The Hindu Business Line : Tardy flows the money back

EVEN after decades, the Income-Tax Department has hardly made any changes to the mechanism of refund claim. The promises on settling refund claims expeditiously have remained unfulfilled.

Computerisation, e-mail filing, electronic clearing system, online accounting and a host of other management tools have not succeed in creating an awareness in the minds of the income-tax officials about the need for paying refunds expeditiously. The law allows interest on delayed refunds.

Can there be interest on interest in such cases? One would have thought that the matter stood settled following the Supreme Court ruling on the subject. But the Bombay High Court did not think so.

CIT vs Narendra Doshi

In this case (254 ITR 607 SC), the question posed was whether the Income-Tax Appellate Tribunal (ITAT) was justified in law in upholding the order of the Deputy Commissioner of Income-Tax (Appeals) directing to allow interest on interest when the law points for grant of simple interest only.

The Supreme Court held that the Tribunal, whose decision the High Court affirmed, had relied upon the decision of the Gujarat High Court in D. J. Works vs Deputy CIT (1992 195 ITR 227), which had been followed by the same High Court in Chimanlal S. Patel vs CIT (1994 210 ITR 419).

These decisions hold that the Revenue is liable to pay interest on the amount of interest which it should have paid to the assessee but has unjustifiably failed to do.

The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein.

Following that principle, the question has been rightly answered, in the affirmative and in favour of the assessee.

Sandvik Asia Ltd vs CIT

In this case (2004 137 Taxman 167 Bombay), the matter came up before the Bombay High Court in writ petitions filed by the company claiming interest on interest in respect of delayed refunds.

The Supreme Court's ruling in the Narendra Doshi case was relied on heavily. The High Court interpreted the meaning of the terms, such as tax, interest and penalty, and observed that there is no provision in the statute for paying interest on interest. Commenting on the apex court's ruling, the court observed in para 34:

"Neither the said Narendra Doshi's case (supra) deals with the issues regarding the liability of the Revenue under the provisions of the said Act to pay interest on interest nor regarding the correctness of the view taken by the Gujarat High Court in D. J. Works' case (supra), nor it confirms the ruling either in the D. J. Works' case or in the Chimanlal S. Patel's case (supra)."

Those two decisions of the High Court of Gujarat also do not lay down any general proposition of law to the effect that the Revenue department is liable to pay interest on interest under the provisions of the said Act for delay in payment of interest.

"In fact, the High Court of Gujarat in the facts of those two cases had held that the department was liable to pay interest on interest which was unjustifiably withheld by the department and this fact was also noted by the apex court in Narendra Doshi's case (supra), while observing that "these decisions hold that the Revenue is liable to pay interest on the amount of interest which it should have paid to the assessee but has unjustifiably failed to do so."

The Narendra Doshi was heard by a Full Bench of three judges of the Supreme Court. In the D. J. Works case, the Gujarat High Court had held:

"Therefore, in our opinion, though there is no specific provision for payment of interest on interest amount for which no order is passed at the time of passing the order of refund of the excess amount and which has been wrongfully retained, interest would be payable at the same rate at which the excess amount carries interest."

Commenting on the above decision, the Bombay High Court had this to say:

"The decision clearly refers to the absence of provision of law for payment of interest on interest in the said Act.

"But the direction for payment of interest was given on innovation of the proposition of law that once the interest amount becomes due, it takes the colour of the excess amount of tax refundable to the assessee, and that therefore even in the absence of the provision of law, the revenue would be liable to pay interest on interest wrongfully withheld.

"... We are unable to persuade ourselves to agree with the proposition of law innovated and the opinion expressed. As already observed above, neither the provision of law in the said Act, nor the scheme thereof leaves any room for allowing the amount payable by the Department to the assessee to take the colour of amount of tax."

The Bombay High Court rejected the claim for interest on interest in respect of delayed refunds. This should leave the taxpayers confused. Does it not call for a clear amendment to the law?

In yet another recent case (Balwant Singh Bhangal vs Income Tax Officer — 2000 137 Taxman 200), the Punjab and Haryana High Court, commenting on the delay in refund, observed:

"Before parting, we record our anguish at the way the Department is functioning. It is unfortunate that an assessee who is entitled to refund has to approach the High Court. His grievance has not been redressed even by the so-called grievance cell which has been created by the departmental authorities to help the assessees.

"While disposing of this writ petition in the above terms, we are of the view that the assessee petitioner deserves to be compensated at least qua the costs. The same are assessed at Rs 2,500 and shall be borne personally by the official who was found to be responsible for causing the delay."

When will there be no complaints about delay in refunds?

(The author is a former Chief Commissioner of Income-Tax.)

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