The Chhattisgarh High Court has held that taxpayers are entitled to interest on excess self-assessment tax refunded to them, with such interest running from the date on which the tax was paid, subject to the statutory framework under Section 244A of the Income Tax Act, 1961.

The bench of Justice Rakesh Mohan Pandey relied upon the principles laid down by the Supreme Court in Union of India v. Tata Chemicals Ltd. and the Karnataka High Court in Commissioner of Income-Tax v. Vijaya Bank.

The petitions arose from assessment proceedings for Assessment Year 2009-10. The petitioners had declared total incomes of ₹68,27,080 and ₹89,40,150, respectively, and had claimed deductions under Chapter VI-A of the Income Tax Act. They also claimed credit for tax deducted at source and paid self-assessment tax of ₹17.27 lakh and ₹23.56 lakh, respectively, under Section 140A.

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At the time of filing their returns, the petitioners had claimed only nominal refunds of ₹230 and ₹110. However, the assessment proceedings subsequently resulted in substantial additions after the Assessing Officer disallowed their claims for exemption under Section 54-B of the Act.

The Assessing Officer consequently assessed their total incomes at ₹2,69,78,440 and ₹1,91,77,440, respectively, substantially higher than the income originally returned.

The petitioners challenged the assessment orders before the Commissioner of Income Tax (Appeals). By orders dated August 31, 2012, the appellate authority held that the land transferred by the petitioners did not constitute a “capital asset” within the meaning of the Income Tax Act.

Consequently, the CIT(A) directed that the gains arising from the transfer of the land be excluded from the taxable income. Following the appellate orders, the taxable incomes were reduced to ₹8,88,070 and ₹9,80,885, respectively.

Due to an inadvertent failure to give effect to the appellate orders in the departmental records, the assessment figures were not immediately reduced. The mistake was subsequently rectified under Section 154 of the Act by an order dated May 9, 2013.

The reduction in assessed income resulted in refunds of ₹16,09,310 in one case and ₹21,64,020 in the other.

According to the petitioners, although the appellate orders were passed in August 2012 and given effect to in October 2012, the department ultimately released the refund amounts only on July 30, 2018.

The department subsequently paid interest on the refunds for the period from June 1, 2016 to July 30, 2018 at the applicable rate of 6% plus 3% per annum. The petitioners, however, claimed that they were entitled to interest for the earlier period as well, beginning from the dates on which they had actually paid the self-assessment tax.

They sought interest under Section 244A, additional interest under Section 244A(1A), and further compensation in the form of interest on interest for the period during which the refund remained unpaid.

The Income Tax Department opposed the petitions, arguing that the tax amounts had been voluntarily paid by the petitioners as self-assessment tax.

The Revenue contended that, before the amendment introduced by the Finance Act, 2016, Section 244A did not specifically provide for payment of interest on refunds arising from self-assessment tax. According to the department, the amended provisions could not be applied retrospectively to create an entitlement for an earlier period.

The Revenue also argued that the CIT(A)’s orders had already been given effect to and that the department had subsequently paid interest for the period beginning June 1, 2016. It therefore maintained that no further interest was payable from the original date of payment of tax.

The High Court examined the statutory scheme governing interest on refunds under Section 244A.

The provision states that where a refund of an amount becomes due to an assessee under the Income Tax Act, the assessee is entitled, subject to the statutory conditions, to simple interest in addition to the refund.

In respect of tax paid under Section 140A, Section 244A(1)(aa) provides for interest at the rate of one-half per cent for every month or part of a month from the date of furnishing the return or payment of tax, whichever is later, until the date on which the refund is granted.

Section 244A(1A) further provides for additional interest at the rate of 3% per annum where a refund arises as a result of giving effect to an order under specified appellate and other provisions of the Act.

A significant factor in the High Court’s reasoning was the Supreme Court’s judgment in Union of India v. Tata Chemicals Ltd., reported in (2014) 6 SCC 335.

The Supreme Court had held that a refund becomes due when tax deducted at source, advance tax, self-assessment tax or tax paid on regular assessment exceeds the tax chargeable for the relevant year as a result of an appellate or other order under the Act.

The Supreme Court also recognised that payment of interest on eligible tax refunds constitutes a statutory obligation rather than a matter of discretion.

The Chhattisgarh High Court particularly considered the Supreme Court’s principle that where excess tax has been paid and is subsequently required to be refunded, the statutory scheme contemplates refund together with applicable interest.

The High Court also relied upon the decision of the Karnataka High Court in Commissioner of Income-Tax v. Vijaya Bank, decided on July 27, 2011.

In that case, the Karnataka High Court dealt with a situation where tax had been paid by an assessee before or along with filing of the return and was subsequently found to be excessive. The Court held that where the case did not fall under the specific situations contemplated by Section 244A(1)(a) or the Explanation to clause (b), interest could be payable from the date of payment of the tax.

The Karnataka High Court had reasoned that Section 244A was intended to ensure that excess tax paid by an assessee is not merely refunded but, where the statutory requirements are satisfied, is refunded together with interest.

The decision also recorded that the substantial question of law was answered in favour of the assessee and against the Revenue.

After considering the statutory provisions, the appellate orders and the judicial precedents, the Chhattisgarh High Court concluded that the petitioners were entitled to the interest component on the refund amount for the period beginning from the date of payment of tax until June 1, 2016.

The Court noted that interest for the subsequent period, from June 1, 2016 to July 30, 2018, had already been paid by the department. Therefore, the surviving entitlement was limited to interest for the earlier period.

Accordingly, the two writ petitions were disposed of with a direction to the respondents to determine the interest payable in accordance with the Court’s order.

The High Court further directed the department to make payment of the determined interest within 60 days.

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