The Court
1. In this reference made under s. 256(1) of the IT Act, 1961 (in short 'the Act'), we have been called upon to consider the question of payment of interest on refunds admissible to assessees which has already been considered recently by the Supreme Court in all its possible aspects. The decision of the Supreme Court is in the case of Modi Industries vs . CIT : [1995]216ITR759(SC) .
2. We will first set out the basic facts. During the previous year ending on 31st December, 1982 pertaining to the asst. yr. 1982-83, the assessee had paid advance tax to the tune of Rs. 9,07,19,323. There was also deduction of tax at source to the extent of Rs. 44,427. The original assessment for the period was completed under s. 143(3) of the Act on 25th February, 1985. The tax assessed was at Rs. 9,16,05,911. Thus, as per the original assessment order, the petitioner was required to pay an additional amount by way of tax to the extent of Rs. 8,42,161.
3. Against the said order of assessment, the petitioner went in appeal under s. 246 of the Act and was favoured with substantial relief. On giving effect to the appellate order, it was found that the assessee became entitled to refund of Rs. 1,20,42,846. This amount was refunded to the assesses-company on 29th November, 1985. But, the IAC allowed interest on Rs. 8,42,161 i.e. amount which was paid pursuant to the demand notice after the first order purported to be under s. 244(1A) of the Act. The assesses-company being dissatisfied with the order, went in appeal before the CIT (A) and raised a contention that it is entitled to interest on the entire amount of refund from the first day of assessment year in question i.e. from 1st April, 1982 till the date of refund i.e. 29th November, 1985. But, it failed in appeal. Subsequently, the second appeal was taken to the Tribunal and got the relief. The order of the Tribunal is dt. 18th July, 1991. The Tribunal, considering the full bench decision of the High Court of Gujarat in the case of Bardolia Textiles Mills vs . ITO : [1985]151ITR389(Guj) and of this Court in the case of CIT vs . Deepchand Kishanlal : [1990]183ITR299(KAR) , took the view that the Government is liable to pay interest under s. 214 on tax as determined finally by the first appellate authority. It is in this background that the following question of law has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to interest under s. 214 on the amount of Rs. 1,20,42,846 refunded by the IAC while giving effect to the order passed by the CIT (A) in first appeal ?'
4. In the case of Modi Industries Ltd. (supra), the Supreme Court has held that, because of the opinion of the various High Courts it had become incumbent to trace out the entire history pertaining to grant of interest on refunds admissible to the assessees and to settle the law once for all. Accordingly, the Supreme Court took note of the entire scheme of the Act leading to refunds particularly with reference to ss. 214 and 244 of the Act with all its amendments right from inception.
5. It has been noticed by the Supreme Court that the main difference had arisen between the High Courts regarding the meaning of word 'Regular assessment' in the context of s. 214. This has now been finally resolved by the Supreme Court by holding that the word 'Regular assessment' will mean 'the first assessment made either under s. 143 or 144 of the Act'. After so holding, at page 786 of the report. Their Lordships have considered the question 'is any interest payable if the amount of tax determined as payable by the ITO is reduced in appeal' The answer given is at page 787 (Supreme Court judgment).
'... the answer will depend upon the scheme of the Act. The advance tax is quantified on the assessed income of the latest previous year in respect of which an assessment has been made. Income-tax is payable on the total income of the relevant previous year. The amount of advance tax which is not income-tax levied by s. 4(1) and computed under s. 143 is treated by s. 219 as 'payment of tax in respect of the income of the period which would be the previous year for the assessment year next following the financial year in which it was paid'. After computation of the total income under s. 143, the ITO will have to determine the tax payable by an assessee. This he can do only after giving credit to the assessee for the amount of income-tax standing to his credit. Once the amount of advance tax has been treated as income-tax payable by the assessee and dealt with as such in the assessment order, there is no scope for treating it as advance tax once again. The excess realisation of advance tax, upon assessment and adjustment, becomes refundable under s. 237. No further interest is payable on it under s. 214. Interest, if any, on delayed refund is payable under s. 243. If a further sum of money becomes refundable as a result of any appellate order, that amount has to be refunded under s. 240 and with interest, if any, under s. 244. The refund amount is not treated any more in the Act as a portion of the advance tax paid by the assessee. What is refunded pursuant to an appellate order is a portion of what was treated and dealt with as payment of income-tax by the assessee. Its character is in no way different from the tax paid pursuant to notice of demand under s. 156 by an assessee. Any tax refundable pursuant to the appellate order has to be dealt with in accordance with the provisions of ss. 240 and 244. There is no scope for invoking the provisions of s. 214 in such a situation'.
6. Thereafter, they have noticed the effect of insertion of sub-s. (1A) in s. 214 of the Act. In this connection, it has been held that :
'It should also be noted that the new sub-s. (1A) has taken note of not only increase, but also reduction of the amount on which interest was paid under s. 214. Simultaneously with this, s. 215 was amended and sub-s. (3) was recast on the lines of newly introduced sub-s. (1A) of s. 214 w.e.f. 1st April, 1985. Under this provision, the amount of interest payable by an assessee had to be increased or reduced pari passu with the increase or reduction of the amount on which such interest was payable in consequence of an order of rectification or an order passed by a higher authority.
In other words, s. 214 and s. 215, w.e.f. 1st April, 1985, have brought about important changes in the scheme of payment of interest by the Central Government or the assessee, as the case may be. The period therefore, for which the interest has to be paid remains the same i.e. the first day of the relevant assessment year to the date of the regular assessment (first assessment). But, the quantum of interest payable will depend upon the amount of refund payable after the quantum of tax payable is finally determined in appeal, revision or any other proceeding'.
7. Thereafter, their Lordships proceeded to consider the effect of insertion of s. (1A) of s. 244 of the Act. After quoting the section it has been held that :
'This sub-section applies only to a case where an assessee has paid tax or penalty after 31st March, 1975, in pursuance of any order of assessment or penalty. If, as a result of appeal or other proceedings under this Act, it is found that the amount of tax or penalty paid by an assessee is in excess of what the assessee is liable to pay, then the Central Government has to pay interest on the excess amount paid by the assessee. Such interest has to be paid up to the date on which the refund was granted.
Sub-s. (1A) of s. 244 does not affect the operation of s. 214 in any manner whatsoever. The period during which interest has to be paid under s. 214 is the first day of the relevant assessment year to the date of the assessment order. The period covered by s. 244(1A) is the period commencing from the date of payment of tax or penalty.
Under Chapter XVII of the Act, tax may be collected from an assessee by way of deduction at source, advance payment and by a notice of demand under s. 156. But the amount of tax deducted at source is treated as income-tax paid by the assessee upon the completion of the assessment proceedings [s. 199(1)].
Similarly, the amount of advance tax paid has to be treated as payment of tax and credit for this amount has to be given to the assessee in the regular assessment (s. 219). Any excess amount remaining to the credit of the assessee thereafter will have to be refunded to the assessee. The amount which was retained by the ITO and adjusted against the tax demand must be treated as payment of tax pursuant to the assessment order by the assessee. Advance tax or tax deducted at source loses its identity as soon as it is adjusted against the liability created by the assessment order and becomes tax paid pursuant to the assessment order.
Therefore, the phrase 'any amount having been paid ... after 31st March, 1975' occurring in sub-s. (1A) of s. 244 must be construed to mean not only the amount which has been paid directly pursuant to the order of assessment but will also include the amount of tax deducted at source and advance tax, which were lying to the credit of the assessee and were ultimately adjusted and set off against the tax demands raised in the assessment order. The excess amount of tax paid under sub-s. (1A) of s. 244 must be calculated by treating the amount of tax deducted at source and the amount of advance tax which were adjusted against the assessee's liability to pay tax as well as the amount of tax paid directly upon the assessment under Chapter XVII of the IT Act. In other words, so far as the amount of advance tax is concerned, it must be understood to have been paid 'in pursuance of any order of assessment' only on the date of the original order of assessment' - and not on the date of actual payment. The reason is obvious, on the day the advance tax amount is paid there is no assessment and, hence, it cannot be said to have been paid 'in pursuance of any order of assessment'. This view was also taken by the Punjab and Haryana High Court in the case of Leader Engineering Works .
Interest under sub-s. (1A) of s. 244 is payable when the tax or penalty paid by an assessee pursuant to an order of assessment has been reduced in appeal or any other proceeding. In such a case, an excess amount of tax or penalty paid by the assessee will have to be refunded and the Central Government has to pay interest on the excess amount from the date on which such amount was paid to the date on which the refund was granted. Of course, there can be no question of paying interest both under s. 214(1A) and s. 244(1A) simultaneously. The rate of interest being the same under both the provisions, there would be no difference in the actual amount of interest payable, whichever provision is applied.
This sub-section substantially alters the scheme of payment of interest on refund contained in ss. 243 and 244 of the IT Act, but does not affect the scope of s. 214 in any way. Sec. 214 deals with payment of interest on the amount of tax found to have been paid in excess of the tax determined as payable on the regular assessment. Interest will have to be paid from the first day of the relevant assessment year to the date of the regular assessment i.e. the first assessment. If the amount on which the interest was payable was varied subsequent to the first assessment, then the quantum of interest held also to be increased or decreased accordingly. But the period for which the interest had to be paid was not altered by the newly substituted sub-s. (1A) of s. 214.'
8. After so holding, they summarised their proposition as laid down by them under the head 'summary' at page 808 which is to the following effect :
'Summary
The position that emerges from the above analysis can be summarised finally as under :
(i) Up to 31st March, 1975, interest under s. 214 is payable from the first day of April to the relevant assessment year to the date of the first assessment order. The amount on which the interest is to be paid is the amount of advance tax paid in excess of the tax payable by the assessee as calculated in the regular assessment (the first assessment order). The amount on which interest was payable did not vary due to the reduction or enhancement of tax as a result of any subsequent proceeding. But w.e.f. 1st April, 1985, while the period for which interest was payable remained constant, the amount on which the interest was payable, varied with the variation in the quantum of refund as a result of any subsequent orders.
(ii) If any tax is paid pursuant to an assessment order after 31st March, 1975 (which will include tax deducted at source and advance tax to the extent the same has been retained and treated by the ITO ... payment of tax in discharge of the assessee's tax liability in the assessment order), becomes refundable wholly or in part as a result of any appellate or other order passed, the Central Government will have to pay the assessee interest on the refundable amount under s. 244(1A). For the purpose of this section, the amount of advance payment of tax and the amount of tax deducted at source must be treated as payment of income-tax pursuant to an order of assessment on and from the date when these amounts were set off against the tax demand raised in the assessment order, in other words, the date of the assessment order.
(iii) With effect from 1st April, 1985, interest payable under s. 214 will increase or decrease in accordance with the variation in the quantum of the excess payment of tax brought about by orders passed subsequent to the regular assessment as mentioned in sub-s. (1A).
Accordingly, we approve the view taken by the Bombay, Allahabad, Andhra Pradesh, Patna and Delhi High Courts to the extent their views accord with the view taken herein'.
9. In view of the said enunciation of law by the apex Court, we hold that so far as the payment of interest to the assesses-company for the period 1st April, 1984 to 25th February, 1985 i.e. from the first day of assessment year in question till the completion of the original assessment is concerned, it will be admissible under s. 214 of the Act. But, so far as the entitlement of interest for the period 26th February, 1985 to 29th November, 1985 is concerned, it can be justified only under s. 244(1A) as explained by the Supreme Court in the case referred to above.
10. In the present case, on a reading of the order of the Tribunal, we find that, the Tribunal has merely held that on the amount refunded the assessee will be entitled to payment of interest under s. 214 without specifying the period for which the said amount will be admissible. That matter has to be considered by the Tribunal on receiving this opinion of ours while considering the case under sub-s. (1) of s. 260.
11. Mr. Indrakumar, learned standing counsel appearing for the IT Department, has taken a technical objection that, we, while exercising our jurisdiction under s. 256 cannot express any opinion regarding admissibility of interest under s. 244(1A) since that question has not been referred to us. We appreciate his anxiety. But, we find that the assessees had raised the question of admissibility of interest under s. 244(1A) of the Act both before the CIT (A) as also before the Tribunal. Though the Tribunal does not seem to have considered the same in its proper perspective and was swayed away by the consideration that in view of the High Court decisions, the assessees may be entitled to claim interest for the entire period under s. 214 itself. The objection raised is highly technical in nature. In our opinion since the principal question arising from the order of the Tribunal is whether the assessee is entitled to interest on the refunds which have been made to it, which necessarily implies the period for which the interest was admissible, under all the relevant provisions of the Act. If it is found that interest was admissible for a given period to the assessee, then it was wholly inconsequential whether reference to a particular section is made or not or wrong section has been referred. It is well settled that wrong labelling of section cannot be held to be fatal to the order if the power to pass the same is traceable to some statutory provision. (See. Municipal Corporation of City of Ahmedabad vs . Ben Hiraben Manilal : [1983]2SCR676 ). Therefore, we do not find the objection raised by the learned standing counsel to be of any consequence.
12. Considering the said facts and circumstances of the case, the question referred to us is answered in favour of the assessee though it will be applicable to only a part of the period and considering the judgment of the Supreme Court and our findings noted above, the Tribunal has to consider the application under s. 244(1A) of the Act. There will be no order as to costs.