Income Tax

Dilemma over delayed interest payment

The process of getting a refund back from the Income Tax Department is in itself a very tedious task. It comes with its own set of challenges and delays. On one hand where the taxpayers have to shell out high interest rates in case where they delay in making tax payments, the taxpayers do not get the same privilege to receive from the Income Tax Department at those very high rates. Instead they get delayed interest payment at very low and sometimes deprived from that meagre interest also.

What does section 244A of the Income Tax Act, 1961 talk about?

Section 244A of the Income Tax Act, 1961 talks about the mechanism for the payment of simple interest that a taxpayer is entitled to receive on account of refund of “any amount” which is due to the assessee under this Act.

Issue of interest on delayed payment of Interest

In an ideal situation, refund of the due amount to the tax payer should be refunded including the delayed interest payment should be paid together to the taxpayer. In reality, the tax payer is granted refund either without the delayed interest under section 244A or with delayed interest payment which is actually less than the actual amount that should have been refunded according to the provisions of section 244A. This leads to a question whether the taxpayers are entitled to interest on delayed interest payment.    

Judicial view on interest on delayed interest payment

The issue at hand is whether interest must be paid by the Income Tax Department must be paid on the delayed interest payment has been dealt multiple times by many courts of law including the honourable Supreme Court of India. However, only conflicting views have come to the fore:

The Supreme Court in the case of Sandvik Asia Ltd. v Commissioner of Income Tax [2016] came across a case where the taxpayer received refunds from the Income Tax Department without due payment of Interest. The interest was later given to the taxpayer, but that was released after substantial period of twelve to seventeen years. Here the Supreme Court imposed interest on the delayed interest payment on the refund that was due to the taxpayer. The Supreme Court further held that where the Income Tax department has wrongfully withheld the amount due to the taxpayer, without the authority of law, then in such cases the taxpayer needs to be compensated. The court also held that the phrase ‘any amount’ will also include interest on refund within its ambit.

In another case of CIT, Bhopal v H.E.G. Ltd. [2010] before the Supreme Court of India, a three judge bench of the honourable court held that the interest accrued on the refund but not paid to the taxpayer assumes the character of principal amount and falls within the ambit of the phrase ‘amount due’ under section 244A of the Income Tax Act.

However, the division bench judgment of Sandvik Asia Ltd. v Commissioner of Income Tax was later reconsidered by the honourable court in a three judgment in the case of CIT v Gujarat Fluro Chemicals. The court held that the position held by the court in the case of Sandvik Asia Ltd. (supra) is a peculiar where the refunds along with the statutory interest was released after a long period of time causing serious hardships to the taxpayer. Hence, what the court granted in the case of Sandvik Asia Ltd. (supra) was a mere compensation given in the form of interest and the same should not be considered as interest on delayed payment of interest. On this basis, the honourable court restricted the scope of ‘amount due’ to the refund along statutory interest and not the interest on such statutory interest.

It must be noted that in the judgement of CIT v Gujarat Fluro Chemicals, the honourable court did not discuss the principles laid down in the case of CIT, Bhopal v H.E.G. Ltd.(supra). It is even more interesting to note that former CJI who was on the panel of Gujarat Fluro Chemicals (supra) and CIT, Bhopal v H.E.G. Ltd decisions.

Because of the conflicting opinion of the Supreme Court, most of the High Courts have a divided opinion on this question. Some of the High Courts have relied on the judgments of Sandvik Asia Ltd. (supra) or CIT, Bhopal v H.E.G. Ltd. and gave decision in favour of the taxpayer while other High Courts relied on the judgement of Gujarat Fluro Chemicals (supra) and gave decisions against the assessee.

Conclusion

This dilemma of interest on delayed payment of interest has the potential of opening the floodgates of a long and protracted litigation between the Income Tax Department and taxpayer and also substantial amounts of loss to the taxpayer, whether it is called compensation or for inordinate delay or interest on delayed payment of interest. This may lead to interpretation of the phrases like ‘substantial’ and ‘inordinate’ delay.

In another case of Union of India v Tata Chemicals Ltd.(2014), the honourable Supreme Court held that in cases where the collection of amount is done in an illegal manner by the Income Tax Department, then the department is not only bound to refund the amount along with the interest. The rationale behind this is that the Income Tax Department has received, retained and used the amount which does not rightfully belong to them. The law of equity also says that just as the taxpayer is made to pay tax on higher interest rates for delay in payment of taxes, similar standards must also be applied to the Income Tax department and it should be made liable to pay interest on the delayed payment of interest. Keeping in mind the principles laid down in the case of Tata Chemicals Ltd.(supra), it is high time that the government or the judiciary puts an end to this dilemma and the save everyone from a series of unnecessary and protracted litigation.

Read our Article:Provisions related to cash transactions under Income Tax