2024 (9) TMI 288 - AT - Income Tax

Refunds must be adjusted first against interest payable then principal tax under section 244A

Joint Commissioner of Income Tax-3 (4), Mumbai Versus Reliance Industries Ltd. And Reliance Industries Ltd. Versus Deputy Commissioner of Income Tax- 3 (4), Mumbai

ITAT Mumbai held that when computing interest under section 244A, refunds must be adjusted first against interest payable and then against principal tax ... Computation of interest u/s. 244A - adjustment of refund first towards interest payable and balance towards principal portion of tax, if any, does not tantamount to paying of compound interest, as alleged by the Revenue - HELD THAT:- We find that assessee has raised the ground before us stating that refund granted to the assessee is to be first adjusted against the correct amount of interest due on that day and thereafter the leftover portion should be adjusted with the balance tax. This is more so when the refunds were issued to the assessee in parts. According to the assessee, AO has reduced the interest only to the extent it was determined at the point of issuance of the earlier refunds, thus leading to larger adjustment of the refund towards the tax component as against the interest component. Refering to analogy drawn by the assessee in terms of explanation to section 140A(1), we note that there is no such specific provision u/s. 244A with respect to adjustment of refund, already issued for computing amount of interest payable to assessee on the amount of refund due. The law is silent on this issue. In our mind, under these circumstances, it would be just and fair that the same principle is applied while granting the refund, as is applied while collecting the tax. We have perused the judicial precedents referred by assessee as quoted above and notice that Coordinate Benches have consistently held after taking into consideration the decision relied upon by the ld. CIT (DR) that ld. Assessing Officer is required to adjust the interest component first and then the taxes for the purpose of calculating interest u/s. 244A of the Act. Following the Rule of Consistency, we hold that assessee is entitled to interest on the unpaid refund in accordance with the principle laid down in the aforesaid decisions relied upon by the assessee. According to us, the manner in which the AO has adjusted the refund is not correct. Assessee has furnished detailed working of the manner in which the interest u/s. 244A ought to have been computed by the AO. We thus, direct the AO to compute the interest u/s. 244A as claimed by the assessee in its detailed working, placed on record. Assessee appeal allowed. Issues Involved:1. Revision of interest under Section 244A.2. Adjustment of refund against interest and tax payable.3. Calculation of interest under Section 244A and the allegation of compound interest.Issue-wise Detailed Analysis:1. Revision of Interest under Section 244A:The Revenue contended that the CIT(A) erred in accepting the assessee's plea for revising the interest under Section 244A, ignoring that the AO had issued a notice under Section 154 and the assessee had given its NOC before the rectification order was passed. The Tribunal observed that the notice issued under Section 154 only mentioned the rectification of the total income due to an arithmetical mistake and did not mention any rectification of interest under Section 244A. The Tribunal noted that any amendment that enhances an assessment or reduces a refund requires a notice and an opportunity for the assessee to be heard, which was not provided in this case. Therefore, the rectification of interest under Section 244A was deemed improper.2. Adjustment of Refund Against Interest and Tax Payable:The core issue was whether the refund should first be adjusted against the interest payable to the assessee and the balance, if any, towards the tax payable. The assessee argued that the AO's method of adjusting refunds first towards outstanding taxes and then towards interest was incorrect. The Tribunal agreed with the assessee, citing judicial precedents that support the adjustment of refunds first towards interest and then towards the tax component. The Tribunal found that this method does not result in compound interest, as alleged by the Revenue.3. Calculation of Interest under Section 244A and Allegation of Compound Interest:The Revenue argued that the CIT(A)'s direction to adjust refunds first towards interest payable would result in compound interest, which is not allowed by law. The Tribunal referred to several judicial precedents, including decisions from the Mumbai ITAT and the Delhi High Court, which consistently held that refunds should first be adjusted against interest due under Section 244A and the balance against tax. The Tribunal also distinguished the Supreme Court's decision in Gujarat Fluoro Chemicals, noting that the assessee was not claiming interest on interest but rather the correct adjustment of refunds. The Tribunal directed the AO to compute the interest under Section 244A as claimed by the assessee, following the principle laid down in the judicial precedents.Conclusion:The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. It directed the AO to compute the interest under Section 244A as per the assessee's detailed working, ensuring that the assessee is given a reasonable opportunity to be heard. The order was pronounced in the open court on 30 August 2024.