1. The Hon'ble President, Income-tax Appellate Tribunal has constituted this Bench for considering the following issue : Whether the interest payable to the assessee under Section 244A of the I.T. Act, on the tax refundable in the proceedings under Section 143(1)(a) of the Act, accrued to the assessee in the year of its receipt or in the year in which the proceedings under Section 143(1)(a) attained finality 2. This Bench has been constituted because of the cleavage of opinion between the Benches at Mumbai. In the case of Saffron Trading Co. Pvt.
Ltd., "G" Bench of the Tribunal at Mumbai, took the view that the income by way of interest under Section 244A of the Income-tax Act, 1961 (Act) is assessable in the year in which it was received by the assessee. On the other hand, the Tribunal Benches at Mumbai in the case of Shrusti Trading Pvt. Ltd. and in the case of Swarna Trading Pvt.
Ltd. has held that right to receive interest under Section 244A is contingent till the assessment is made under Section 143(3) of the Act or the period when limitation for taking action under Section 143(2) is expired. In view of such difference of opinion, the reference was made to the Hon'ble President. Hence, the Hon'ble President referred the issue mentioned above for the consideration of the Special Bench.
3. The contention on behalf of assessee is that right to interest under Section 244A(1) is inchoate/contingent inasmuch as quantification of the same is dependent on the final outcome of assessment under Section 143(3). So, till the assessment is made under Section 143(3), such right remains contingent. It was also argued that in case the Assessing Officer does not choose to make assessment, then such right would become absolute only when the time for issue of notice under Section 143(2) expires. In support of his contention, he relied on the Tribunal decisions which are mentioned in the earlier para. Lastly, it was argued that if interest is held to be taxable in the year of receipt, then assessee would be without remedy if the interest is reduced under Section 244A(3).
4. On the other hand, the Learned Departmental Representative has contended that an absolute right is created in favour of assessee under Section 244A(1) and, therefore, the moment a refund is issued the assessee becomes entitled to interest. There is no compulsion on the Assessing Officer to make assessment under Section 143(3) in every case. Further, the right vested in assessee is independent right and is not dependent on the assessment under Section 143(3). It is the quantification which is finally done in case assessment is made under Section 143(3). In support of his contention, he relied on the decision of Tribunal in the case of Saffron Trading Co. (supra). A query was raised whether provisions of Section 154 of the Act can be invoked in case interest is taxed in the year of receipt but varied under Section 244A(3). In response to the same, the Learned Departmental Representative did not respond but the learned Counsel for the assessee submitted that he has no objection if it is held that such assessment can be rectified under Section 154 of the Act. The hearing was concluded at this stage on 15-9-2005.
5. Subsequently, Mr. S.K. Ray, CIT-DR filed a letter on 21-9-2005 stating that the hearing was concluded without hearing him and he was asked to submit the written submission. Though incorrect statement was made by him yet in the interest of justice, fresh hearing was fixed for 20-12-2005. Shockingly, Mr. Ray, CIT-DR did not appear. Mr. Maheshwari, another CIT-DR who was present in the Court for other regular matters stated that he was unaware about such hearing. The learned Counsel for the assessee submitted that when Mr. Ray was informed by them it was stated by him that some other DR would represent the case since he had been transferred. In these circumstances, the Bench expressed its displeasure and closed the matter.
6. At the outset, we express our displeasure on the behaviour and conduct on the part of Department. It was at the request of the Department, the case was re-fixed. Despite the same, nobody appeared.
If Mr. Ray had been transferred to some other charge, it was their duty to appoint somebody to represent their case. It is not further Department to abuse the process of judicial proceedings. When Mr. Ray was personally informed by the assessee then it became his duty either to appear before the Bench or to ensure that case was represented by some other DR. We hope that the department would be careful in future.
7. Rival contentions have been considered carefully. The question for consideration is whether interest under Section 244A granted to assessee in the proceedings under Section 143(1)(a) of the Act is taxable in the year of its receipt or in the year in which proceedings under Section 143(1)(a) attains finality. According to the charging provisions of Sections 4 and 5 of the Act, the income is chargeable in the year in which it is either accrued or received as the case may be.
The issue regarding accrual of income is concluded by the judgment of the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT , wherein it has been held that income accrues when right to receive is acquired and such right can be said to have been acquired when an enforceable debt is created in favour of the assessee.
This legal position has been applied by the Courts including the Apex Court in various cases.
8. Let us now look at the relevant provisions of Section 244A of the Act which for the benefit of this order are stated below: 244A. (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of his Section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely:-- (a) Where the refund is out of any tax paid under Section 115WJ or collected at source under Section 206C or paid by way of advance tax or treated as paid under Section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted: Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined under Sub-section (1) of Section 115WE or Sub-section (1) of Section 143 or on regular assessment; (b) in any other case, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.
(3) Where, as a result of an order under Sub-section (3) of Section 115WE or Section 115WF or Section 115WG or Sub-section (3) of Section 143 or Section 144 or Section 147 or Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263 or Section 264 or an order of the Settlement Commission under Sub-section (4) of Section 245D, the amount on which interest was payable under Sub-section (1) has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly, and in a case where the interest is reduced, the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the amount of the demand shall be deemed to be a notice under Section 156 and the provisions of this Act shall apply accordingly.
A bare look at the provisions of Sub-section (1) reveals that as soon as any refund becomes due under any provisions of the Act, the assessee becomes entitled to receive the interest in respect of such refund calculated in the manner provided in Clauses (a) and (b) of such provisions. Therefore, the moment the refund is granted, as enforceable debt is created in favour of assessee in respect of interest due on such refund. Consequently, income can be said to accrue on the date of refund itself. Therefore, when such interest is actually granted along with the refund then, in our opinion, the requirement of Sections 4 and 5 of the Act are fully satisfied and the same can be taxed in the year of receipt.
9. The main contention of the assessee's counsel is that such right is contingent as the interest so received can be varied or withdrawn after the assessment under Section 143(3). We are unable to accept such contention of assessee for the reasons given hereafter. According to the dictionary meaning, a right or an obligation can be said to be contingent when such right or obligation is dependent on something not yet certain. According to Section 244A, the only condition for grant of interest is that there must be a refund due to assessee under any provision of the Act. There is no other condition in the said provision affecting such right. Therefore, the moment a refund becomes due to assessee, an enforceable debt is created in favour of assessee and assessee acquires a right to receive the interest. Sub-section (3) of Section 244A only affects its quantification under certain circumstances and not the right of interest. The Hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. , has observed at page 681 that once a debt is created, then the liability cannot be said to be contingent merely because it is to be quantified at later date. Under Section 244A, even the interest is quantified immediately whenever a refund is issued. In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest of Rs. 1,000 on the date of granting refund. Subsequently, under Section 244A(3), it is reduced to Rs. 600 by virtue of assessment under Section 143(3). Can it be said that right to interest did not accrue on the date of refund? In our opinion, the right of interest came into existence on the date of refund by virtue of Section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment.
10. The view of ours is justified by the judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT , approving the judgment of the Hon'ble Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495. In the case before the Hon'ble Madras High Court, a demand for excise duty was served on the assessee, which was objected to by the assessee before the higher authorities. However, such liability was claimed as deduction while computing its income since mercantile method of accounting was adopted. The revenue authorities did not allow the claim since such demand was subject-matter of dispute and this liability did not crystallise in the year in which demand was served.
The High Court upheld the claim of assessee. This judgment was considered by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and the Apex Court approved the view of the Hon'ble Madras High Court by observing that assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract or retard the efficacy of the liability which had been imposed upon him by the competent Excise authority.
11. The Hon'ble Supreme Court in the case mentioned in the earlier para, had to consider a case where sales tax authority had served a demand notice on assessee on 21-11-1957 for payment of sales tax of Rs. 1,49,776 in respect of sale effected during the financial year ended 31-12-1954 relevant to assessment year 1955-56 without claiming any deduction on account of such liability. However, subsequently revised return was filed on 9-11-1959 claiming the aforesaid deduction even though the said demand was objected to by the assessee before the higher authority. The ITO computed the assessment on 11-3-1960 denying the claim of assessee when appeal before the Sales Tax authority was pending. The claim of the assessee was also rejected by Income-tax Tribunal as well as High Court. On further appeal, the Hon'ble Supreme Court held that the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till quantification is effected by assessment proceeding, the liability for payment of tax is independent of assessment. In view of these observations, the Apex Court upheld the claim of assessee. It also affirmed the Madras High Court judgment in the case of Pope the King Match Factory (supra).
12. The ratio of the above judgment is clearly applicable to the present case. According to the above judgment, if an enforceable debt is created under a statute then any subsequent event would not affect the existence of such right/obligation despite the fact that such debt is subject-matter of appeal. The right to interest under Section 244A is not dependent upon any assessment inasmuch as there is no compulsion or obligation upon the Assessing Officer to make an assessment under Section 143(3). The moment the return is processed under Section 143(1)(a) and refund is issued on the basis of intimation under Section 143(1)(a), an enforceable legal right is created in favour of assessee under Section 244A and simultaneously the Assessing Officer is under legal obligation to grant the interest. Merely because quantum of such interest may vary on assessment made under Section 143(3), it cannot be said that legal right was not acquired on the date of refund. The effect of assessment under Section 143(3) would be that interest on refund under Section 244A would get substituted in terms of Sub-section (3) of Section 244A without affecting right already accrued.
13. At this stage, it would appropriate to refer to the judgment of the Hon'ble Supreme Court in the case of CIT v. Chunilal V. Mehta & Sons (P.) Ltd. . In that case, assessee was the managing agent of a company 'Century' (in short) under an agreement which provided that assessee would be entitled to compensation if its services were terminated before the period of 21 years except for the reasons mentioned in Clause 15 of the agreement. In April 1951, the services of assessee were terminated and assessee became entitled to compensation. Assessee claimed compensation of Rs. 50 lakhs but the managed company offered to pay only Rs. 2,34,000. The assessee refused to accept the same and filed suit against the said company in the High Court of Bombay. The suit was decreed on 17-11-1955, in the sum of Rs. 2,34,000 and the decree was affirmed in appeal. Assessee received the said amount in December 1955.
In the income-tax proceedings for assessment year 1956-57, this amount was considered as business profits and consequently the Assessing Officer assessed the same in that year. The assessee challenged the same before the appellate authority on the ground that compensation became due to assessee in the year 1951 when its services were terminated and, therefore, could not be assessed in the assessment year 1956-57. The matter reached the Apex Court. The Hon'ble Supreme Court rejected the appeal of the revenue by observing as tinder: It was urged on behalf of the department that, as the assessee A disputed the quantum of compensation to which it was entitled, we must hold that its right to get the amount arose when the dispute was determined by the Hon'ble High Court. We are unable to accede to this contention. As mentioned earlier, the right of the assessee to get compensation for unlawful termination of its services and the quantum of compensation to which it was entitled were clearly prescribed in the agreement. It was also so held by the High Court in the suit between the assessee and the managed company. The fact that the assessee was claiming an exorbitant sum to which it was not entitled will not convert its right into a contingent right. In Thiagaraja Chettiar & Co. v. Commissioner of Income-tax, the High Court of Madras held that, where a managing agent is entitled under the terms of the managing agency agreement to remuneration at a certain percentage on the annual net profits of the company, the remuneration payable to the managing agent accrued when the net profits of the company for the year are ascertained. The mere fact that, owning to disputes between the company and the managing agent the company had not credited the managing agent with the remuneration due to the latter in its accounts would not entitle the managing agent to claim that the remuneration due to him had not accrued and should not be assessed to incometax until the company had credited him in its accounts with the amount of commission due to him. We are in agreement with the ratio of that decision and that ratio governs the facts of the present case.F.E. Hardcastle & Co. (P.) Ltd. v. CIT The above judgment clearly shows that once a right accrues under an agreement, then such accrual is not affected by dispute between the parties. Further, in case of dispute, the final outcome would ultimately relate back to the year of accrual.
14. It has been apprehended by assessee's counsel that assessee would be without remedy if the interest is reduced by virtue of assessment under Section 143(3). This apprehension, in our opinion, is unfounded.
If interest is reduced by virtue of Sub-section (3) of Section 244A on account of assessment under Section 143(3), the interest granted in earlier year gets substituted and it is the reduced amount of interest that would form part of income of that year. Thus, it would amount to mistake rectifiable under Section 154 of the Act. In our opinion, if the basis, on which income was assessed is varied or ceases to exist, then such assessment would become erroneous and can be rectified. This can be explained with an example. For instance, land in a village belonging to various persons is acquired by Government for some development works and the compensation is awarded by the Collector with interest, if any. But one of the land holders challenges the acquisition proceedings in the High Court and later on succeeds as the acquisition is declared illegal. By virtue of such High Court order, such compensation has to be returned and Government will have to restore the land to the villagers. Therefore, if capital gain has been assessed in the hands of some of the persons where lands were acquired, such assessment would become patently erroneous, as the basis itself has ceased to exist. Such assessment would, therefore, amount to mistake, which, in our opinion, can be rectified. Similarly, any income assessed may become non-taxable by virtue of retrospective amendment and consequently, erroneous assessment can be rectified. Therefore, in our humble opinion, if the interest granted under Section 244A(1) is varied under Sub-section (3) of such section, then the interest originally granted would be substituted by the reduced/increased amount as the case may be. Thus, income on account of interest if assessed can be rectified under Section 154.
15. In view of the above discussion, we are of the view that interest on refund under Section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality.