2025 (7) TMI 516 - AT - Income Tax

Computation of amount of eligible interest on refund due to the appellant bank - calculation of interest u/s. 244A - HELD THAT - The amount of refund was determined pursuant to the consequential order passed to the order ITAT order. The amount of refund determined by the AO undisputedly includes the interest determined u/s. 244A of the Act pursuant to the earlier order passed by the AO. While determining the amount of refund it appears that the AO had not granted interest on the component of interest u/s. 244A perhaps by holding the opinion that the assessee is not entitled for interest on interest in view of the decision of Gujarat Fluoro Chemicals 2013 (10) TMI 117 - SUPREME COURT (LB) Section (1A) was inserted by the Parliament by Finance Act 2016 w.e.f. 01.06.2016 governing grant of interest in such situations. The term refund includes the interest earlier granted u/s. 244A of the Act as interpreted by the courts in the context of earlier provisions of sections 243 and 244 of the Act. In the light of this statutory provision it appears that the AO had not taken cognizance of the latest provisions of law while disposing the application filed by the appellant. The decision of Sandvik Asia Ltd. 2006 (1) TMI 55 - SUPREME COURT has no application to the facts of the case. Therefore we are of the considered opinion that the matter requires remand. AO is directed to dispose of the application filed by the appellant u/s. 154 of the Act taking into consideration the statutory provisions of section 244(1A) of the Act which are undoubtedly applicable since the order u/s. 154 was passed after insertion of sub-section (1A) of the Act. Accordingly the matter is set aside to the file of the AO. Appeal of the assessee stands partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the appellant bank is entitled to receive interest under section 244A of the Income Tax Act, 1961 on the interest component already granted as part of the refund amount (i.e., interest on interest)?
• Whether the Assessing Officer (AO) was correct in rejecting the appellant's application for rectification under section 154 of the Act seeking interest on the interest component included in the refund?
• What is the correct legal interpretation of the provisions of section 244(1A) of the Act, inserted by the Finance Act, 2016 with effect from 01.06.2016, regarding the grant of interest on interest in tax refund cases?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Interest on Interest under Section 244A of the Income Tax Act

Relevant legal framework and precedents: The principal statutory provision governing interest on refunds is section 244A of the Income Tax Act, 1961. Prior to the insertion of sub-section (1A) by the Finance Act, 2016, the law was interpreted by the Supreme Court in CIT v. Gujarat Fluoro Chemicals and CIT v. H.E.G. Ltd. to exclude the grant of interest on interest. The Apex Court held that the assessee is not entitled to interest on the interest component included in the refund.

However, section 244(1A), inserted w.e.f. 01.06.2016, explicitly governs the grant of interest in cases where the refund includes interest previously granted under section 244A. The legislative intent behind this insertion was to clarify and modify the earlier position, allowing interest on interest in certain circumstances.

Court's interpretation and reasoning: The Tribunal noted that the AO, while disposing of the rectification application under section 154, relied on the pre-2016 Supreme Court decisions to deny interest on interest. However, the Tribunal observed that the rectification order was passed after the insertion of section 244(1A), which governs the grant of interest on interest. The Tribunal held that the AO failed to consider the amended statutory provision, which is applicable to the case.

Key evidence and findings: The refund amount determined included interest under section 244A from an earlier order. The appellant's application under section 154 sought rectification for non-grant of interest on this interest component. The AO rejected the claim citing the Supreme Court's pre-2016 position. The Tribunal found that the AO did not apply the amended law (section 244(1A)) applicable at the time of the order.

Application of law to facts: Since the rectification order was passed post-insertion of section 244(1A), the Tribunal held that the appellant is entitled to have the AO reconsider the claim for interest on interest in light of the amended provision. The Tribunal distinguished the earlier Supreme Court decisions as they predated the statutory amendment.

Treatment of competing arguments: The appellant relied on decisions such as Union of India v. Tata Chemicals Ltd., Union Bank of India v. ACIT, and Tata Sons (P.) Ltd. v. DCIT, which support the grant of interest on interest post amendment. The Revenue relied on the Supreme Court decisions denying interest on interest. The Tribunal gave precedence to the statutory amendment and the more recent judicial interpretations supporting the appellant's claim.

Conclusion: The Tribunal concluded that the AO's rejection of interest on interest was incorrect as it failed to consider the statutory amendment under section 244(1A). The matter was remanded to the AO for fresh consideration applying the correct legal provisions.

Issue 2: Validity of the AO's Order under Section 154 and the Need for Remand

Relevant legal framework and precedents: Section 154 of the Income Tax Act allows rectification of mistakes apparent from the record. The scope of rectification includes correcting errors in calculation of interest on refunds.

Court's interpretation and reasoning: The Tribunal observed that the AO's order under section 154 rejecting the appellant's claim was based on an incorrect legal premise. Since the order was passed after the insertion of section 244(1A), the AO was obliged to apply the amended law. The Tribunal found that the AO did not take cognizance of the latest provisions and therefore the order was not sustainable.

Key evidence and findings: The appellant filed the section 154 application seeking rectification of the interest calculation. The AO rejected the application relying on outdated legal principles. The Tribunal found this approach erroneous.

Application of law to facts: The Tribunal directed the AO to dispose of the section 154 application afresh, considering the provisions of section 244(1A) of the Act. This was necessary to ensure correct computation of the refund amount including interest on interest where applicable.

Treatment of competing arguments: The Revenue's contention that no interference was warranted was rejected by the Tribunal on the ground that the AO's order did not reflect the current legal position.

Conclusion: The Tribunal set aside the AO's order under section 154 and remanded the matter for fresh disposal applying the amended statutory provisions.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is encapsulated in the following observations:

"The term 'refund' includes the interest earlier granted u/s. 244A of the Act as interpreted by the courts in the context of earlier provisions of sections 243 and 244 of the Act. In the light of this statutory provision it appears that the AO had not taken cognizance of the latest provisions of law while disposing the application filed by the appellant. The decision of the Hon'ble Supreme Court in the case of Sandvik Asia Ltd. v. CIT has no application to the facts of the case. Therefore, we are of the considered opinion that the matter requires remand. The AO is directed to dispose of the application filed by the appellant u/s. 154 of the Act taking into consideration the statutory provisions of section 244(1A) of the Act, which are undoubtedly applicable, since the order u/s. 154 was passed after insertion of sub-section (1A) of the Act."

Core principles established include:

• The entitlement to interest on interest under section 244A must be considered in light of the statutory amendment introduced by Finance Act, 2016 (section 244(1A)).
• Pre-amendment Supreme Court decisions denying interest on interest are not applicable to orders passed after the insertion of section 244(1A).
• Assessing Officers must apply the current statutory provisions when disposing of rectification applications under section 154.
• Where an order under section 154 is passed without considering the amended law, the matter should be remanded for fresh consideration.

Final determinations on each issue:

• The appellant is entitled to have the AO reconsider the claim for interest on interest under section 244A of the Act, applying section 244(1A).
• The AO's order rejecting the claim under section 154 is set aside and remanded for fresh disposal.
• The appeals are partly allowed accordingly.