Commissioner of Income Tax vs Gujarat State Financial Services Ltd.

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Sonia Gokani, J.—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. These tax appeals arise out of the order of the Tribunal dt. 21st Jan., 2011 for the asst. yr. 2002-03.

The sole substantial question of law which arises in the present tax appeal and admitted is as follows:

"Whether the Tribunal is right in law and on facts in cancelling the interest charged under s. 234D of the Act?"

The question arises in the following factual background:

3.1 The assessee-company is a non-banking 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.

3.2 The respondent-assessee for the assessment year under question filed its return of income on 29th Oct., 2002, disclosing total income at Rs. 21.11 lakhs (rounded off). On processing such return under s. 143(1) of the Act, on 10th Jan., 2003, the refund order was passed on 10th Jan., 2003, for an amount of Rs. 32.84 lakhs (rounded off), inclusive of interest under s. 244A of the Act.

3.3 The assessee filed revised return on 13th Aug., 2003, on the ground that the claim under s. 36(1)(viia) of the Act in respect of bad debts was erroneously claimed and declared the income @ Rs. 22.16 lakhs (rounded off). The assessment case was taken under scrutiny and statutory notice was issued under s. 143(2) of the Act, availing fresh opportunity of hearing to the assessee.

3.4 The AO on finalising the assessment under s. 143(3) of the Act issued demand notice as also charged interest under s. 234D of the Act.

3.5 This was carried by the assessee to the CIT(A). Following the decision of the Supreme Court in the case of Commissioner of Income Tax, Mumbai Vs. Anjum M.H. Ghaswala and Others, , the CIT(A) confirmed the same on the ground that such levy of interest is mandatory.

3.6 When the matter travelled to the Tribunal, it cancelled the interest following its own decision of earlier years. Hence, the present appeals.

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 respondent-assessee.

4.1 We notice that s. 234D of the Act provides for interest for excess refund, where any refund is granted to the assessee under sub-s. (1) of s. 143 of the Act, the assessee is made liable to pay simple interest @ � per cent from the date of grant of refund to the date of such regular assessment.

4.2 Profitable it would be to reproduce the provision of s. 234D at this stage:

"234D: Interest on excess refund--(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-s. (1) of s. 143, and--

(a) no refund is due on regular assessment; or

(b) the amount refunded under sub-s. (1) of s. 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of one-half 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 sub-s. (4) of s. 245D, the amount of refund granted under sub-s. (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 sub-s. (1) shall be reduced accordingly.

Explanation 1: Where, in relation to an assessment year, an assessment is made for the first time under s. 147 or s. 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 June, 2003 if the proceedings in respect of such assessment year is completed after the said date."

4.3 Explanation 2 which has been added w.e.f. 1st June, 2003, is declaratory and clarificatory in nature which states that the provision of this section shall also apply to the assessment year commencing before 1st June, 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 June, 2003, regardless of the year of assessment, this provision shall be made applicable to such assessment year.

4.4 Decision of the Kerala High Court in the case of Commissioner of Income Tax Vs. Kerala Chemicals and Proteins Ltd., , considered the scope of s. 234D of the Act in respect of its introduction by Finance Act, 2003 w.e.f. 1st June, 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 s. 143(1) of the Act, but interest could be levied only w.e.f. 1st June, 2003. Even though refund in the said case was granted under s. 143(1) on 28th June, 2000, and regular assessment under s. 143(3) was completed converting the refund to demand of tax on 22nd Jan., 2004, interest could be demanded only for the period from 1st June, 2003 till 22nd Jan., 2004, which is what is done by the AO. We do not find any justification for the CIT to give any retrospectivity to s. 234D which is what he has done by directing the AO to revise the assessment levying interest from the date of refund. In fact, the CIT 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 s. 234D could be levied in cases of regular assessment completed under s. 143(3) of the Act prior to 1st June, 2003, leading to demand of refunded amount as tax determined on regular assessment. We are, therefore, of the view that the CITs order under s. 263 was rightly found to be untenable by the Tribunal. However, we vacate the finding of the Tribunal that s. 234D is applicable only from the asst. yr. 2004-05 onwards. The view taken by the AO that section applies from 1st June, 2003 is the correct position. The appeal is dismissed, but by restoring the assessment with demand of interest levied under s. 234D w.e.f. 1st June, 2003."

Thus, Kerala High Court has held that the provision of interest will apply to all cases of refund granted under s. 143(1) of the Act, but interest could be levied only w.e.f. 1st June, 2003.

4.5 Karnataka High Court in the case of ACIT Vs. M/s. Fanuc India Ltd. : ACIT Vs. M/s. Fanuc India Ltd. , was considering the scope of s. 234D of the Act and the Court held that the provision of s. 234D of the Act is applicable only from 1st June, 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 provision in the Act, would not make the said provision retrospective. In the matter before Karnataka High Court, the assessment was completed under s. 143(3) for the asst. yr. 1999-2000 on 20th Dec., 2004. It held that the interest under s. 234D could be calculated only from 1st June, 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 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."

4.6 This very issue came up for scrutiny before the Bombay High Court in the case of The Commissioner of Income Tax 10, Aayakar Bhavan, M.K. Road, Mumbai-400020 Vs. M/s. Indian Oil Corporation Ltd., G-9, Ali Yavar Jung Marg, Bandra (E), Mumbai-400051, and the Bombay High Court has held that addition of Expln. (2) to s. 234D of the Act by Finance Act, 2012, with retrospective effect from 1st June, 2003, is made applicable even to the period under asst. yr. 2004-05. In respect of excess refund granted to the assessee under s. 143(1) of the Act, the interest was payable by the assessee even if it was received prior to 1st June, 2003, so long as the proceedings of the concerned assessment year for which the refund was granted was completed after 1st June, 2003. The Bombay High Court held the Expln. 2 to s. 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:

"21. The question therefore is whether the word ''is'' in s. 234D has a past signification. We think it does. Explanation 2 in fact supports this view. In view of the declaratory amendment to s. 234D of the Act by the addition of Expln. 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 s. 143(1) is in the nature of a provisional refund and is subject to the final determination under s. 143(3). This grant of refund is pending the conclusion of the final assessment under s. 143(3) in respect of the year for which the refund is granted. The classification done in s. 234D is on the basis of the date of the completion of assessment proceedings prior to 1st June, 2003 on the one hand and post 1st June, 2003, on the other. The classification is not on the basis of the date of grant of refund under s. 143(1) of the Act. The classification on the basis of the 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 s. 234D of the Act. In the circumstances the submission of the respondent that s. 234D of the Act only applies to refunds granted prior to 1st June, 2003 is not acceptable.

It must be borne in mind that refund which is granted under s. 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 1st June, 2003 would be to curtail the plain meaning of Expln. 2 to s. 234D.

Sec. 143(4) also supports our view. It reads as under:

Sec. 143--Assessment--...........

(4) Where a regular assessment under sub-s. (3) of this section or s. 144 is made,--

(a) any tax or interest paid by the assessee under sub-s. (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-s. (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 s. 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 s. 143(1) of the Act it became necessary to provide for the same by having a charging provision. This was done by s. 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 s. 234D of the Act. Under s. 234D(1) where the refund under s. 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 Expln. 2 there can be no doubt that even where refund is granted prior to 1st June, 2003 the same would carry interest provided the proceedings for assessment are completed after 1st June, 2003. The respondent has not contended that the Expln. 2 to s. 234D of the Act is not retrospective. Their only contention is that it would not apply to refunds granted prior to 1st June, 2003 even in respect of assessments completed after the cutoff date of 1st June, 2003. This submission ignores the fact that Expln. 2 which is declaratory in nature clarifies that the section would apply to an assessment year even before 1st June, 2003 provided the proceedings in respect of such assessment years are not completed by the cut off date i.e. 1st June, 2003.

........

A statute could be retrospective in operation being expressly stated or by necessary implication. The case of the Revenue is that s. 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 s. 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 Karimtharuvi Tea Estate Ltd. Vs. State of Kerala, , (1945) 13 ITR 221 (Privy Council) and Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., . The aforesaid decisions are not relevant for our purpose particularly, in view of the fact that Expln. 2 to s. 234D of the Act as introduced by the Finance Act, 2012 being declaratory in nature would be retrospective. This amendment makes it clear that it shall apply assessment years even prior to 1st June, 2003."

4.7 It can also be noted that the Bombay High Court has in terms held that the decision of the (2008) 113 ITD 719 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 s. 143(1) of the Act, which are not concluded and finalized, the refunds are held to be granted under s. 143(1) of the Act as finally determined when final assessment is passed under s. 143(3) of the Act. Explanation 2 to s. 234D of the Act applies thus to the pending proceedings, where the assessment in respect of assessment year is not completed on 1st June, 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 to 1st June, 2003, s. 234D was not applied for not having any retrospective operation, however, in all pending proceedings, where the assessment had not been completed on 1st June, 2003, the same has been made applicable. In other words, Expln. (2) to s. 234D of the Act has been made applicable to even the assessment year commencing before 1st June, 2003. The only requirement in such a case would be that the assessment has to be completed after 1st June, 2003. Therefore, after insertion of Expln. 2, the operation of s. 234D of charging interest on the excess refund paid to the assessee is not restricted, making operation of such section effective from 1st June, 2003. In other words, the refund granted under s. 143(1) of the Act in respect of a particular assessment year, is subject to the final determination under sub-s. (3) of s. 143 of the Act. Addition of Expln. 2 to s. 234D of the Act when is being held declaratory amendment, what would be relevant for the purpose of charging interest on the refund granted under s. 143(1) of the Act is the date of completion of assessment. If the assessment is framed after 1st June, 2003, the said provision shall have applicability.

4.8 The Bombay High Court has extensively dealt with the Expln. 2 and has interpreted the provisions keeping in mind the principles of interpretation of statutes. We 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 s. 234D of the Act applicable only w.e.f. 2004-05 and further holding that the interest under this section is not chargeable for earlier assessment years, even though the assessment has been framed after 1st June, 2003, is not held to be a correct law and, accordingly, the Revenue''s appeal deserves to be allowed.

In view of the discussion held hereinabove, the tax appeals are allowed. The order dt. 21st Jan., 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 s. 234D of the Act will apply and even in the case of earlier assessment years where the assessments were framed after 1st June, 2003, the interest will be chargeable in accordance with law. There shall be, however, no order as to costs.