Interest on tax refund qualifies for deduction where integrally connected to business receipts; full deduction allowed on receipt.

Interest on an income-tax refund received in the year under appeal is taxable on a receipt basis and, where such interest arises from or is integrally connected with the business receipts of an eligible undertaking, it forms part of business income and qualifies for deduction under the regime for eligible undertakings. The timing of the underlying refund (relating to an earlier year) does not defeat deduction; the entire interest amount was treated as statutory compensation received in the year of receipt and allowed as a deduction.

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Issues: Whether interest on income-tax refund of Rs. 38,98,773 received during the year under appeal qualifies for deduction under section 80IA of the Income-tax Act, 1961 in the assessment year 2014-15.

Analysis: The interest on income-tax refund was received in the year under appeal and is taxable on a receipt basis. The Tribunal followed the decision of the Hon'ble Bombay High Court in Gateway Terminals India Pvt. Ltd. v. DCIT which held that interest on TDS refund that arises from the business receipts of an eligible undertaking forms part of business income for the purposes of deduction under section 80IA. The Tribunal held that the year to which the underlying refund pertains (earlier assessment year) is irrelevant when the interest is received and taxed in the year under appeal. The submission that only a proportionate part of the interest should be allowed was rejected on the basis that interest on income-tax refund is statutory compensation received in toto in the year of receipt.

Conclusion: Deduction under section 80IA of the Income-tax Act, 1961 is allowable to the assessee in respect of the entire interest on income-tax refund of Rs. 38,98,773 received during the year under appeal; the appeal is allowed in favour of the assessee.

Ratio Decidendi: Interest on income-tax refund received by an eligible undertaking is taxable on receipt basis and, where such interest arises from or is integrally connected with business receipts of the eligible undertaking, it qualifies for deduction under section 80IA of the Income-tax Act, 1961.

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