2006 Supreme(SC) 69

2006(1) Supreme 608
Supreme Court of India
(From Bombay High Court)
H.K. Sema and Dr. A.R. Lakshmanan, JJ.
Sandvik Asia Ltd. —Appellant
versus
Commissioner of Income Tax-I, Pune & Ors. —Respondents
Civil Appeal Nos. 1337-1340 of 2005
Decided on 27-1-2006
Counsel for the Parties :
For the Appellant : Jehangir D. Mistri and Rustom B. Hathikhanawala, Advocates.
For the Respondents : Mohan Parasaran, ASG, Manish Tiwari, Gaurav Dingra, 1Chidananda D.L., Vivek Sood and B.V. Balaram Das, Advocates.

Very important point
An assessee is entitled to compensation by way of interest on the delay in the payment of amounts lawfully due to the assessee which were withheld wrongly and contrary to the law by the income tax department for an inordinately long period.

Headnote:Income Tax Act, 1961—Sections 214(1) r/ws 214(1A) and 244(1A)—Interest on delayed payment of refund—Compensation for delay is required to be paid—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 —Assessment years 1977-78, 1978-79, 1981-82 and 1982-83—Assessment order was passed determining income of Rs. 3,45,91,830/- and tax thereon at Rs. 1,99,76,781/- —Appellant assessee paid the amount—Appellate order determining income at Rs. 2,68,88,220/- and tax thereon at Rs. 1,47,88,521/- — Appellant on 30.4.1986 received a refund of Rs. 42,38,260/- —Prayer made for grant of interest on refund for the period from 1.4.1977 to 31.3.1986—Order rejecting the claim for interest on interest challenged—High Court rejected appellant’s claim on interest holding that no such interest on interest is payable under any of the provisions of the Act—Whether appellant was entitled to interest on the delay in payment of amounts due from the income tax department—(Yes)—Does the Act provide for payment of compensation for delayed payment of amounts due to an assessee in a case where these amounts include interest—Held, the Act recognizes the principle that a person should only be taxed in accordance with law—Compensation for delay is required to be paid.

       Held : In our opinion, the High Court has failed to notice that in view of the express provisions of the Act an assessee is entitled to compensation by way of interest on the delay in the payment of amounts lawfully due to the appellant which were withheld wrongly and contrary to the law by the Department for an inordinate long period of up to 17 years. The High Court, in our opinion, has unnecessarily made the judgment a bulky one by considering various provisions of the Act and, in particular, Section 240 which was inserted by Direct Tax Laws (Amendment) Act, 1987 with effect from 01.04.1989 and hence was not applicable to the present case. The High Court has not considered Section 240 as it stood then i.e. at the relevant point of time. This apart, the High Court has also considered the question of merger and relied on many number of judgments which were not even relied on or cited by counsel for the parties. Counsel for the appellant has taken specific grounds in regard to the above factors in the special leave petition grounds which were not denied by the Department. (Para 18)

       In our view, 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. At the initial stage of any proceedings under the Act any refund will depend on whether any tax has been paid by an assessee in excess of tax actually payable to him and it is for this reason that Section 237 of the Act is phrased in terms of tax paid in excess of amounts properly chargeable. It is, however, of importance to appreciate that section 240 of the Act, which provides for refund by the Revenue on appeal etc., deals with all subsequent stages of proceedings and therefore is phrased in terms of ‘any amount’ becoming due to an assessee. (Paras 30 and 31)

       In our opinion, the appellant is entitled to interest under Section 244 and/or Section 244A of the Act in accordance with the terms and provisions of the said sections. The interest previously granted to it has been computed up to 27.03.1981 and 31.03.1986 (under different sections of the Act) and it’s present claim is for compensation for periods of delay after these dates. (Para 34)

       The appellant was undisputably entitled to interest under Sections 214 and 244 of the Act as held by the various High Courts and also of this Court. In the instant case, the appellant’s money had been unjustifiably withheld by the Department for 17 years without any rhyme or reason. The interest was paid only at the instance and the intervention of this Court in Civil Appeal No. 1887 of 1992 dated 30.04.1997. Interest on delayed payment of refund was not paid to the appellant on 27.03.1981 and 30.04.1986 due to the erroneous view that had been taken by the officials of the respondents. Interest on refund was granted to the appellant after a substantial lapse of time and hence it should be entitled to compensation for this period of delay. The High Court has failed to appreciate that while charging interest from the assesses, the Department first adjusts the amount paid towards interest so that the principle amount of tax payable remain outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence as per the stand that the Department takes they are liable to pay interest only upto the date of refund of tax while they take the benefit of assesses funds by delaying the payment of interest on refunds without incurring any further liability to pay interest. This stand taken by the respondents is discriminatory in nature and thereby causing great prejudice to the lakhs and lakhs of assesses. Very large number of assesses are adversely affected inasmuch as the Income Tax Department can now simply refuse to pay to the assesses amounts of interest lawfully and admittedly due to that as has happened in the instant case. It is a case of the appellant as set out above in the instant case for the assessment year 1978-79, it has been deprived of an amount of Rs. 40 lakhs for no fault of its own and exclusively because of the admittedly unlawful actions of the Income Tax Department for periods ranging up to 17 years without any compensation whatsoever from the Department. Such actions and consequences, in our opinion, seriously affected the administration of justice and the rule of law. (Para 46)

       There cannot be any doubt that the award of interest on the refunded amount is as per the statute provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the Court has to take all relevant factors into consideration while awarding the rate of interest on the compensation. (Para 48)

       This is the fit and proper case in which action should be initiated against all the officers concerned who were all in charge of this case at the appropriate and relevant point of time and because of whose inaction the appellant was made to suffer both financially and mentally, even though the amount was liable to be refunded in the year 1986 and even prior to. A copy of this judgment will be forwarded to the Hon’ble Minister for Finance for his perusal and further appropriate action against the erring officials on whose lethargic and adamant attitude the Department has to suffer financially. (Para 49)