Wednesday 11 October 2023

Interest on excess refund granted to the assessee [Section 234D]

The provisions of section 234D in the Income-tax Act were intro-duced for the first time by the Finance Act, 2003, with effect from 1st June, 2003 (the date on which the section came into force).

Section 234D makes provision for charging interest on excess refund granted under section 143(1). According to section 234D(1), subject to the other provisions of the Act, where any refund is granted to the assessee under section 143(1), and (a ) no refund is due on regular assessment; or (b) the amount refunded under section 143(1) exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the specified rate 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.

In other words, under section 234D interest is levied if any refund is granted to the taxpayer under section 143(1) and:

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

(b) the amount refunded under section 143(1) exceeds the amount refundable on regular assessment.

Regular assessment generally means an assessment under section 143(3), i.e., scrutiny assessment or an assessment under section 144, i.e., best judgment assessment. Assessment made for first time under section 147 or section 153A shall also be treated as regular assessment.

Text of Section 234D

[1][234D. Interest on excess refund.

(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and -

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

(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment,

the assessee shall be liable to pay simple interest at the rate of [2][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 section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 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-section (1) shall be reduced accordingly.

Explanation [3][1]. - Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section.]

[4][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 day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date.]

KEY NOTE

1.    Inserted by the Finance Act, 2003, with effect from 01.06.2003.

2.    Substituted for “two-third per cent” by the Taxation Laws (Amendment) Act, 2003, with effect from 08.09.2003.

3.    Explanation numbered as Explanation1 by the Finance Act, 2012, with retrospective effect from 01.06.2003.

4.   Explanation 2 inserted by the Finance Act, 2012, with retrospective effect from 01.06.2003.

Basic provisions [Section 234D(1)]

If the taxpayer has paid excess tax, then he will claim the refund of the same in his return of income and it will be refunded to him. Many times it may happen that the taxpayer is granted a refund at initial stage, i.e., at the time of intimation under section 143(1) and at a later stage (i.e., on regular assessment) the refund gets reduced. In such a case the excess refund is recovered from the taxpayer along with interest under section 234D.

For example, initial refund of Rs. 84,000 was granted after processing the return under section 143(1) and, subsequently, on regular assessment the refund was reduced to Rs. 50,000. Hence, in this case Mr. ‘A’ was granted excess refund of Rs. 34,000. He will be liable to repay the excess refund amount received earlier (i.e. Rs. 34,000) along with interest under section 234D. In other words, Mr. ‘A’ will be liable to pay interest under section 234D on the excess refund of Rs. 34,000.  

Sub-section (1) of the said section provides that where any refund is granted to the assessee under sub-section (1) of section 143 and no refund is due on regular assessment, or the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, then, 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.

Adjustment under Section 234D(2) [Section 234D]

Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 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 subsection (1) of Section 234D shall be reduced accordingly.

If under an order passed under any of the sections mentioned below, the refund granted under Section 143(1) is held to be correctly allowed, then the interest levied under Section 234D would be adjusted as per the orders:

§  Section 154 – Rectification of mistake

§  Section 155 – Other amendments

§  Section 250 – Procedure in appeal

§  Section 254 – Orders of Appellate Tribunal

§  Section 260 - Decision of High Court or Supreme Court on the case stated

§  Section 262 - Hearing before Supreme Court

§  Section 263 – Revision of orders prejudicial to revenue

§  Section 264 – Revision of other orders

Explanation (1) in section 234D states that where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of section 234D.

Provisions of section 234D would be applicable to any proceeding which is completed on or after 1st June, 2003, irrespective of the assessment year to which it pertains [Explanation 2 of Section 234D]

Explanation (2) has been inserted for the removal of doubts and it has been declared that the provisions of section 234D shall also apply to an assessment year commencing before 01.06.2003 if the proceedings in respect of such assessment year is completed after the said date.

Explanation 2 was inserted by the Finance Act, 2012, with retrospective effect from 01.06.2003 to override the Special Bench decision of ITAT Delhi in the case of Ekta Promoters (P) Ltd. (2008) 113 ITD 719 (ITAT Delhi) (SB) and many others wherein it was held that the provisions of section 234D inserted with effect from 01.06.2003 would be applicable from the assessment year 2004-05 only and accordingly no interest could be charged for earlier assessment years even though the regular assessments for such years were framed after 1st June, 2003 or refund was granted for those years after the said date.

It was stated that these decisions were not in conformity with the legislative intent of the provision. It is, therefore, clarified that the provisions of section 234D would be applicable to any proceeding which is completed on or after 1st June, 2003, irrespective of the assessment year to which it pertains.

Manner of computation of interest under the Income -tax Act [Rule 119A]

Provisions of Rule 119A which gives the manner of computation of interest under the Income-tax Act. As per Rule 119A, while calculating the interest payable by the taxpayer or the interest payable by the Central Government to the taxpayer under any provision of the Act:

(a) Interest calculation on annual basis

Where interest is to be calculated on annual basis, the period for which such interest is to be calculated shall be rounded off to a whole month or months. For this purpose, any fraction of a month shall be ignored and the period so rounded off shall be deemed to be the period in respect of which the interest is to be calculated;

(b) Interest calculation on monthly basis

Where the interest is to be calculated for every month or part of a month comprised in a period, any fraction of a month shall be deemed to be a full month and the interest shall be so calculated;

(c) Amount rounded off to one hundred

The amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees. For this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

PROVISIONS ILLUSTRATED

If we want to compute interest under section 234D on Rs. 18,489 for 3 months and 10 days, then as per Rule 119A discussed above, while computing the amount liable to interest, any fraction of Rs. 100 is to be ignored and, hence, we will ignore Rs. 89 from Rs. 18,489 and the balance amount will come to Rs. 18,400, thus interest under section 234D will be computed on Rs. 18,400. Further, the period of 10 days will be considered as full month and, hence, interest will be computed for 4 months. The same rule will apply for computation of interest under other sections too.

Text of Rule 119A

119A. Procedure to be followed in calculating interest.

In calculating the interest payable by the assessee or the interest payable by the Central Government to the assessee under any provision of the Act,-

(a)   where interest is to be calculated on annual basis, the period for which such interest is to be calculated shall be rounded off to a whole month or months and for this purpose any fraction of a month shall be ignored; and the period so rounded off shall be deemed to be the period in respect of which the interest is to be calculated;

(b)   where the interest is to be calculated for every month or part of a month comprised in a period, any fraction of a month shall be deemed to be a full month and the interest shall be so calculated;

(c)   the amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees and for this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

 Rate of interest

Interest under section 234D is levied @ ½ % per month or part of the month.

Period of levy of interest

§  Interest is levied from the date of grant of refund under section 143(1) till the date of regular assessment.

§  Regular assessment means an assessment under section 143(3) or section 144. Assessment made for first time under section 147 or section 153A shall also be treated as a regular assessment.

 

Notification No. [F. No. 243/6/90-IT(A-II)], Dated 20.12.1993

 

Subject : Section 119 of the Income-tax Act, 1961 - Income-tax Authorities - Instructions to    subordinate authorities

In exercise of the powers conferred under clause (a) of sub-section (2) of section 119 of the Income-tax Act, 1961, the Central Board of Direct Taxes (hereinafter referred to as 'the Board') hereby orders that the Board's earlier order under section 119(2)(a) in the file of even number dated 1-9-1992, shall have effect for two more assessment years, viz., assessment years 1992-93 and 1993-94.

2. The Board also orders that, in the cases of these assessees, who reside in, or have their principal place of business in, the Kashmir Valley and are assessed or assessable in the Kashmir Valley and have filed their returns of income for the assessment years 1990-91 to 1993-94, interest chargeable under section 234A (for belated filing of the returns) and under section 234D (for non-payment/ short payment of advance tax) shall be waived for these assessment years for the period up to the date of filing of the return of income or one year from the end of the assessment year whichever expires earlier.

Date for Section 234D interest computation, a debatable issue, not ‘mistake apparent’; ​Sets aside rectification order

Mumbai ITAT allows SBI’s appeal, sets aside the rectification order under Section 154 and holds that whether the interest under section 234D has to be computed from the date of grant of refund or from the date of receipt of refund, is a debatable issue and capable of divergent views, thus, falls beyond the ambit of the expression 'mistake apparent from the record' thus, beyond the purview of Section 154; Assessee-Company was granted refund of Rs. 8471.56 Cr. for assessment year 2012-13, however, Revenue, during scrutiny assessment, discovered that refund of Rs. 801.47 Cr was made in excess and duly recovered it with interest; Thereafter, Revenue passed the rectification order under Section 154 for interest under section 234D for a period of 12 months (March 2014 to February 2015) which was levied only for 11 months, thus considering this as a mistake apparent from the record, Revenue charged interest of Rs. 4 Cr under Section 234D which was confirmed by CIT(A); ITAT refers to the coordinate bench ruling in DDIT v. Development Bank of Singapore (2013) 33 Taxmann.com 300 (ITAT Mumbai), wherein it was held that interest under Section 234D shall be charged from the date of grant of refund by referring to the similar expression used in section 244A; Also refers to another coordinate bench ruling in Small Industries Development Bank of India v. DCIT, in ITA no. 3707/Mum/2012, vide order dated 15.09.2017, wherein it was held that interest under section 244A shall be granted up to actual date of receipt of the refund by the Assessee; Opines that, “the very fact that assessee objected to the levy of interest under section 234D of the Act from the date of grant of refund instead of date of receipt of cheque of refund, renders the issue to be debatable issue”; States that the contradicting findings of the co-ordinate bench in abovestated cases, renders the issue to be a contentious issue, which requires long-drawn process of reasoning and arguments from both parties; Relies on Supreme Court ruling in T. S. Balaram, Income Tax Officer v. Volkart Brothers (1971) 82 ITR 50 (SC), wherein it was held that for initiating proceedings under Section 154, the mistake apparent from record must be an obvious and patent mistake and not something which can be established by long drawn process of reasoning on points on which there may conceivably be two opinions; Thus, opines that the issue of rectification order under Section 154 which is, whether to levy the interest from date of refund or date of receipt of such refund, is capable of divergent views and since the same does not appear to have been settled by any decision of Hon’ble Supreme Court, holds that, the present case clearly falls beyond the ambit of the expression “mistake apparent from the record”; Thus, sets aside the rectification order. [In favour of assessee] (Related Assessment year : 2012-13) – [State Bank of India v. ACIT [TS-418-ITAT-2022(Mum)] – Date of Judgement : 26.05.2022 (ITAT Mumbai)]

Interest under section 234D is leviable only if refund granted to assessee becomes collectable in order passed under regular assessment; hence, where assessment in pursuance to reassessment proceedings could not be termed as ‘first assessment’ so as to come within meaning of expression ‘regular assessment’ for purposes of section 234D, no interest could have been levied on assessee for excess income tax refund

Interest under section 234D is leviable only if refund granted to assessee becomes collectable in order passed under regular assessment. Assessee filed its return of income on 31.10.2001 and assessment under section 143(3) was made on 31.03.2004. Subsequently, notice under section 148 was issued on 28.03.2008. Assessee, by letter dated 27.04.2008, requested to treat original return filed on 31.10.2001 as a return in response to notice under section 148. Reasons for reopening were furnished and assessee objected to reopening and ultimately, assessment stood completed under section 143(3) read with section 147, by order dated 26.12.2008. Facts clearly showed that there was an assessment, which was made under section 143(3) on 31.03.2004 and assessment order dated 26.12.2008 passed under section 143(3) read with section 147 could not be termed as ‘first assessment’ so as to come within meaning of expression ‘regular assessment’ in terms of section 2(40) and consequently provisions of section 234D could not be applied to assessee’s case. [In favour of assessee] (Related Assessment year : 2001-02) –  [CIT, Chennai v. United India Insurance Co. Ltd. (2021) 438 ITR 301 : 130 taxmann.com 251 : (2022) 284 Taxman 598 (Mad.)]

Amount of refund granted to assessee for earlier period was adjusted against outstanding demand for relevant year, no interest was leviable under section 234D

Where amount of refund granted to assessee for earlier period was adjusted against outstanding demand for relevant year, no interest was leviable under section 234D. [In favour of assessee] (Related Assessment year : 2007-08) – [Bank of Tokyo-Mitsubishi UFJ Ltd. v. DCIT(International Taxation) [2020] 180 ITD 300 : (2019) 112 taxmann.com 116 (ITAT Delhi)]

Meaning of ‘First assessment under section 147’

Assessment made for the first time under section 147 of the Act can be called as a regular assessment for the purpose of charging interest under section 234D. The second and subsequent reassessments made under section 147 of the Act after the completion of the first reassessment under section 147 of the Act are excluded from the purview of section 234D of the Act.

However, reassessment proceedings under section 147 after completion of the assessment under section 143(3) is excluded from the purview of 'regular' assessment. Where the assessment under section  147 has been made not for the first time, but after the completion of an assessment under section  143(3), the same cannot be termed as 'regular' assessment and, consequently, the provisions of section  234D cannot be applied. [Vodafone India Ltd. v. ACIT (ITA No. 4749/Mum/2016) ITAT Mumbai decided on 06.04.2018]

In case of any assessment completed after 01.06.2003, regardless of year of assessment, provisions of section 234D would be applicable to such assessment year

For relevant assessment year, assessee’s return was processed under section 143(1) and order of refund was passed. Subsequently, assessee filed revised return on the ground that the claim under section 36(1)(viia) in respect of bad debts was erroneously claimed and declared.    The assessment case was taken under scrutiny and statutory notice was issued under section 143(2). The Assessing Officer on finalising the assessment under section 143(3) issued demand notice as also charged interest under section 234D. The Tribunal, cancelled the interest charged under section 234D following its own decision of earlier years. On revenue’s appeal:

Held : Explanation (2) to section234D which has been added with effect from 1-06-2003, is declaratory and clarificatory in nature which states that the provision of this section shall also apply to the assessment year commencing before June 1, 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 day of June, 2003, regardless of the year of assessment, this provision shall be made applicable to such assessment year.

This very issue came up for scrutiny before the Bombay High Court in the case of CIT v. Indian Oil Corpn. Ltd. (2012) 210 Taxman 466 : 25 taxmann.com 284 (Bom.) and the Bombay High Court has held that addition of Explanation (2) to section 234D of the Act by Finance Act, 2012, with retrospective effect from June 01, 2003, is made applicable even to the period under assessment year 2004-05. In respect of excess refund granted to the assessee under section 143(1) the interest was payable by the assessee even if it was received prior to June 01, 2003, so long as the proceedings of the concerned assessment year for which the refund was granted was completed after June 01, 2003. The Bombay High Court held the Explanation 2 to section 234D as declaratory/clarificatory in nature. The same being declaratory/clarificatory, the same was held to be applied with retrospective effect. In view of the discussion above and following aforesaid order passed by Bombay High Court, revenue's appeals are allowed. The order passed by the Tribunal is quashed and set aside. It is held that where excess refund has been granted by the Revenue, the provision of section 234D will apply even in the case of earlier assessment years where the assessments were framed after 01.06.2003. [In favour of revenue] (Related Assessment year : 2002-03) – [CIT v. Gujarat State Financial Services Ltd. (2014) 270 CTR 83 : 49 taxmann.com 221 (Guj.)]

Where assessment was completed prior to 01.06.2003, provisions of section 234D could not be applied

Having regard to legal position which has been clarified by Parliament by insertion of Explanation 2 in section 234D where assessment was completed prior to 01.06.2003, retrospectively of section 234D did not arise. [In favour of assessee] (Related Assessment year : 1998-99) - [CIT v. Reliance Energy Ltd. (2013) 358 ITR 371 : 262 CTR 272 : 40 taxmann.com 116 : (2014) 220 Taxman 89 (SC)]

Payment of interest in case of wiping out of refund - Where refund granted to assessee under section 143(1) is wiped out due to subsequent framing of regular assessment, assessee is liable to pay interest under section 234D from date of grant of refund to date of regular assessment

Where any refund is granted to assessee under section 143(1) and, subsequently, due to framing of regular assessment after 01.06.2003, such refund is wiped out fully or partly, assessee will be liable to pay interest under section 234D from date of grant of refund to date of such regular assessment. Therefore, occasion for charging of interest under section 234D can arise only on completion of assessment and not when original refund is granted. However, date of original grant of refund is relevant for purpose of calculation of amount of interest under this section as interest is payable by assessee from the date of grant of refund to date of regular assessment. [In favour of revenue] (Related Assessment year : 2001-02) – [ITO v. Strides Arcolab Ltd. (2013) 153 TTJ 20 : (2012) 138 ITD 323 : 24 taxmann.com 89 (ITAT Mumbai)]

Scrutiny assessment is completed, interest on excess refund under section 234D is not leviable on reassessment, since it is not regular assessment

Subsequent to assessment under section 143(3), assessment was reopened under section 147 wherein Assessing Officer levied interest under section234D on account of excess refund granted to assessee. Section 234D authorizes levy of interest on excess refund in respect of only regular assessment. Where there is no regular assessment, then assessment made for first time under section 147 or 153A shall be regarded as a regular assessment. Therefore, where assessment had already been completed under section 143(3) reassessment done under section 147 could not be held as regular assessment and thus, interest under section 234D could not be levied on assessee in an assessment completed under section 147. [In favour of assessee] (Related Assessment year : 2005-06) – [K. Anji Reddy v. DCIT (2013) 59 SOT 92 : 35 taxmann.com 653 (ITAT Hyderabad)]

Regular assessment was completed on 30.03.2004, i.e., after amended provisions of section 234D came into operation, assessee was liable to pay interest on refunded amount under section 234D

The return of assessee for assessment year 2001-02 was processed under section 143(1) on 30.11.2002 and assessment order under section 143(3) was passed on 30.03.2004. The Assessing Officer, while giving effect to the order, levied interest under section 234D. The assessee claimed that since section 234D had been introduced with effect from 01.06.2003 impugned interest was liable to be set aside.

Held that the assessment was completed only on 30.03.2004, the date on which the order of assessment came to be passed. But, the amended provision of section 234D came into force with effect from 01.06.2003. When the regular assessment was completed after the amended provision of law came into operation, the assessee was liable to pay interest on the refunded amount, as contemplated under section 234D. It is not the year of assessment that falls for consideration in such circumstances, but the date on which the regular assessment order has been passed. Therefore, the order passed by the Assessing Officer, levying interest on the amount of refund, was well within the parameters of law. [In favour of revenue] (Related Assessment year : 2001-02) – [CIT v. Infrastructure Development Finance Co. Ltd. (2012) 340 ITR 580  : (2013) 33 taxmann.com 622 (Mad.)]

Section 234D interest leviable only when excess refund was granted to the assessee pursuant to intimation under section 143(1) and not upon appellate orders

The assessee Delta Air Lines Inc was granted refund of excess tax paid, pursuant to the order of CIT(A).  Later, ITAT set-aside CIT(A) based on which tax refund was reduced. The Assessing Officer while giving effect to ITAT’s order also levied interest under section 234D. Section 234D provides for levy interest on excess amount of tax refunded to the assessee.

A Division bench of Bombay High Court rejecting Assessing Officer’s contention, held that the interest under section 234D was leviable only where the refund has been granted to the assessee pursuant to intimation under Section 143(1) of the Act and thereafter such refund was found to be excessive under regular assessment. High Court observed that the refund was granted pursuant to the order passed by CIT (A) not under Section 143(1). Accordingly, ruling in favour of assessee, High Court deleted the levy of interest under section 234D. [In favour of assessee] (Related Assessment years : 1992-93 to 1998-99) – [Director of Income Tax (International Taxation) v. Delta Air Lines Inc Date of Judgement : 05.09.2011 (Bom.)]

Meaning of ‘refund’, not to include interest under section 244A

For the purpose of charging interest under section 234D only refund granted on account of excess TDS, advance tax and self-assessment tax over and above the tax liability is to be considered and not the entire amount of refund. Thus, interest under section 244A paid on the refund of taxes are excluded from charging interest under section 234D. - [DDIT v. Clough Engineering Ltd. (ITA NO. 5605/DEL/2010) (ITAT Delhi)]

 

Set-off of MAT credit

Amount of MAT credit under section 115JAA shall be first given effect before calculating interest u/s 234D and withdrawal of interest under section 244A. - [Mewar Polytex Ltd. v. ITO (D.B. Income Tax Appeal No. 57 of 2009) (Raj.)]

 

Refund may be granted earlier

It is not necessary that both the grant of a refund to the assessee and the assessment must be completed on or after 01.06.2003. Further, when the regular assessment is made on or after 1.6.2003 and interest under section 234D is found chargeable, the period has to be reckoned from the date of granting refund till the date of regular assessment and not from 01.06.2003 even if the refund was granted prior to that date. - [Sigma Aldrich Foreign Holding Co. vs. ACIT (2008) 296 ITR 165 (ITAT Bangalore)]

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