COMMISSIONER OF INCOME TAX-V vs. SHANTABEN K PATEL

O/TAXAP/936/2011 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 936 of 2011 WITH TAX APPEAL NO. 897 of 2010 WITH TAX APPEAL NO. 1941 of 2010 WITH TAX APPEAL NO. 1675 of 2010 WITH TAX APPEAL NO. 2297 of 2010 WITH TAX APPEAL NO. 246 of 2011 FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI

and HONOURABLE MS JUSTICE SONIA GOKANI

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX-II....Appellant(s) Versus GUJARAT STATE FINANCIAL SERVICES LTD....Opponent(s) Page 1 of 21

O/TAXAP/936/2011 JUDGMENT ================================================================ Appearance: MR MR BHATT, LD.SENIOR COUNSEL WITH MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR MANISH J SHAH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 17/02/2014

COMMON ORAL JUDGMENT (PER : HONOURABLE MS JUSTICE SONIA GOKANI) 1. Since all the Tax Appeals raise common question of law and facts, by a common judgment, they are being   decided.   However,   for   the   purpose   of adjudication, the facts contained in Tax Appeal No.1048   of   2010,   wherever   necessary   shall   be referred. 2. These Tax Appeals arise out of the order of the Income­tax Appellate Tribunal dated January 21, 2011 for the assessment year 2002­2003. Page 2 of 21

O/TAXAP/936/2011 JUDGMENT 3. The sole substantial question of law which arises in   the   present   Tax   Appeal   and   admitted   is   as follows : “Whether the Appellate Tribunal is right in law and on facts in cancelling the interest charged under section 234D of the Act ?” 4. The   question   arises   in   the   following   factual background : 4.1 The   assessee­company   is   a   non­banking financial   company,   which   is   engaged   in   the business   of   providing   loans   and   advances   to industrial

units,

leasing

and

hiring transactions   and   also   providing   financial services. 4.2 The   respondent­assessee   for   the   assessment year under question filed its return of income on October 29, 2002, disclosing total income at Rs.21.11 lakh (rounded off). On processing such return   under   section   143(1)   of   the   Act,   on January 10, 2003, the refund order was passed Page 3 of 21

O/TAXAP/936/2011 JUDGMENT on January 10, 2003, for an amount of Rs.32.84 lakh (rounded off), inclusive of interest under section 244A of the Act. 4.3 The assessee filed revised return on August 13, 2003, on the ground that the claim under section 36(1)(viia) of the Act in respect of bad debts was erroneously claimed and declared the   income   at   the   rate   of   Rs.22.16   lakh (rounded off).   The assessment case was taken under scrutiny and statutory notice was issued under section 143(2) of the Act, availing fresh opportunity of hearing to the assessee. 4.4 The   Assessing   Officer   on   finalising   the assessment   under   section   143(3)   of   the   Act issued demand notice as also charged interest under section 234D of the Act. 4.5 This   was   carried   by   the   assessee   to   the Commissioner   Income­tax   (Appeals).   Following the decision of the Supreme Court in the case of CIT v. Anjum, reported in 252 ITR 1 (SC). Page 4 of 21

O/TAXAP/936/2011 JUDGMENT The   CIT   (Appeals)   confirmed   the   same   on   the ground that such levy of interest is mandatory. 4.6 When the matter travelled to the Tribunal, it   cancelled   the   interest   following   its   own decision of earlier years. Hence, the present appeals. 5. We have heard the learned Senior Counsel Mr.M.R. Bhatt, who has strenuously argued in favour of the Revenue and Mr.M.J. Shah, learned counsel for the respondent­assessee. 5.1 We   notice   that   section   234(D)   of   the   Act provides for interest for excess refund, where any   refund   is   granted   to   the   assessee   under sub­section (1) of section 143 of the Act, the assessee is made liable to pay simple interest at the rate of ½% from the date of grant of refund to the date of such regular assessment. 5.2 Profitable   it   would   be   to   reproduce   the provision of section 234D at this stage : Page 5 of 21

O/TAXAP/936/2011 JUDGMENT “234D   :   Interest   on   excess   refund  –   (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub­section (1) of section 143, and­ (a)  no refund is due on regular assessment; or (b)  the amount refunded under sub­section (1) of   section   143   exceeds   the   amount refundable   on   regular   assessment,   the assessee   shall   be   liable   to   pay   simple interest at the rate of one­half per cent, on   the   whole   or   the   excess   amount   so refunded, for every month or part of a month comprised   in   the   period   from   the   date   of grant of refund to the date of such regular assessment. (2) Where,   as   a   result   of   an   order   under s.154 or s.155 or s.250 or s.254 or s.260 or s.262 or s.263 or s.264 or an order of the Settlement   Commission   under   sub­s.(4)   of s.245D, the amount of refund granted under sub­s.(1) of s.143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if   any,   under   sub­s.(1)   shall   be   reduced accordingly. Page 6 of 21

O/TAXAP/936/2011 JUDGMENT Explanation   1   –   Where,   in   relation   to   an assessment year, an assessment is made for the first time under section 147 or section 153A,   the   assessment   so   made   shall   be regarded   as   a   regular   assessment   for   the purposes of this section. Explanation 2 ­ For the removal of doubts, it is hereby declared that the provisions of this   section   shall   also   apply   to   an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date.” 5.3 Explanation   (2)   which   has   been   added   with effect from June 01, 2003, is declaratory and clarificatory in nature which states that the provision of this section shall also apply to the assessment year commencing before June 01, 2003,   if   the   proceeding   in   respect   of   such assessment   year   is   completed   after   the   said date. In other words, any assessment completed after the 1st day of June, 2003, regardless of the year of assessment, this provision shall be made applicable to such assessment year. Page 7 of 21

O/TAXAP/936/2011 JUDGMENT 5.4 Decision   of   the   Kerala   High   Court   in   the case of  Commissioner of Income­tax v. Kerala Chemicals   and   Proteins   Ltd.,   reported   in (2010)   323   ITR   584, considered the  scope  of section   234D   of   the   Act   in   respect   of   its introduction by Finance Act, 2003 with effect from June 01, 2003 and has taken a view that demand or levy of interest has to be from 1st June,   2003   only.   Kerala   High   Court   has   held that   “this   provision   on   interest   is   not introduced   with   reference   to   any   assessment year which is obvious from the fact that it is not   effective   from   the   beginning   of   the financial   year.   On   the   other   hand,   this provision on interest will apply to all cases of refund granted under section 143(1) of the Act,   but   interest   could   be   levied   only   with effect from June 01, 2003. Even though refund in   the   said   case   was   granted   under   section 143(1)   on   June   28,   2000,   and   regular assessment under section 143(3) was completed converting   the   refund   to   demand   of   tax   on January 22, 2004, interest could be demanded Page 8 of 21

O/TAXAP/936/2011 JUDGMENT only for the period from June 01, 2003 till January 22, 2004, which is what is done by the Assessing   Officer.   We   do   not   find   any justification for the Commissioner to give any retrospectivity to section 234D which is what he has done by directing the Assessing Officer to revise the assessment levying interest from the date of refund. In fact, the Commissioner has   no   authority   to   give   retrospective operation   to   a   substantive   provision   of   law providing   for   interest.   The   Revenue   has   no answer   to   our   query   as   to   whether   interest under section 234D could be levied in cases of regular   assessment   completed   under   section 143(3)   of   the   Act   prior   to   June   01,   2003, leading   to   demand   of   refunded   amount   as   tax determined   on   regular   assessment.   We   are, therefore, of the view that the Commissioner's order under section 263 was rightly found to be   untenable   by   the   Tribunal.   However,   we vacate   the   finding   of   the   Tribunal   that section   234D   is   applicable   only   from   the assessment   year   2004­05   onwards.   The   view Page 9 of 21

O/TAXAP/936/2011 JUDGMENT taken   by   the   Assessing   Officer   that   section applies   from   June   01,   2003   is   the   correct position.   The   appeal   is   dismissed,   but   by restoring   the   assessment   with   demand   of interest levied under section 234D with effect from June 01, 2003.”

Thus, Kerala High Court has held that the   provision   of   interest   will   apply   to   all cases of refund granted under section 143(1) of the Act, but interest could be levied only with effect from June 01, 2003. 5.5 Karnataka   High   Court   in   the   case   of Commissioner   of   Income­tax   and   another   v. Fanuc India Ltd., reported in (2011) 244 CTR (Kar.)   529,   was   considering   the   scope   of section 234D of the Act and the Court held that the provision of section 234D of the Act is applicable   only   from   June   01,   2003   and, therefore,   no   interest   under   that   provision could be levied from earlier date and merely because   the   order   of   assessment   was   passed subsequent   to   the   insertion   of   the   said Page 10 of 21

O/TAXAP/936/2011 JUDGMENT provision in the Act, would not make the said provision retrospective.  In the matter before Karnataka   High   Court,   the   assessment   was completed   under   section   143(3)   for   the assessment year 1999­2000 on December 20, 2004. It held that the interest under section 234D could   be   calculated   only   from   June   01,   2003 onwards and not from the date of issuance of refund which was in March, 2002. In the words of Karnataka High Court : “There   is   no   indication   in   the   language employed   in   the   entire   s.234D   that   the Parliament intended to make this levy of tax on   excess   refund   retrospectively.   On   the contrary  after  inserting   this  provision   in the Act, it is specifically stated that it comes into effect from 1st June, 2003. Though the   amendment   is   by   insertion,   the Parliament   has   expressly   stated   that   the amendment   comes   into   effect   from   1st  June, 2003. The Parliament has made its intention clear and unambiguous. In other words, it is not retrospective. It comes into effect from only   1st  June,   2003.   The   liability   to   pay interest on such  a refund  arises from  the date of refund and not from the date of the Page 11 of 21

O/TAXAP/936/2011 JUDGMENT assessment order. When the assessment order quantifies the tax payable and if at such a time, it is found that the assessee has been paid a refund, which he is not entitled to in   law,   he   is   liable   to   refund   the   said amount. Therefore, merely because the order of assessment was passed subsequent to the insertion of the said provision in the Act, would   not   make   the   said   provision retrospective.   The   provision   providing   for imposition   of   interest   is   a   substantive provision. In the absence of a contract or a usage providing for a payment of interest, interest can be levied only under law and it cannot   be   recovered   by   way   of   a   wrong deduction   of   the   amount.   Therefore,   the liability to pay interest emanates from the statutory provision. It is also equally well settled that unless a substantive provision is   made   retrospectively   either   by   express words   or   by   implication,   it   has   to   be considered as prospective only. A liability, which was not in law earlier, is sought to be   foisted   on   a   taxpayer.   In   those circumstances,  when   the  Courts   were  called upon   to   interpret   those   provisions,   it   is not open to the  Courts to interpret them as retrospectively   and   foist   liability  on  the taxpayer which he is not liable on the date of such refund.” Page 12 of 21

O/TAXAP/936/2011 JUDGMENT 5.6 This very issue came up for scrutiny before the   Bombay   High   Court   in   the   case   of Commissioner   of   Income­tax   v.   Indian   Oil Corporation Ltd., reported in 2010 TAXMAN 466 and   the   Bombay   High   Court   has   held   that addition of explanation (2) to section 234D of the   Act   by   Finance   Act,   2012,   with retrospective   effect   from   June   01,   2003,   is made   applicable   even   to   the   period   under assessment year 2004­2005. In respect of excess refund granted to the assessee under section 143(1) of the Act, the interest was payable by the assessee even if it was received prior to June 01, 2003, so long as the proceedings  of the   concerned   assessment   year   for   which   the refund was granted was completed after June 01, 2003.   The   Bombay   High   Court   held   the explanation 2 to section 234D of the Act as declaratory/ clarificatory in nature. The same being declaratory/ clarificatory, the same was held to be applied with retrospective effect. In the words of the Bombay High Court : Page 13 of 21

O/TAXAP/936/2011 JUDGMENT “21) The   question   therefore   is  whether the   word   “is”   in   section   234D   has   a   past signification. We think it does. Explanation 2 in fact supports this view. In view of the declaratory amendment to Section 234D of the Act by the addition of Explanation 2 thereto any   doubt   with   regard   to   the   word   “is” having a past signification has been set at rest. In fact the context in which the word “is”  has been used also supports the view that   it   has   a   past   signification.   The Legislature was obviously aware that refunds must have been made in respect of previous assessment   years.   Despite   this,   the amendment   did   not   exclude   such   cases   from the   operation   of   the   section.   A   grant   of refund under section 143(1) is in the nature of a provisional refund and is subject to the final   determination   under   section 143(3). This grant of refund is pending the conclusion   of   the   final   assessment   under section 143(3) in respect of the year for which   the   refund   is   granted.   The classification   done   in   section   234D   is   on the basis of the date of the completion of assessment proceedings prior to 1/06/2003 on the   one   hand   and   post   1/06/2003   on   the other.   The   classification   is   not   on   the basis of the date of grant of refund under section

143(1)

the

Act.

The classification   on   the   basis   of   the Page 14 of 21

O/TAXAP/936/2011 JUDGMENT completion of assessment proceedings is not a   subject   matter   of   challenge   before   us. Therefore, the date of grant of refund is immaterial to determine the applicability of section­234D   of   the   Act.   In   the circumstances   the   submission   of   the respondent that section 234D of the Act only applies   to   refunds   granted   prior   to 1/06/2003 is not acceptable. 22) It   must   be   borne   in   mind   that   refund which is granted under section 143(1) of the Act   to   an   assessee   is   qua   an   assessment proceeding for a particular assessment year. The   refund   granted   is   qua   an   assessment year.   The   refund   emanates   from   assessment proceedings   for   a   particular   assessment year. The refund granted cannot be divorced from the assessment year or the assessment proceeding.   Consequently   to   hold   that interest on such refund would only run from 1/06/2003   would   be   to   curtail   the   plain meaning of Explanation 2 to Section 234D. 23) Section 143(4) also supports our view. It reads as under :­ “Section 143 – Assessment ­ .. .. .. xxx xxx xxx (4)   Where   a   regular   assessment   under   sub section (3) of this section or section 144 is made,­ Page 15 of 21

O/TAXAP/936/2011 JUDGMENT a) any tax or interest paid by the assessee under   sub­section   (1)   shall   be   deemed   to have   been   paid   towards   such   regular assessment; b) if no refund is due on regular assessment or the amount refunded under sub section (1) exceeds   the   amount   refundable   on   regular assessment, the whole or the excess amount so   refunded   shall   be   deemed   to   be   tax payable by the assessee and the provisions of this Act shall apply accordingly”. It   is   clear   therefore,   that   excess   refund determined under section 143(3) of the Act is deemed to be tax payable by the assessee. However,   as   there   was   no   provision   of interest   on   the   grant   of   refund   under Section   143(1)   of   the   Act   it   became necessary to provide for the same by having a   charging   provision.   This   was   done   by section 234D of the Act in respect of  all pending   assessments   in   which   refund   was given. Thus even if, a refund has already been granted, the same would be subject to the provisions of section 234D of the Act. Under section 234D(1) where the refund under section 143(1) is in excess of the amounts refundable   on   regular   assessment,   interest on the excess amount would be  payable. In any   case   after   the   introduction   of Explanation   2   there   can   be   no   doubt   that even   where   refund   is   granted   prior   to 1/06/2003   the   same   would   carry   interest provided the proceedings for assessment are completed   after   1/06/2003.   The   respondent has not contended that the Explanation 2 to section   234D   of   the   Act   is   not Page 16 of 21

O/TAXAP/936/2011 JUDGMENT retrospective. Their only contention is that it would not apply to refunds granted prior to 1/06/2003 even in respect of assessments completed   after   the   cut­off   date   of 1/06/2003. This submission ignores the fact that Explanation 2 which is declaratory in nature   clarifies   that   the   section   would apply   to   an   assessment   year  even   before 1/06/2003   provided   the   proceedings   in respect of such   assessment years are not completed   by   the   cut   off   date   i.e. 1/06/2003. xxx xxx xxx 26)   A   statute   could   be   retrospective   in operation   being   expressly   stated   or   by necessary   implication.   The   case   of   the revenue is that section 234D as introduced on   1st   June,   2003   was   retrospective   in operation by necessary implication. However, as   doubts   were   raised   about   its retrospectivity,  the same  was clarified  by adding   an   explanation   to   section   234D   by Finance   Act,   2012.   Under   the   Act   what   is brought   to   tax   is   not   the   income   of   the assessee   in   the   assessment   year   but   the income of the assessee in the previous year. The liability to tax arises on account of the   Finance   Act   which   fixes   the   rate   at which the tax is to be paid. The law to be applied   is   as   existing   on   the   1st   day   of April of the previous year. In support the Counsel for the respondent relied upon the decision   of   the   Supreme   Court   in Karimthuravi   Tea   Estate   ltd.   v.   State   of Kerala 60 ITR 262, Maharajah of Pithapurm v. CIT 13 ITR 221 (PC) and CIT v. Scindia Steam Navigation   Co.   Ltd.   42   ITR   539. The aforesaid decisions are not relevant for our purpose   particularly,   in   view   of   the   fact that Explanation 2 to section 234D of the Act   as   introduced   by   the   Finance   Act,2012 being   declaratory   in   nature   would   be retrospective. This amendment make it clear that   it   shall   apply   assessment   years   even prior to 1/06/2003.” Page 17 of 21

O/TAXAP/936/2011 JUDGMENT 5.7 It can also be noted that the Bombay High Court has in terms held that the decision of the  Tribunal   in  ITO   v.   Ekta   Promoters   (P.) Ltd., reported in (2008) 113 ITD 719 (Delhi) (SB) was not correct, by holding that till such time, the assessment proceedings are completed in   respect   of   relevant   assessment   year,   the Amended Act would be applicable to the pending proceedings. For all the pending proceedings in regard to which the refund has been provided under section 143(1) of the Act, which are not concluded and finalized, the refunds are held to be granted under section 143(1) of the Act as finally determined when final assessment is passed   under   section   143(3)   of   the   Act. Explanation   2   to   section   234D   of   the   Act applies thus to the pending proceedings, where the assessment in respect of assessment year is not completed on June 01, 2003. The Court held that   the   provision   for   charging   interest   in every case was a part of substantive law and not an arbitrary provision and though in those cases where the refunds have been granted prior Page 18 of 21

O/TAXAP/936/2011 JUDGMENT to June 01, 2003, section 234D was not applied for   not   having   any   retrospective   operation, however, in all pending proceedings, where the assessment had not been completed on June 01, 2003,   the   same   has   been   made   applicable.   In other words, explanation (2) to section 234D of the Act has been made applicable to even the assessment   year   commencing   before   June   01, 2003. The only requirement in such a case would be   that   the   assessment   has   to   be   completed after June 01, 2003. Therefore, after insertion of Explanation 2, the operation of section 234D of charging interest on the excess refund paid to   the   assessee   is   not   restricted,   making operation of such section effective from June 01, 2003. In other words, the refund granted under section 143(1) of the Act in respect of a particular assessment year, is subject to the final   determination   under   sub­section   (3)   of section 143 of the Act. Addition of Explanation 2 to section 234D of the Act when is being held declaratory amendment, what would be relevant for   the   purpose   of   charging   interest   on   the Page 19 of 21

O/TAXAP/936/2011 JUDGMENT refund granted under section 143(1) of the Act is the date of completion of assessment. If the assessment is framed after June 01, 2003, the said provision shall have applicability. 5.8 The Bombay High Court has extensively dealt with the explanation 2 and has interpreted the provisions keeping in mind the principles of interpretation

statutes.

have respectfully chosen to   follow the aforesaid decision   of   the   Bombay   High   Court   and, therefore,   the   order   of   the   Tribunal   in   the instant case following the decision the case of Ekta Promoters  (P.) Ltd. (supra) holding the provision of section 234D of the Act applicable only   with   effect   from   2004­2005   and   further holding that the interest under this section is not   chargeable   for   earlier   assessment   years, even   though   the   assessment   has   been   framed after   June   01,   2003,   is   not   held   to   be   a correct   law   and,   accordingly,   the   Revenue's appeal deserves to be allowed. Page 20 of 21

O/TAXAP/936/2011 JUDGMENT 6. In view of the discussion held hereinabove, the Tax Appeals are allowed. The order dated January 21, 2011 passed by the Tribunal is quashed and set aside. Answering the substantial question of law in favour of the Revenue that in all those matters where excess refund has been granted by the Revenue, the provision of section 234D of the Act will apply and even in the case of earlier assessment   years   where   the   assessments   were framed after June 01, 2003, the interest will be chargeable  in accordance with law. There shall be, however, no order as to costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Aakar Page 21 of 21