Saved reassessment proceedings under the 1922 Act did not attract refund interest under the 1961 Act

Proceedings begun before the Income-tax Act, 1961 continued to be governed by the Indian Income-tax Act, 1922 under section 297(2)(a), and the use of "may" did not give the Income-tax Officer an option to proceed under either Act. A refund arising from a reassessment order treated as an order under the 1922 Act could not be brought within section 240 of the 1961 Act, and therefore did not attract interest under section 244(1). Section 297(2)(i) also did not apply because the refund was linked to a fresh assessment after the 1961 Act commenced, not to the earlier annulled assessment. The departmental circular was consistent with section 297(2)(i) but did not extend to such a refund.

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Issues: Whether interest on refund was payable under the Income-tax Act, 1961 on a refund arising from reassessment proceedings relating to assessment years governed by the Indian Income-tax Act, 1922, and whether the departmental circular supported such claim.

Analysis: The refund arose from reassessment proceedings that commenced before the Income-tax Act, 1961 came into force. Section 297(2)(a) of the Income-tax Act, 1961 governed such saved proceedings and required their continuation under the Indian Income-tax Act, 1922. The mere use of the word "may" in that provision did not confer an election on the Income-tax Officer to proceed under either enactment. Where the reassessment order was therefore an order under the 1922 Act, the refund could not be treated as one falling within section 240 of the 1961 Act so as to attract section 244(1). Section 297(2)(i) also did not assist, because the refund claimed was referable to the fresh assessment order passed after the commencement of the 1961 Act, and not to the earlier annulled assessment. The circular relied upon was held to be consistent with section 297(2)(i) and, in any event, did not cover a refund arising from a fresh assessment not made pursuant to an appellate or revisional order.

Conclusion: The assessee was not entitled to interest on the refund under section 244(1) of the Income-tax Act, 1961, and the challenge to the Commissioner's order failed.

Ratio Decidendi: Where assessment proceedings were initiated before the commencement of the Income-tax Act, 1961, all subsequent proceedings relating to that assessment remained governed by the Indian Income-tax Act, 1922, and a refund arising from a fresh assessment in such saved proceedings did not attract interest under section 244(1) of the 1961 Act.

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