Refund adjustments under section 244A must be applied first against interest then tax component

The ITAT Mumbai held that when computing interest on refunds under section 244A, there is no requirement to segregate refunds into tax and interest portions. The AO's practice of adjusting refunds first against tax portion and then against interest portion, thereby reducing the assessee's eligibility for further interest, was deemed contrary to the taxation scheme's spirit. Following the analogy of section 140A which mandates appropriation of payments first towards interest then tax, the tribunal directed that refund adjustments should follow the same method - first against interest component, then against tax component. The appeal was decided in favor of the assessee.

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Issues Involved:
- Adjustment of refunds against tax and interest portions.
- Calculation of interest on refunds under Section 244A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustment of Refunds:
The primary issue in this appeal was the method of adjustment of refunds by the Assessing Officer (AO). The AO adjusted the refunds first against the tax portion and then against the interest portion, which reduced the eligibility of the assessee to claim further interest on the remaining tax refund. The Commissioner of Income Tax (Appeals) [CIT(A)] granted relief to the assessee, directing the AO to calculate the interest correctly as per law.

2. Calculation of Interest on Refunds:
The CIT(A) had directed the AO to grant correct interest under Section 244A of the Income Tax Act, following the decision of the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs CIT. The AO calculated the interest on the refund originally determined but only granted a partial refund to the assessee, leading to a dispute over the calculation of interest for subsequent periods.

Tribunal's Findings and Directions:
- The Tribunal noted that the CIT(A) had directed the AO to calculate the interest correctly but did not delve into the dispute. Both the assessee and the revenue appealed against this action.
- The Tribunal held that the remaining amount of Rs. 52.09 crores (from the original refund of Rs. 200.87 crores) should be treated as the principal portion, on which the assessee is eligible for interest.
- The Tribunal emphasized that there is no need to segregate the refunds into tax and interest portions for calculating interest under Section 244A for periods after 4.7.1997. This approach aligns with the provisions of Section 140A of the Act, which prioritize the adjustment of payments towards interest before tax.
- The Tribunal referenced its own decision in the case of Union Bank of India vs ACIT, where it was held that partial refunds should first be adjusted against the interest component and then against the tax component. This ensures that the assessee is not deprived of interest on the unpaid refund amount.
- The Tribunal cited the Hon’ble Delhi High Court’s judgment in India Trade Promotion Organisation, which supports the principle that interest should be paid on the unpaid refund amount, not on the refunded amount, thereby avoiding the payment of interest on interest.
- The Tribunal also referred to the Hon’ble Supreme Court’s judgment in the case of Tata Chemicals Ltd., which underlined the obligation of the revenue to refund excess tax collected with interest, treating it as a debt owed to the assessee.

Conclusion:
The Tribunal directed the AO to compute the interest on the refund under Section 244A as per the assessee’s plea, following the principles laid out in the Union Bank of India case. The Tribunal dismissed the revenue’s appeal and allowed the assessee’s appeal, ensuring that the interest on the unpaid refund amount is calculated correctly.

Final Order:
The appeal of the revenue was dismissed, and the Tribunal’s decision was pronounced in the open court on 19/06/2019.

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