Court rules interest on refund in Income-tax Act assessed in relevant previous year

The High Court upheld the Tribunal's decision, ruling that interest on refund should be assessed in the relevant previous year when it accrues or is received by the assessee, based on the statutory provisions of the Income-tax Act.

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Issues:
1. Taxability of interest received on refund in the assessment year.
2. Interpretation of statutory provisions regarding interest on refund under the Income-tax Act.

Issue 1: Taxability of interest received on refund in the assessment year
The appeal raised the question of whether the interest received by the assessee on a refund relating to a previous year is assessable to tax in the assessment year in which the interest is granted along with the refund. The Assessing Officer revised the assessment and treated the entire interest amount as income of the assessment year 1994-95, which was contested by the assessee. The Tribunal held that interest income is assessable on a receipt basis, following certain decisions, leading the appellant to approach the High Court.

Issue 2: Interpretation of statutory provisions regarding interest on refund under the Income-tax Act
The High Court analyzed the eligibility of interest on refund under section 244(1A) of the Income-tax Act. It was determined that interest on refund arises only when excess tax is found to have been paid by the assessee and refund is ordered in favor of the assessee. The liability of the Government to grant interest under section 244(1A) is mandatory and runs from the date of payment till the date of refund. However, the court emphasized that interest accrues only when the assessee is found eligible for a refund based on orders in appeal. The court also referred to the method of accounting under section 145 of the Act, stating that income should be assessed in the relevant assessment year in which it accrues or is received by the assessee. In this case, the interest under section 244(1A) accrued and was paid to the assessee in the previous year relevant to the assessment year 1994-95, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decision, ruling that interest on refund should be assessed in the relevant previous year when it accrues or is received by the assessee, based on the statutory provisions of the Income-tax Act.

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