Income Tax Issues in relation to Refund

Abhilash T.G, Asst. Professor in Law, CSI College for Legal Studies, Kottayam

STUDY OF THE VERDICT OF THE APPEX COURT IN COMMISSIONER OF INCOME TAX Vs GUJARAT FLOURO CHEMICALS (2013)

Tax refund is the amount, which the tax department gives back to a taxpayer who has paid excess taxes. Refund means, “To pay back”. The refund under the Income Tax Act 1961 signifies return of excess amounts of income tax that a taxpayer has paid to the state or the return by the government of excess taxes paid by an assessee, after taking into consideration income tax, withholdings, tax deductions or credits, and other factors. Withholding of such amount without any reasonable cause amounts to unjust enrichment on the part of state. Therefore, a timely action is required in disposal of refund application for speedy and affordable justice in the administration of tax.

Statutory framework

Before going into detail, it is desirable to quote here the legal provisions relating to refund. Sections 237 to245 in Chapter XIX of the Income Tax Act 1961 highlight the law relating to refund.
Section 237 – Refunds
Section 238 – Person entitled to claim refund in certain special cases
Section 239 – Form of claim for refund and limitation
Section 240 – Refund on appeal, etc
Section 241 – [Omitted] Section 242 – Correctness of assessment not to be questioned
Section 243 – Interest on delayed refunds
Section 244 – Interest on refund where no claim is needed
Section 244A – Interest on refunds1.
Section 245 – Set off refunds against tax remaining payable

Section 244 deals with interest on refund where no claim is needed. It is the obligation of the department to give interest on excess tax collected. When a refund is due to the assessee, in pursuance of an order referred to in Section 240′ and the Assessing Officer does not grant the refund within the stipulated time, the Central Government is required to pay simple interest at the stipulated rate2. A “refundee” will be an assessee though no assessment proceedings were initiated3. Section 240 deals with refund on appeal, etc. This provision clearly lays down that where as a result of any order passed in appeal or other proceedings under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf. The crucial expressions in Section 240 are ‘any amount which becomes due to the assessee as a result of any order passed in any appeal or other proceedings under the Act and the ‘amount becomes due to the assessee’. Section 244 refers to the liability fastened on the Central Government in case of failure to grant refund within the stipulated time in a case where refund is due to the assessee in pursuance of an order referred to in Section 240. A combined reading of both the provisions makes the position clear that it is any amount, which becomes due to the assessee and not necessarily the tax component.

Is the refund taxable?

The tax refund is not your income as it is just a receipt of excess taxes paid and therefore the amount of refund is not taxable. However, interest received on tax refund is taxable. The rate of tax would be as per your applicable slab rate. You may include it in the taxable income of the year in which such refund is received.

Judicial trends

In Union of India (UOI) Through Director of Income Tax vs. Tata Chemicals Ltd4,the Supreme Court ruled that refund due and payable to the Assessee is debt-owed and payable by the Revenue. This judgment reiterates the legal position on refund as contained in section 237 of the Income Tax Act 1961.For getting the benefit of section 237,a refund application has to be filed by the assessee5. The claim for refund is to be accompanied by return of income in the form prescribed under Section 139 of the Act unless the claimant has already made such a return to the Income-tax Officer6.

Not refunding an excess amount collected from the assessee can thus result in violation of article 265 of the Indian Constitution7. In the context of this judgment the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances.

The fundamental legal issue to be discussed in this article is;

1. Whether the Revenue is obliged to pay an interest on interest in the event of its failure to refund the interest payable within the statutory period ?

To answer this issue we must start the discussion by referring to the judgment of the Supreme Court in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors8, was a case relating to payment of advance tax. In Sandvik case (supra) wherein, the main issue for consideration and determination by the Supreme Court was, whether the Assessee is entitled to be compensated by the Revenue for delay in payment of the amount admittedly due to the Assessee. From the facts of the Sandvik case (supra) there was an inordinate delay on the part of the Revenue in refunding the amount due to the Assessee. Therefore, the apex court had thought it fit that the Assessee should be properly and adequately compensated and therefore in paragraph 51 of the judgment, the Court while compensating the Assessee had directed the Revenue to pay compensation by way of interest.

In Commissioner of Income Tax, Gujarat vs. Gujarat Flouro Chemicals9decided on 23.08.2012, the Assessee by relying upon the judgment of the Division Bench of the Supreme Court in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors(supra) argued that it was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to which it was wrongly withheld for a long period. The main issue, which arose for determination in Sandvik Asia [supra], was, whether the Assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The court held that the Act recognizes the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law the Revenue must compensate the assessee. In other words, the Assessee was entitled to a refund. However, a refund order was passed in favour of the Assessee. With regard to the payment of interest on the amount ordered to be refunded, the court made some remarks such as in Sandvik Asia [supra], interest was ordered on the basis of equity. It was also ordered to be paid based on Article 265 of the Constitution. Hence the major question was, whether the Revenue was obliged to pay interest on the amount ordered to be refunded. Doubting the correctness of the decision in its earlier judgment in the case of Sandvik Asia Limited v. Commissioner of Income Tax and Ors. (supra) a bench of two learned Judges comprising chief justice S.H. Kapadia, and justice Madan B. Lokur referred the matter to a larger bench for consideration and authoritative pronouncement by order dated 28.08.2012. The larger bench comprising justice H.L. Dattu, Sudhansu Jyoti Mukhopadhaya and M. Yusuf Eqbal settled the issue on 18.09.201310as follows;

“In our considered view, the aforesaid judgment has been misquoted and misinterpreted by the Assessees and also by the Revenue. They are of the view that in Sandvik case (supra) this Court had directed the Revenue to pay interest on the statutory interest in case of delay in the payment. In other words, the interpretation placed is that the Revenue is obliged to pay an interest on interest in the event of its failure to refund the interest payable within the statutory period.

As we have already noticed, in Sandvik case (supra) this Court was considering the issue whether an Assessee who is made to wait for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period. In the facts of that case, this Court had come to the conclusion that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and therefore, directed the Revenue to pay compensation for the same not an interest on interest.

At a policy level, it is incumbent upon the department and financial ministry to evolve a comprehensive framework for the implementation of law relating to refund in the context of the above decisions. Based on this judgment, it is the responsibility of the Income tax department to give effect to relevant provisions in a manner that is consistent and predictable. The Gujarath Fluro Chemicals case and its dictum will have far-reaching consequences for the disposal of refund applications and cases in India.

  1. Prayag Udyog Pvt. Ltd., Allahabad Vs.Union Of India and Others[ 2012]348ITR217(All)- Interest on refund amount is due from the date of actual payment under section 244A(1)(b) to the date of refund []
  2. Income Tax Act 1961,section 244(2). []
  3. Income Tax Officer, New Delhi vs. Delhi Development Authority(AIR2002SC264). []
  4. MANU/SC/0213/2014 []
  5. Under Rule 41 of the Income-tax Rules, 1962 a claim for refund is to be made in Form No. 30. The excess tax can be claimed as refund by filing your income tax return. It will be refunded by issue of cheque or by crediting to your bank account. The department has been making efforts to settle refund claims within four months from the month of filing return []
  6. Trustees of H.E.H. The Nizam’s Supplemental Family Trust vs. CIT( AIR2000 SC 966). []
  7. “No tax shall be levied or collected except by authority of law” []
  8. [2006] 2 SCC 508: AIR2006SC1223 []
  9. [2012]348ITR319(SC),2012(8)SCALE660 []
  10. In Commissioner of Income Tax, Gujarat vs. Gujarat Flouro Chemicals (2013)262CTR(SC)269; 2013(296)ELT433(S.C.); [2013]358ITR291(SC);2013(12)SCALE281; (2014)1SCC126 []

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