CIT PATIALA vs. THE BHUPINDRA FLOUR MILLS P.LT

Facts

The assessee, M/s Bhupindra Flour Mills (P) Limited, was charged interest under Section 217(1)(a) of the Income Tax Act, 1961, amounting to ₹1,68,639, for not submitting an advance tax estimate for assessment year 1982-83. This interest was later deleted in appeal and refunded to the assessee. However, the revenue did not allow interest under Section 244(1A) on this refunded interest. The Assessing Officer rejected the assessee's application for interest under Section 154, stating Section 244(1A) applied only to tax and penalty, not interest, as per Section 2(43). The CIT(A) allowed interest under Section 244(1A) based on High Court precedents, a decision upheld by the Income Tax Appellate Tribunal (ITAT). The revenue has filed a reference to the High Court.

Held

The High Court held that the revenue was liable to pay interest under Section 244(1A) on the amount of interest refunded to the assessee. The Court reasoned that Section 240 of the Act, which deals with refunds becoming due as a result of any order, encompasses 'any amount', including interest. Section 244(1A) mandates interest payment on such refunds. The Court, following the precedents set by the Kerala, Madhya Pradesh, and Madras High Courts, concluded that the expression 'amount' in Section 244(1A) is neutral and includes interest, even though the latter part of the section refers to 'tax or penalty'. The definition of 'tax' in Section 2(43) should not be restrictively applied to Section 244(1A). The intention of Parliament is to compensate the assessee for the excess payment during the period they were deprived of the use of funds. Therefore, the interest paid in pursuance of an order of assessment, even if it is interest itself, is eligible for interest under Section 244(1A). The question of law is answered against the revenue and in favour of the assessee. The reference is disposed of.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in upholding the decision of the CIT(A) allowing interest under Section 244(1A) on the amount of interest charged under Section 217(1)(a)? (Question of law) Assessee's contentions: The assessee argued that interest charged under Section 217(1)(a) and subsequently refunded should be eligible for interest under Section 244(1A). They relied on decisions from the Kerala High Court in CIT vs. Ambat Echukutty Manon and the Madhya Pradesh High Court in CIT vs. Sardar Balwant Singh Gujral, and the Madras High Court in CIT vs. Needle Industries Pvt. Limited. Revenue's contentions: The revenue contended that the Tribunal erred in awarding interest under Section 244(1A) on the refund of interest. They argued that interest on interest charged under Section 217(1)(a) was not admissible as 'tax' as defined under Section 2(43) of the Act does not include interest.