VIP Road Chartered Accountants Association

Interest on refunds and excess refunds

Interest on refund or return of amount seized, found in excess of tax liability (section 132B):
Under sub-section (4) of section 132B of the Income Tax Act, 1961 ("the Act"), the Assessee is entitled simple interest at 8% per annum on the amount by which the aggregate amount of money seized under section 132 or 132A, minus the amount of money, if any, released under the 1st proviso to clause (i) of sub-section (1), plus the proceeds, if any, of the assets sold towards the discharge of the existing liability referred to in clause (i) of sub-section (1), exceeds the aggregate of the amount required to meet the liabilities referred to in clause (i) of sub-section (1) of this section.

Such interest shall become due from the date immediately following the expiry of the 120 days from the date on which the last of the authorisations under section 132 or 132A was executed till the date of completion of the assessment under section 153A or under Chapter XIV-B.
Old Provisions: Sections 214, 243 and 244

Upto Assessment Year ("A.Y.") 1988-1989, the provisions relating to payment of interest to the assessee were contained in sections 214, 243 and 244 of the Act. Accordingly, if the refund was not granted within 3 months from the date of determination of tax under section 143(1)/143(3), the interest was payable @ 15% per annum. The interest was payable from the date on which the said period of 3 months expired till the date on which the refund is granted. Except in case of income by way of interest on securities or dividend, it was necessary on the part of the assessee to claim refund.
Present Provisions: Section 244A
From A.Y. 1989-90, the interest on amount of refund arising out of advance tax paid or tax deducted at source ("TDS") or tax collected at source ("TCS") is payable from 1st April of relevant assessment year till the date on which the refund is granted. Such advance tax paid, TDS and TCS shall hereinafter be collectively referred to as "the prepaid taxes".

If the refund does not arise out of prepaid taxes, the interest is payable from the date on which tax or penalty was paid till the date on which refund is granted. Till 30.09.1991, interest was receivable by the assessee @ 1.50% per month or part thereof, from 01.10.1991 to 31.05.2001, the same was receivable @ 1% per month or part thereof, from 01.06.2001 to 31.05.2002, the same was receivable @ 3/4th % per month or part thereof (9% per annum) and 01.06.2002 onwards, the same is receivable @ 2/3rd % per month or part thereof (8% per annum). Thus, the rate of interest on refund has been gradually going down.

If the amount of refund is less than 10% of tax determined under section 143(1)/143(3), then interest is not receivable at all.

If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or partly, the period of delay so attributable shall be excluded from the period for which the interest on refund is to be calculated. For example, the due date is 31.07.2003 and the Return of Income is filed on 31.03.2004, the interest under section 244A on prepaid taxes will become due from 01.04.2004 and not from 01.04.2003. This also reflects the importance of filing the Return of Income by the due date.

If the amount on which interest was receivable is increased or reduced due to Orders under section 143(3) or reassessment or rectification or appeal or revision or by Settlement Commission, interest shall also be increased or reduced accordingly.
Rule 119A: Method of Rounding off of Months
Rule 119A provides for rounding off of part of the month for the purpose of calculating interest. Accordingly, part of the month shall be rounded off to full month.

Where interest on refund arises out of tax or penalty, such amount of tax or penalty shall be rounded off to the nearest multiple of Rs.100.

Illustrations

The following illustrations will help understand the above provisions more clearly:

A.	Where refund arises out of prepaid taxes: A.Y. 2003-2004:
	a.	Due date for filing the Return of Income	31.10.2003
	b.	Actual date of filing the Return of Income	30.10.2003
	c.	Prepaid taxes	Rs. 5,00,000
	d.	Tax due on returned income	Rs. 4,00,000
	e.	Refund due (more than 10% of Rs. 4,00,000)	Rs. 1,00,000
	f.	Date of grant of refund of Rs. 1,00,000 under section 143(1):	03.04.2004
	g.	Interest receivable under section 244A at the rate of 2/3% per month for a period of 13 months (12 months and 3 days) (from 01.04.2003 to 03.04.2004) on Rs. 1,00,000:	Rs. 8,667
B.	Where refund does not arise out of prepaid taxes: A.Y. 2001-2002:
	a.	Tax due as per Return of Income filed on due date being Rs. 3,00,000 was paid by way of advance tax (Rs. 2,50,000) and self-assessment tax (Rs. 50,000):	Rs. 3,00,000
	b.	Tax determined on completion of regular assessment under section 143(3) on 20.01.2004:	Rs. 3,50,000
	c.	Demand under section 156 (b-a)	Rs. 50,000
	d.	Demand under section 156 of Rs. 50,000 paid on:	05.04.2004
	e.	Tax determined by CIT(A) under section 250 on 01.05.2004:	Rs. 3,25,000
	f.	Refund due to the assessee as a result of appeal (b-e):	Rs. 25,000
	g.	Date of grant of actual refund:	10.06.2004
	h.	Interest payable to assessee @ 2/3% per month for 3 months (2 months and 5 days) (from 05.04.2004 to 10.06.2004) on Rs. 25,000:	Rs. 500

Issues
1. Injustice to the Assessee:
  1. Assessee receives interest under section 244A @2/3% p.m., whereas he pays interest under section 234A, etc. @ 1.25% p.m.
  2. Interest received by the assessee is subject to tax, whereas the interest paid by him is not deductible as an expense. As a result, the effective cost to the assessee works out much more than 1.25% p.m. Similarly, the post-tax interest income @ 2/3% turns out to be lesser.
2. Meaning of "Date on which refund is granted":
  Under section 244A, from A.Y. 1989-90, the interest on amount of refund arising out of prepaid taxes is payable from 1st April of relevant assessment year till the date on which the refund is granted.
  According to Circular dated 20.08.1968 of CBDT issued under section 243, interest should be calculated till the date on which the refund voucher is issued. There is no doubt that the same Circular equally applies to section 244A also.
  
  Despite the said Circular, it is common experience that the interest is calculated till the date of Intimation under section 143(1)(a) only, the refund voucher is prepared a couple of months later and the same is posted again after few months.
3. Interest on "interest paid as per demand under section 156":
  In CIT vs. Needle Industries Pvt. Ltd. 233 ITR 370 (Mad.), it was held that the assessee is entitled to interest under section 244(1A) (present corresponding section 244) on interest paid by him under sections 139(8) (present corresponding section 234A) and 215 (present corresponding section 234B).
  A question arises whether the ratio of said Madras High Court decision would apply to present provisions under section 244A also. The answer is in affirmation. Explanation to section 244A(1) says that interest is payable to the assessee on excess paid over demand under section 156 and such demand always includes an element of interest also wherever applicable. This view gets further support from the decision of Jaipur Tribunal in the case of ITO vs. JKs Employees Welfare Fund 68 TTJ 660 (JP) wherein it was held that the interest under section 244(1A) is payable to assessee even in respect of refund of interest under sections 139(8) and 217 of the Act.
4. Appealability of Order under sections 154 and 155 refusing grant of interest:
  If refund of tax is granted under section 154/ 155 but interest on such refund is refused, whether such an Order is appealable?
  Here, reference should be made to section 246(1) / 246A (1) which lists out Orders which are appealable. Clause (c) of section 246(1) / 246A(1) empowers the assessee to appeal against the Order passed under section 154 (besides Order under section 155), where the said Order has the effect of :
  1. enhancing the assessment, or
  2. reducing the refund, or
  3. refusing to allow the claim made by the assessee under section 154.
  Where the assessee is granted refund by Order under section 154 but is not allowed any interest thereon, he cannot be said to have been assessed by higher amount.
  
  However, it is possible to argue that by not allowing interest on refund granted by Order under section 154, his claim qua interest is refused by Order under section 154. Therefore, he may fall under category (c) above and may be entitled to file appeal under section 246(1) / 246A(1) against the Order under section 154.
  
  Another argument in favour of the assessee is that interest on refund is part and parcel of total amount of refund claim. Hence if interest is not allowed on refund, it may be argued that the aggregate amount of refund is reduced.
5. Interest on excess payment made under section 172:
  Under section 172(2), 7.5% of amount received/receivable by the non-resident owner or charterer of ship on carriage of passengers, goods, etc. is deemed income accruing to him in India.
  Under sub-section (3), the master of the ship is supposed to furnish to the Assessing Officer ("AO") the Return of Income of full amount of carriage charges before the departure of ship from any port in India.
  
  Under sub-section (7), such owner or charterer of ship can ask the AO, before the end of the assessment year, to make regular assessment under normal provisions and in that case, tax paid @ 7.5% under sub-section (2) shall be treated as payment in advance of tax leviable for that assessment year. The owner is entitled to refund, or as the case may be, liable to tax based on such regular assessment.
  
  In A.S. Glittre & Others vs. CIT 225 ITR 739 (SC), it was held that the assessee is entitled to interest under the then existing section 214, besides refund.
  
  A question arises whether the ratio of said Supreme Court decision would apply to the existing section 244A. Although it appears that interest under section 244A would be available on such excess payment, the matter is not free from doubt, especially because the wordings under the old and the new provisions are different. Even if it is taken that interest is payable to the assessee under section 244A, the question still remains whether interest would fall under clause (1) or clause (2) of sub-section (1) of that section.
Interest on excess refund: Section 234D:
The Finance Act, 2003 has inserted new provision, namely, section 234D with effect from 01.06.2003. Accordingly, interest on excess refund under section 143(1) of the Act is to be levied. Under the existing provisions, on determination of total income under section 143(1), if the tax payable is less than the prepaid taxes, then the assessee becomes entitled to refund of the excess amount. If subsequently, on the basis of the regular assessment, it is found that excess refund has been granted under section 143(1), there was no provision for levy of interest on such excess refund.
According to this new section, where any refund is granted to the assessee under section 143(1) and on regular assessment, it is found that no refund is due or that the refund granted under section 143(1) was excessive, the assessee will be liable to pay simple interest at the rate of 2/3% per month on such excessive amount from the date of grant of refund to the date of regular assessment.

If as a result of an order under sections 154, 155, 250, 254, 260, 262, 263 or 264 or an order of the Settlement Commission under section 245D(4), the refund granted, if any, under section 143(1) is found to be correctly allowed, either in whole or in part, then the interest chargeable under section 234D(1) shall be reduced accordingly. The assessment made for the first time under section 147 or 153A shall be treated as a regular assessment for the purpose of section 234D.
Other Relevant Provisions:
1. Section 2(1) defines "advance tax" payable under the provisions of chapter XVII-C.
2. Section 2(43) defines "tax" to mean income tax chargeable under the Act and as a result, does not include interest payment.
3. Section 240 provides that AO shall refund the excess amount of tax to the assessee without he being required to claim it after the appeal order is passed or other proceeding is completed.
Some Recent Relevant Decisions:
1. Flint Pharma (P.) Ltd. vs. ACIT 82 ITD 342 (SMC) (Ahd)
  For the relevant assessment year, the Assessing Officer did not grant credit for advance tax paid by the assessee inadvertently through Challan No. 2 which was meant for TDS payment. The CIT (A) ordered the refund but refused to grant interest u/s. 244A on the ground that repayment of refund to the assessee had been delayed due to the fault of the assessee who used a wrong challan and so it was not entitled to interest u/s. 244A.
  The Tribunal held that the assessee was entitled to interest on refund. The Tribunal noted that no statutory form has been prescribed for the payment of tax. Forms in Challan No. 1 meant for advance tax and Challan No.2 meant for TDS are all non-statutory forms which are meant for the convenience of the taxpayers. Neither in the Act nor in the Rules any statutory form been prescribed for the payment of different types of taxes like advance tax, TDS or payment of regular demand or even of self-assessment tax under section 140A.
2. M/s Jay Bros. Investment & Trading Co. Pvt. Ltd. vs. Dy. CIT: ITA No. 6542/ Mum/97: A. Y. 1993-1994
  The case of the assessee is that interest u/s. 244A has to be calculated upto the date of refund voucher. Since the AO has not calculated interest upto that date, assessee challenged his order before the CIT (A). As CIT(A) affirmed the order of the AO on this issue; assessee filed further appeal before the Appellate Tribunal, contending inter alia that under section 244A, the interest has
  to be calculated upto the date of refund voucher.
  The Tribunal held that the plea of the assessee deserves favourable consideration. In several cases, where a refund has to be granted to the assessee, the revenue officials used to take longer time in clearing such refunds resulting in considerable hardship to the assessee.

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