Causal link for tax refund interest: refund flowing directly from successful reference attracts interest under section 66(7).

Interest under the proviso to section 66(7) of the Income-tax Act, 1922 was payable where a reference result directly reduced the assessee's tax liability and triggered the refund, without any effective break in causation. The Madras High Court noted that, for a registered firm under the law then applicable, the finding that registration ought to have been granted meant the firm's own tax liability became nil, and the refund necessarily followed. Adjustment of the refunded sum against the partners' individual liabilities did not sever the causal link. Interest was therefore payable on the refunded amount from the date of payment to the date of assessment.

---

---

Issues: Whether interest under the proviso to section 66(7) of the Income-tax Act, 1922 was payable on the amount refunded to a registered firm after the firm succeeded in reference proceedings.

Analysis: Section 66(7) operated in aid of tax collection and contemplated payment of interest where, as a result of the reference, the assessee succeeded in reducing the tax liability flowing directly from the assessment. The liability to pay interest depended on whether the reduction in tax and the resulting refund were the direct consequence of the reference, without any effective break in the chain of causation. In the case of a registered firm under the law then applicable, the determination that registration should have been granted made the firm's own tax liability nil, and the refund necessarily followed from that determination. The fact that the amount was adjusted against the partners' individual liabilities did not sever the causal link.

Conclusion: The petitioner was entitled to interest under the proviso to section 66(7) on the sum of Rs. 51,137.03 from the date of payment to the date of assessment.

Ratio Decidendi: Interest under the proviso to section 66(7) of the Income-tax Act, 1922 is payable where the assessee's reduced tax liability and refund arise directly from the success of the reference, and an effective intervening break in causation is absent.

---