Case Note & Summary
The petitioner, M/s. Sunflag Iron & Steel Co. Ltd., a public limited company engaged in steel manufacturing, entered into an agreement with a German company on 8.11.1985 for transfer of technical knowhow. As per the agreement, the petitioner was required to pay technical knowhow fee in three instalments totaling Rs.76,45,000. In pursuance of the agreement, the petitioner deducted tax at source (TDS) on the payments made to the German company and deposited the TDS amounts with the Revenue on various dates between 29.03.1986 and 11.08.1988. Subsequently, the Assessing Officer passed an order under Section 195(2) read with Section 197 of the Income Tax Act, 1961, directing refund of the TDS amount of Rs.49,40,923 to the petitioner. The Revenue refunded the principal amount but denied interest under Section 244A of the Act, relying on a communication dated 18.7.1995 issued by the Central Board of Direct Taxes (CBDT) to the Chief Commissioner of Income Tax, Pune, which stated that interest under Section 244A should not be paid on refunds arising out of orders under Section 195(2) read with Section 197. The petitioner filed a writ petition seeking a mandamus directing the respondents to pay interest on the refunded amount as provided under Section 244A, and also sought quashing of the CBDT communication. The Court examined the provisions of Section 244A, which mandates payment of interest on refunds at the prescribed rate from the date of payment of tax to the date of refund. The Court held that the interest under Section 244A is mandatory and compensatory in nature, and the CBDT communication cannot override the statutory provisions. The Court observed that the CBDT circular, being contrary to the plain language of the statute, is not binding and cannot be used to deny the statutory right to interest. The Court allowed the petition, directed the respondents to pay interest on the refunded amount from the respective dates of payment of TDS to the date of refund, as per Section 244A, and quashed the CBDT communication dated 18.7.1995 to the extent it denied interest.
Headnote
A) Income Tax - Interest on Refund - Section 244A of the Income Tax Act, 1961 - Mandatory Interest - The petitioner, a steel manufacturing company, deducted tax at source (TDS) on technical knowhow fee paid to a German company and deposited the same with the Revenue. Subsequently, the Assessing Officer passed an order under Section 195(2) read with Section 197 of the Act, directing refund of the TDS amount. The Revenue refunded the principal amount but denied interest under Section 244A, relying on a CBDT communication dated 18.7.1995. The Court held that interest under Section 244A is mandatory and compensatory in nature, and the CBDT communication cannot override the statutory provisions. The Court directed the respondents to pay interest on the refunded amount from the date of payment of TDS to the date of refund, as per Section 244A. (Paras 1-10) B) Income Tax - CBDT Circular - Binding Nature - Section 119 of the Income Tax Act, 1961 - The CBDT communication dated 18.7.1995, which directed that interest under Section 244A should not be paid on refunds arising out of orders under Section 195(2) read with Section 197, was held to be contrary to the plain language of Section 244A. The Court observed that circulars cannot override or restrict the statutory right to interest, and such circulars are not binding on the courts. (Paras 8-10)
Issue of Consideration
Whether the petitioner is entitled to interest under Section 244A of the Income Tax Act, 1961 on the refund of tax deducted at source (TDS) for the period from the date of payment of TDS to the date of refund, and whether the CBDT communication dated 18.7.1995 denying such interest is valid.
Final Decision
The Court allowed the writ petition, directed the respondents to pay interest on the refunded amount of Rs.49,40,923 from the respective dates of payment of TDS to the date of refund as per Section 244A of the Income Tax Act, 1961, and quashed the CBDT communication dated 18.7.1995 to the extent it denied interest.
Law Points
- Interest on refund under Section 244A is mandatory and compensatory
- not discretionary
- delay in processing refund does not disentitle assessee to interest
- CBDT circular cannot override statutory provisions
