2014 (3) TMI 610 - SC - Income Tax

Revenue must pay interest on refunds of excess tax deposited under Section 195(2) despite no express statutory provision

Union of India Through Director of Income Tax Versus M/s Tata Chemicals Ltd.

Union of India Through Director of Income Tax Versus M/s Tata Chemicals Ltd. - [2014] 363 ITR 658, 2014 AIR 3483, 2014 (3) SCR 298, 2014 (6) SCC 335, 2014 ... The central legal question considered by the Court is whether the Revenue is legally obligated under Section 244A of the Income Tax Act, 1961 ('the Act') to pay interest on the refund of tax made to a resident/deductor under Section 240 of the Act, specifically in cases where tax was deducted and deposited under Section 195(2) of the Act.This issue arises in the context of assessment years from 1989-90 onwards, following the insertion of Section 244A by the Direct Tax Laws (Amendment) Act, 1987, which introduced provisions for interest on refunds due to assessees under the Act.In the factual matrix, a resident company deducted tax at source under Section 195(2) on payments made to a foreign company, pursuant to a special order by the Assessing Officer. Upon successful appeal, the appellate authority directed refund of tax deducted on reimbursement expenses, which were held not to be income chargeable under the Act. The Assessing Officer granted the refund under Section 240 but denied interest on the refund under Section 244A, reasoning that the refund was not due to the assessee but to the deductor and that the refund arose from Board circulars rather than statutory provisions. This denial was upheld by the first appellate authority but reversed by the Tribunal and the High Court, which held that the deductor was entitled to interest on refund under Section 244A(1)(b).The Court examined the relevant statutory provisions, including Sections 156, 195(2), 240, 244, and the newly inserted Section 244A. Section 156 mandates issuance of a notice of demand specifying sums payable under the Act. Section 195(1) imposes an obligation to deduct tax at source on payments to non-residents, while Section 195(2) allows the deductor to seek determination of the appropriate taxable proportion. Section 240 requires refund to the assessee pursuant to orders in appeal or other proceedings without any claim. Section 244 provides for interest on refunds where no claim is needed, but was repealed for assessment years from 1989-90 onwards, replaced by Section 244A, which consolidates and clarifies the law relating to interest on refunds.Section 244A(1) entitles an assessee to interest on refunds due under the Act, calculated either under clause (a) or (b). Clause (a) applies to refunds of tax paid under specified heads such as advance tax or tax collected at source, with interest calculated from the first day of the assessment year. Clause (b), which applies 'in any other case,' provides for interest calculated from the date of payment of tax or penalty, with an explanation that the 'date of payment' means the date on which excess tax is paid pursuant to a notice of demand under Section 156.The Revenue contended that since the refund to the deductor was not pursuant to a notice of demand under Section 156, and since the refund arose from Board circulars rather than statutory provisions, interest under Section 244A was not payable. The Revenue emphasized the explanation to clause (b), which restricts the date of payment to payments made pursuant to a Section 156 notice, and argued that refunds to deductors under Section 195(2) do not fall within the ambit of Section 244A.The resident/deductor argued that the tax deposited under Section 195(2) was paid pursuant to an order passed by the Assessing Officer under the Act, which is covered by Section 156, and thus interest under Section 244A(1)(b) is payable. They further contended that the refund was statutory in nature under Section 240 and that the Revenue's retention of the tax amount unjustly enriched the Government, warranting payment of interest as compensation for use of the money.The Court applied well-established principles of statutory interpretation, emphasizing that words in a statute must be given their natural and ordinary meaning unless doing so leads to absurdity or is contrary to the statute's object. The Court observed that the language of Section 244A is clear and unambiguous, granting a substantive right to interest on refunds due to the assessee under the Act.In interpreting clause (b) of Section 244A(1), the Court noted that the opening phrase 'in any other case' indicates a residual category beyond the specific cases enumerated in clause (a). The explanation to clause (b) restricts the 'date of payment' to payments made pursuant to a Section 156 notice, but the Court found this explanation does not exclude other cases where tax is paid under the Act but not pursuant to a Section 156 notice.The Court analyzed the factual situation: the resident/deductor deposited tax pursuant to an order under Section 195(2), which is an order passed under the Act and involves payment of tax. The subsequent refund was ordered under Section 240. The Court held that such refund is covered by Section 244A and entitles the deductor to interest on the refund amount.The Court further observed that the purpose of Section 244A, as clarified by the Board's Circular No. 549 dated 31.10.1989, was to remove gaps and inequities in the earlier provisions relating to interest on refunds, ensuring that the Government pays interest on money retained beyond due time. The Court rejected the Revenue's reliance on Circular No. 790 dated 20.04.2000, which denied interest on refunds to persons making payments under Section 195, on the ground that the amount refunded in such cases is no longer 'tax' but held that the statutory right under Section 244A cannot be negated by such circulars.The Court emphasized that the refund of tax deducted at source and deposited by the resident/deductor is a statutory refund under Section 240 and that the Government's retention of such money without statutory basis obliges it to pay interest as compensation. The Court reasoned that the obligation to refund money unlawfully retained carries with it the right to interest, consistent with principles of equity and justice.Regarding the date from which interest is payable, the Court held that since the payment was not made pursuant to a notice under Section 156, the explanation to clause (b) of Section 244A does not apply. Similarly, the refund does not fall under clause (a) of Section 244A(1). Therefore, the interest is payable from the date of payment of the tax by the resident/deductor.The Court concluded that the resident/deductor is entitled to refund of the tax deposited under Section 195(2) along with interest calculated under Section 244A from the date of payment until the date of refund.In sum, the Court held:Section 244A of the Income Tax Act entitles an assessee to interest on refunds of tax due under the Act, including refunds of tax deducted and deposited by a resident/deductor under Section 195(2).The refund ordered under Section 240 following an appeal or other proceeding under the Act includes refunds to deductors of tax deducted at source.The explanation to clause (b) of Section 244A(1) restricting the date of payment to payments made pursuant to Section 156 notices does not exclude payments made under orders passed under Section 195(2).The Government's retention of tax amounts deducted and deposited without lawful basis obliges it to pay interest as compensation for use of such funds.Interest on refund in such cases is payable from the date of payment of tax by the resident/deductor until the date of refund.The appeals filed by the Revenue were dismissed, affirming the entitlement of the resident/deductor to interest on the refund under Section 244A.