2025 (7) TMI 674 - AT - Income Tax

Interest on tax refund is taxable income requiring disclosure even when adjusted against outstanding demands under Section 154

Gujarat State Police Housing Corporation Limited Versus The Deputy Commissioner of Income Tax, Gandhinagar Circle, Gandhinagar.

Gujarat State Police Housing Corporation Limited Versus The Deputy Commissioner of Income Tax, Gandhinagar Circle, Gandhinagar. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the interest income of Rs. 27,67,422/- received under section 244A of the Income Tax Act, 1961, on income tax refund for AY 2010-11, which was not disclosed in the profit and loss account or offered to tax by the assessee for AY 2015-16, is taxable in the hands of the assesseeRs.(b) Whether the interest income received under section 244A belongs to the assessee or to the Government of Gujarat, given that the assessee is a wholly owned Government company acting as a nodal agency for construction activities on a no-profit no-loss basisRs.(c) Whether the rectification application filed under section 154 of the Act to delete the addition of interest income was rightly rejected by the Assessing Officer as not constituting a mistake apparent from the recordRs.(d) Whether the First Appellate Authority (Addl. CIT(A)) erred in upholding the addition and rejecting the rectification application without properly considering the explanations and evidence furnished by the assesseeRs.(e) Whether the assessee's remedy lay in filing a rectification application under section 154 or a regular appeal against the assessment orderRs.2. ISSUE-WISE DETAILED ANALYSIS(a) Taxability of Interest Income under Section 244ARelevant legal framework and precedents: Section 244A of the Income Tax Act provides for payment of interest by the Government on income tax refunds. Such interest is generally taxable under the head 'Income from Other Sources.' The law requires that income earned during the relevant assessment year must be disclosed and offered to tax.Court's interpretation and reasoning: The Tribunal observed that the interest of Rs. 27,67,422/- was indeed received by the assessee during AY 2015-16. The interest income arises on excess tax paid or excess tax collected on behalf of the assessee. The Tribunal held that the interest income under section 244A is taxable in the hands of the assessee and must be disclosed in the return of income. The fact that the refund was adjusted against outstanding demands for earlier years does not negate the fact that the interest income accrued to the assessee in the relevant year.Key evidence and findings: The Assessing Officer found that the interest was paid to the assessee and was not disclosed in the profit and loss account or offered to tax. The assessee's explanation that the interest was not actually received but adjusted against outstanding demands was rejected.Application of law to facts: The Tribunal applied the statutory provision that interest under section 244A is taxable income and held that the assessee cannot deny ownership or taxability of this income based on the adjustment of refund against earlier demands.Treatment of competing arguments: The assessee argued that the interest income did not belong to it but to the Government of Gujarat, relying on earlier decisions where interest on funds temporarily held was held to belong to the Government. The Tribunal distinguished those cases on facts, noting that the interest under section 244A arises from excess tax paid by the assessee itself, not from funds held on behalf of the Government.Conclusion: The interest income under section 244A is taxable in the hands of the assessee and must be disclosed and offered to tax.(b) Ownership of Interest Income vis-`a-vis Government of GujaratRelevant legal framework and precedents: The assessee is a wholly owned Government company functioning on a no-profit no-loss basis, undertaking construction activities for the Government. Earlier decisions by the Tribunal and Gujarat High Court held that interest earned on funds temporarily deposited with a financial corporation from Government grants belongs to the Government and not to the assessee.Court's interpretation and reasoning: The Tribunal distinguished the present interest income under section 244A from the interest on Government funds. It held that the interest under section 244A arises from excess tax paid by the assessee itself and not from Government funds held on behalf of the Government. Therefore, the ownership of this interest income lies with the assessee and not with the Government of Gujarat.Key evidence and findings: The assessee's own accounting practice and the nature of the interest income were examined. The interest under section 244A was adjusted against the assessee's own outstanding tax liabilities, confirming ownership.Application of law to facts: The principle established in earlier decisions regarding interest on Government funds does not apply to interest received under section 244A on income tax refunds.Treatment of competing arguments: The assessee's reliance on prior Tribunal and High Court rulings was rejected as factually and legally distinguishable.Conclusion: The interest income under section 244A belongs to the assessee and is taxable accordingly.(c) Validity of Rejection of Rectification Application under Section 154Relevant legal framework and precedents: Section 154 allows rectification of mistakes apparent from the record. However, issues requiring application of mind or involving debatable questions of law or fact are not rectifiable under this provision. Such matters require regular appeals.Court's interpretation and reasoning: The Tribunal held that the question of taxability of interest under section 244A was a debatable issue requiring application of mind and could not be treated as a mistake apparent from the record. Therefore, the Assessing Officer rightly rejected the rectification application.Key evidence and findings: The Assessing Officer's order rejecting rectification was based on the ground that the issue was debatable and not a clerical or apparent mistake.Application of law to facts: The Tribunal applied the settled principle that rectification proceedings are not a substitute for regular appeals on substantive issues.Treatment of competing arguments: The assessee contended that the addition was a mistake and rectification was warranted. The Tribunal rejected this, emphasizing the distinction between mistakes apparent from the record and issues requiring adjudication.Conclusion: The rejection of the rectification application was valid and in accordance with law.(d) Adequacy of Consideration by the First Appellate AuthorityCourt's interpretation and reasoning: The Tribunal found no infirmity in the order of the Addl. CIT(A) upholding the addition and rejecting the rectification application. The appellate order was not a non-speaking order as alleged and the explanations furnished by the assessee were duly considered and found unpersuasive.Application of law to facts: The appellate authority correctly applied legal principles and facts to reach its decision.Conclusion: No error was committed by the First Appellate Authority in dismissing the appeal.(e) Appropriate Remedy for AssesseeCourt's interpretation and reasoning: The Tribunal emphasized that the assessee's remedy to challenge the taxability of interest income was by filing a regular appeal against the assessment order and not by filing a rectification application under section 154.Application of law to facts: The rectification proceedings cannot be used to re-open concluded issues that require detailed examination and adjudication.Conclusion: The assessee's attempt to challenge the addition through rectification was misconceived.3. SIGNIFICANT HOLDINGSThe Tribunal held:'The interest on refund paid u/s. 244A of the Act was in respect of excess tax paid by the assessee or excess tax collected on behalf of the assessee. Therefore, the assessee cannot take a plea that this interest income does not belong to it.''The interest received u/s. 244A of the Act cannot be equated with the interest on surplus fund received from the Government and deposited with Gujarat State Finance Corporation Ltd. The decision of the Tribunal and the High Court, relied upon by the assessee, was in respect of interest income earned on fixed deposit made on temporary basis out of the grant received from the Government. In that case, the fund belonged to the Government which was temporarily deposited with the Corporation and interest earned thereon was held as belonging to the Government of Gujarat and not to the assessee. The same principle cannot be applied to the interest received by the assessee u/s. 244A of the Act.''Whether the interest u/s. 244A of the Act was liable to tax in the hands of the assessee or not, required application of mind and this cannot be considered as mistake apparent from the record. Therefore, the AO had correctly rejected the rectification application of the assessee.''If the assessee wanted to challenge this matter, it should have been done by filing a regular appeal against the assessment order and not in the proceedings u/s. 154 of the Act.'The Tribunal dismissed the appeal, thereby upholding the addition of interest income under section 244A and the rejection of the rectification application.