By TIOL News Service

NEW DELHI, JAN 19, 2018: THE ISSUE BEFORE THE APEX COURT IS - Whether exercise of discretionary power by Settlement Commission to waive interest u/s 234A, equally negates the concomitant right for refund of interest to the assessee. NO IS THE VERDICT.

Facts of the case:

The Assessee, being a partnership firm, filed its return for A.Ys 1993-95, and once the order of assessment was completed, interest u/s 234(A) to (C) was levied. Challenging this levy of interest, the assessee filed an application before the Settlement Commission, requesting the Commission to waive the interest on the ground that it caused hardship to it. The Settlement Commission, by referring to CBDT Circular, partially waived te said interest for the A.Ys in questions. Consequently, the assessee moved an application to the AO, who refused to grant interest on the refund that was payable, and was not paid, within three months from the specified date. This was done on two grounds, namely, that the provisions of Section 244(A) did not provide for payment of interest on refund due on account of waiver of interest that was charged u/s 234(A)-(C) and second, that the power assumed by the Settlement Commission for waiver of interest, by following the CBDT circular referred to, did not enable the Commission to provide for payment of interest u/s 244(A).

On appeal, the FAA reversed the order of AO by referring to the judgment of Madras High Court in Commissioner of Income-Tax Vs. Needle Industries Pvt. Ltd. and with reference to the CBDT circular which enabled the Settlement Commission to waive interest. On further appeal, the High Court held that, since waiver of interest was within the discretion of the Settlement Commission, no right flowed to the assessee to claim refund as a matter of right under law. Accordingly, the AO's order was restored.

Supreme Court held that,

++ it is seen that a perusal of Section 240 shows that refund may become due to the assessee, either as a result of an order passed in appeal or other proceedings under this Act. It is clear that refund that arises as a result of an order passed u/s 245(D)(4) is an order passed in "other proceeding under this Act". Thus, it is clear that the assessee in the present case is covered by Section 240 of the Act. When it comes to interest on refund, Section 244, which applied to assessment years up to and including assessment year 1989-90, made it clear that it would apply where a refund is due to the assessee in pursuance of an order referred to in Section 240. It is only if the AO does not grant the refund within three months from the end of the month in which such order is passed, that the Central Government shall pay to the assessee simple interest on the amount of refund due. Similarly, a cursory look at Section 244A shows that the said section is even wider than section 244 and is not restricted to refund being issued to the assessee in pursuance to an order referred to in Section 240. Under this Section, it is enough that the refund become due under the Income-tax Act, in which case the assessee shall, subject to the provisions of this Section, be entitled to receive simple interest;

++ it is seen that the Madras High Court in Needle Industries Pvt. Ltd. case, concerned itself with the position prior to the advent of Section 244A. The High Court therein has found that the expression "refund of any amount" used by Section 240 and 244 would include not only tax and penalty but interest also. It was, therefore, held that the clear intention of Parliament is that the right to interest will compensate the assessee for the excess payment during the intervening period when the assessee did not have the benefit of use of such money paid in whatsoever character. The Court therein held that the result would be that the asssessee would be entitled to interest on refund also. This Court thereafter in Sandvik Asia Ltd. case, after setting out the relevant statutory provisions, which at that time covered Section 244 and not Section 244(A), and after referring to a number of decisions, the Court ultimately referred to Needle Industries case and expressly approved the same, by concluding that what is relevant is whether any amount has become due to an assessee, and further the phrase any amount will also encompass interest. Again, in Union of India Vs. Tata Chemicals Ltd - 2014-TIOL-27-SC-IT, this Court after going into the object for the enactment of Section 244(A), held that it grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of Section 244 applicable to assessments before 01.04.1989, albeit with clarity of application as contained in Section 244A;

++ it is seen that a catena of judgments has made it clear that a corresponding right exists, to refund to individuals any sum paid by them as taxes which are found to have been wrongfully exasted or believed to be, for any reason, inequitable. The statutory obligation to refund, being non discretionary, carries with it the right to interest, also making it clear that the right to interest is parasitical. The right to claim refund is automatic, once the statutory provisions have been complied with. However, the counsel for Revenue relied upon the decision of this Court in Ghaswala's case, wherein this Court has held that the Settlement Commission was introduced into the Income-tax Act for purpose of quick settlement of cases before it, so that the tax due to the Revenue gets collected at the earliest. The object of this exercise is not to assist tax evaders. In so holding, this Court held that Section 245(D)(6) being procedural in nature, cannot be used to locate any power to waive interest, if it is not otherwise waived under some other substantive provision in the Income-Tax Act. Ultimately, this Court arrived at the conclusion that the Commission cannot either waive or reduce interest which is statutorily payable, unless there is express power to do so in that behalf. However, while so saying, the Court went on to clarify that the circulars issued pursuant to the powers u/s 119 of I-T Act, which empower the authorities under the Act to waive or reduce interest, may be availed by the Settlement Commission to waive interest;

++ this court is also of the view that the expression "due" only means that a refund becomes due if there is an order under the Act which either reduces or waives tax or interest. It is of no matter that the interest that is waived is discretionary in nature, for the moment that discretion is exercised, a concomitant right springs into being in favour of the assessee. Therefore, the High Court was incorrect in its view that since a discretionary power has been exercised, no concomitant right was found for refund of interest to the assessee.

(See 2018-TIOL-20-SC-IT)