

VI. Excess disbursement over Voted Grants/Charged Appropriations

VII. Recurring excess expenditure

VIII. Provisions in the Budget Manual

PART – II

OBSERVATIONS AND RECOMMENDATIONS

ANNEXURES

I. Action Taken Notes by the Ministry of Finance (Department of Revenue) on the Recommendations contained in 66th Report (15th Lok Sabha)

^*II. Opinion of Ld. AG furnished to PAC

^*III. Statement of case put up by Ministry of Finance (Department of Revenue) to the Ld. AG

^*IV. Opinion of Ld. AG furnished to the Ministry of Finance (Department of Revenue)

^*V. Details of Supplementary Grants obtained during the last five years

APPENDICES

I. Minutes of the 8th Sitting of Public Accounts Committee (2013-14) held on 26.07.2013.

II. Minutes of the 9th Sitting of Public Accounts Committee (2013-14) held on 02.09.2013.

III. Minutes of the Sixteenth Sitting of Public Accounts Committee (2013-14) held on 30.01.2014.

COMPOSITION OF THE PUBLIC ACCOUNTS COMMITTEE

(2013-14)

Dr. Murli Manohar Joshi - Chairman

MEMBERS

LOK SABHA

2. Shri Anandrao Adsul

3. Dr. Baliram

4. Shri Ramen Deka

5. Shri Sandeep Dikshit

6. Dr. M. Thambi Durai

7. Shri T.K.S. Elangovan

8. Shri Jayaprakash Hegde

9. Dr. Sanjay Jaiswal

10 Shri Bhartruhari Mahtab

11. Shri Abhijit Mukherjee

12. Shri Sanjay Brijkishorlal Nirupam

13. Shri Ashok Tanwar

^†14. Shri Ajay Maken

15. Shri Dharmendra Yadav

RAJYA SABHA

16. Shri Prasanta Chatterjee

17. Shri Prakash Javadekar

^‡18. Shri Ashwani Kumar

19. Shri Satish Chandra Misra

^§20. Dr. V. Maitreyan

21. Shri N.K. Singh

22. Smt. Ambika Soni

SECRETARIAT

1. Shri Devender Singh - Joint Secretary

2. Smt. A. Jyothirmayi - Deputy Secretary

3. Smt. Anju Kukreja - Under Secretary

INTRODUCTION

I. the Chairman, Public Accounts Committee, having been authorised by the Committee, do present this Ninety-sixth Report (Fifteenth Lok Sabha) on ‘Contravention of Constitutional Provisions by Ministry of Finance: Expenditure incurred on Interest on Refunds without Parliamentary Approval' based on the action taken replies submitted by the Government on their 66th Report (15th Lok Sabha) on ‘Expenditure incurred on interest on Refunds of Taxes’ relating to the Ministry of Finance (Department of Revenue).

2. In their 66th Report (15th Lok Sabha) the Committee had unanimously recommended that the Ministry of Finance cannot make departure from the established financial procedure as enshrined in the Constitution. In their considered view, reporting of interest liability to Parliament would bring greater transparency in financial administration of the country, uphold the spirit of the Constitution and help reduce interest burden, bring in greater efficiency in tax administration and reinforce Constitutional morality.

3. Subsequently, at the request of the Ministry of Finance (Department of Revenue) the Ld. Attorney General tendered his opinion to the Ministry of Finance which was contrary to the opinion given by him earlier to the Public Accounts Committee. With regard to the contradiction in the two opinions given by the Ld. Attorney General on the same matter, the Committee took oral evidence of the representatives of the Ministry of Law and Justice (Department of Legal Affairs) on 26th July, 2013. Thereafter, the Committee took oral evidence of the representatives of the Ministry of Finance (Department of Revenue) on 2nd September, 2013 to examine the reasons that prompted the Ministry to seek another opinion of the Ld. Attorney General for India. The Committee also took evidence of the Ld. Attorney General for India on 2nd September, 2013 on the subject to ascertain the reasons for completely reversing the opinion tendered by him earlier to the Committee. The Ld. Attorney General conceded that Parliamentary supremacy in financial matters was the bedrock of our Constitution and ultimately, the Ministry of Finance would have to abide by the recommendation of the PAC. The Committee considered and adopted this Report at their sitting held on 30th January, 2014. Minutes of the Sittings form Appendices to the Report.

4. In this Report, the Committee have exhorted the Ministry of Finance (Department of Revenue) to scrupulously abide by Constitutional provisions and cautioned them to desist from taking precipitous action which even remotely tinkers with, dilutes or negates Parliamentary control over public purse in any manner. Further, having regard to the written testimony of the Ld. Attorney General, and his later deposition conceding that the provision of Article 114 is supreme and the Department had to follow the procedure prescribed by the PAC, the Committee have desired that the Department of Revenue seek ex ante or ex post facto Parliamentary approval for interest payments on tax refunds as the Constitution leaves no doubt about the manner of authorization of expenditure or withdrawal of moneys from and out of the Consolidated Fund of India other than seeking ex ante approval under Article 114 and 115(1)(a) or seeking ex post facto approval of Parliament under Article 115(1)(b) of the Constitution.

5. The Committee would like to express their thanks to the representatives of the Ministry of Law & Justice (Department of Legal Affairs), Ministry of Finance (Department of Revenue) and Ld. Attorney General for India for tendering evidence before them and furnishing requisite information to the Committee in connection with the examination of the subject.

6. The Committee place on record their appreciation of the assistance rendered to them in the matter by the Office of the Comptroller and Auditor General of India.

NEW DELHI;
31st January, 2014
11 Magha, 1935 (Saka)

DR. MURLI MANOHAR JOSHI
Chairman,
Public Accounts Committee

REPORT

PART - I

This Report of the Committee is the follow-up Report on the action taken replies submitted by the Government on the Observations/Recommendations contained in their 66th Report (15th Lok Sabha) on ‘Expenditure incurred on Interest on Refunds of Taxes’ based on Para 4.1.1 of C&AG’s Report No. 1 of 2011-12 Union Government – Accounts of the Union Government relating to the Ministry of Finance (Department of Revenue).

2. The 66th Report which was presented to Lok Sabha/Laid in Rajya Sabha on 26th February, 2013 contained five Observations/Recommendations. The Action Taken Notes in respect of all the five Observations/ Recommendations contained in the 66th Report have been received from the Ministry of Finance (Department of Revenue - CBDT) and the same alongwith the vetted comments of Audit thereon are reproduced at Annexure – I.

3. The Public Accounts Committee (2012-13) had selected Para No. 4.1.1 of the C&AG Report No. 1 for the year 2011-12, Union Government, Accounts of the Union Government, relating to "Expenditure incurred on Interest on Refunds of taxes" for detailed examination during the year 2012-13. The Audit had pointed out that expenditure on interest on refunds of taxes amounting to Rs. 10,499 crore was incurred by the Central Board of Direct Taxes in the year 2010-11 without the authorization of Parliament. A total expenditure of Rs. 37,365 crore on interest payments was incurred over a period of five years between 2006-07 to 2010-11 without obtaining the approval of Parliament through necessary appropriations. Since Audit was of the view that the expenditure on interest payment on refunds of taxes was in contravention of Article 114(3) of the Constitution of India, the views of the Ministry of Law and Justice were sought. However, the Ministry of Law and Justice referred the matter to Attorney General for India for his considered opinion.

4. During the sitting of the Committee on 30th August, 2012 for examination of the representatives of the Ministry of Finance (Department of Revenue) on the subject, when asked whether the Department of Revenue had consulted the Ministry of Law and Justice in the matter, the Chairperson CBDT replied in the negative. It was also conceded that ‘expenditure incurred on interest on refunds is the Legislature's power and the Executive certainly is not the final authority at all’.

5. Further, Secretary Revenue had testified before the Committee that :

"….. obviously it has not been the intention of the Department anyway to bypass the Constitution. The Constitution is supreme. There is no doubt about it and no amount of administrative difficulty can be cited in order to say that we will not follow the Constitution…. …... We would certainly look into this how the Constitutional provisions are satisfied and yet, we find a way in which we satisfied the CAG. This hon. Committee should be satisfied. I think that is what we have to do so that we do not have the difficulties which we encountered in 2001 when we made it. If we cannot do anything, it leads to chaos in refunds. At the same time, you have rightly said that Constitutional provisions have to be followed. We will consult and we will come back to the Committee with what is Constitutionally correct, legally correct and also administratively feasible."

6. The PAC Secretariat had also made a reference on to the Ministry of Law and Justice for their considered opinion in the matter who referred the matter to Ld. AG. The Secretariat received the opinion of the Ld. Attorney General through the Ministry of Law and Justice on 25th September, 2012. The Ld. Attorney General after due consideration of the provisions of the Constitution relating to Appropriation Bill, the Consolidated Fund of India and the custody of the Consolidated Fund, as contained in Articles 114, 266 and 283 of the Constitution, had opined on 25th September 2012 that:

"The objection taken by the Comptroller and Auditor General with regard to the practice followed in relation to payment of interest on refunds of excess tax is completely justified. The proper procedure would be to clearly indicate the tax collection as a receipt and estimate the interest payable on refund of taxes as an expenditure. I agree with the view of the C&AG that the reason given with regard to administrative difficulties is not tenable".

The full text of the opinion tendered by the Ld. Attorney General vide his note dated 25.9.12 is reproduced at Annexure – II.

7. Based on the observations of the Audit, deposition made by the representatives of the Ministry of Finance (Department of Revenue) before the Committee and the opinion received from Ld. Attorney General, the Committee presented their Report [66th Report (15th LS)] on the subject to the Parliament on 26.2.2013. In this Report the Committee had unanimously recommended that the Ministry of Finance cannot make departure from the established financial procedure as enshrined in the Constitution. In their considered view, reporting of interest liability to Parliament would bring greater transparency in financial administration of the country, uphold the Constitution, help reduce interest burden and bring greater efficiency in tax administration.

Constitutional Provisions and Relevant Rules

8. Article 114 of the Constitution dealing with Appropriation Bills states as:

"(1) As soon as may be after the grants under Article 113 have been made by the House of the People, there shall be introduced a Bill to provide for the appropriation out of the Cosolidated Fund of India of all moneys required to meet-

(a) the grants so made by the House of the People; and

(b) the expenditure charged on the Consolidated Fund of India but not exceeding in any case the amount shown in the statement previously laid before Parliament.

(2) No amendment shall be proposed to any such Bill in either House of Parliament which will have the effect of varying the amount of any expenditure charged on the Consolidated Fund of India, and the decision of the person presiding as to whether an amendment is inadmissible under this clause shall be final.

(3) Subject to the provisions of Articles 115 and 116, no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law passed in accordance with the provisions of this Article’’.

9. According to Article 266, all revenues received by the Government of India, all loans raised by the Government and all moneys received by the Government of India form one consolidated fund called 'the Consolidated Fund of India'. The Consolidated Fund of India has to be distinguished from the Public Account of India.

Clause (3) of the Article 266 ordains that:

“No moneys out of the Consolidated Fund of India or the Consolidated Fund of a State shall be appropriated except in accordance with law and for the purposes and in the manner provided in this Constitution”.

10. Further as per Article 283:

"the custody of the Consolidated Fund and the withdrawal of moneys therefrom and all other matters connected therewith shall be regulated by law made by Parliament and until such provision is made by rules made by the President".

11. Rule 8 of Delegation of Financial Powers Rules, 1978, enumerates categories of expenditure. Along with salaries, wages, medical treatment, etc. interest has also been classified as expenditure (primary unit of appropriation).

12. There exists a separate Appropriation for 'Interest Payments' and each year, expenditure on interest payment is authorized, based on the approvals obtained from Parliament through the Appropriation Act.

13. However, subsequently the Committee were apprised that the Ld. AG had revised his opinion after the Department of Revenue sought the opinion of Ministry of Law and Justice and the Attorney General on applicability of Article 114(3) of the Constitution of India in relation to the accounting of payment of ‘interest on excess tax’. The Department of Revenue had requested the Ministry of Law and Justice to refer the matter to Ld. AG to review his opinion well after the PAC Report had been presented to Parliament. The chronology of events that occurred is given in the following table:

14. The statement of case as presented by the Department of Revenue to the Ministry of Law and Justice for onward transmission to the Ld. AG for reconsideration of his earlier opinion is given at Annexure – III.

15. Subsequently, at the request of the Ministry of Finance (Department of Revenue) the Ld. Attorney General had tendered his revised opinion [Annexure – IV] which was contrary to the opinion given by him earlier to the Public Accounts Committee. The last para of the revised opinion reads as under:

"Since the excess tax and interest to be paid on the refund is a statutory non discretionary obligation of the Department, it cannot qualify as tax for the purposes of receipt under Article 266. It is only the tax duly chargeable which can form receipts for the purposes of Article 266 to which Article 114 applies. In view of the aforesaid, and having regard to the provisions of Articles 114, 265, 266 of the Constitution, section 237 and 244A of the Income Tax Act 1961, Rule 270(4) of the General Financial Rules as mentioned above, I reconsider my earlier opinion dated 25th September 2012. In view of the above, the following conclusions emerge:

(i) Interest on refund of excess tax has to be included in refund under Rule 270(4).

(ii) Refund on excess tax is not an expenditure and such outgo cannot be considered with other operational expenses.

(iii) Interest on refund of excess tax is not an expenditure under Article 112(1)".

16. With regard to the contradiction in the two opinions given by Ld. Attorney General on the same matter, the Committee examined the representatives of the Ministry of Law and Justice (Department of Legal Affairs) on 26th July, 2013.

17. To the query of the Committee as to why the mutually contradictory opinions were tendered by Ld. Attorney General for India on the same subject, the Law Secretary during evidence submitted that the O&M instructions of the Department of Legal Affairs permitted reconsideration and revision of the opinion of the Department rendered earlier but under certain conditions like a change in the law or a decision of the Supreme Court or High Court which were not previously available or in cases where fresh facts were brought to light or when any new aspect relating to the matter is brought to notice for the first time.

18. The Committee then asked the Law Secretary which law or decision of the Supreme Court or High Court formed the basis of revision of opinion of Ld. Attorney General in the context of the OM cited. The Committee also wanted to know that when, Article 114(3) of the Constitution clearly stipulated that no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by Law, why this aspect was not taken into consideration while presenting the case before Ld. Attorney General for the second time. The Law Secretary could not give specific answer to the Committee.

The Committee further found that in the earlier statement of case presented to Ld. Attorney General, the Ministry of Law and Justice had dwelt upon the Articles 112 to 119, 114(3), 266, 267, 283 and 284 of the Constitution of India. Also, the Ministry had quoted the following statement of Dr. B.R. Ambedkar made in the Constitution Assembly debates:

“The only thing is that when there is a supplementary estimate the sanction is obtained without excess expenditure being incurred. In the case of excess grant, the excess expenditure has already been incurred and the executive comes before Parliament for sanctioning what has already been spent. Therefore, I think there is no difficulty; not only there is no difficulty but there is necessity, unless you go the length of providing that when any executive officer spends any money beyond what is sanctioned by the Appropriation Act, he shall be deemed to be a criminal and prosecuted, you shall have to adopt this procedure of excess grant.”

In its revised note to Ld. Attorney General, the Ministry had only summarized the case of the Department of Revenue and posted the same for the opinion of Ld. Attorney General without making any specific recommendation of their own. Having asked as to whether the Rules/sub-Rules could override the Constitutional provisions, the Secretary, Department of Legal Affairs admitted during evidence that “the Constitution was supreme”.

19. The Law Secretary also deposed that the matter was referred by them to the Ld. Attorney General ‘because the Ministry of Finance, at the level of the Finance Minister wanted reconsideration’ of the opinion that had been tendered earlier.

20. Thereafter, the Committee took evidence of the representatives of the Ministry of Finance (Department of Revenue) on 2nd September, 2013 to examine the reasons that prompted the Ministry to seek another opinion of the Ld. Attorney General for India.

21. While citing the reasons for seeking revision of opinion of Ld. Attorney General for India, Secretary Revenue deposed that the contention of the Department of Revenue had not been considered by the Ld. Attorney General while rendering his earlier opinion dated 25.09.2012 and, therefore, a note containing an analysis of the relevant provisions of the Income Tax Act/legal provisions and the administrative impediments that would arise if the appropriation for interest payment on refunds formed part of the annual Budget, was prepared and sent to the Ministry of Law and Justice with the request to refer the matter to the Ld. Attorney General to review his earlier opinion.

22. Explaining the reasons in detail for seeking a revision of opinion by Ld. Attorney General, especially after the presentation of the Report of PAC to the Parliament, the Department of Revenue in its written replies submitted as follows:

“During the course of evidence before the PAC on 30.08.2012, detailed submissions were made to explain the existing practice of classifying the interest on refund as reduction in revenue. The Hon’ble Committee during the oral evidence suggested that the Department of Revenue should consult the Ministry of Law & Justice (MoLJ) and the Attorney General (AG) on the same.

Accordingly, a reference was made to MOLJ on 17.10.2012 soliciting opinion of MoLJ and Ld. AG on the subject, as per the directions of the PAC. MoLJ on 9.1.2013 informed that on a reference from Lok Sabha Secretariat dated 2.7.2012, the opinion of the Ld. AG was obtained on 25.09.2012 on the issue under consideration. They communicated the opinion of AG along with their note-sheet.

The Department thereafter requested MOLJ on 10.01.2013 to provide a copy of the documents referred to by the AG in his opinion dated 25.09.2012. On receipt of the same from MOLJ on 11.01.2013, it was seen that the Statement of Case prepared by the MoLJ on the reference made by the Lok Sabha Secretariat did not incorporate the submissions of the Department of Revenue as made before the PAC on 30.08.2012. Therefore, a note dated 11.02.2013 was prepared which contained an analysis of the relevant provisions of the Income Tax Act, administrative impediments and chronology of events as were submitted before the PAC during oral evidence on 30.08.2012. This note was sent to MoLJ, with a request to refer the matter to Ld. AG to review his opinion in light of submissions of the Department of Revenue”.

23. When the Committee sought to know whether the provisions of Income Tax Act, Rules/sub-Rules can override the Constitutional provisions, the Secretary Revenue conceded during evidence that the Constitutional provisions were supreme.

24. The Committee also sought the reasons for not providing interest on refunds as an item of expenditure when payment of interest was treated as an item of expenditure under Delegation of Financial Power Rules 1978. The Committee further enquired from the Ministry to outline the administrative constraints for not complying with the mandatory Constitutional provisions and the action taken by the Ministry to comply with the budgetary process enshrined in the Constitution. The Committee specifically asked from which fund the Department was paying interest on refunds. The representative of the Department of Revenue failed to reply to the satisfaction of the Committee.

25. On being asked whether the Report of the PAC on the subject [66th Report (15th Lok Sabha)] was studied before seeking revision of opinion by Ld. Attorney General, the Department of Revenue in its written note submitted that the entire exercise was done in conformity with the directions of the PAC given on 30.08.12.

26. The Committee thereafter took evidence of the Ld. Attorney General for India on 2nd September, 2013 on the subject and sought to know the reasons for completely reversing the opinion dated 25th September 2012 tendered by him to the Committee.

27. While clarifying his stand in the matter, the Ld. Attorney General in his deposition before the Committee explained as under:

“I had extensive discussions with the officers of the Ministry of Finance and what weighed with me, was what they were saying that the appropriation would ultimately be reported to Parliament. But according to them, it was impossible for them to calculate the interest payable. They also referred to articles 265 and 266 of the Constitution; they referred to statutory provisions which provide for refund; they referred to Rule 270(4) of the General Financial Rule; and they very clearly said that it is not possible for them to calculate the interest”.

He further deposed that:

“I am very clear in my mind that ultimately nothing can be done without the sanction of Parliament and that everything has to be placed before Parliament. For me, it is a matter of faith that having regard to the historical development of Parliamentary powers, all spending has to be authorised by Parliament, all receipts have to be placed before Parliament and the only reason why I reconsidered it was because I felt that if ultimately the facts are going to be placed before Parliament, even the Income Tax Act has been made by Parliament, statutory refunds have been provided for in the Income Tax Act and interest on refunds is also provided for, I did not feel that there was anything which could be done without reference to Parliament. I would only say this”

The Ld. Attorney General also submitted that an opinion ultimately is an opinion and it is for the Committee to decide what the correct procedure is.

28. On being asked as to whether any difficulty by the bureaucracy can surpass or circumvent the provisions of the Constitution, the answer of Ld. Attorney General was a vehement ‘No’.

He further added:

“Now, if this can be got over and if it is possible for them to have an estimate of the interest which would require to be paid on some actuarial basis or any other basis instead of a mathematical procedure, I don’t see any difficulty why they shouldn’t do it”.

29. To a suggestion that if the administrative problem of estimating interest on refund was insurmountable then the Government could consider amending to the Constitution, the Ld. Attorney General was categorical that he would not recommend any amendment to the Constitution in this regard.

30. While replying to the various questions of the Committee in this regard, the Ld. Attorney General enumerated the Articles of the Constitution such as Article 112(1), 114(3), 115, 117, 118(2),119 and at the end he admitted that:

“I feel that Article 114 is paramount and has to be complied with and nothing should be done which in any way dilutes the authority and supremacy of Parliament”.

Action taken by the Department of Revenue on the recommendations contained in 66th Report of PAC (15th Lok Sabha)

31. In response to the Committee’s Recommendation [No. 1 of 66th Report (15th Lok Sabha)], the Ministry stated that Taxes imposed by authority of law under Article 265 form receipts under the Consolidated Fund of India. However, the excess tax being an amount not chargeable to tax cannot qualify as a part of receipt under the Consolidated Fund of India under Article 265 read with Article 266. Consequently, the stipulation in Article 114 stating that no appropriation can be made out of CFI does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the CFI. It therefore, does not qualify to be called an expenditure for the purposes of grants or appropriation to which Article 114 of the Constitution applies.

32. During the course of examination of this subject, by the Committee (2012-13), the Ministry was asked to explain the reasons for treating interest payments on refunds as a reduction from gross tax collection. To this, the Ministry in its written replies submitted as under:

“The interest payment on refund has no correlation with the earning of revenue and, therefore, it cannot be related in any way with the performance of revenue. Moreover, the amount of excess tax is retained in the Consolidated Fund and not by the Income Tax Department and, therefore, the interest outgo on such refunds can neither be an expenditure of the Income Tax Department nor a part of cost of collection”.

33. In Action Taken Note on the Observations/Recommendations contained in 66th Report (15th Lok Sabha) on the subject, the Ministry stated that:

“Excess tax received by the Central Government which is required to be refunded along-with interest is netted off from receipts and only the balance is the tax as mentioned in Article 265 of the Constitution and only this tax is the receipt for the purposes of Article 266. Consequently, the stipulation in Article 114 stating that no appropriation can be made out of Consolidated Fund of India does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the Consolidated Fund of India. It, therefore, does not qualify to be called an expenditure for the purposes of grants or appropriation to which Article 114 of the Constitution applies”.

During evidence when the Committee confronted the representatives of Ministry of Finance to the diametrically opposite stand taken by them with their stand that the refunds were netted off from the receipts and did not form part of the Consolidated Fund of India, the representatives could not give any specific answer.

34. Further, Shri Jayaram Pangi, MP on 23rd August, 2013 had raised the unstarred Question No. 2414 in the Lok Sabha on the subject, which sought clarification as to whether any money had been appropriated out of the Consolidated Fund of India without the approval of Parliament in the recent past. In reply to the said question, the Minister of State, Ministry of Finance, Shri Namo Narain Meena had replied in the negative.

35. When asked during evidence about the contradiction in the statement of Minister of State, Ministry of Finance given in this regard in Parliament and the figures appeared in Para 4.1.1 of the C&AG’s Report No. 1 of 2011-12 on the said subject, Secretary, Revenue testified before the Committee that:

“The Hon’ble Member of Parliament raised the issue of whether adjustment can be done on a running basis. Any adjustment can only be done after the assessment is completed. That happens at different points of time. The advance taxes are paid at different points of time. Indeed, if they have actually completed the assessment, some adjustment can be made there”.

36. While submitting further justification on the reply given by Minister of State, Ministry of Finance, on this issue, the Ministry of Finance (Department of Economic Affairs-Budget Division) in its written note stated as follows:

“The opinion of Ld. Attorney General on applicability of Article 114(3) of the Constitution of India in relation to the accounting of payment of interest on excess tax was also sought. Ld. AG affirmed that the stipulation in Article 114 stating that no appropriation can be made out of CFI does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the CFI. He observed that:-

“Since the excess tax and interest to be paid on the refund is a statutory non-discretionary obligation of the Department, it cannot qualify as tax for the purposes of receipt under Article 266. It is only the tax duly chargeable which can form receipts for the purposes of Article 266 to which Article 114 applies”.

It is further clarified that Government intends to contain its expenditure within the appropriation authorized by Parliament through Appropriation Act and in certain cases, expenditure occur in excess of the appropriation authorized by Parliament beyond its control due to factors like exigencies, incorrect assessment of expenditure, etc. However, these expenditure are regularized by Parliament through Rs. excess grant’ on getting the recommendation of the Public Accounts Committee in terms of Article 115(1)(b) of the Constitution of India. The overall implication is that no money is appropriated out of the Consolidated Fund of India (CFI) without the approval of the Parliament.

In this backdrop, it is submitted that reply to Lok Sabha Unstarred Question NO.2414 dated 23.8.2013 stating that no money has been appropriated out of the Consolidated Fund of India (CFI) without the approval of the Parliament in the recent past is in conformity with the provisions of the Constitution”.

37. Questioning further, the Ministry was asked that when excess collection of tax was not authorized by any Act of Parliament, the interest paid on excess tax refunded could not be treated on par with refund of taxes and it had to be treated like an expenditure and Parliamentary authorization thereof was mandatory under Article 114(3) of the Constitution. In response thereto, the Department of Revenue in its written submission stated as under:

“Article 265 of the Constitution of India states that taxes cannot be imposed, save by the authority of law. In view of the same, the State is not authorized to collect “excess” tax. Refund under the provisions of the Income Tax Act constitutes “excess” tax paid by the taxpayer. The said amount being in excess of the tax liability duly computed under the provisions of the Income Tax Act is required to be refunded as per the procedure under Income Tax Act along with the interest arising thereon.

In CIT vs Shelly Products, (2003) 5 SCC 461, the Hon’ble Apex Court observed that the excess tax has to be refunded to the assessee since its retention may offend Article 265 of the Constitution. The Hon’ble Supreme Court had observed as under:

“35. …. In other words, the tax paid by the assessee must be accepted as it is, and in the event of the tax paid being in excess of the tax liability duly computed on the basis of return furnished and the rates applicable, the excess shall be refunded to the assessee, since its retention may offend Article 265 of the Constitution.”

Therefore, it may not be correct to classify refund of excess tax as expenditure, and hence such refund does not call for appropriation under Article 114 of the Constitution.

The interest paid on refund is a statutory obligation which is non-discretionary in nature and is very much an integral part of the refund outgo to the tax payer. The payment of interest on refund is as per the legislative provision as specified in Section 244A of the Income Tax Act. Hence the excess tax received by the Central Government which is required to be refunded along with interest is netted off from the receipts and only the balance is the tax as mentioned in Article 265 of the Constitution. This amount of tax is the receipt for the purposes of Article 266 of the Constitution. Refund of excess tax cannot be classified as expenditure. Accordingly, the stipulation in Article 114 does not apply to the refund along with the interest”.

38. In response to the Recommendation No. 2 of the Committee that the Department was not legally authorised to withdraw the interest on excess tax collected without recourse to Appropriation Law passed by Parliament, the Ministry quoted the Rules 4(2) and 4(3) of the DFPR which enables a subordinate authority, i.e. the Department of the Central Government to sanction any expenditure (a) if payment is authorized under provisions of law for the time being in force and does not involve introduction of a new principle or practice by the subordinate authority; (b) if it involves introduction of new principle or practice in the context of the provision of any law, it can be done with the previous consent of the Finance Ministry.

39. On being asked whether it was legally correct that a subordinate authority, i.e. the Department of Central Government can bypass Parliament with regard to authorization of expenditure, the Department of Revenue in its written note submitted an emphatic “No”.

40. When asked if the Rules 4(2) and 4(3) of DFPR were supreme to Constitutional provisions, the Department of Revenue categorically replied that ‘Constitutional provisions are supreme’.

41. Further, with regard to the revival of the practice for making provisions under the Head ‘Interest on refunds of excess taxes’ as made during the year 2001-02, the Ministry has submitted that:

“Only on one occasion i.e. in the budget of 2001-02, the interest on refund of excess tax was shown under major head ‘2020’ and a provision of Rs. 92 crore was made. However, looking into the appropriate facts and circumstances of the matter soon thereafter in the budget of 2002-03, the interest on refund of excess tax was reduced to nil for the RE of 2001-02 and no BE was given for the year 2002-03. The practice of not putting “interest on refund of excess tax” under any head continued thereafter in the Budget of 2003-04 onwards”.

42. To a specific query of the Committee about the reasons for discontinuing this practice from the year 2003-04 onwards and whether the Department of Revenue had considered revival of this practice as recommended by the Public Accounts Committee in [para 2 of 66th Report, the Department in its written reply submitted as follows:

“(i) CBDT directed its assessing officers vide its Instruction dtd. 13/10/1988 (F.No.380/24/86-IT(B)) that payment of interest on delayed refund on disputed tax be classified under the “minor head 108 Interest Paid on Delayed refund of disputed tax” below the Major Head 2020. This instruction was issued at the time when refunds were required to be claimed through separate applications and interest was paid in accordance with the then existing provisions of the Income Tax Act. The interest on refunds therefore had the following components:

a) Section 214, relating to payment of interest to the assessee on the excess amount paid as advance tax.

b) Section 243, relating to payment of interest to the assessee for delay in granting the refund after a claim for refund was made or after the refund was determined.

c) Section 244, relating to payment of interest to the assessee for delay in granting refund as a result of appeal etc.

The provisions of Sections 214, 243 and 244 were withdrawn with effect from AY 1989-90.

Later, a letter was issued on 19.03.1996 (F. No. 380/8/90–IT(B)) informing the Chief Controller of Accounts that interest on refunds paid under Section 244A of the IT Act 1961 along-with the refund is not to be treated as an expenditure. The matter however continued to be agitated upon by the Revenue Audit. The issue was dealt with at length within the Ministry of Finance during the period FY 1999-00 to FY 2003-04. The Department of Economic Affairs provided for a sum of Rs. 92 crore under the head “Interest payment on refund of excess tax” in the Budget estimates for FY 2001-02. But after due deliberations within the Ministry of Finance, the said allocation for interest on refunds was withdrawn in the Revised Estimates for FY 2001-02, after due approval of the then Finance Minister on 17.07.2001. It was decided that the outgo on account of interest on refunds would not be shown as expenditure. The said practice has since been followed in the Department. No allocation was made in the budget for FY 2002-03 on account of interest on refunds.

(i) It is submitted that as per the directions of the Public Accounts Committee, the matter was referred to MoLJ for the opinion of MoLJ and Ld. AG. The Ld. AG after due consideration of the statement of facts gave the following opinion on 06.05.2013:

a. Interest on Refund on excess tax has to be included in refund under Rule 270(4)

b. Refund on excess tax is not expenditure and such outgo cannot be considered with other operational expenses.

c. Interest on refund of excess tax is not an expenditure under Article 112 (1),

The Department is yet to take any step on the subject, as it awaits the final recommendation of the Hon’ble PAC”.

43. The Committee in Para 3 of Recommendations of their 66thReport had called upon the Ministry to work out a proper accounting procedure in conformity with Constitutional Provisions and Financial Rules within three months of the presentation of the PAC Report. However, the Action Taken Notes submitted by the Ministry thereon does not indicate any steps taken in this regard.

44. When the Committee asked about the action taken in this regard, the Department of Revenue replied the same as above that it is yet to take any step on the subject, as it awaited the final recommendation of the Public Accounts Committee.

45. Again, in Recommendation No. 4, the Committee had desired to be apprised of the corrective action taken by the Government to ensure that a suitable administrative procedure is devised in accordance with the provisions of the Constitution and the Financial Rules within three months of the presentation of the PAC Report. However, in its Action Taken Notes thereon the Ministry simply quoted the revised opinion of Ld. AG only. Action Taken Notes are completely silent about the action taken as desired by the Committee and the Department of Revenue repeated the reply that it was awaiting the final recommendation of the Public Accounts Committee.

46. Further, in response to the Committee’s Recommendation No. 5 that the reporting of interest liability to Parliament would bring in greater transparency in financial administration of the country, uphold the Constitution, help reduce interest burden and bringing efficiency in tax administration, the Department has stated that the suggestion of treatment of interest paid on refunds as expenditure is not based on correct appreciation of statutory and machinery provisions of the Income Tax Act and will lead to unnecessary administrative burden on Field formations.

47. Regarding the steps that had been initiated to remove those administrative constraints to bring in transparency in financial administration of the country and bring in efficiency in tax administration, the Department of Revenue replied:

“(i) It is not the case of the DoR that administrative constraint is the reason for not following the discipline of Parliamentary financial control. The case of the DoR is that interest on refund has not been provided for as expenditure.

(ii) The Department of Revenue awaits the final recommendation of the Hon’ble Public Accounts Committee”.

48. Interest payments are the second largest component of revenue expenditure. It provides for payment of interest on Public debt, both internal and external and other interest bearing liabilities of the Government which includes insurance and pension Funds, provident funds, reserve funds, deposits, interest on special securities issued to various Central Public Sector Enterprises and interest payment on borrowing under market stabilization scheme.

49. To a specific query that when all the above-said interest payments came under the ambit of revenue expenditure and formed part of Annual Budget and appropriated with the prior approval of Parliament, why then the interest payment on refunds did not form part of the Budget Estimates and be passed by Parliament, Department of Revenue in its written replies submitted as follows:

“Interest payment on refunds is a statutory obligation which is non-discretionary in nature. It is an integral part of the refund to the tax payer and is according to the legislative provisions of Section 244A of the Income Tax Act. The interest is calculated at the rate of one-half per cent for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted, and no interest is payable if the amount of refund is less than ten per cent of the tax determined. Further, if the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of delay so attributable to him is excluded from the period for which interest is payable. Accordingly, payment of interest on refund is not expenditure; rather it is a statutory obligation - a liability that needs to be discharged as per the provisions of the Income Tax Act”.

50. The Committee also noticed that every year approximately 5-7% of the total expenditure is incurred on interest payments by the Government. The proportion of interest payments to total expenditure for the last six years is given as under:

(Rs. in crore)

Supplementary Grants

51. If the amount authorized by law made in accordance with the provisions of Article 114 of the Constitution, to be expended for a particular service for the current financial year, is found to be insufficient for the purpose of that year or when a need has arisen during the current financial year for the supplementary or additional expenditure upon some ‘new service’ not contemplated in the original budget for the year, Government is to obtain Supplementary Grants or Appropriations in accordance with the provision of Article 115(1) of the Constitution.

Procedure for sanctioning of Supplementary Grants

52. There are three Parliament sessions in each financial year viz., Monsoon Session, Winter Session and Budget Session. Supplementary Demands for Grants is normally presented in each session of the Parliament, largely owing to the following circumstances-

- When amount authorized during Current Financial Year is insufficient;

- Need has arisen during CFY for additional expenditure on existing service or expenditure on a new service not contemplated in the Annual financial Statement for that year;

- For recouping Contingency Fund Advance.

(i) During the Monsoon Session, Supplementary Demands are called for the following purposes:-

- Cases where advances from Contingency Fund of India have been granted, which are required to be recouped to the Fund,

- Payment against court decree, which cannot be postponed, and

- Urgent cases of additional requirement of funds to be met by re-appropriation of savings in the Grant which attracts the limitation of New Service/New Instrument of Service.

(ii) During the Winter Session, Supplementary Demands are called for the following purposes:-

- Cases where advances from Contingency Fund of India have been granted, which are required to be recouped to the Fund,

- Payment against court decree, which cannot be postponed,

- Urgent cases of additional requirement of funds to be met by re-appropriation of savings in the Grant which attracts the limitation of New Service/New Instrument of Service, and

- Cases where Ministry of Finance has specifically advised moving of Supplementary Demand in the Winter Session.

(iii) During the Budget Session, Supplementary Demands are called for the following purposes:-

- Cases where advances from Contingency Fund of India have been granted, which are required to be recouped to the Fund,

- In cases where the approved Revised Estimates would result in excess over the sanctioned provision in the Grant. The excess is separately assessed for the Revenue expenditure, Capital expenditure, the Voted expenditure and the Charged expenditure included in the Grant. Thus the Supplementary Demands will be required in cases where additional provision is required over and above the original budget provision plus the additional provisions granted in the first and second batches of the Supplementary Demands for Grants plus the advances sanctioned from the Contingency Fund of India, if any.

- Payment against court decree, which cannot be postponed,

- Urgent cases of additional requirement of funds to be met by re-appropriation of savings in the Grant which attracts the limitation of New Service/New Instrument of Service, and

- Cases where Ministry of Finance has specifically advised moving of Supplementary Demand in the Budget Session.

Types of Supplementary Demands for Grants

53. On the basis of the Supplementary Demands for Grants received from various Ministries/Departments, Supplementary Demands can be classified into three categories, which are as follows:

(i) Cash Supplementary

- This supplementary is over and above the original budget provisions and results in enhancement of the allocation for the Demand/Grant. For Example, if a sum of Rs. 1000 crore is sought for by a line Ministry for payment of Subsidy and the Ministry is unable to find any savings within the Demand/Grant, then the additional fund sought for, in case it is agreed to be provided, results in cash supplementary or enhancement of the overall allocation for the Demand/Grant.

- Cash Supplementary impacts the fiscal/revenue deficit.

- Cash supplementary should be obtained as a last resort and after proper due diligence.

- Cash supplementary is required to have specific approval of Secretary (Expenditure).

(ii) Technical Supplementary

- There are 4 Sections in each Demand viz., Revenue-Voted, Revenue-Charged, Capital- Voted and Capital-Charged. When there is a saving in one of the Sections e.g. Revenue- Voted and the same is proposed to be utilized for another scheme under Capital- Voted section, the same can be done after obtaining approval of Parliament through ‘Technical Supplementary’.

- There are three occasions when technical supplementary is sought viz., (a) surrender from one of the 4 sections mentioned above and utilizing the same in other section within the Demand, (b) transfer of a scheme from one Demand to another Demand which will result in surrender of the amount from the Demand which has transferred the scheme and utilization of the same in the other Demand, where the scheme has been transferred, and (c ) waivers/write offs.

Technical Supplementary, if resorted between the Revenue and Capital sections of the Grant, has an impact on the revenue deficit position but does not change the fiscal deficit position.

(iii) Token Supplementary

Token supplementary of Rs. 0.01 crore is obtained when due to NS/NIS limits, approval of Parliament is required for Reappropriation towards utilizing the savings within the same section of the Demand. For example, if under revenue section there are savings under a major head which is proposed to be utilized in another major head but falls within the purview of NS/NIS limits for expenditure, the same can be made available for reappropriation after obtaining a token supplementary. Token supplementary does not alter revenue/fiscal deficit position.

54. Details of Supplementary Grants obtained during the last five years are given at Annexure –V.

Charged and Voted disbursements

55. Article 112 lays down the procedure for preparing the Annual Financial Statement drawing distinction between ‘Voted’ and ‘Charged’ expenditure as follows:

(i) Voted Grants: Sum required to meet other expenditure for which vote of Parliament is required under Article 113(2) of the Constitution is called Voted Grant.

(ii) Charged Appropriation: Sum required to meet expenditure ‘charged’ on Consolidated Fund of India under Article 112(3) of the Constitution is called charged Appropriation.

56. It is seen from para 3.3 of C&AG’s Report No. 1 of 2013 that during the years 2000-01 to 2011-12, 70 percent to 81 percent of the total disbursements for the Civil Ministries/Departments were charged on the Consolidated Fund of India and the charged disbursements increased by 948 percent i.e. from Rs. 4,05,289 crore in 2000-01 to Rs. 38,40,960 crore in 2011-12. The details in this regard are given below:

(Rs. in crore)

57. Moreover, the Committee have observed that the other charged appropriations for which there are also statutory provisions, like the salary and allowances, etc of the President of India, Officers of Parliament, namely the Chairman Rajya Sabha, Dy. Chairman Rajya Sabha, the Speaker Lok Sabha and the Dy. Speaker Lok Sabha etc. are being withdrawn from the Consolidated Fund of India with the specific annual approval of Parliament.

58. The Committee further find that all receipt of taxes irrespective of what is due and what is excess collected by the Department of Revenue are credited to specific tax receipt heads which form part of the Consolidated Fund of India (e.g. to Major Heads 0020 for corporation tax, 0021 for Taxes on income other than Corporation Tax, 0037 for Customs, etc) and the withdrawal or appropriation out of the Consolidated Fund of India can be made with the prior legislative approval that is through the Appropriation Act under Article 114 of the Constitution which is defined as Money Bill by the Constitution. Moreover, interest payment on tax refunds comes within the meaning of Money Bill as defined in Article 110 which also requires specific Parliamentary approval.

Excess disbursement over Voted Grants/Charged Appropriations

59. The Committee further observe that Article 114(3) of the Constitution provides that no money be withdrawn from the Consolidated Fund of India except under appropriations made by law. Rule 52(3) of General Financial Rules, 2005 stipulates that no disbursements be made which might have the effect of exceeding the total Grant or Appropriation authorized by Parliament for a financial year except after obtaining a Supplementary Grant or through an advance from the Contingency Fund.

60. Any expenditure incurred by the Union Government in excess of the authorised Grants/Appropriations in a financial year requires regularisation by Parliament in terms of Article 115(1)(b) of the Constitution which stipulates that if any money had been spent on any service during a financial year in excess of the amount granted for that service and for that year, the President should cause to be presented to the House of People a demand for such excess.

Recurring excess expenditure

61. The Committee’s examination has revealed that incurring of excess expenditure by the various Ministries/Departments over and above the Original Grants/Appropriations sanctioned by the Parliament is a recurring phenomenon in the Government budgetary exercise over the years. The following table indicates the position of the excess expenditure incurred by various Ministries/Departments during the last ten years.

(Rs. in crore)

Provisions in the Budget Manual

62. The Budget Manual (September 2010) brought out by the Ministry of Finance (Department of Economic Affairs) further reiterates the aforesaid financial procedure. The Manual also categorically states:

“In India the Parliamentary control over public finances becomes operative primarily through the approval of the Annual Budget. This enormous responsibility of spending public funds falls upon the Government as well as the Parliament. While the Government is responsible for planning how public money should be spent, the Parliament’s duty as the people’s representative body is, to observe and scrutinize the Government’s proposals and policies. For such Legislative control over the financial procedures, Articles 265, 266 and 112 of the Indian Constitution clearly vests “the power over the purse in the hands of chosen representatives” by providing that “no tax shall be levied or collected except by authority of law, no expenditure can be incurred except with the authorization of the Legislature; and President shall, in respect of every financial year, cause to be laid before Parliament, “Annual Financial Statement”. Thus, the Indian Government is accountable to the Parliament in its financial management. With the constitutional supremacy of the bicameral Parliament, especially of Lok Sabha (House of People), every single financial act is processed and passed by the representatives of the people. However, proposals for the formulation of budget levying taxes, determining government accounts and expenditures, are prepared by the Government’s Ministries and consolidated in the Ministry of Finance”.

63. Further, about the procedure for withdrawal of money from the Consolidated Fund of India, the Manual says:

“Voting of Grants by the Lok Sabha does not by itself authorize the issue of money out of the Consolidated Fund of India. The Constitution lays down that “no money shall be withdrawn from the Consolidated Fund of India except under Appropriation made by law”. This Act is the sole authority for the appropriation of money from the Consolidated Fund.

PART – II

Observations/Recommendations

Introductory: The Public Accounts Committee (2012-13) in their 66th Report had disapproved withdrawal of moneys by the Ministry of Finance (Department of Revenue) out of the Consolidated Fund of India (CFI) for interest payments on income tax refunds without Parliamentary approval. An expenditure on interest on refunds amounting to Rs. 10,499 crore was incurred by the CBDT in the year 2010-11 and a total expenditure of Rs. 37,365 crore over a period of five years between 2006-07 to 2010-11 without obtaining approval of Parliament through necessary appropriations. The practice was viewed as contravention of Article 114(3) of the Constitution of India by the C&AG. On a reference by the PAC Secretariat to the Ministry of Law and Justice, the Ld. AG had opined that he was in complete agreement with the views of the C&AG. The Secretary, Revenue, Ministry of Finance had also assured the Committee that the Department would devise a procedure which is Constitutionally correct and administratively feasible. Thereafter, based on the observations of the Audit, depositions made by the representatives of the Ministry of Finance (Department of Revenue) and the opinion received from the Ld. AG, the Committee, in their Report [66th Report (15th Lok Sabha)] presented to Parliament on 26-02-13, had observed that they found no valid ground as to why the Department could not make broad estimates of the interest liability on tax refunds based on the studied trends of the past and seek excess grants where estimation fell short of Parliamentary authorisation. The Committee had, therefore, recommended that the Ministry of Finance follow the prescribed procedure in accordance with the Constitution and the Financial Rules to avoid such a deviation. Subsequently, on a reference made by the Ministry of Finance (Department of Revenue), the Ld. AG tendered a revised opinion which was just opposite to the opinion given by him to the Committee on an earlier occasion. The Committee, therefore, decided to hear the Department of Revenue and the Ld. AG again in the matter.

2. Reiteration that interest payments on tax refunds be shown in the AFS: The Committee observe that according to Article 112(3) of the Constitution, expenditure charged on the CFI includes the debt charges for which the Government of India is liable to pay , including interest, sinking fund charges and redemption charges. Article 114(3) of the Constitution dealing with Appropriation Bills also stipulates that subject to the provisions of Articles 115 and 116, no money shall be withdrawn from the CFI except under Appropriation made by law passed in accordance with the provisions of this Article. Further, Article 266(3) of the Constitution ordains that no moneys out of the CFI shall be appropriated except in accordance with law and for the purposes and in the manner provided in the Constitution. Rule 8 of the Delegation of Financial Powers Rules, 1978, also enumerates categories of expenditure. Along with salaries, wages, medical treatment, etc, "interest" has also been classified as expenditure (Primary unit of appropriation). Notably, in the Demands for Grants of Ministry of Finance, there exists a separate appropriation to defray charges in respect of "Interest Payments" and each year expenditure on interest payment is authorised, based on the approvals obtained from Parliament through the Appropriation Act. During the year 2001-02, under Demand No. 34-Direct Taxes, a provision of Rs. 92 crore was made under the head "Interest on Refunds of Excess Tax". The Constitution and the Financial procedure also provide for additional or Supplementary Grants thrice a year and finally, in case the expenditure exceeds Parliamentary authorisation, the excess expenditure is reported to Parliament annually by the C&AG and regularised, through Appropriation (Excess) Act, on the recommendation of the PAC. It would be instructive to recall the words of Dr B.R.Ambedkar when he elucidated the import of excess expenditure in the Constituent Assembly thus:

“The only thing is that when there is a supplementary estimate the sanction is obtained without excess expenditure being incurred. In the case of Excess grant, the excess expenditure has already been incurred and the Executive comes before Parliament for sanctioning what has already been spent. Therefore, I think there is no difficulty; not only there is no difficulty but there is necessity, unless you go the length of providing that when any executive officer spends any money beyond what is sanctioned by the Appropriation Act, he shall be deemed to be a criminal and prosecuted, you shall have to adopt this procedure of excess grant”.

The Committee note with deep concern that despite the Constitution prohibiting withdrawals from CFI except under Appropriation made by the legislature, the Department of Revenue has been making payment of interest on refunds without the approval of Parliament. The Committee therefore reiterate their earlier recommendation that the Ministry devise a procedure in conformity with the Constitutional provisions and the Financial Rules so that interest payments on tax refunds are shown in the Annual Financial Statement (AFS) and Demand for Grants and receive Parliamentary approval as ordained by the Constitution.

3. No material evidence for change of opinion: The Committee note that in order to strengthen their case for continuing with the irregular practice of payment of interest on refunds, the Department of Revenue moved the Ministry of Law and Justice for a review of the opinion of the Ld. AG rendered by him on 25 September, 2012. The Committee further find that in the earlier Statement of the Case presented to the Ld. AG, the Ministry of Law and Justice placed reliance on articles 112 to 119, 114(3), 266, 267 and 284 of the Constitution whereas in the revised note for the Ld. AG, the Ministry merely summarised the case presented by the Department of Revenue. The Law Secretary also admitted before the Committee that the matter was referred by them to Ld. AG because the Ministry of Finance had desired reconsideration of the opinion tendered by him earlier. The Committee are of the considered view that the role of the Ministry of Law and Justice should not be limited merely to pass on the information in a routine manner from any Ministry to Ld. AG as had been done in this case. In view of the importance of the issue, the Ministry should have done comparative analysis of the earlier opinion of Ld. AG and the Statement of the Case put up to them by the Department of Revenue and after taking into consideration the supremacy of the Constitutional provisions,the case should have been presented before the Ld. AG. To a specific query of the Committee whether Acts/Rules/Sub-Rules, as quoted by the Department of Revenue in their Statement of the Case, could override the Constitutional provisions, the Secretary Legal Affairs conceded that the Constitution was supreme. Queried about the mutually contradictory opinions tendered by Ld. AG, the Law Secretary submitted that O&M instruction of the Department of Legal Affairs permitted reconsideration and revision of an opinion under certain conditions like a change in the Law or decision of the Supreme Court or High Court which were not previously available or also in the light of fresh facts or any new aspect of the matter that is brought to notice for the first time. The Secretary, Law & Justice was, however,unable to share with the Committee any such change in the Law, or the judgment of the Supreme Court or the High Court. While taking a serious view of such a cavalier functioning, the Committee are dismayed to note that the Ministry of Law and Justice failed to live up to the responsibility cast on them. This is unfortunate to say the least.

4. Paramount Supremacy of Parliament over control of public purse: The Committee note that on a reference made by the Public Accounts Committee, the Ld. AG had opined on 25th September, 2012 that the objection taken by the Comptroller and Auditor General of India with regard to the practice followed in relation to payment of interest on refunds of excess tax was completely justified. He had also concurred with the view of the C&AG that the reasons given with regard to administrative difficulties were not tenable. However, the Ld. AG in his revised opinion dated 6th May, 2013 opined inter-alia, as follows:

(i) Interest on refund of excess tax has to be included in refund under Rule 270(4);

(ii) Refund on excess tax is not an expenditure and such outgo cannot be considered with other operational expenses and;

(iii) Interest on refund of excess tax is not an expenditure under Article 112(1) Asked to explain the mutually contradictory opinions rendered by him on the same subject, the Ld. AG testified, inter-alia, that “an opinion ultimately is an opinion and it is for the Committee to decide what the correct procedure is”. Further, in response to various questions posed by the Committee with respect to the principles of Parliamentary control over public purse as enshrined in Articles 112(1), 114(3), 115, 117, 118(2), 119 and 266(3), the Ld. AG conceded: "I feel that Article 114 is paramount and has to be complied with and nothing should be done which in any way dilutes the authority and supremacy of Parliament"

The Committee, therefore, exhort the Ministry of Finance to scrupulously abide by Constitutional provisions and caution them to desist from taking precipitous action which even remotely tinkers with, dilutes or negates Parliamentary control over public purse in any manner.

5. No withdrawal from CFI without Parliamentary approval: The Committee note that no tax can be imposed or collected, save by the authority of law as proclaimed by Article 265. In view of the same, any excess payment received by the State after the tax assessment is made, has to be refunded to the assessees. The amount received in excess of the tax liability, duly computed under the provisions of the Income Tax Act, is required to be refunded as per the procedure under Income Tax Act along with the interest arising thereon. The Committee do not accept the specious argument of the Ministry that the interest payments on such refunds are reductions from gross receipts. Since interest on refund of taxes is paid out from and out of the CFI, the withdrawal of moneys from the CFI for payment of interest requires authorisation of Parliament under Article 114(3) read with Article 266(3) of the Constitution. The Committee further observe that while seeking revised opinion of the Ld. AG, the Department of Revenue mostly relied on the provisions of the Income Tax Act disregarding the Constitutional provisions which are supreme and override all Acts/Rules/Sub-Rules inconsistent with the Constitution. The Committee wish to caution the Department that mere provision of refunds and interest payment on such refunds in the Income Tax Act cannot be a ground to override the mandatory Constitutional requirement. To wit, payment of salaries and allowances of the Chairman and the Deputy Chairman of the Rajya Sabha and Speaker and the Deputy Speaker of the Lok Sabha is governed by the Salaries and Allowances of Officers of Parliament Act, 1953. Likewise, payment of Salaries and Allowances of the judges of the Supreme Court of India is governed by the Supreme Court Judges (Salaries and Conditions of Service) Act, 1958. Notwithstanding the fact that both the above cited Acts have been enacted by the Parliament, like the Income Tax Act, 1961, the withdrawal of moneys to meet all such charged expenses is effected only through the Appropriation Act. The Committee are repelled to note as to why the Income Tax Act, 1961 is being interpreted differently and on stand alone basis by the Department of Revenue in contravention of the Constitutional provision and the procedure followed by other Departments of the Government. This is not just acceptable to the Committee.

6. No departure can be allowed from established financial procedure: The Committee note that interest payments are the second largest component of revenue expenditure. The interest payment include- payment of interest on Public Debt both internal and external, and other interest bearing liabilities of the Government which include insurance and Pension Funds, Provident Funds, Reserve Funds, deposits, interest on special securities issued to various Central Public Enterprises and interest payment on borrowing under market obligation scheme. The Committee note that all the aforesaid interest payments come under the purview of revenue expenditure and form part of the Annual Budget and are appropriated with the prior approval of Parliament. The Committee further find that every year approximately 5-7 per cent of the total expenditure is incurred on interest payments by the Government. The Ministry has failed to convince the Committee as to why any departure can be allowed from the Constitutionally ordained procedure only in the case of payment of interest on refunds. The Committee, however, note the subsequent assurance that it was yet to take 'any step on the subject as it awaits the final recommendation of the Committee. The Committee only wish to reiterate their earlier recommendation.

7. An opinion is an opinion and correct procedure is laid down by PAC: Further, in response to another recommendation of the Committee, the Ministry stated that the suggestion of treatment of interest paid on refunds as expenditure is not based on correct appreciation of statutory provisions of the Income Tax Act and would lead to unnecessary administrative burden on Field formations. The Department also tried to justify the procedure followed by them in the matter of payment of interest on refunds by quoting Rules 4(2) and 4 (3) of the DFPR which enable a subordinate authority i.e. the Department of Central Government to sanction any expenditure (a) of payments authorised under provisions of law for the time being in force and does not involve introduction of a new procedure by the subordinate authority and (b), if it involves introduction of new principle or practice in the context of the provisions of any law, it can be done with the previous consent of the Finance Ministry. To a query whether it is feasible that a subordinate authority i.e. the department of Central Government can bypass Parliament with regard to authorisation of expenditure, the Department of Revenue categorically stated 'No'. Further, having asked if the Act/Rules/Sub-Rules could overrule the Constitutional provisions, the Secretary, Revenue conceded during evidence that the Constitution was supreme. When the Ld. AG was asked whether the constraints faced by bureaucracy could allow circumvention of the provisions of the Constitution, he outrightly said 'No'. Besides he added that "if this can be got over and if it is possible for them to have an estimate of the interest which would require to be paid on some actuarial basis or any other basis instead of a mathematical procedure. I don’t see any difficulty why they should not do it”. The Ld. AG was quite candid to further depose that "an opinion ultimately is an opinion and it is for the Committee to decide what the correct procedure is". When asked whether the administrative problem of estimating interest on refunds was insurmountable, the Government could resort to amending the Constitution, the Ld. AG was categorical that he would not recommend any amendment to the Constitution and conceded that Article 114 is supreme. The Ld. AG also conceded that the Rules of Procedure referred to in Article 118 of the Constitution dealt with the business rules to be made by each House of Parliament and the financial rules of the Government would have to conform to the Constitutional provisions. Therefore, the Committee reiterate that the Department of Revenue ensure that expenditure on interest on refunds is incurred in accordance with the Constitutional provisions requiring the specific Parliamentary approval.

8. Let the Ministry follow the well-established and Constitutionally ordained financial procedure: The Committee's examination also revealed that during the years 2000-01 to 2011-2012, 70 per cent to 81 per cent of the total disbursements for the Civil Ministries/Departments was charged on the CFI and the charged disbursements increased by 948 per cent i.e. from Rs. 4,05,289 crore in 2000-01 to Rs. 38,40,960 crore in 2011-12. Further, all receipts of taxes, irrespective of what is due and what is excess collected by the Department of Revenue, are credited to specific tax receipt heads which form part of the CFI (major heads 0020 for Corporation tax, 0021 for taxes on income other than Corporation tax and 0037 for Customs, etc.) and the withdrawal out of the CFI can be made with the prior legislative approval under article 114 of the Constitution. If such a large amount of expenditure can be charged on the CFI and withdrawn with the approval of Parliament, the Committee see no valid reason or difficulty as to why the Ministry of Finance (Department of Revenue) should not make suitable budgetary provisions for the expenditure on interest payment on refunds while submitting the Demands for Grants for approval by Parliament. In their earlier Report, the Committee had observed that on one occasion i.e. in the budget of 2001-02, the interest on refund of excess tax was shown under major head 2020 and a provision of Rs. 92 crore was made. However, this practice was discontinued from the year 2003-04 onwards. While expressing their concern over discontinuance of this practice, the Committee in their 66th Report had recommended for revival of this practice. In its Action Taken Note, the Ministry stated that this practice was withdrawn after due approval of the then Finance Minister and the suggestion of treatment of interest paid on refunds as expenditure is not based on correct appreciation of statutory provisions of the Income Tax Act and will lead to unnecessary administrative burden on Field formations. This is not tenable since ‘administrative difficulty’, as also conceded by the Ld. AG, cannot be a ground for contravening the Constitution. The Government can obtain Supplementary/Excess Grants or Appropriations in accordance with the provision of Article 115(1) of the Constitution as Parliament meets at regular intervals in a year. Having regard to the written testimony of the Ld. AG , and his later deposition conceding that the provision of Article 114 is supreme and the Department had to follow the procedure prescribed by the PAC, the Committee find that the Department of Revenue has no option but to seek ex ante or ex post facto Parliamentary approval for interest payments on tax refunds. The Constitution leaves no doubt about the manner of authorization of expenditure or withdrawal of moneys from and out of the CFI other than seeking ex ante approval under Article 114 and 115(1)(a) or seeking ex post facto approval of Parliament under Article 115(1)(b) of the Constitution. The Committee should like to be apprised of the corrective measures taken in this regard within six months of the presentation of this report.

NEW DELHI;
31st January, 2014
11 Magha, 1935 (Saka)

DR. MURLI MANOHAR JOSHI
Chairman,
Public Accounts Committee

Annexure – I

Action Taken by the Ministry of Finance (Department of Revenue) on the Recommendations contained in 66th Report (15th Lok Sabha)

Recommendation Para No. 1

The Committee note that the Department of Revenue incurred an expenditure of Rs. 37,365 crore on interest on refunds alone during 2006-07 to 2010-11. When the amount of tax paid exceeds the amount of tax payable, the assessee is entitled to refund of the excess amount. Simple interest at the prescribed rate is payable on the amount of such refund. Refund of any amount as a result of any order passed in appeal or other proceedings is also admissible along with simple interest at the prescribed rate. The Department has been classifying interest on refunds of taxes as ‘reduction in revenue’ instead of treating as an item of expenditure by netting off interest on refunds from tax receipts rather than including this expenditure item in the Budget Estimates. The Ministry/Department bypassed Parliament and contravened the Constitutional provisions. The Committee note that under Article 110(e), the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or increasing of any such expenditure comes within the scope of Money Bill. A charge on the Consolidated Fund of India is payable only after having been authorized under the due appropriation made by law passed in accordance with Article 114(3) of the Constitution which clearly stipulates that no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law.

Action Taken by the Ministry of Finance (Department of Revenue)

Article 265 of the Constitution of India provides that taxes cannot be imposed save by authority of law. Refund under the provisions of Income Tax Act constitutes excess tax paid by the taxpayer. The said excess tax paid by the taxpayer is the amount which is received in excess of the tax which can be levied under law. The said amount being an excess of tax liability duly computed under the provisions of Income Tax Act is required to be refunded as per the procedure under the Income Tax Act along with the interest arising.

Taxes imposed by authority of law under article 265 form receipts under the Consolidated Fund of India. However, the excess tax being an amount not chargeable to tax cannot qualify as a part of receipt under the Consolidated Fund of India under Article 265 read with Article 266. The interest paid on refunds is a statutory obligation which is non discretionary in nature and is very much an integral part of the refund/outgo to the tax payers. Excess tax received by the Central Govt. which is required to be refunded along-with interest is netted off from receipts and only the balance is the tax as mentioned in Article 265 of the Constitution and only this tax is the receipt for the purposes of Article 266. Consequently, the stipulation in Article 114 stating that no appropriation can be made out of CFI does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the CFI. It, therefore, does not qualify to be called an expenditure for the purposes of grants or appropriation to which Article 114 of the Constitution applies.

Vetting comments of Audit

The collection of tax is authorized under Article 265 of the Constitution of India. Excess collection of tax is not authorized by any Act of the Parliament. As such excess amount credited to the Consolidated Fund of India does not form part of tax dues and can correctly be refunded from the gross tax collection by way of deduction from receipt. However, the interest paid on excess tax refunded cannot be treated at par with refund of tax. Interest on refund of taxes is essentially an expenditure which is met out through withdrawal from the CFI and hence, parliamentary authorization under Article 114(3) was mandatory.

Counter comments of the Ministry

The interest on excess tax on interest to be paid is a statutory and non discretionary obligation and cannot qualify as expenditure. This position has been affirmed by the Attorney General of India in his note dated 06.05.2011. The stipulation in Article 114 which states that no appropriation can be made out of Consolidated Fund of India will not apply to the refund loaded with interest which is netted off from the receipts, as it does not form part of the Consolidated Fund of India. The interest on excess tax, therefore, does not qualify to be called an expenditure for which Parliamentary authorization is required.

Recommendation Para No. 2

The Committee note that the Financial Powers vested under Delegation of Financial Powers Rules, 1978 clearly describes ‘Interest’ as an item of expenditure. Asked to explain why the interest payments on refunds was being treated as a reduction from gross tax collection rather than the same being incorporated in the Budget Estimate, the Ministry submitted that the interest payment on refunds has no co-relation with the Revenue earnings and therefore, it cannot be co-related with the performance of revenue. The Ministry further contended that the amount of excess tax is retained in the Consolidated Fund of Indian and not with the Income Tax Department and, therefore, the interest outgo on such refunds is not to be treated as an expenditure of the Income Tax Department nor a part of cost of its collections. The Committee are of the considered view that interest payment, as specified, is an item of expenditure under Delegation of Financial Powers Rules and there is also a separate appropriation which clearly provided for interest payment of Union Government and therefore the Department cannot claim an exception with regard to interest on refunds. The Committee wish to remind the Ministry that during the year 2001-02, under Demand No. 34—Direct Taxes, a provision of Rs. 92 crore was made under the Head ‘Interest on Refunds of Excess Tax’, a practice which needs revival. Moreover, as admitted by the Department the tax collected is deposited in the Consolidated Funds of India and not retained by the Department has no legal authority to withdraw the ‘interest’ on excess tax collected/refunds without recourse to Appropriation law passed by Parliament.

Action Taken by the Ministry of Finance (Department of Revenue)

Rule 3 of the Delegation of Financial Powers Rules, 1978 (DFPR) provides certain definitions including that of expenditures under various heads. Rule 8 of DFPR lists the primary units of appropriation where ‘interest’ is shown separately. However, Rules 4(2) and 4(3) of the DFPR enable a subordinate authority i.e. the department of Central Govt. to sanction any expenditure as under:-

i) if the payment is authorized under the provisions of any law for the time being enforced and does not involve introduction of a new principle or practice by the concerned subordinate authority, and

ii) if it involves the introduction of a new principle or practice in the context of the provision of any law with the previous consent of the Finance Ministry.

As payment of interest is legislatively sanctioned under the Income Tax Act and the interest is directly payable/sanctionable by the Income Tax Department, Rule 3 read with Rule 8 of the DFPR are not violated.

It is submitted that only on one occasion i.e. in the budget of 2001-02, the interest on refund of excess tax was shown under major head ‘2020’ and a provision of Rs. 92 crores was made. However, looking into to the appropriate facts and circumstances of the matter soon thereafter in the budget of 2002-03, the interest on refund of excess tax was reduced to nil for the RE of 2001-02 and no BE was given for the year 2002-03. The practice of not putting “interest on refund of excess tax” under any head continued thereafter in the Budget of 2003-04 onwards.

It is further submitted that the excess tax being an amount not chargeable to tax cannot qualify as a part of receipt under the Consolidated Fund of India under Article 265 read with Article 266. The interest paid on refunds is a statutory obligation which is non discretionary in nature and is very much an integral part of the refund/outgo to the tax payers. Excess tax received by the Central Govt. which is required to be refunded along-with interest is netted off from receipts and only the balance is the tax as mentioned in Article 265 of the Constitution and only this tax is the receipt for the purposes of Article 266. Hence, the stipulation in Article 114 stating that no appropriation can be made out of CFI does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the CFI. It, therefore, does not qualify to be called an expenditure for the purposes of grants or appropriation.

Vetting comments of Audit

In terms of Rule 4(2)(a) of DFPR 1978, a subordinate authority may sanction any expenditure or advances of public money in those cases only in which it is authorized to do so by the provision of any law for the time being in force.

For payment of interest on refund of excess tax there is enabling provision in the Income Tax Act entitling assessees to receive interest in addition to the amount of refund. This enabling provision cannot be equated as legislatively sanctioned.

For payment of interest out of Consolidated Fund of India, legislative authorization in terms of Article 114(3) of the Constitution of India is, a priori, mandatory.

Counter comments of the Ministry

Interest on refund is an outgo which emanates out of excessive tax deposited by the taxpayers and need to be paid back by the virtue of operation of Article 265 of the Constitution of India.

Recommendation Para No. 3

The Committee are concerned to note that an expenditure to the tune of Rs. 37,365 crore on interest payments on refunds had been incurred over a period of last five years in blatant disregard to Constitutional provision. The Chairperson, CBDT conceded before the Committee that regularization of expenditure incurred on interest on refunds is a matter of Legislative power to be exercised by Parliament. Mindful of the mandatory Constitutional provisions governing the financial procedure, the Committee reiterate that a mandatory constitutional provision requiring specific Parliamentary approval cannot be disregarded with Ministerial approval on ground of administrative constraint or difficulty. The Committee wish to remind the Department that Article 114(3) clearly mandates that no money shall be withdrawn from Consolidated Fund of India except under ‘Appropriation’ made by the Legislature. The Committee therefore, call upon the Ministry to work out a proper accounting procedure in conformity with Constitutional provisions and financial rules.

Action Taken by the Ministry of Finance (Department of Revenue)

Section 244A of the Income Tax Act mandates payment of interest along-with the refund, where it becomes due in accordance with the interest calculations laid down in Section 244A. Payment of interest on refunds is a statutory non discretionary obligation. As already stated in reply to the observation No. 1 of the Hon’ble Committee, it is again submitted that Article 265 of the Constitution of India provides that taxes cannot be imposed save by authority of law and such taxes imposed by authority of law under article 265 form receipts under the Consolidated Fund of India. However, the excess tax being an amount not chargeable to tax cannot qualify as a part of receipt under the Consolidated Fund of India under Article 265 read with Article 266. Hence, the excess tax received by the Central Govt. which is required to be refunded along-with interest is netted off from receipts and only the balance is the tax as mentioned in Article 265 of the Constitution and only this tax is the receipt for the purposes of Article 266. Consequently, the stipulation in Article 114 stating that no appropriation can be made out of CFI does not apply to the refund loaded with interest which is netted off from receipts and does not form part of the CFI.

It is, hence submitted that classification of interest on refund of excess tax as reduction in revenue by the Ministry, is in conformity with the Constitutional provisions and financial rules.

Vetting comments of Audit

Section 244A of the Income Tax Act entitles assessees to receive interest in addition to the amount of refund. This enabling provision of Income Tax Act cannot be equated as interest having been legislatively sanctioned under the Constitution of India for withdrawal of money from the Consolidated Fund of India.

The collection of tax is authorized under Article 265 of the Constitution of India. Excess collection of tax is not authorised by any Act of the Parliament. As such excess amount credited to the Consolidated Fund of India does not form part of tax dues and can correctly be refunded from the gross tax collection by way of deduction from receipt. However, the interest paid on excess tax refunded cannot be treated at part with refund of tax. Interest on refund of taxes is an expenditure which is met out only through withdrawal from the CFI and hence, parliamentary authorization under Article 114(3) was mandatory.

Counter comments of the Ministry

As per Article 265 of the Constitution of India, it is only the taxes imposed by the authority of law that would form receipts of Consolidated Fund of India. In other words, excess tax paid does not qualify as receipts to form part of Consolidated Fund of India under Article 265 read with Article 266. Thus, payment of refund along-with interest arising thereon as per the provisions of the Income Tax Act and the rates prescribed therein do not qualify to be called an appropriation to which Article 114(3) applies.

Recommendation Para No. 4

The Committee are surprise to note that the Ministry of Finance did not consider it expedient or necessary to seek the opinion of the Ministry of Law in the matter. On a reference being made by the Committee, the Ministry of Law and Justice furnished the opinion of the Ld. Attorney General. According to Ld. Attorney General the objection taken by the Comptroller and Auditor General with regard to the practice followed in relation to payment of interest on refunds of excess tax is completely justified. The proper procedure would be to clearly indicate the tax collection as a receipt and estimate the interest payable on refunds of taxes as an expenditure. The Ld. Attorney General concurred with the view of the C&AG that the reason given with regards to administrative difficulties is not tenable. Further, the Revenue Secretary conceded before the Committee that the Constitutional provisions have to be followed and assured to report back to the Committee to devise a procedure which is Constitutionally correct and administratively feasible. The Committee would like to be apprised of the corrective action taken by the Government to ensure that a suitable administrative procedure is devised in accordance with the Constitution and the Financial Rules within three month of the presentation of this Report.

Action Taken by the Ministry of Finance (Department of Revenue)

As per the directions of the Hon’ble Committee, opinion of MoL&J and Attorney General of India(AG) was solicited. However, Ld.AG on a reference from Lok Sabha Secretariat on the issue under consideration vide his opinion dated 25.09.2012 stated that the objection of CAG is justified and concurred with the view of CAG that proper procedure would be to clearly indicate tax collection as a receipt & estimate the interest payable on refund of taxes as an expenditure. The matter was hence submitted for re-consideration of Ld. AG through MoLJ requesting therein to review his earlier opinion in light of the contentions of the CBDT/D/o Revenue as these were not considered while rendering his earlier opinion dated 25.09.2012.

2. In this context, MoLJ vide letter No. AG.5/2013-Adv.C, dated 17.05.2013 forwarded a copy of the opinion rendered by the Ld. AG dated 06.05.2013. The Ld. AG after perusing the matter in detail has reconsidered his earlier opinion dated 25.09.2012 and opined in concluding part of para 11 as under:-

(i) Interest on refund of excess tax has to be included in refund under Rule 270(4) of the General Financial Rules.

(ii) Refund of excess tax is not an expenditure and such outgo cannot be considered with other operational expenses.

(iii) Interest on refund of excess tax is not an expenditure under Article 112(1) of the Constitution.

3. It is, hence submitted that the accounting procedure followed by the Ministry for treatment of interest on refunds is in accordance with the Constitution and the Financial Rules.

Vetting comments of Audit

No comments, as the Hon’ble Committee is seized of the matter.

Counter comments of the Ministry

The learned AG in his opinion dated 06.05.2013 has stated that interest on refund of excess tax is not an expenditure under Article 112(1) of the Constitution. The audit has not commented on the opinion of the learned AG.

Recommendation Para No. 5

Having regard to the fact the Annual Budget is prepared ex-ante based on sound principles of estimation, the Committee find no valid ground as to why the Department cannot make broad estimates of interest liability on tax refunds based on the studied trends of the past. Moreover, the Constitution and the financial procedure provides for additional or supplementary grants and finally, in case the expenditure exceeds Parliamentary authorization, the excess expenditure is reported to Parliament annually by the C&AG and regularized, through appropriation(Excess) Act, on the recommendation of the PAC. In their considered view reporting of interest liability to Parliament would bring greater transparency in financial administration of the country, uphold the Constitution, help reduce interest burden and bring efficiency in tax administration.

Action Taken by the Ministry of Finance (Department of Revenue)

As detailed in reply to observation 1,2,3 & 4 of the Hon’ble Committee, it is again submitted that classification of interest on refunds of excess tax as reduction in revenue is very much in accordance with the dictate of the Constitution of India and abides to the Financial Rules as affirmed by Ld. AG. It is submitted that suggestion of treatment of Interest paid on refunds as expenditure is not based on correct appreciation of statutory and machinery provisions of the Income Tax Act and will lead to unnecessary administrative burden on Field formations, resulting in a cobweb entangling the entire efforts made by the Department to improve taxpayer service and having negative impact on tax collections. The suggested accounting policy will result in no revenue benefit. Considering the advances taken by the Department in handling Refund cases it is recommended that historical practice to treat Interest payment on Refunds as “Reduction from gross tax collection” or Deduct- Refund” should continue.

Moreover, the outgo of interest u/s 244A is regularly monitored at the macro level by the Parliament through Standing Committee on Finance, Public Accounts Committee and Parliamentary Questions asked in both the Houses of the Parliament. Parliamentary Committees have been regularly guiding the Department on this aspect. Also the Tax Revenue statistics in Receipts Budget reflects net collection figures. As “interest on refunds of excess tax” is also an outgo, the collection figures given there depict the net collection after taking to account the outgo of such interest thereby abiding to the norms of transparency in financial administration.

Vetting comments of Audit

It is reiterated that interest on refund of excess tax is an item of expenditure and cannot be treated as a reduction of revenue.

The issue at hand is not one of monitoring of interest but of authorization of interest payment by Parliament in terms of constitutional provisions.

Counter comments of the Ministry

In response, it is reiterated that excess interest paid on refund of excess tax is a statutory non discretionary obligation having sanction of legislature in form of Section 244A of the IT Act. 1961. Interest on refund is concomitant with the refund and is not an expenditure.

Appendix - I

MINUTES OF THE EIGHTH SITTING OF THE PUBLIC ACCOUNTS COMMITTEE (2013-14) HELD ON 26TH JULY, 2013

The Public Accounts Committee sat on Friday, the 26th July, 2013 from 1500 hrs. to 1600 hrs. onwards in Room No 'G-074', Parliament Library Building, New Delhi.

PRESENT

Dr. Murli Manohar Joshi - Chairman

LOK SABHA

2. Dr. Baliram

3. Shri Ramen Deka

4. Shri Jayaprakash Hegde

5. Shri Bhartruhari Mahtab

6. Shri Abhijit Mukherjee

7. Shri Sanjay Brijkishorlal Nirupam

8. Shri Ashok Tanwar

RAJYA SABHA

9. Shri Satish Chandra Misra

10. Shri N.K. Singh

11. Smt. Ambika Soni

LOK SABHA SECRETARIAT

1. Shri Devender Singh - Joint Secretary

2. Shri Abhijit Kumar - Director

3. Smt. A. Jyothirmayi - Deputy Secretary

4. Smt. Anju Kukreja - Under Secretary

REPRESENTATIVES OF THE OFFICE OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA

1. Shri Shashi Kant Sharma - CAG of India

2. Shri A.K. Singh - Dy. CAG

3. Shri C. Gopinathan - Director General of Audit (Central Revenues)

4. Shri Jayant Sinha - Principal Director (RC)

5. Shri Purushottam Tiwary - Principal Director (PAC)

REPRESENTATIVES OF THE MINISTRY OF LAW AND JUSTICE (DEPARTMENT OF LEGAL AFFAIRS)

1. Dr. B. A. Agrawal - Law Secretary

2. Shri Dinesh Bhardwaj - Joint Secretary and Legal Adviser

3. Dr. R.J.R. Kasibhatla - Additional Legal Adviser

2. At the outset, the Chairman welcomed the Members, Comptroller and Auditor General of India and other Audit Officers to the sitting of the Committee. The Chairman, then apprised the Members that the Sitting was convened to take oral evidence of the representatives of the Ministry of Law and Justice (Department of Legal Affairs) in connection with the mutually contradictory opinions tendered by Ld. Attorney General for India on Para No. 4.1.1 of the C&AG Report No. 1 for the year 2011-12, Union Government, Accounts of the Union Government relating to ‘Expenditure incurred on interest on refunds of taxes’.

3. Thereafter, the Members desired to know the reasons which had prompted the Ministry of Finance (Department of Revenue) to seek further opinion of the Ld. Attorney General after the Report of Public Accounts Committee on the subject was presented to the Parliament, and it was then decided that the Revenue Secretary was to be called before the Committee. The Chairman also apprised the Members that during the sitting of the Public Accounts Committee (2012-13) held on 30th August, 2012 for examination of the representatives of the Ministry of Finance (Department of Revenue) on the subject the Committee had sought to know if, the Department of Revenue had consulted the Ministry of Law and Justice on this issue. The chairperson CBDT had then replied in the negative. Besides, Secretary Revenue had also submitted before the Committee that:

“…. …. …. ….Obviously it has not been the intention of the Department anyway to bypass the Constitution. The Constitution is supreme. There is no doubt about it and no amount of administrative difficulty can be cited in order to say that we will not follow the Constitution. …. …. ….. We would certainly look into this how the constitutional provisions are satisfied and yet, we find a way in which we satisfy the CAG. This hon. Committee should be satisfied. I think that is what we have to do so that we do not have the difficulties which we encountered in 2001 when we made it. If we cannot do anything, it leads to chaos in refunds. At the same time, you have rightly said that constitutional provisions have to be followed. We will consult and we will come back to the Committee with what is Constitutionally correct, legally correct and also administratively feasible."

4. To the query of the Members as to whether the Committee in their Report on the subject had recommended to the Ministry of Finance (Department of Revenue) to obtain the opinion of Ld. Attorney General, the Chairman apprised the Members that the Secretariat had sought the considered opinion of the Ld. Attorney General which is contained in the following recommendation of the Committee (66th Report/15th Lok Sabha):

“On a reference being made by the Committee, the Ministry of Law and Justice furnished the opinion of the Ld. Attorney General. According to Ld. Attorney General the objection taken by the Comptroller and Auditor General with regard to the practice followed in relation to payment of interest on refunds of excess tax is completely justified. The proper procedure would be to clearly indicate the tax collection as a receipt and estimate the interest payable on refund of taxes as an expenditure. The Ld. Attorney General concurred with the view of the C&AG that the reason given with regard to administrative difficulties is not tenable. Further, the Revenue Secretary conceded before the Committee that the Constitutional provisions have to be followed and assured to report back to the Committee to devise a procedure which is Constitutionally correct and administratively feasible. The Committee would like to be apprised of the corrective action taken by the Government to ensure that a suitable administrative procedure is devised in accordance with the Constitution and the Financial Rules within three months of the presentation of this Report”.

5. After some deliberations, the representatives of the Ministry of Law and Justice (Department of Legal Affairs) were called in. Before commencing the examination, the Chairman made it clear that the deliberations of the Committee were confidential and were not to be divulged to any outsider particularly to the press. The Committee then proceeded with the examination of the subject.

6. The Law Secretary, after introducing his colleagues to the Committee submitted that the Attorney General had tendered his opinions on 25.09.2012 and 06.05.2013 on the same subject. He added that the earlier opinion was tendered by the Attorney General on receipt of a request from the Lok Sabha Secretariat whereas the second opinion was given on a request from the Department of Revenue, Ministry of Finance. He also submitted that the O&M instructions of the Department of Legal Affairs permitted reconsideration and revision of the opinion of the Department rendered earlier but under certain conditions like a change in the law or a decision of the Supreme Court or High Court which were not previously available or also in the light of fresh facts or any new aspect of the matter that is brought to notice for the first time. The Members then desired to know the basis on which the revised opinion of Ld. Attorney General was sought particularly in the context of the OM cited. The Committee also wanted to know that when, Article 114(3) of the Constitution clearly stipulated that no money shall be withdrawn from the consolidated Fund of India except under appropriation made by Law, why this aspect was not taken into consideration while presenting the case before Ld. Attorney General for the second time. The representative could not give specific answer.

7. The Committee found that in the earlier statement of case presented to Ld. Attorney General, the Ministry of Law and Justice had dwelt upon the Articles 112 to 119, 114(3), 266, 267, 283 and 284 of the Constitution of India and in its revised note to Ld. Attorney General, the Ministry had only summarized the case of the Department of Revenue and posted the same for the opinion of Ld. Attorney General without making any specific recommendation of their own. Therefore, the Committee sought to know as to whether the Rules/sub-Rules were superior to overrule the Constitutional provisions.The Secretary, Department of Legal Affairs conceded that the Constitution was supreme.

8. The Chairman quoted the following statement of Dr. B.R. Ambedkar made in the Constituent Assembly debates:

“The only thing is that when there is a supplementary estimate the sanction is obtained without excess expenditure being incurred. In the case of excess grant, the excess expenditure has already been incurred and the executive comes before Parliament for sanctioning what has already been spent. Therefore, I think there is no difficulty; not only there is no difficulty but there is necessity, unless you go the length of providing that when any executive officer spends any money beyond what is sanctioned by the Appropriation Act, he shall be deemed to be a criminal and prosecuted, you shall have to adopt this procedure of excess grant”.

9. The Law Secretary submitted that the matter was referred by them to Ld. Attorney General ‘because the Ministry of Finance, at the level of the Finance Minister wanted reconsideration’ of the opinion tendered earlier.

10. The Chairman then thanked the representatives of the Ministry of Law and Justice (Department of Legal Affairs) and said that if necessary, the Committee may call them again. The Chairman also thanked the Comptroller and Auditor General of India and other Audit officers for providing valuable assistance to the Committee in the examination of the subject.

The witnesses, then, withdrew.

A copy of the verbatim proceedings of the sitting was kept on record.

The Committee, then, adjourned.

Appendix-II

MINUTES OF THE NINTH SITTING OF THE PUBLIC ACCOUNTS COMMITTEE (2013-14) HELD ON 2ND SEPTEMBER, 2013

The Public Accounts Committee sat on Monday, the 2nd September, 2013 from 1600 hrs. to 1830 hrs. in Committee Room 'C', Parliament House Annexe, New Delhi.

PRESENT

Dr. Murli Manohar Joshi - Chairman

LOK SABHA

2. Shri Anandrao Adsul

3. Shri Jayaprakash Hegde

4. Dr. Sanjay Jaiswal

5. Shri Bhartruhari Mahtab

6. Shri Abhijit Mukherjee

7. Shri Sanjay Brijkishorlal Nirupam

8. Shri Ashok Tanwar

RAJYA SABHA

9. Shri Prasanta Chatterjee

LOK SABHA SECRETARIAT

1. Shri Devender Singh - Joint Secretary

2. Shri Abhijit Kumar - Director

3. Smt. A. Jyothirmayi - Deputy Secretary

4. Smt. Anju Kukreja - Under Secretary

REPRESENTATIVES OF THE OFFICE OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA

1. Shri A.K. Singh - Dy. CAG

2. Shri C. Gopinathan - Director General of Audit (Central Revenues)

3. Shri Jayant Sinha - Principal Director (RC)

4. Shri Purushottam Tiwary - Principal Director (PAC)

REPRESENTATIVES WHO ATTENDED THE SITTING

(I) MINISTRY OF FINANCE (DEPARTMENT OF REVENUE)

1. Shri Sumit Bose - Revenue Secretary

2. Shri R.K. Tiwari - Member (R)

3. Ms. Anita Kapur - Member (A&J)

4. Shri Sanjay Kumar - CIT (IT&CT)

5. Shri D.S. Chaudhry - CIT (A&J)

(II) Shri Goolam E. Vahanvati - Attorney General for India

(A) Evidence of the representatives of Ministry of Finance (Department of Revenue)

2. At the outset, the Chairman welcomed the Members and the representatives of the Office of the C&AG of India to the sitting of the Committee. The Chairman, then apprised the Members that the Sitting was convened to take oral evidence of the representatives of the Ministry of Finance (Department of Revenue) and the Ld. Attorney General for India in connection with the mutually contradictory opinions tendered by Ld. Attorney General for India on Para No. 4.1.1 of the C&AG Report No. 1 for the year 2011-12, Union Government, Accounts of the Union Government relating to ‘Expenditure incurred on interest on refunds of taxes’.

3. Thereafter, the Chairman apprised the Members that the Revenue Secretary in his earlier deposition before the Committee (dated 30.08.2012) had admitted that:

“You have kindly shown us the way as the Committee how to take this matter forward. Obviously, it has not been the intention of the Department anyway to bypass the Constitution. The Constitution is supreme. There is no doubt about it and no amount of administrative difficulty can be cited in order to say that we will not follow the Constitution. That has not been the idea. It will never be the idea of the Ministry to do. We would certainly look into this how the Constitutional provisions are satisfied and yet we find a way in which we satisfy the C&AG. This hon. Committee should be satisfied. I think, that is what we have to do so that we do not have the difficulties which we encountered in 2001 when we made it. If we cannot do anything, it leads to chaos and refunds. At the same time, you have rightly said that Constitutional provisions have to be followed. We will consult and we will come back to the Committee with what is constitutionally correct, legally correct and also administratively feasible."

4. The Chairman recalled that the representatives of the Ministry of Finance had unambiguously and categorically acknowledged the supremacy of the Constitution and the financial control of Parliament over the executive but the Ministry still sought the opinion of the Ld. Attorney General for India and that too after the Committee had presented the Report to the Parliament which contained the considered advice of the Ld. Attorney General sought by the Lok Sabha Secretariat. He also stated that the Committee would first examine the representatives of the Ministry of Finance (Department of Revenue) in order to know the reasons that prompted the Ministry to seek another opinion of the Ld. Attorney General. Further, he added that the Ld. Attorney General would be examined with regard to the reasons that led to revision of his earlier opinion tendered to the Committee.

5. After some deliberations, the representatives of the Ministry of Finance (Department of Revenue) were called in. Before commencing the examination, the Chairman made it clear that the deliberations of the Committee were confidential and were not to be divulged to any outsider particularly to the Press. The Committee then proceeded with the examination of the Subject.

6. After introducing his colleagues to the Committee, the Revenue Secretary while citing the reasons for seeking revised opinion of Ld. Attorney General stated that the contention of the Department of Revenue had not been considered by the Ld. Attorney General while rendering his earlier opinion dated 25.09.2012 and therefore, a note, containing an analysis of the relevant provisions of the Income Tax Act/legal provisions and the administrative impediments that would arise if the appropriation for interest payment on refunds form part of the annual Budget, was prepared and sent to the Ministry of Law and Justice with the request to refer the matter to the Ld. Attorney General to review his earlier opinion.

7. When the Committee sought to know whether the provisions of Income Tax Act, Rules/sub-Rules can overrule the Constitutional provisions, the Secretary Revenue conceded that the Constitutional provisions were supreme.

8. The Chairman also pointed out that in an earlier submission to the Committee, the Ministry had stated that the amount of excess tax was retained in the Consolidated Fund of India and not by the Income Tax Department. Therefore, the interest outgo on such refunds could neither be an expenditure of the Income Tax Department nor a part of the cost of collection. He then drew the attention of the representative of Ministry of Finance to the diametrically opposite stand taken by the Ministry stating in the Action Taken Notes on the recommendations contained in 66th Report of PAC (15th Lok Sabha), that the refunds were netted off from the receipts and did not form part of the Consolidated Fund of India.

9. Furthermore, the Chairman also desired to know why the interest payments on refunds of taxes should not form part of the Budget Estimates and passed by Parliament when all the other interest payments such as Small Savings, Deposit Certificates, Operational expenses, Pension Funds, Provident Funds, Reserve Funds, etc. were categorised as revenue expenditure, formed part of the Annual Budget and appropriated with the prior approval of Parliament.

10. Thereafter, the Members sought clarifications on the Subject from the representatives of the Ministry of Finance (Department of Revenue). Reasons were also sought for not providing interest on refunds as an item of expenditure when payment of interest was treated as an item of expenditure under Delegation of Financial Power Rules 1978. Then the Committee asked the Ministry to outline the administrative constraints for not complying with the mandatory Constitutional provisions and the action taken by the Ministry to comply with the budgetary process enshrined in the Constitution. Members specifically asked from which fund the Department was paying interest on refunds. The representative of the Department could not reply to the satisfaction of the Committee.

11. The Chairman then thanked the representatives of the Ministry of Finance (Department of Revenue) for their deposition before the Committee.

The witnesses, then, withdrew.

The Committee then adjourned for tea break.

*** *** ***

The Committee reassembled after the tea break

(B) Evidence of the Ld. Attorney General

1. On reassembling, the Chairman welcomed the Ld. Attorney General for India to the sitting of the Committee and made it clear that the proceedings of the Committee were confidential. Then, the Ld. Attorney General was asked to furnish reasons for the mutually contradictory opinions tendered by him on para 4.1.1 of the C&AG Report No. 1 for the year 2011-12 relating to the ‘Expenditure incurred on interest on refunds of taxes’.

2. Explaining the reasons for reconsideration of his earlier opinion, the Ld. Attorney General deposed that:

“I had extensive discussions with the officers of the Ministry of Finance and what weighed with me, Sir, was what they were saying that the appropriation would ultimately be reported to Parliament. But according to them, it was impossible for them to calculate the interest payable.

Sir, they also referred to articles 265 and 266 of the Constitution; they referred to statutory provisions which provide for refund; they referred to rule 270(4) of the General Financial Rule; and they very clearly said that it is not possible for them to calculate the interest”.

3. (i) He further added that:

“I am very clear in my mind that ultimately nothing can be done without the sanction of Parliament and that everything has to be placed before Parliament. For me, it is a matter of faith that having regard to the historical development of Parliamentary powers, all spending has to be authorised by Parliament, all receipts have to be placed before Parliament and the only reason why I reconsidered it was because I felt that if ultimately the facts are going to be placed before Parliament, even the Income Tax Act has been made by Parliament, statutory refunds have been provided for in the Income Tax Act and interest on refunds is also provided for, I did not feel that there was anything which could be done without reference to Parliament. I would only say this”

(ii) The Ld. Attorney General further submitted that an opinion ultimately is an opinion and it is for the Committee to decide what the correct procedure is.

4. (i) On being asked as to whether any difficulty by the bureaucracy can surpass or circumvent the provisions of the Constitution, the answer of Ld. Attorney General was straight ‘no’.

(ii) He further added:

“Now, if this can be got over and if it is possible for them to have an estimate of the interest which would require to be paid on some actuarial basis or any other basis instead of a mathematical procedure, I don’t see any difficulty why they shouldn’t do it”.

5. Asked if the administrative problem of estimating interest on refund was insurmountable the Government could consider amendment to the Constitution, the Ld. Attorney General was categorical that he would not recommend any amendment to the Constitution in this behalf.

6. The Members then posed several questions in this regard, to which the Ld. Attorney General replied comprehensively by enumerating the various Articles of the Constitution such as Article 112(1), 114(3), 115, 117, 118(2) and 119. At the end he admitted that:

“I feel that Article 114 is paramount and has to be complied with and nothing should be done which in any way dilutes the authority and supremacy of Parliament”.

7. The Chairman, then thanked the Attorney General for his deposition before the Committee. The Chairman also thanked the representatives of the office of the C&AG of India for providing valuable assistance to the Committee in the examination of the Subject.

The witness, then, withdrew.

A copy of the verbatim proceedings of the Sitting was kept on record.

The Committee, then, adjourned.

Appendix-III

MINUTES OF THE SIXTEENTH SITTING OF THE PUBLIC ACCOUNTS COMMITTEE (2013-14) HELD ON 30TH JANUARY, 2014

The Public Accounts Committee sat on Thursday, the 30th January, 2014 from 1130 hrs. to 1400 hrs. in Committee Room 'B', Parliament House Annexe, New Delhi.

PRESENT

Dr. Murli Manohar Joshi - Chairman

LOK SABHA

2. Shri Anandrao Adsul

3. Dr. Baliram

4. Shri Sandeep Dikshit

5. Dr. M. Thambi Durai

6. Shri Bhartruhari Mahtab

RAJYA SABHA

7. Shri Prasanta Chatterjee

8. Shri Prakash Javadekar

9. Dr. V. Maitreyan

10. Shri N.K. Singh

11. Smt. Ambika Soni

LOK SABHA SECRETARIAT

1. Shri Devender Singh - Joint Secretary

2. Shri Jaya Kumar T. - Additional Director

3. Shri D.R. Mohanty - Deputy Secretary

4. Smt. A. Jyothirmayi - Deputy Secretary

5. Ms. Miranda Ingudam - Under Secretary

6. Shri A.K. Yadav - Under Secretary

7. Smt. Anju Kukreja - Under Secretary

REPRESENTATIVES OF THE OFFICE OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA

1. Shri A.K. Singh - Dy C&AG

2. Smt. Usha Sankar - Dy C&AG

3. Shri Gautam Guha - Director General of Audit

4. Smt. Ila Singh - Director General of Audit

5. Shri C. Gopinathan - Director General of Audit

6. Shri Jayant Sinha - Pr. Director of Audit

7. Shri Purushottam Tiwari - Pr. Director of Audit

8. Shri A.M. Bajaj - Pr. Director of Audit

2. At the outset, the Chairman welcomed the Members and the representatives of the Office of C&AG to the sitting of the Committee. The Chairman, then, apprised that the meeting was convened to consider and adopt nine Draft Reports (five Original and four Action Taken Reports) of the Committee. Thereafter, the Committee took up the following draft Reports one by one for consideration:

(i) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(ii) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(iii) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(iv) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(v) Draft Report on ‘Contravention of Constitutional Provisions by Ministry of Finance: Expenditure incurred on Interest on Refunds without Parliamentary Approval’;

(vi) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(vii) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX;

(viii) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX; and

(ix) XXXXXX XXXXXXXX XXXXXXX XXXXXXXX.

3. After detailed deliberations, the draft Reports at Sl. Nos. (i), (ii) and (iii) were adopted with some modifications/amendments that are given at Annexure and the rest were adopted without any changes. The Committee also authorized the Chairman to finalise these Reports, in light of their suggestions and the factual verifications received from the Audit and present the same to the House on a date convenient to him.

4. The Chairman thanked the Members for their valuable suggestions on the consideration of the Draft Reports.

The Committee, then, adjourned.

______________________________________________________________

^* Not appended to the Cyclostyled of the Report

^† Elected w.e.f. 14th August, 2013 vice Dr. Girija Vyas appointed as Minister of Housing, Urban Development & Poverty Alleviation w.e.f. 17th June, 2013.

^‡ Elected w.e.f. 3rd September, 2013 vice Dr. V. Maitreyan ceased to be a Member upon his retirement as a Member of Rajya Sabha w.e.f. 24th July, 2013.

^§ Elected w.e.f. 3rd September, 2013 vice Dr. E.M. Sudarsana Natchiappan appointed as Minister of State for Commerce and Industry w.e.f. 17th June, 2013.

xxxx- Matter does not pertain to this Report.