Payment of interest on refunds by tax dept

It is not uncommon that taxpayers, particularly foreign companies, become entitled for refunds from the income tax department on conclusion of their assessments and appeals.

The refunds arise due to excess payment of tax made by them either at the time of deduction of tax at source or payment of disputed tax demanded by the department.

There are several specific provisions under the Income Tax Act requiring the income tax department to pay interest to the assessee on the amount of refund due to the assessee.

But despite specific provisions, the tax officials are often reluctant to issue refund vouchers in time. Another bad practice, which has developed in the tax department, is to refund the amount of tax only and withhold the amount of interest due on the said tax.

It may also be stated that while charging interest from the assessee, the department first adjusts the amount paid towards interest so that the principal amount of tax payable remains 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, refunds are first adjusted towards taxes and then the balance towards interest.

All these issues have recently been considered by the Supreme Court in the Sandvik Asia Ltd vs Commissioner of Income Tax case, (2006) 150 Taxman 591. In this case there was considerable delay of 17 years in payment of amount of interest due to the assessee.

The department was of the view that in the absence of any specific provision in law for payment of interest on interest, the assessee was not entitled for any kind of compensation on the delay of the payment of interest even if the delay was for an inordinate period of 17 years.

The Supreme Court debated at length on the issue whether on general principles the assessee ought to have been compensated for the inordinate delay in receiving money properly due to it.

It was finally held by the apex court that the department was obliged to pay interest on interest. "As per the stand that the department takes, they are liable to pay interest only up to the date of refund of tax while they take the benefit of assessee's funds by delaying the payment of interest on refunds without incurring any further liability to pay interest," the Supreme Court observed.

This stand, the court held, was discriminatory in nature causing great prejudice to the thousands of assesses.

In the Sandvik Asia case, as the delay was for 17 years, the Supreme Court took a serious note of this and observed: "This is the fit and proper case in which action should be initiated against all 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 1986 and even prior to. A copy of this judgement will be forwarded to the finance minister for his perusal and appropriate action against the erring officials on whose lethargic and adamant attitude the department has to suffer financially".

Now that the law on payment of interest on interest has been explicitly clarified by the apex court, foreign enterprises should also stake their claim for interest wherever applicable.

agar@bol.net.in