Holding that “the Revenue for having retained the sum by way of tax has to compensate the person who had deposited the tax”, the Supreme Court of India in a recent decision1, has rejected the technical interpretation of statutory provisions put forth by the Income Tax Department to avoid payment of interest on refunds.
The Supreme Court took note of the legislative intent codifying the earlier decisions into the statute and the consequent insertion of Section 244A in the Income Tax Act, 1961, and declared that except where specifically provided in respect of certain taxes2, “the interest is payable from the date of payment of tax” in all other cases. The following observation of the Supreme Court in this respect is instructive in as much as it would continue to serve as a guiding beacon even for the interpretation of other fiscal enactments:
“Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. 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 obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course.”
Even though the Departmental Circulars (which the Supreme Court declared are binding on the officers, and a contrary view thereto cannot therefore be taken by them) required the payment of interest on such refunds, the Income Tax Department took recourse to an anomalous explanation3 appended to the statutory provision to contend that interest would be payable in other cases only in the event that an assessee paid tax in excess of the specified demand notice served upon it. Holding that the statutory provision was to be given its ordinary meaning “upon ascertaining the object of the legislation through the medium or authoritative forms in which it is expressed”, the Supreme Court rejected the stand of the Income Tax Department to declare the legal position in favour of the assessee.
ELP Comments: The legal principle enshrined in this decision is a welcome change to one and all and especially those who pay tax under protest to ward off harassment during pendency of litigation. The declaration of the Supreme Court that the liability of the department to pay interest arises from the date of payment of tax clearly implements the equitable principle that those who are wrongly deprived of money must be duty compensated. It is hoped that this decision will deter the tax officers from wrongly collecting tax where not legally tenable, to the benefit of the taxpayers, and also saving the exchequer unwarranted interest liability.