Loading judgment…
Facts
The assessee filed an appeal against an order pertaining to a rectification order concerning the short grant of interest under Section 244A of the Income Tax Act. The primary dispute revolves around how refunds should be adjusted against interest and principal components of outstanding demands.
Held
The Tribunal held that while Section 244A of the Act doesn't explicitly mandate the order of adjustment, principles of fairness, justice, and equity, along with judicial precedents, suggest that refunds should first be adjusted against the interest component and then the principal. The AO was directed to re-compute the interest accordingly.
Key Issues
Whether the refund due to the assessee should be first adjusted against the interest component (u/s 244A) and the balance against the principal component of outstanding tax demands.
Sections Cited
244A, 154, 143(3), 254, 140A(1), 245
AI-generated summary — verify with the full judgment below
Before: JUSTICE (RETD.) C. V. BHADANG & SHRI PRABHASH SHANKAR
Date of Hearing 10.11.2025 Date of Pronouncement 10.12.2025 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 03.06.2025 is filed by the assessee against the order passed by the Learned Commissioner of Income-tax, Appeal, CIT(A)-47, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to rectification order passed u/s. 154 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 10.01.2023 for the Assessment Year [A.Y.] 2008-09. P a g e | 2 A.Y. 2008-09 Goldencross Pharma Limited 2. The grounds of appeal are as under:-
1. Short Grant of Interest u/s 244A of the Income Tax Act a. The Commissioner of Income Tax (Appeals)-47, Mumbai (hereinafter referred to as the Ld. CIT(A)) erred in law and facts of the case in rejecting the appellant's contention that the refund should be first adjusted against the interest due u/s 244A and the remaining, if any, against the principal component. b. The Ld. CIT(A) failed to appreciate that any refund received shall first be adjusted towards the interest receivable by the appellant and thereafter, the balance shall be adjusted against the principal amount of refund. c. The Ld. CIT(A) failed to appreciate that the adjustment of refund against the interest first and balance against principal is in accordance with judicial precedents laid down by various courts. d. The Ld. CIT(A) erred in not considering the binding nature of the decisions of higher judicial authorities which have consistently held that the refund should be adjusted first against interest due u/s 244A and the balance, if any, against the principal. e. Without prejudice to the above, the Ld. CIT(A) ought to have followed the analogy and principles of equality laid down u/s140A of the Act, wherein the allocation should me made towards interest first and then to the principal amount for adjusting the taxes paid. f. The Ld. CIT(A) failed to appreciate that the adjustment of refund in the manner pleaded by the appellant is in line with the principles of natural justice and equity.
2. Misinterpretation of the facts on record a. The Ld. CIT(A) erred in facts and law that the appellant has claimed the interest u/s 244A of the Act upto the date of filing the appeal. In fact, the appellant has clearly sought interest u/s 244A upto the date of issuance of the refund voucher. b. The Ld. CIT(A) erred in facts by disregarding that there was a time gap between the order u/s 154 of the Act passed and the refund voucher actually issued to the appellant. c. The Ld. CIT(A) ought to have granted the interest u/s 244A till the actual date of refund issued, in accordance with the statutory provisions and judicial interpretations.
Briefly stated facts of the case are that the assessee has challenged short grant of interest u/s 244A of the Act by the AO in the P a g e | 3 A.Y. 2008-09 Goldencross Pharma Limited rectification order u/s 154 of the act passed which has been upheld by the appellate authority. It is claimed that the AO was not correct in failing to allocate refund first against the interest component and then balance towards principal component. It is stated that the AO had to follow the analogy and principals of equality of section 140A of the act for allocation of interest first and then principal for adjusting taxes paid.
According to the ld.CIT(A),as per the facts, the AO passed an order u/s 143(3) r.w.s.254 of the Act determining the refund of Rs.97,005/-. Subsequently, by way of an order u/s 154 of the Act determined refund of Rs.1,32,32,690/-. In the said order interest u/s 244A of the act was computed at Rs.51,14,475/-. In the course of appellate proceedings, the assessee submitted that there was an error in the computation of interest u/s 244A of the Act. It sought relief requesting for directions to the AO to correctly adjust the refund first against the interest component and balance if any against the tax component. For this the assessee relied on various judgements which include: i. Tata Sons Private Limited V/s DCIT (TS-761-ITAT-2023, Mumbai) ii. Union Bank of India V/s ACIT 72Taxman.348. iii. Grasim Industries Limited V/s DCIT 123Taxmann.312. iv. Bank of Baroda V/s DCIT (ITA no. 164682565/2017).
P a g e | 4 A.Y. 2008-09 Goldencross Pharma Limited v. DCIT V/s Peerless General Finance & Investments Company Limited (I.T.A. no.50/KOL/2009 etc.) 4.1 Relying on the above judgements, the assessee argued that the Revenue was required to first adjust the refunds against interest component and then the principal taxes. In the facts of the present case, the assessee's case was subjected to scrutiny for AY 2008-19 and a demand was raised against which refunds of subsequent years was adjusted as regular taxes paid. There were two instances where the refund due to the assessee was adjusted against the outstanding demand. On 17.02.2011, refund due to the assessee for AY 2009-10 of Rs. 7,55,040/- was adjusted against the excess refund issued to the assessee for AY 2008-09 of Rs. 2,98,356/-. At this juncture, there was no adjustment of refund against principal amount and interest due from the assessee. In the second instance, refund due to it for AY 2011-12 was adjusted against the outstanding demand for AY 2008-09. No segregation of adjustment of refund against the principal and interest is provided. It was observed by the ld.CIT(A) that the assessee failed to submit the facts related to the case and relied on the judgements adducing an argument that refund should be first adjusted against the interest component and the balance against principal outstanding, if any. There was no occasion to apply the ratio of judgements relied upon P a g e | 5 A.Y. 2008-09 Goldencross Pharma Limited by the assessee to the facts of the case. It is further stated by the ld.CIT(A) that section 244A of the Act provides for interest on refunds due to the assessee. However, there is no mandate under the Act or Rules that refunds when adjusted against the outstanding demand must first be set off against the interest component of the demand. Further, adjustments made u/s.245 of the Act were silent about the order of adjustment. Hence, there was no legal compulsion to adjust the refund against the interest first. He further distinguished the citations relied upon by the assessee stating that the facts were different therein. Consequently, ground of appeal of the assessee in this regard was rejected.
Before us, the ld.AR has contended that action of the lower authorities was inconsistent with the decisions of coordinate benches of Tribunal including those of jurisdictional ITAT, Mumbai which are binding on the authorities concerned as the issue in the instant appeal is quite identical. The ld.DR on the other hand has claimed that there is no basis for the claim of the assessee as the Act does not provide for interest on interest as in the of present case.
We have heard the rival contentions and perused the materials on record and have also gone through the written submissions made P a g e | 6 A.Y. 2008-09 Goldencross Pharma Limited including the detailed working of computation of interest u/s. 244A of the Act. The assessee has claimed that refund should be first adjusted against the interest component and the balance against principal outstanding if any. It has also drawnanalogy drawn in terms of Section 140A(1) of the Act. We find that there is no such specific provision u/s. 244A of the Act with respect to claim of the assessee. However, we observe that there are plethora of decisions of various courts of law including coordinate benches of ITAT and of jurisdictional ITAT, Mumbai where by similar claims of the assessee are being consistently allowed in its favour.
6.1 We notice that the ITAT, Mumbai in the case of Union Bank of India(2016) 162 ITD 142 held that adjustment of refund shall be first towards interest receivable u/s 244A and balance towards principal amount of tax and same did not result into payment of interest on interest. Likewise, in the case of Grasim Industries Ltd V DCIT (2021) 188 ITD 675 (Mum ITAT) following the decision of Union Bank of India (supra)ITAT held that the refund granted shall be first appropriated or adjusted against correct amount of interest and consequently, the short fall of refund is to be regarded as shortfall of tax and that shortfall should then be considered for the purpose of P a g e | 7 A.Y. 2008-09 Goldencross Pharma Limited computing further interest payable to the assessee u/s.244A of the Act till the date of grant of such refund. In yet another case of Tata Sons (P) Ltd V DCIT (2023) 204 ITD 802 Mumbai ITAT following the decision of Union Bank of India (supra), Grasim Industries Ltd (supra) and hon’ble Delhi High Court decision in case of India Trade Promotion Organisation Vs. CIT in 361 ITR 646 wherein the Court observed that under Explanation to section 140A(1) of the Act, when an assessee is duty bound to pay the outstanding tax, amount paid by the assessee shall first be adjusted against interest payable and the balance shall be adjusted against tax payable, the same procedure needs to be followed in respect of refund due to the assessee i.e., the amount shall first be adjusted towards interest payable and balance, if any, shall be adjusted towards lax payable (in the instant case tax refundable to the assessee.
6.2 Thus, it is clear that where the amount of tax demanded is paid by the assessee, then it shall first be adjusted towards interest payable and balance if any whatever tax payable. However, the Act is silent on this issue. Under these circumstances, fairness and justice remands that same principle emerging from the cited decisions should be applied while granting the refund as has been applied while collecting P a g e | 8 A.Y. 2008-09 Goldencross Pharma Limited amount of tax. The Revenue is not expected to follow double standards while dealing with the tax payers. The fundamental principle of fiscal legislation in any civilized society should be that the state should treat its citizens (i.e. tax payers in this case) with the same respect, honesty and fairness as it expects from its citizens. It is further noted by us that Hon'ble Delhi High Court has already decided this issue in clear words which has been followed by the Tribunals. It is further noted by us that assessee is not asking for payment for interest on interest. It is simply requesting for proper method of adjustment of refund and for following the same method which was followed by the department while making collection of taxes. In a recent judgment of Hon'ble Supreme Court in the case of Union of India v. Tata Chemicals Ltd. 363 ITR 658 (SC) wherein it has discussed at length about moral and legal obligation of the department to refund the amount of tax collected from the tax payers which was more than the amount actually due as per law, along with interest. Some of the observations are reproduced hereunder for the sake of better clarity in deciding the issue before us: "37 A "tax refund" is a refund of taxes when the tax liability is less than the tax paid. As per the old section an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to a special order passed by the assessing officer/Income Tax Officer. In the appeal filed against the said order the assessee has succeeded and a direction is issued by the appellate authority to refund the tax paid. The amount paid by the resident/ deductor was P a g e | 9 A.Y. 2008-09 Goldencross Pharma Limited retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a resident/ deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company.
Providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debtowed 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 aequo et bono ought to be refunded, the right to interest follows, as a matter of course." 6.3 It is noted that since the statute itself has already prescribed a particular method of adjustment in explanation to section 140A(1) of the Act, then justice, fairness, equity and good conscience demands that same method should be followed while making adjustment for refund of taxes, especially when no contrary provision has been provided. Under these circumstances and aforesaid discussion, we find that the judicial proprietary demands that order of the Tribunals (supra)must be followed and therefore we direct the AO to re-compute the amount of P a g e | 10 A.Y. 2008-09 Goldencross Pharma Limited interest u/s 244A of the Act by first adjusting the amount of refund already granted towards the interest component and balance left if any shall be adjusted towards the tax component after due verification of the facts on record. Further, he would allow the interest till the date of issue of refund. Needless to say, that assessee be given reasonable opportunity of being heard to represent its case and make any further submission, if so required. Accordingly ,grounds of appeal of the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 10/12/2025. [Justice (Retd. ) C. V. BHADANG] [PRABHASH SHANKAR] PRESIDENT ACCOUNTANT MEMBER