Sum Directed To Be Refunded To Assessee Is A debt In The Hands Of Dept.: Delhi High Court Allows Interest On Refund U/S 244A

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that a sum has been found refundable to the assessee as a consequence of a reduction in the taxable income. The sum directed to be refunded to the assessee is a debt in the hands of the department, and for the department to term "payment of this debt" as "interest" is fallacious. In fact, it is on the payment of this debt that the assessee is demanding that the department be liable to pay interest for the period that the department retained the money.

Initially, the income of the assessee/respondent was assessed at Rs.73,17,35,961 vide an order dated January 19, 2010. Consequently, a demand for payment of interest under Section 234D(2) and Section 220(2) of the Income Tax Act, 1961 was raised by the department on the respondent. However, upon subsequent re-computation of the income, the income of the assessee was assessed at Rs.40,88,00,550 after setting-off brought forward losses for AY 1996-1997. Consequently, as a result of the reduction of taxable income, the respondent was entitled to a refund of the sum deposited as interest under Section 234D and Section 220 (2).

The assessee was, however, aggrieved by the non-grant of 'interest' on the order of refund under Sections 234D and 220(2) of the Act. The assessee filed an appeal before the CIT(A) against the order on the ground that the AO had erred in not granting interest under Section 244A of the Act on the refund granted. The CIT(A) dismissed the appeal of the assessee. The CIT(A) concluded that the claim of "interest" by the respondent for the refund amounts to "interest on interest" and held that it is beyond the scope of Section 244A.

The assessee was aggrieved by the order of the CIT (A) and filed an appeal before the ITAT, which allowed the appeal. The ITAT held that the assessee is entitled to interest under Section 244A(1)(b) on the sum refunded to the assessee on recomputation as a result of the reduction of its taxable income.

The department contended that the ITAT had erred in awarding interest on the refund as the amount of the grant of "interest on interest" is beyond the scope of Section 244A of the Income Tax Act. Since the refund is of the statutory interest deposited by the assessee, the sum directed to be refunded by AO is interest. Since the refunded amount was deposited by the assessee towards 'interest' due to the department, any award of interest on the refund would amount to 'interest on interest', which is factually incorrect.

The assessee contended that the department is liable under Section 244A(1) (b) to pay interest upon a refund of tax deposited by the assessee on self-assessment.

The court noted that the amount which has been directed by the AO to be refunded to the assessee under Section 234D and Section 220(2) is not "interest" in the hands of the assessee, i.e., the recipient. The refund amount does not bear the character of "interest" either in the hands of the assessee, i.e., the payee, or in the hands of the department, i.e., the payer. As per the definition of 'interest' under Section 2(28)A, "interest" means interest payable in any manner in respect of any money borrowed or debt incurred and includes any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilised.

The court noted that the payment of refund made by the department is a return of money to the assessee and it does not bear any character of interest. Therefore, the contention that the award of interest granted by ITAT on a refund amounts to "interest on interest" is untenable.

Case Title: PCIT Versus Punjab & Sind Bank

Citation: 2022 LiveLaw (Del) 776

Dated: 04.08.2022

Counsel For Appellant: Senior Standing Counsel Kunal Sharma

Counsel For Respondent: Advocates Sumit Lalchandani and Tarun Chanana

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