Taxpayer is entitled to compensation for the delay in payment of interest due on refund
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Taxpayer is entitled to compensation for the delay in payment of interest due on refund

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Recently, the Andhra Pradesh High Court in the case of The Sirpur Paper Mills Ltd. (the taxpayer) held that the taxpayer is eligible to receive compensation on account of the delay in payment of ...

Recently, the Andhra Pradesh High Court in the case of The Sirpur Paper Mills Ltd. (the taxpayer) held that the taxpayer is eligible to receive compensation on account of the delay in payment of interest due on refund.

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Taxpayer is entitled to compensation for the delay in payment of interest due on refund Document Transcript

  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA Taxpayer is entitled to compensation for the delay in payment of interest due on refund 19 June 2014 22 21 February 2013 Background Recently, the Andhra Pradesh High Court (High Court) in the case of The Sirpur Paper Mills Ltd 1 (the taxpayer) held that the taxpayer is eligible to receive compensation on account of the delay in payment of interest due on refund. Facts of the case  During the Assessment Year (AY) 1984-85, the taxpayer had paid an advance tax of INR2.25 million and also paid an amount of INR50,000 towards Tax Deducted at Source (TDS).  During the assessment proceedings, the income was assessed under the head long term capital gains for a sum of INR0.33 million. Thus, the taxpayer was eligible for refund of an amount of INR1.97 million along with interest. __________________ 1 The Sirpur Paper Mills Ltd. v. JCIT (Writ Petition No. 5807 OF 1999) – Taxsutra.com  The Assessing Officer (AO) determined the refund of INR1.97 million, on which the taxpayer was entitled for the interest for the period from 1 April 1984 to 31 March 1987.  The taxpayer claimed that it was also entitled for the payment of compensation on account of the delay in payment of the interest amount for the period from 31 March 1987 to 22 December 1998.  The AO rejected the claim of the taxpayer on the ground that there was no provision in the Income- tax Act, 1961 (the Act) to grant interest on interest. It was held that as per the decision of the Supreme Court in the case of Modi Industries Limited 2 , interest is allowable only from the 1st day of April of the assessment year to the date of making an order of assessment. ________________ 2 Modi Industries Ltd. v. CIT [1995] 216 ITR 759 (SC)
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. High Court’s ruling  Perusal of the Supreme Court’s decision in the case of Sandvik Asia Ltd. 3 , the High Court observed that the issue involved in the present case is not res integra 4 .  The Supreme Court in the above case while reversing the Bombay High Court’s decision 5 had extensively dealt with the issue and held that, under the Act, the tax department is entitled to collect only tax, interest, penalty, etc., within the four corners of the Act and any other amount which has been collected in excess, would have the general character of the amount. The Supreme Court observed that if the amount is withheld beyond the period permissible under the statute, the taxpayer is entitled to be compensated for the deprivation of the said amount.  Further in the said decision, meaning that is required to be given to the word compensation has been considered extensively and the tax department was directed to pay interest at 9 per cent per annum on interest payable within a period of one month from the date of receipt of copy of the order, failing which the tax department shall pay a penal interest at 15 per cent per annum.  Relying on the decision of the Supreme Court in the case of Sandvik Asia Ltd, the High Court directed the tax department to pay the simple interest at 9 per cent per annum for the period i.e., from 31 March 1987 to 22 December 1998 to the taxpayer within a period of two months from the date of receipt of copy of this order, failing which the tax department shall pay the penal interest at 15 per cent per annum for the above said period. Our comments Whether taxpayer is entitled to receive interest on interest on refund due has been a matter of debate before the courts from several years. The Supreme Court, in the case of Sandvik Asia Ltd., dealt with a case where there was inordinate delay on the part of the revenue authorities in refunding the amount due to the taxpayer. The Supreme Court held that revenue authorities should pay compensation to the taxpayer for such inordinate delay. Relying on the Sandvik Asia Ltd decision, various High Courts 6 have held that the taxpayer is entitled to receive interest on the delay in payment of interest due on tax refund. ______________________________ 3 Sandvik Asia Ltd. v. CIT [2006] 150 Taxman 591 (SC) 4 Res integra means an entire thing or untouched matter. The term res integra is applied to those points of law which have not been decided, which are untouched by dictum or decision. 5 Sandvik Asia Ltd. v. CIT [2004] 267 ITR 78 (Bom) 6 India Trade Promotions Organisations v. CIT (ITA Nos. 167/2012 & 168/2012) , Gujarat Flourochemicals Ltd. v. CIT [2008] 300 ITR 328 (Guj) However, the larger bench of Supreme Court in case of Gujarat Fluro Chemicals 7 has held that it is only interest provided under Section 244A of the Act which may be claimed by the taxpayer and no other interest on such statutory interest would be available. The Supreme Court observed that the decision in the case of Sandvik Asia Limited has been misquoted and misinterpreted by the taxpayers as well as by the tax department. It was also observed that the issue in the case of Sandvik Asia was whether the taxpayer who had waited for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period. Accordingly, the Sandvik’s case was of an inordinate delay on the part of the tax department in refunding certain amount which included the statutory interest and therefore, the Supreme Court directed the tax department to pay compensation for the same and not an interest on interest. It is pertinent to note that the Supreme Court in the case of Gujarat Fluoro Chemical did not consider its earlier decision in the case of HEG Ltd. 8 where the Supreme Court had held that the interest due on refund will partake the character of the ‘amount due’ under Section 244A and will become an integral part on which the taxpayer is entitle to interest under Section 244A of the Act. However, in the present case the Andhra Pradesh High Court followed the decision of the Supreme Court in the case of Sandvik Asia Ltd. and held that the taxpayer is entitled for compensation for the delay in payment of the interest due on refund. ____________________ 7 CIT v. Gujarat Fluro Chemicals (SLP No. 11406 of 2008) 8 CIT v. H.E.G Ltd [2010] 189 Taxman 335 (SC)
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010