Refund interest cut-off dates can be valid, but compensatory interest may be granted for unlawfully withheld amounts over long periods.

A fiscal cut-off date fixing the commencement of refund interest under section 54(1)(aa) of the Gujarat Sales Tax Act was upheld because the classification had an intelligible differentia and a rational nexus with the legislative object, and the presumption of constitutionality was not displaced. The court also noted that, although interest on refund generally depends on statute or contract, compensatory interest may be granted where money legally due is withheld without authority of law for an extraordinary period. On that basis, the article states that constitutional courts may award interest to prevent grave injustice when public funds are retained unlawfully for years.

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Issues: (i) Whether the cut-off linked to the expression "for the specified year" in section 54(1)(aa) of the Gujarat Sales Tax Act, so as to confine interest on refund to periods from 1 April 1993 onwards, was arbitrary or discriminatory under Article 14 of the Constitution of India; (ii) whether, in the absence of a statutory provision, interest could still be awarded on refund amounts wrongfully withheld for an extraordinary length of time.

Issue (i): Whether the cut-off linked to the expression "for the specified year" in section 54(1)(aa) of the Gujarat Sales Tax Act, so as to confine interest on refund to periods from 1 April 1993 onwards, was arbitrary or discriminatory under Article 14 of the Constitution of India.

Analysis: The provision introducing interest on refund was inserted with effect from 1 April 1993, and the explanation made the benefit applicable only to the specified year commencing from that date. The classification was tested on the well-settled principles of Article 14, namely, intelligible differentia and rational nexus with the object of the provision. A legislature may validly choose a date from which a new fiscal benefit operates, and a mere exclusion of earlier periods does not by itself render the classification unconstitutional. The presumption of constitutionality was not displaced.

Conclusion: The cut-off date was held to be valid and not violative of Article 14.

Issue (ii): Whether, in the absence of a statutory provision, interest could still be awarded on refund amounts wrongfully withheld for an extraordinary length of time.

Analysis: As a general rule, interest on refund is claimable only when supported by statute or contract. However, the facts disclosed that the amount legally due to the assessee had been withheld for nearly three decades, despite the governing legal position being in the assessee's favour. The withholding was found to be without authority of law and contrary to Article 300A of the Constitution of India. In such exceptional circumstances, a constitutional court may grant interest as compensation to prevent grave injustice, even where the statute does not expressly provide for it.

Conclusion: Interest was awarded on the refunded amount at 8% per annum for the relevant period.

Final Conclusion: The petition succeeded substantially: the statutory challenge failed, but the assessee was granted compensatory interest on the delayed refund because the amount had been unlawfully retained for an extended period.

Ratio Decidendi: A fiscal cut-off date fixing the commencement of a refund interest regime is valid if it is a reasonable legislative classification, but a constitutional court may grant compensatory interest where public authorities retain money without authority of law for an extraordinary period.

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