2013 (10) TMI 117 - SC - Income Tax

Supreme Court Clarifies Interest Liability Under Section 244A, Limits Revenue's Obligation to Statutory Provisions

Commissioner of Income Tax, Gujarat Versus Gujarat Fluoro Chemicals

SC analyzed the liability of Revenue to pay interest when Advance Tax or TDS exceeds assessed tax. The Court clarified that Revenue's interest obligation ... Interest u/s 214 and 244 - Interest on interest for late grant of refund - whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance Tax OF TDS paid exceeds the assessed tax? - Correctness or otherwise of the decision of this Court in the case of Sandvik Asia Limited vs. Commissioner of Income Tax & Ors. [2006 (1) TMI 55 - SUPREME COURT] - Held that:- it is only that interest provided for under the statute which may be claimed by an assessee from the Revenue and no other interest on such statutory interest. 1. ISSUES PRESENTED and CONSIDEREDThe primary legal question referred for authoritative pronouncement was whether the Revenue is liable to pay interest to the assessee when the aggregate of installments of Advance Tax or Tax Deducted at Source (TDS) paid exceeds the assessed tax. This question arose in the context of a prior Supreme Court decision in Sandvik Asia Limited vs. Commissioner of Income Tax & Ors., where the entitlement of the assessee to compensation for delayed payment of amounts due by the Revenue was considered. The Court also examined the correctness of the interpretation of that decision, particularly whether the Revenue is obliged to pay interest on interest (i.e., penal interest) for delays in refunding statutory interest amounts.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether interest is payable by the Revenue to the assessee if the aggregate of Advance Tax or TDS installments paid exceeds the assessed taxRs.Relevant Legal Framework and Precedents: The Court examined Section 214 of the Income Tax Act, 1961, which governs refunds by the Revenue when an amount is found to be due to the assessee, and the statutory provisions relating to interest on refunds. The Court also analyzed the precedent set in Sandvik Asia Limited (2006) 2 SCC 508, which dealt with compensation for delay in payment of amounts due to the assessee by the Revenue.Court's Interpretation and Reasoning: The Court revisited the Sandvik decision, noting that the principal issue there was whether the assessee was entitled to compensation for delay in payment of amounts admittedly due, including statutory interest, where the delay extended over many years (12 to 17 years). The Court observed that Sandvik was concerned with compensating the assessee for inordinate delay, not with imposing a general obligation on the Revenue to pay interest on interest. The Court clarified that the Sandvik judgment had been misquoted and misinterpreted by both assessees and the Revenue, who had contended that the Revenue must pay interest on statutory interest in cases of delay.Key Evidence and Findings: The Court found that in Sandvik, the compensation was ordered as a remedy for exceptional delay in refunding amounts due, and the interest awarded was not an interest on interest but a form of compensation for prejudice caused by the delay. The Court further noted the legislative insertion of Section 244A in 1988 (effective from 01.04.1989), which explicitly provides for interest on refunds under specified circumstances.Application of Law to Facts: Applying this understanding, the Court held that only the interest explicitly provided for under the statute (Section 244A) may be claimed by the assessee from the Revenue. There is no statutory basis for claiming interest on such statutory interest or penal interest beyond what the statute prescribes. Thus, where the aggregate of Advance Tax or TDS exceeds the assessed tax, the Revenue is not liable to pay interest on interest unless specifically provided under the Act.Treatment of Competing Arguments: The Court addressed the contention that the Revenue must pay penal interest for delayed refunds of interest amounts by emphasizing that Sandvik was a special case dealing with extraordinary delay and compensation, not a general principle for interest on interest. The Court rejected the interpretation that Sandvik mandated payment of interest on interest as a rule. It also clarified that the legislative framework post-Sandvik (Section 244A) governs interest on refunds and no additional interest beyond that is payable.Conclusions: The Court concluded that the Revenue's liability to pay interest to the assessee is limited to the statutory interest prescribed under the Income Tax Act. Interest on interest or penal interest for delayed payment of interest is not payable as a matter of right, except in cases where the statute explicitly provides for it or in exceptional circumstances warranting compensation as in Sandvik.3. SIGNIFICANT HOLDINGSThe Court's crucial legal reasoning is encapsulated in the following verbatim observations:'In Sandvik case (supra) this Court was considering the issue whether an assessee who is made to wait for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period... this Court had come to the conclusion that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and therefore, directed the Revenue to pay compensation for the same not an interest on interest.''It is only that interest provided for under the statute which may be claimed by an assessee from the Revenue and no other interest on such statutory interest.''The aforesaid judgment has been misquoted and misinterpreted by the assessees and also by the Revenue. They are of the view that in Sandvik case (supra) this Court had directed the Revenue to pay interest on the statutory interest in case of delay in the payment.'Core principles established include:The Revenue's obligation to pay interest to the assessee is confined to the statutory interest prescribed under the Income Tax Act.Compensation for delay in refund of amounts due, including interest, is an exceptional remedy applicable in cases of inordinate delay, not a general entitlement.Interest on interest (penal interest) is not payable unless specifically provided for by statute or exceptional circumstances justify compensation.The legislative insertion of Section 244A post-dates Sandvik and governs interest on refunds, clarifying the scope of interest payable.Final determinations on the referred issue were that the Revenue is not liable to pay interest on interest merely because the aggregate of Advance Tax or TDS installments paid exceeds the assessed tax. Cases must be considered independently, and the statutory provisions, especially Section 244A, must be applied to determine the entitlement to interest on refunds.