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D.J Works v. Deputy Commissioner Of Income-Tax.
Factual and Procedural Background
The petitioner is a partnership firm carrying on business at Ahmedabad. For the assessment years 1983-84, 1984-85 and 1985-86 the Assessing Officer computed the firm's total income and, in each year, initially refused continuance of registration of the firm. In appeals the Commissioner of Income-tax (Appeal) granted continuance of registration for each year; in 1983-84 the Commissioner also granted a relief that reduced total income and resulted in a refund.
The Assessing Officer gave effect to the appellate orders on October 4, 1988, and issued refund orders as follows: for 1983-84 a refund of Rs. 58,682; for 1984-85 a refund net of an outstanding demand (resulting in Rs. 39,839 paid) though entitlement shown as Rs. 54,877; and for 1985-86 a refund of Rs. 40,413. The petitioner claimed it was entitled to interest under section 214(1) of the Income-tax Act, 1961 ("the Act") on the excess advance tax retained by the Government for each assessment year from the 1st day of the assessment year until October 4, 1988 (the date the appellate orders were given effect).
The Assessing Officer did not, at the time of giving effect to the appellate orders, award the interest claimed by the petitioner. After the petition was filed in this Court, the Assessing Officer issued separate orders awarding interest for two of the years: Rs. 21,216 for 1985-86 (order dated July 13, 1989) and Rs. 36,168 for 1984-85 (order dated December 15, 1989). The Assessing Officer did not award interest for 1983-84. The petitioner challenged the Assessing Officer's failure to award interest (and sought interest on interest, i.e., interest from October 4, 1988 on amounts of interest wrongfully withheld).
Legal Issues Presented
- Whether the petitioner is entitled to interest under section 214(1) of the Income-tax Act, 1961 on the amounts refunded to it for the assessment years 1983-84 to 1985-86, computed from the 1st day of the assessment year up to the date of regular assessment (here applied to the date appellate orders were given effect, October 4, 1988).
- Whether, in the absence of an express statutory provision, interest is payable on interest (i.e., whether the Government/Assessing Officer must pay interest on interest amounts that became due when interest was wrongfully withheld), and if so at what rate and for what period.
Arguments of the Parties
Petitioner's Arguments
- The petitioner relied on the Full Bench decision in Bardolia Textile Mills v. ITO ([1985] 151 ITR 389) to assert entitlement to interest under section 214(1) from the first day of the assessment year to October 4, 1988 (the date the appellate orders were effected).
- The petitioner quantified interest under section 214(1) as Rs. 45,708 for 1983-84, Rs. 36,168 for 1984-85 and Rs. 21,210 (rounded in later orders as Rs. 21,216) for 1985-86, aggregating Rs. 1,03,086, and sought payment of these amounts together with further interest from October 4, 1988 until payment.
- The petitioner contended that because the Assessing Officer illegally withheld interest when refunding the excess tax, the respondent is liable to pay interest on the amounts wrongfully withheld (i.e., interest on interest) from October 4, 1988 until payment, at least at the rate of 15% per annum.
Respondent's / Revenue's Arguments
- The Assessing Officer eventually paid the interest amounts for two years (1984-85 and 1985-86) by orders dated December 15, 1989 and July 13, 1989 respectively, but had not paid the interest for 1983-84.
- The Revenue argued that there is no provision in the Act for payment of interest on interest (i.e., interest on amounts of interest that were wrongfully withheld).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bardolia Textile Mills v. ITO [1985] 151 ITR 389 (Full Bench) | Defined "regular assessment" (section 2(40)) to include assessments under section 143 or 144; held that an assessment made pursuant to an appellate authority's decision is an assessment under section 143 and that the quantum of excess tax must be determined on the basis of the regular assessment, with interest payable up to the date of such (revised) regular assessment. | The Court applied this Full Bench decision to hold that the Assessing Officer was bound to award interest under section 214(1) on the excess amounts refundable to the petitioner from the 1st April of the assessment year up to October 4, 1988 (the date effect was given to the appellate orders). |
Court's Reasoning and Analysis
The Court began by referring to section 214(1) of the Income-tax Act, 1961, which prescribes payment of simple interest at 15% per annum on the amount by which advance tax in a financial year exceeds the assessed tax, from the 1st April of the assessment year to the date of the regular assessment. It accepted (as conceded) that the provisions of section 214(1) are attracted in the present cases and that the petitioner is entitled to interest on the excess amounts.
The Court relied on the Full Bench decision in Bardolia Textile Mills to settle the meaning of "regular assessment" and to determine that an assessment made pursuant to an appellate decision is an assessment under section 143. Applying that principle, the Court held that the assessing authority was bound to award interest on the excess amounts from the 1st April to October 4, 1988 (the date on which appellate orders were given effect).
The Court then addressed the distinct question whether interest is payable on interest amounts that were due but wrongfully withheld by the Assessing Officer (i.e., whether interest on the interest amount should be payable from the date it became payable until actual payment). The Court observed:
- Section 214(1) recognises liability to pay interest on excess tax retained by the Government at 15% per annum.
- There is no reason in principle why the same principle should not extend to interest amounts that have become due but were wrongfully withheld; once interest becomes due, it has the same character as the refundable excess tax.
- Although the statute does not contain a specific provision expressly providing for payment of interest on interest in such circumstances, on general principles the Government is liable to pay interest on the interest amount at the same rate applicable to the excess amount (15% simple per annum) from the date it became payable until payment.
The Court noted that the Assessing Officer had already passed orders awarding the petitioner's claimed interest for two years (1984-85 and 1985-86) after the petition was filed, and that the claim for 1983-84 (Rs. 45,708) was not disputed by the Revenue. Finding no reason to refuse that undisputed claim, and accepting the extension of principle to interest-on-interest, the Court concluded that the petition must succeed.
Holding and Implications
PETITION ALLOWED.
Holding (direct remedies ordered):
- The respondent (Assessing Officer) is directed to pay to the petitioner Rs. 45,708 due and payable by way of interest for the assessment year 1983-84, together with simple interest at the rate of 15% per annum from October 4, 1988 until the date the amount is actually paid.
- The respondent is directed to pay simple interest at the rate of 15% per annum on Rs. 36,168 (the amount payable by way of interest for assessment year 1984-85) for the period from October 4, 1988 to December 15, 1989 (the date the Assessing Officer passed the order awarding that interest).
- The respondent is directed to pay simple interest at the rate of 15% per annum on Rs. 21,216 (the amount payable by way of interest for assessment year 1985-86) for the period from October 4, 1988 to July 13, 1989 (the date the Assessing Officer passed the order awarding that interest).
- Rule made absolute accordingly with no order as to costs.
Implications:
- Direct effect on the parties: the Assessing Officer / Government must pay the specified interest amounts and pay interest on those interest amounts at 15% per annum for the periods indicated (i.e., the periods during which interest was wrongfully withheld or until the Assessing Officer later adjudicated the interest claim).
- The Court applied the Full Bench authority (Bardolia) to determine entitlement under section 214(1) and, on general principles, held that interest on interest is payable at the same rate where such interest became due but was wrongfully withheld, even in the absence of an express statutory provision to that effect.
1. The petitioner is a partnership firm carrying on business at Ahmedabad. In the assessment year 1983-84, the assessing Officer computed the petitioner's total income at Rs. 6,56,536 by an assessment order dated February 9, 1987. In the appeal preferred by the petitioner, the Commissioner of Income-tax (Appeal) ("the Commissioner" for short), however, granted a relief of Rs. 59,668 reducing the total income to Rs. 5,96,868. The assessing Officer gave effect to the appellate order on October 4, 1988, and issued a refund order for Rs. 58,682. The assessing Officer had refused registration of the petitioner firm at the time of original assessment but the appellate order granted continuance of registration. In the assessment year 1984-85, the petitioner was assessed on a total income of Rs. 5,21,497 by the Assessing Officer by his order dated March 27, 1987. The Assessing Officer had refused registration but the appellate authority, however, continued the registration though the total income computed by the Assessing Officer remained unchanged. The Assessing Officer gave effect to the appellate order on October 4, 1988, and held that the petitioner was entitled to a refund Rs. 54,877. However, since there was an outstanding demand of Rs. 15,038 for the assessment year 1977-78, the Assessing Officer granted refund of only Rs. 39,839. In the assessment year 1985-86, the Assessing Officer assessed the petitioner's total income at Rs. 5,98,690 by assessment order dated March 11, 1988. As in the earlier orders, he refused continuance of registration and treated the petitioner-firm as unregistered. However, in the appeal, the Commissioner, by his order dated July 27, 1988, granted continuance of registration though no change was made in the total income computed by the Assessing Officer. The Assessing Officer gave effect to the appellate order on October 4, 1988, and granted refund of Rs. 40,413.
2. The petitioner was entitled to payment of interest on the amounts refunded to him for the aforesaid assessment years 1983-84 to 1985-86. The Assessing Officer, however, did not award any interest on the amounts refunded. According to the petitioner, in view of the decision of the Full Bench of this court in Bardolia Textile Mills v. ITO [1985] 151 ITR 389, it was entitled to claim interest on the amount refunded for each of the assessment year in question from the first day of the assessment year to October 4, 1988, the date on which effect was given to the appellate orders by the Assessing Officer. According to the petitioner, interest payable to it under section 214 of the Income-tax Act, 1961 ("the Act" for short), worked out to Rs. 45,708 for the assessment year 1983-84, Rs. 36,168 for the assessment year 1984-85 and Rs. 21,210 for the assessment year 1985-86, aggregating to Rs. 1,03,086. The Assessing Officer not having awarded interest, as aforesaid, the petitioner has approached this court by way of this petition under article 226 of the Constitution seeking a direction against the respondent-Assessing Officer to pay forthwith Rs. 1,03,086 together with interest from October 4, 1988.
3. Section 214(1) of the Act under which the petitioner has claimed interest on the amounts refunded to him reads as follows :
"214. (1) The Central Government shall pay simple interest at fifteen per cent. per annum on the amount by which the aggregate sum of any instalments of advance tax paid during any financial year in which they are payable under sections 207 to 213 exceeds the amount of the assessed tax from the 1st day of April, next following the said financial year to the date of the regular assessment for the assessment year immediately following the said financial year, and where any such instalment is paid after the expiry of the financial year during which it is payable by reason of the provisions of section 213, interest of aforesaid shall also be payable on the instalment from the date of its payment to the date of regular assessment :
Provided that in respect of any amount refunded on a provisional assessment under section 141A, no interest shall be paid for any period after the date of such provisional assessment."
4. It is not disputed that the provisions of section 214(1) are attracted and the petitioner is entitled to claimed interest at the rate of 15 per cent. on the amount by which the advance tax paid by it exceeded the amount of the assessed tax from the 1st day of April, of the relevant assessment year to the date of regular assessment. The controversy in regard to the meaning to be given to the terms "regular assessment" has been set at rest by the Full Bench decision of this court in the case of Bardolia Textile Mills [1985] 151 ITR 389. The term "regular assessment" as defined in section 2(40) of the Act means an assessment made under section 143 or section 144 of the Act. It was held by this court in the case of Bardolia Textile Mills [1985] 151 ITR 389 [FB] that an assessment made in pursuance of a decision of an appellate authority is an assessment under section 143 of the Act. It was held that the quantum of excess tax has to be determined on the basis of the regular assessment. When the first assessment is final, it is the regular assessment for the purpose of section 214(1) of the Act. Where the first assessment happens to be revised, the excess has to be determined with reference to such revised assessment. Interest is payable on such excess up to the date of such revised assessment. This, according to the Full Bench, was the scheme of section 214(1) of the Act. The assessing Officer was bound to follow this Full Bench decision and award to the petitioner interest on the excess amount refundable to it from the 1st day of April of the assessment year to October 4, 1988, in each of the assessment years under reference. The Assessing Officer, however, did not award any interest to the petitioner on the amounts of tax paid in excess and refunded to the petitioner. We do not propose to enter into a further discussion of section 214(1) of the Act since it is conceded that the petitioner is entitled to claim interest on the excess amount as aforesaid.
5. It is pertinent to note that, after this petition was file, the Assessing Officer issued an order for payment of interest of Rs. 36,168 for the assessment year 1984-85 on December 15, 1989. A similar order for payment of Rs. 21,216 for the assessment year 1985-86 was passed on July 13, 1989. These interest amounts for the assessment year 1984-85 and 1985-86 are in accordance with the claim made by the petitioner. So far as the assessment year 1983-84 is concerned, according to the petitioner, it is entitled to claim interest of Rs. 45,708 on the excess amount refunded to it for that assessment year, but no interest has been awarded to it by the Assessing Officer on the said amount. This claim is not disputed by the Revenue. There seems to be no reason or justification for not awarding interest of Rs. 45,708 on the amount refunded for the assessment year 1983-84. It must, therefore, be held that the petitioner is entitled to claim interest of Rs. 45,708 on the excess amount refunded to it.
6. It is, however, urged on behalf of the petitioner that the Assessing Officer ought to have awarded interest on the excess amounts refunded to it the assessment years 1983-84, 1984-85 and 1985-86, on October 4, 1988, the date on which the excess amounts were refunded by giving effect to the appellate orders. The Assessing Office, however, illegally withheld the interest payable to the petitioner. It is submitted that, since the retention or withholding of interest was without authority of law, the respondent is liable to pay interest on the amounts wrongfully withheld. According to the petitioner, so far has the assessment year 1983-84 is concerned, the respondent should be directed to pay Rs. 45,708 due by way of interest together with interest at least the rate of 15 per cent. per annum from October 4, 1988, to the date the said amount is paid. So far as the assessment year 1984-85 is concerned, the respondent should be directed to pay interest at the rate of 15 per cent. per annum on the amount of Rs. 36,168 from October 4, 1988, till December 15, 1989. So far as the assessment year 1985-86 is concerned, the respondent should be directed to pay interest at the rate of 15 per cent. per annum on the amount of Rs. 21,216 from October 4, 1988, to July 13, 1989. It is, however, submitted on behalf of the Revenue that there is no provision in the Act for payment of interest on interest.
7. Section 214(1) itself recognizes in principle the liability to pay interest on the amount of tax paid in excess of the amount of assessed tax and which is retained by the Government. Interest on the excess amount is payable at the rate of 15 per cent. from the first day of the year of assessment to the date of regular assessment. It would thus appear that the Legislature itself has considered it fair and reasonable to award interest on the amount paid in excess, which has been retained by the Government. We do not see any reason why the same principal should not be extended to the payment of interest which has been wrongfully withheld by the Assessing Officer or the Government. It was the duty of the Assessing Officer to award interest on the excess amount of tax paid by the petitioner while giving effect to the appellate order and granting refund of the excess amount. If the excess tax paid cannot be retained without payment of interest, so also the interest which is payable thereon cannot be retained without payment of Interest. Once the interest amount become due, it takes the same colour as the excess amount of tax which is refundable on regular assessment. Therefore, in our opinion, though there is no specific provision for payment of interest on the 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. In other words, the amount payable by way of interest would carry simple interest at the rate of 15 per cent. per annum from the date it became payable to the date it is actually paid. The decisions, which were cited at the Bar do not have a direct bearing on the above question and, therefore, we do not propose to refer to or deal with them. On general principles, we are of the opinion that the Government is liable to pay interest, at the rate applicable to the excess amount refunded to the assessee, on the interest amount which had become due under section 214(1) of the Act. In the light of the above discussion, this petition must succeed.
8. In the result, this petition is allowed. We direct the respondent to pay to the petitioner an amount of Rs. 45,708 due and payable by way of interest to the assessee for the assessment year 1983-84 together with simple interest at the rate of 15 per cent. per annum for October 4, 1988, to date the amount is actually paid to it. The respondent is directed to pay simple interest at the rate of 15 per cent. per annum on Rs. 36,168, payable by way of interest for the assessment year 1984-85 from October 4, 1988, to December 15, 1989, and on Rs. 21,216, payable by way of interest for the assessment year 1985-86 from October 4, 1988, to July 13, 1989. Rule made absolute accordingly with no order as to costs.
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