2008 (7) TMI 452 - AT - Income Tax

Interest On Excess Refund - Interpretations of the provisions of section 234D - Retrospective or Prospective effect - Whether interest u/s 234D should be charged from assessment year 2004-05 or with reference to regular assessment framed after 1-6-2003 irrespective of the assessment years involved or irrespective of the date when refund was granted? - revenue contended that Section 234D is not a charging section but a procedural section as it merely prescribes mode for collection and recovery - Heydon's Rule - It was pleaded that Rule directs that the courts must adopt that construction which shall suppress the mischief and advance the remedy.

HELD THAT:- Section 234D was inserted by the Finance Act, 2003 with effect from first day of June, 2003 and the only amendment brought to this section as an amendment by Taxation Laws (Amendment) Act, 2003 whereby in sub-section (1) the words "two-third per cent", were substituted by the words "one-half per cent" with effect from 8-9-2003.

It can be seen from the language of section 234D that there is no ambiguity in the language. It is clear that in a case where a refund has been issued to the assessee on the basis of processing of return u/s 143(1) and such refund is not found to be due to the assessee on framing of the regular assessment and the amount refunded in pursuance of processing of return u/s 143(1) exceeds the amount refundable on regular assessment, then, the recipient of such refund has been made liable to pay interest on such refund or excess refund, as the case may be.

A provision has also been made that if subsequently the said refund is held to be correctly allowed under the various provisions which have been enumerated in the section, either in whole or in part, then, the interest chargeable will be reduced accordingly. Thus, there cannot be said to be any ambiguity so far as it concerns to the circumstances under which such interest is to be levied and also regarding the period for which such interest is to be levied.

According to the contention of revenue, the provisions of section 234 D should be considered to be procedural section, therefore, to be applied retrospectively. As against that contention of the revenue, the contentions of the assessee is that this provision cannot be construed to have retrospective effect. Rather it has been the contention of the assessee that if a provision is not on the statute on the first day of assessment year, then it cannot have an application for that assessment year.

Contention of Ld. DR that section 234D being found in Chapter XVII which is under the head 'Collection and recovery' should be construed being procedural in nature - The provisions of section 234D have already been reproduced and it is observed that the language used therein is plain and unambiguous. So according to the well settled law as laid down by the Hon'ble Supreme Court in the case of Padma Sundara Rao[2002 (3) TMI 44 - SUPREME COURT], nothing can be read in the statutory provision which is found to be plain and unambiguous. Thus, on the basis of argument that Legislature has brought this provision just to fill the lacuna in the law and, therefore, these provisions should be construed retrospective cannot be accepted more particularly when these provisions have been inserted on the statute with effect from 1-6-2003 and not with retrospective effect.

The Legislature has specifically mentioned the date of applicability i.e., 1-6-2003 and the Legislature was not incompetent to make retrospective provision, if it was so intended. Therefore, merely on the basis of interpretation, retrospective effect cannot be given to the provisions of section 234D.

Argument of Ld. DR is that there was a mischief and, therefore, applying the Heydon's Rule it has to be held that provisions of section 234D are retrospective - The Heydon's Rule is also known as 'purposive construction' or 'mischief rule' which enables consideration of four matters in construing an Act. Moreover, the application of Heydon's Rule itself does not confirm retrospective operation of a provision brought under that rule. This is irrespective of the fact that for application of that rule it is a condition precedent to find out that there existed a mischief.

Mere fact that earlier there was no provision to charge interest on the refund issued on processing of return cannot by itself be described as 'mischief' or 'defect'. The interest whether is to be charged on certain refunds or not is within the discretion of the Legislature. In other words, absence of provision of charging interest on such refunds by itself cannot be described as 'mischief' or 'defect' which is a necessary element for the application of mischief rule. Apart from that it has already been mentioned that even application of Heydon's Rule in itself does not mean that provision shall have retrospective effect.

Contention of Ld. DR that the provisions of section 234D being under the Chapter 'Collection and recovery' should be construed as procedural and not charging provision - The decision of the Hon'ble Supreme Court in the case of J.K. Synthetics Ltd.[1994 (5) TMI 233 - SUPREME COURT] held that the provisions regarding levy and collection of interest even if construed as forming part of the machinery provisions are substantive law for the simple reason that in the absence of contract or usage interest can be levied under law and it cannot be recovered by way of damages for wrongful detention of amount. Thus, their lordships have held that even if the levy of interest is falling under the head 'Collection and recovery' despite that the provision of levy of interest has to be construed as substantive in nature.

Thus, the contention of the Ld. DR that the provision of section 234D being under the Chapter XVII under the head 'Collection and recovery' should be construed to be a procedural or machinery section and, therefore, should be applied retrospectively has to be rejected in view of aforementioned decision of Hon'ble Supreme Court.

If the provisions of section 234D are substantive, then the same cannot be held to be retrospective unless specifically provided in the statute itself as discussed in earlier paragraphs. It is, therefore, held that the provisions of section 234D are substantive and they cannot be applied retrospectively.

Submission of Mr. Gunjan Prasad is that every assessment made after 1-6-2003 must take into consideration section 234D and as assessee was assessed after 1-6-2003, its assessments must be considered to be governed by the Income-tax Act as it was amended upto that date - One must bear in mind two basic facts about the Income-tax Act. The first is that the Income-tax Act objects to tax not the income of the assessee in the year of assessment, but in the previous year and the other basic fact is that the liability to tax arises not by reason of the provisions of Income-tax Act, but by reason of the fact that Finance Act fixes the rate at which the assessee is liable to pay tax and it is by the reason of Finance Act that the income of previous year of assessee becomes liable to tax. Thus, for an assessment to be made for assessment year 2003-04 which ended on 31-3-2003 for that Finance Act of 2002 will impose a liability on assessee to pay tax on its income at the rate mentioned in that Act.

Applying the principle laid down by the Hon'ble Supreme Court in the case of Scindia Steam Navigation Co.[1961 (4) TMI 6 - SUPREME COURT]. It has to be held that section 234D which has been brought on the statute from 1-6-2003 cannot be applied to assessment year 2003-04 or earlier years, but it will have application only with effect from assessment year 2004-05.

Therefore, our answer to question referred to us is that interest u/s 234D is chargeable from assessment year 2004-05 and it could not be charged for earlier years even though regular assessments for these years are framed after 1-6-2003 or the refund was granted for those years after the said date.

In all these three appeals the only question involved is regarding the charge ability of interest in respect of assessment years 1998-99, 1999-2000 and 2000-01. It has been held in the above part of this decision that interest u/s 234D could not be charged in respect of assessment years falling prior to assessment year 2004-05 therefore it is held that ld. CIT(A) has rightly deleted the interest levied on assessee u/s 234D in respect of all the appeals under consideration.

In the result departmental appeals stand dismissed.