2023 (11) TMI 193 - AT - Income Tax

AO incorrectly calculated section 244A interest by artificially splitting refund before adjustment against outstanding demands

Deputy Commissioner of Income-tax-3 (4), Mumbai Versus M/s IDBI Bank Ltd.

ITAT Mumbai held that AO incorrectly calculated interest under section 244A by artificially splitting refund into interest and tax components before ... Adjustment of refunds granted for computing of interest u/s 244A - manner of adjusting the refund - assessee submitted before the CIT(A) that AO had granted interest u/s 244A by artificially splitting the refund granted into interest and tax and adjusting the same from interest and tax refund resulting in reduced interest u/S 244A being granted - HELD THAT:- The amount of interest u/s. 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left if any shall be adjusted towards the tax component. Accordingly we hold that the manner in which the assessing officer has adjusted the refund is not correct and that the assessee would be entitled for interest on the unpaid refunds in accordance with the principle laid out in the aforesaid decision of Tribunal. AO is directed to compute interest under section 244A as per the claim of the assessee after giving a proper opportunity of being heard. Issues Involved:1. Adjustment of refunds for computing interest under section 244A of the Income Tax Act.2. Whether the method of adjustment results in interest on interest.Summary:Issue 1: Adjustment of refunds for computing interest under section 244A of the Income Tax ActThe appeals by the Revenue challenge the direction given by the CIT(A) to the Assessing Officer regarding the adjustment of refunds for computing interest under section 244A. The CIT(A) relied on the decision in the case of DCIT-2(1)(1) vs Bank of Baroda, holding that the method of computation for granting interest under section 244A was not in accordance with prevailing jurisprudence. The CIT(A) directed the Assessing Officer to re-examine the computation of the refund as per the directions in the Bank of Baroda case.Issue 2: Whether the method of adjustment results in interest on interestThe Revenue argued that the assessee's method of adjusting the refund would result in granting interest on interest, which the Supreme Court in CIT vs. Gujarat Fluoro Chemicals Ltd. has held is not permissible. The Revenue contended that the Assessing Officer's method of adjusting the tax, which avoids interest on interest, should be upheld. The assessee countered that the issue was the manner of adjustment of the refund, not the entitlement to interest on interest. The assessee maintained that the CIT(A) correctly followed the decision in Bank of Baroda, which is directly applicable to the issue at hand.Tribunal's Decision:The Tribunal examined the manner of refund adjustment and noted that the assessee's method did not result in interest on interest but rather in a short grant of interest under section 244A. The Tribunal found merit in the assessee's submission that the ratio in Gujarat Fluoro Chemicals Ltd. and Indian Farmer Fertilizer Cooperative cases were not applicable. The Tribunal upheld the decision in Bank of Baroda, which dictates that refunds should be adjusted first against the interest component and then the tax component. The Tribunal directed the Assessing Officer to compute interest under section 244A as per the assessee's claim, ensuring proper opportunity for being heard.For the assessment year 2002-03, the Tribunal's decision for AY 1997-98 was applied mutatis mutandis.Order Pronounced:The order was pronounced in the open court on 30/10/2023.