The Punjab and Haryana High Court has held that income tax authorities must compensate a taxpayer for unjustifiably retaining seized cash after completion of an assessment that found no tax payable, even if the Income-tax Act does not expressly provide for interest for that period.

The Bench of Justice Deepak Sibal and Justice Sunish Bindlish awarded statutory interest up to the completion of assessment and interest at 6% per annum for the subsequent period until the money was actually released.

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A petition filed by a school teacher, whose cash remained with the department for more than five years. The Court rejected the department’s argument that interest could not be awarded after assessment merely because there was no specific statutory provision permitting such payment.

On December 27, 2011, the assessee was travelling by car from Faridkot to Khanna in Punjab when police intercepted his vehicle. During checking, officers recovered ₹30 lakh in cash.

The police handed over the money to the income tax authorities at Ludhiana on the same day. The department requisitioned and seized the amount under Section 132A of the Income-tax Act, 1961, and initiated assessment proceedings.

Niharika Gupta, the counsel on behalf of the assessee explained the possession of the cash to the satisfaction of the authorities. On March 20, 2014, an assessment order was passed under Section 143(3), read with Section 153B(1)(b), without making any addition to his declared income for assessment year 2012–13. The assessment order attained finality.

Despite that outcome, the department did not immediately return the money. The assessee applied to the Chief Commissioner of Income Tax, Chandigarh, on April 24, 2014, seeking its release. He subsequently approached the Principal Commissioner of Income Tax, Ludhiana, on August 5, 2015.

The ₹30 lakh was eventually released on January 15, 2017, without interest. After his requests for interest remained unanswered, the assessee approached the High Court.

The assessee sought interest for two distinct periods. For the period beginning after expiry of 120 days from the requisition and seizure until completion of assessment, he relied on Section 132B(4). For the period after assessment until actual repayment, he invoked the doctrine of restitution.

The revenue accepted his entitlement to statutory interest for the first period but opposed interest beyond the assessment date. It argued that the Act contained no provision authorising such a payment.

The department also submitted that it had earned no interest on the seized money, which had been deposited in the personal deposit account of the Commissioner of Income Tax (Central). According to the revenue, this ruled out payment even on considerations of equity or fair play.

The Court therefore examined whether interest was payable for the delayed release and, if so, the applicable rate and period.

The Bench explained that Section 132B(3) requires assets or proceeds remaining after discharge of the relevant tax liabilities to be returned forthwith to the person from whose custody they were seized.

Section 132B(4), meanwhile, provides statutory interest on the qualifying excess amount from the day immediately following expiry of 120 days from execution of the relevant search or requisition authorisation until completion of assessment.

Applying these provisions, the Court held that the 120-day period following the authorisation executed on December 27, 2011, expired on April 25, 2012. Statutory interest consequently became payable from April 26, 2012, until March 20, 2014, at one-half per cent for every month or part of a month.

The Bench separately examined the department’s retention of the money after assessment. Since no tax was found payable upon completion of the proceedings, the cash should have been released forthwith. Instead, the department retained it until January 15, 2017.

The Court noted that the authorities had offered no explanation for this delay and held that their continued retention of the money after March 20, 2014, was contrary to Section 132B(3).

The High Court held that the taxpayer’s claim for interest after assessment could not be rejected solely because Section 132B, or another provision of the Act, did not expressly provide for it.

The department’s inaction prevented the assessee from using his own money for nearly three years after the assessment had concluded in his favour. In these circumstances, the absence of an express interest provision did not relieve the authorities of their obligation to compensate him.

The Bench reasoned that a constitutional court exercising writ jurisdiction was obliged to address such deprivation where the money had been retained without any legal justification.

In support of its conclusion, the Court relied on the Delhi High Court’s decisions in Ajay Gupta v. Commissioner of Income Tax, 2007 SCC OnLine Del 526, and GL Jain v. Commissioner of Income Tax and Others, 2012 SCC OnLine Del 4453.

Those decisions, discussed in the judgment, recognised that the statutory endpoint for interest could not justify continued retention of money without compensation. The restitutionary principle remained relevant where the authorities delayed repayment beyond completion of assessment.

The Bench also rejected the argument that no interest was payable because the department had not earned any return on the seized cash.

It explained that interest compensates the person deprived of the use of money. Entitlement must therefore be assessed from that person’s standpoint, rather than by asking whether the authority retaining the money profited from doing so.

Whether the department chose to put the money to profitable use was within its own control. The taxpayer could not be made to bear the consequences of that choice.

While the Delhi High Court had awarded 12% annual interest in GL Jain on the facts of that case, the Bench considered 6% per annum appropriate in assessee’s case.

It adopted a rate corresponding to the monthly rate prescribed under Section 132B(4)(a), explaining that this would place the taxpayer in the position he would have occupied had the statute itself provided interest for the post-assessment period.

The Court directed payment of statutory interest on ₹30 lakh from April 26, 2012, to March 20, 2014. It further awarded interest at 6% per annum on the same amount from March 21, 2014, until its actual release on January 15, 2017.

The authorities were directed to comply within four weeks of receiving a copy of the order. The writ petition was allowed.

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