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Union Of India And Another v. Shreeji Colour Chem Industries .
Factual and Procedural Background
The respondent sought a refund of Rs 2,50,494.31 under Rule 173-L of the Central Excise Rules, 1944. The Assistant Commissioner rejected the claim on 24-7-1991. A first appeal to the Commissioner (Appeals) led to a remand, but the claim was again rejected. A second appeal filed on 21-5-1996 was dismissed on 31-8-1998. The respondent then approached the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT), which on 25-11-2003 allowed the appeal and ordered that the refund be paid “without delay.”
Following CEGAT’s order, the respondent applied on 12-1-2004 to the Assistant Commissioner for refund along with statutory interest. The Deputy Commissioner sanctioned refund of the principal amount on 27-8-2004 but declined interest. The respondent filed a writ petition, and a Division Bench of the Gujarat High Court directed that interest be paid at 9% p.a. from 24-7-1991. The Union of India (appellant) challenged that decision before the Supreme Court.
Legal Issues Presented
- Whether interest on the refund is payable from 24-7-1991 (the date the claim was first rejected) or only in accordance with Section 11-BB of the Central Excise Act, 1944, which came into force on 26-5-1995 and grants interest after three months from the date of a refund application.
- Whether, apart from statutory interest, the court can award “equitable interest” for the entire period of delay when there was no written demand specifically claiming such equitable relief.
Arguments of the Parties
Appellant's Arguments
- After the insertion of Section 11-BB, interest becomes payable only after three months from the refund application; granting interest from 24-7-1991 is contrary to the statute.
- The respondent’s claim did not fall within Section 11-BB because Rule 173-L was no longer in existence, and no separate demand for equitable interest was made.
- Where interest is statutory, equitable considerations are inapplicable.
Respondent's Arguments
- Equitable interest should also be awarded for the prolonged delay.
- By virtue of the proviso to Sections 11(d)(1) and 11(d)(2), the application under Rule 173-L should be deemed an application under Section 11(d), attracting statutory interest.
- The Deputy Commissioner’s order acknowledged earlier refund claims, supporting the respondent’s entitlement to interest from the earlier date.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sandvik Asia Ltd. v. CIT (2006) 2 SCC 508 | Recognised compensation/interest for inordinate delay in granting refunds under tax statutes. | Relied upon by the High Court to justify interest from 24-7-1991; the Supreme Court implicitly limited its applicability by enforcing Section 11-BB. |
| Modi Industries Ltd. v. CIT (1995) 6 SCC 396 | Held that the right to interest on tax refunds exists only if expressly provided by statute. | Quoted to emphasise that interest is not payable on equitable grounds when the statute specifically governs the field. |
| Clariant International Ltd. v. SEBI (2004) 8 SCC 524 | Laid down that interest may be awarded under statute, contract, trade usage, or equity; equitable interest requires a written demand. | Used to hold that, lacking a written demand, equitable interest could not be granted. |
| MCD v. Sushila Devi (1999) 4 SCC 317 | Cited in Clariant for the proposition that equitable interest depends on “totality of circumstances.” | Referenced indirectly to reinforce the need for specific grounds before awarding equitable interest. |
Court's Reasoning and Analysis
The Supreme Court observed that Section 11-BB, introduced on 26-5-1995, clearly governs payment of interest on excise refunds. Under subsection (1), interest becomes payable only “from the date immediately after the expiry of three months from the date of application for refund.” The respondent’s application for refund (and interest) was lodged on 12-1-2004; therefore, statutory interest could accrue only after 11-4-2004.
Relying on Modi Industries, the Court reiterated that a taxpayer has no right to interest unless the statute so provides. Clariant International was invoked to underline that equitable interest requires a prior written demand, which the respondent had not made. Consequently, the High Court’s blanket award of interest from 24-7-1991 contravened Section 11-BB and ignored the absence of any formal equitable claim.
The Court held that the respondent is entitled only to statutory interest for the period 12-4-2004 to 26-8-2004 (i.e., from three months after the refund application until the date immediately preceding actual refund). It directed the authorities to calculate this amount and pay it within four weeks.
Holding and Implications
APPEAL ALLOWED IN PART; HIGH COURT ORDER MODIFIED.
The respondent is entitled to interest solely for the period 12-4-2004 to 26-8-2004 under Section 11-BB. No equitable interest was awarded because no written demand was made. The decision reinforces that, after the enactment of Section 11-BB, interest on excise refunds is governed exclusively by that provision, limiting courts’ discretion to expand the interest period on equitable grounds.
Dr. Arijit Pasayat, J.— Leave granted.
2. The challenge in this appeal is to the judgment of a Division Bench of the Gujarat High Court directing grant of interest to the respondent for alleged delayed refund of amount payable under the Central Excise Act, 1944 (in short “the Act”) and the Central Excise Rules, 1944 (in short “the Rules”).
3. Background facts are undisputed and are essentially as follows:
Refund was claimed by the respondent before the Assistant Commissioner, Central Excise and Customs Division IV, Vadodara, for refund of Rs 2,50,494.31. The applications which were filed under Rule 173-L of the Rules were rejected by the Assistant Commissioner by order dated 24-7-1991. Being aggrieved by the said order, the respondent preferred an appeal before the Commissioner of Appeals, Mumbai who remitted the matter for de novo consideration. After hearing the respondent, the said applications were again rejected. The respondent again preferred an appeal on 21-5-1996 before the Commissioner of Appeals which was dismissed by order dated 31-8-1998. Being aggrieved by the said order, the respondent preferred an appeal before the Customs, Excise and Gold (Control) Appellate Tribunal, West Regional Bench (in short “CEGAT”). By order dated 25-11-2003 CEGAT allowed the appeal and inter alia held as follows:
“I find no reason to reject the claims of refund under Rule 173-L which amounted to Rs 2,50,494 in all. The same should be paid to the appellant without delay.”
The respondent filed an application before the Assistant Commissioner on 12-1-2004 requesting for refund of the amount along with statutory interest which became payable from 26-8-1995. By order dated 27-8-2004 the Deputy Commissioner sanctioned the refund of Rs 2,50,494.
4. A writ petition was filed against the said order dated 27-8-2004 praying for grant of interest. The High Court directed grant of interest with effect from 24-7-1991 i.e the first day on which the Assistant Collector rejected the prayer for refund.
5. It is to be noted that Section 11-BB of the Act was introduced with effect from 26-5-1995 . The High Court by the impugned order directed grant of interest as per the provisions of Section 11-BB of the Act. Though in the original order, paras 12 and 17, it was noted that the respondent had a right to get the amount of interest within two months from 21-5-1996, and entitled to interest at the rate of 9% p.a for the period of three months commencing from 21-5-1996, it was subsequently corrected by order dated 15-6-2006 substituting the date 24-7-1991 for 21-5-1996. In other words, according to the High Court the respondent was entitled to interest at the rate of 9% p.a from 24-7-1991 irrespective of the date when Section 11-BB was inserted. The High Court primarily relied on a decision of this Court in Sandvik Asia Ltd. v. CIT (2006) 2 SCC 508.
6. The learned counsel for the appellant submitted that the High Court has clearly lost sight of the fact that after introduction of Section 11-BB the position relating to grant of interest has got crystallised and the grant of relief from the first date on which the application for refund was rejected cannot be sustained. It is submitted that Section 11-BB makes the position clear that only after three months from the date of application, interest becomes payable. Reference is also made to Section 11(d) of the Act. It is pointed out that the prayer of the respondent should not have been accepted because Rule 173-L was not in existence and the prayer of the assessee was not in terms of Section 11-BB. It is submitted that in any event in case of statutory interest question of any equitable interest is not applicable.
7. The learned counsel for the respondent on the other hand submitted that equitable interest is also payable. With reference to the proviso to Sections 11(d)(1) and 11(d)(2) it is submitted that the application which was filed in terms of Rule 173-L has to be deemed to be an application under Section 11(d). It is pointed out that the Deputy Commissioner in its order has referred to the earlier refund claims.
8. A three-Judge Bench of this Court in Modi Industries Ltd. v. CIT (1995) 6 SCC 396 dealt with the position relating to grant of statutory interest. In paras 58 and 59 it was inter alia observed as follows:
“58. The argument, which was upheld in some of the cases now under appeal, is that it will be inequitable if the assessee does not get interest on the amount of advance tax paid, when the amount paid in advance is refunded pursuant to an appellate order. This is not a question of equity. There is no right to get interest on refund except as provided by the statute. The interest on excess amount of advance tax under Section 214 is not paid from the date of payment of the tax. Nor is it paid till the date of refund. It is paid only up to the date of the regular assessment. No interest is at all paid on excess amount of tax collected by deduction at source. Before introduction of Section 244(1-A) the assessee was not entitled to get any interest from the date of payment of tax up to the date of the order as a result of which excess realisation of tax became refundable. Interest under Section 243 or Section 244 was payable only when the refund was not made within the stipulated period up to the date of refund. But, if the assessment order was reduced in appeal, no interest was payable from the date of payment of tax pursuant to the assessment order to the date of the appellate order.
59. Therefore, interpretation of Section 214 or any other section of the Act should not be made on the assumption that interest has to be paid whenever an amount which has been retained by the tax authority in exercise of statutory power becomes refundable as a result of any subsequent proceeding.”
9. In Clariant International Ltd. v. SEBI (2004) 8 SCC 524 it was observed as follows:
“30. Interest can be awarded in terms of an agreement or statutory provisions. It can also be awarded by reason of usage or trade having the force of law or on equitable considerations. Interest cannot be awarded by way of damages except in cases where money due is wrongfully withheld and there are equitable grounds therefor, for which a written demand is mandatory.
31. In absence of any agreement or statutory provision or a mercantile usage, interest payable can be only at the market rate. Such interest is payable upon establishment of totality of circumstances justifying exercise of such equitable jurisdiction. (See MCD v. Sushila Devi (1999) 4 SCC 317, SCC para 16.)”
As was observed in para 30 referred to above, if the claim of interest is on equitable grounds, a written demand therefor is imperative.
10. In the instant case, admittedly, no such written demand has been made. In terms of Section 11-BB(1), the respondent assessee is entitled to interest from 12-4-2004 to 26-8-2004. The quantum shall be worked out and the amount shall be paid within a period of four weeks. The order of the High Court is accordingly modified and the appeal is allowed to the aforesaid extent. No costs.
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