Partial tax refunds must be adjusted against outstanding interest under section 244A before principal tax amount

The ITAT Ahmedabad held that when a partial income-tax refund is received by an assessee, it must be adjusted first against the outstanding interest component under section 244A, then against the principal tax amount. The assessee contended for adjustment against interest first, while the Department argued for adjustment against principal first. Following precedents from Delhi HC in India Trade Promotion Organisation and ITAT Mumbai in Union Bank of India, the tribunal ruled that adjusting against principal first would allow Revenue to avoid paying interest indefinitely without sanction, constituting a premium on non-compliance. The tribunal rejected the Department's arguments regarding Indian Contract Act provisions and proportionate adjustment, holding such approaches would unjustly benefit Revenue since interest is not payable on interest refunds.

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Issues Involved:
1. Adjustment of income-tax refund against outstanding demand.
2. Entitlement to interest u/s 244A of the Income-tax Act, 1961.

Summary:

Issue 1: Adjustment of Income-Tax Refund Against Outstanding Demand

The solitary issue in both appeals relates to the adjustment of part income-tax refund received by the assessee against the total outstanding refund, comprising of principal/tax and interest. The assessee contends that the refund should be adjusted first against the interest component outstanding and then against the principal/tax. The Department's contention is the opposite. The assessee argues that this method would result in a larger principal component remaining, thus increasing the entitlement to interest u/s 244A of the Act.

AY 1993-94:

The Assessing Officer's order on 01.05.2019 assessed the income at Rs. 2,93,61,076/-, resulting in a refund of Rs. 6,28,89,345/- to the assessee. The calculation included a tax refund of Rs. 4,60,52,921/- and interest thereon Rs. 2,02,83,300/-. The assessee disputes the adjustment of demands of various assessment years, which should be adjusted against the interest refund entirely. The assessee claims a total refund of Rs. 8,96,87,702/- and further interest on the shortfall, totaling Rs. 9,65,21,283/-.

AY 1998-99:

For AY 1998-99, the income was assessed at Rs. 72,22,89,780/- on 30.05.2016. The High Court granted relief on 11.10.2017, reducing the income to Rs. 46,41,25,441/-. The assessee filed a writ petition for the refund, which the High Court allowed on 20.02.2023, directing the Revenue to issue a refund of Rs. 17,15,34,707/- plus interest. The CIT(A) dismissed the assessee's plea of adjustment of refund first against interest and then against the principal. The Assessing Officer issued a refund of Rs. 21,80,45,001/- on 10.03.2023, which the assessee does not contest but fears reduction due to the CIT(A)'s order.

Issue 2: Entitlement to Interest u/s 244A of the Income-Tax Act, 1961

The ITAT noted that the issue has been repeatedly settled in favor of the assessee by various decisions, including the ITAT Mumbai Bench in Union Bank of India Vs. ACIT and other cases. The ITAT held that the refund should first be adjusted against the interest component, following the principle laid down by the Hon'ble Delhi High Court in India Trade Promotion Organisation Vs Commissioner of Income Tax (2014) 361 ITR 646(Delhi). This principle ensures that the Revenue does not benefit from non-compliance by avoiding interest on interest payments.

The ITAT dismissed the Department's contention that adjusting the refund first against interest would result in interest on interest, which is not allowable u/s 244A(1) of the Act. The ITAT also rejected the application of the Indian Contract Act provisions, as it would unjustly benefit the Revenue.

In conclusion, the ITAT directed that the refund granted to the assessee be first adjusted against the interest component of the refund outstanding and thereafter against the principal component. Both appeals of the assessee were allowed.

Order pronounced in the Court on 3rd April, 2024 at Ahmedabad.

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