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Interest on Excess Refund of Income Tax - Section 234D

 
interest-on-excess-refund-of-income-tax-section-234d

When any refund of income tax is granted to an assessee and later on it is found that no refund is due to the assessee or the amount refunded exceeds the amount refundable to the assessee, the assessee is liable to pay interest on such excess amount of income tax refund in accordance with the provisions of section 234D of the Income Tax Act, 1961 (“Act”). Section 234D deals with the charging of interest on excess refund granted at the time of summary assessment.


    Introduction


    Section 234D was inserted by the Finance Act, 2003, w.e.f. 1-6-2003 to provide for payment of interest on excess refund of income tax to the assessee. Prior to June 2003, there was no provision to charge interest on the excess amount of income tax refund collectable from the assessee.


    Under the provisions of section 143(4), where a regular assessment under section 143(3) or section 144 is made, any tax or interest paid under section 143(1) shall be deemed to have been paid towards such regular assessment and if no refund is due on regular assessment or the amount refunded under section 143(1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded is deemed to be tax payable by the assessee.


    In a case where an assessee claims refund of a substantial portion of advance-tax or TDS or TCS treated as paid by him on the basis of the total income as declared in his return of income furnished under section 139, such refund has to be granted to him at the time of processing of the return under section 143(1). Subsequently, if regular assessment is made on a total income much higher than the returned income, the refund earlier granted to the assessee or a substantial portion of it is treated as tax payable.


    While the assessee pays interest for the shortfall in payment of advance-tax with effect from the day of the assessment year, nothing was charged from the assessee for having utilized the refund amount, till the date of regular assessment. Hence, the Finance Act, 2003 inserted a new section 234D in the Income-tax Act to charge interest on excess refund granted at the time of summary assessment.


    Provision of Section 234D


    Section 234D of the Act reads as follows-


    Interest on excess refund.


    234D. (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 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 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.


    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.


    Sub-section (1) of section 234D 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 0.5% 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.


    Sub-section (2) of section 234D provides that 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 254D of the Income-tax Act, 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 under sub-section (1), shall be reduced accordingly. 


    It has also been provided that an assessment made for the first time under section 147 or section 153A shall be regarded as a regular assessment for the purposes of this section.


    Explanation 2 was inserted by the Finance Act, 2012, w.r.e.f. 1-6-2003 to override the Special Bench decision of ITAT Delhi in the case of Ekta Promoters (P.) Ltd. [2008] 113 ITD 719 (Delhi) (SB) and many others wherein it was held that the provisions of section 234D inserted with effect from 1.6.2003 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.


    Notes:

    1. Charging of interest under section 234D is mandatory. [Gujarat Urja Vikas Nigam Ltd. vs. DCIT (ITA No. 3437/Ahd/2015) ITAT Ahmedabad]


    2. The date of granting of refund as applicable to section 244A will also apply here. Refer this article for a detailed discussion on ‘date of grant’ of refund.


    Rate of interest and Computation of Interest under section 234D


    The rate of interest under Section 234D is levied at 0.5% per month or part thereof on the amount of refund recoverable from the assessee. The interest is calculated from the date of granting the refund under Section 143(1) to the date of regular assessment.


    Interest payable by assessee

    U/s 234D of the Act

    Amount on which interest is payable

    Excess amount of refund paid to the assessee/recoverable from the assessee

    Rate of interest

    0.5% p.m. (any part of month is taken as full month)

    Period for which interest is payable

    From the date of granting refund to the date of completion of regular assessment


    Meaning of Regular Assessment


    As per Section 2(40) of Income Tax Act, 1961, unless the context otherwise requires, the term “regular assessment” means the assessment made under sub-section (3) of section 143 or section 144. Further, according to Explanation 1 of section 234D, assessment made for the first time under section 147 or section 153A shall also be treated as a regular assessment. As per Section 2(8), ‘assessment’ includes reassessment.


    Hence, regular assessment means assessment under section 143(3) or 144 or 147 whichever is done earlier. Therefore, interest under section 234D cannot be levied subsequently at the time of reassessment if assessment u/ss. 143(3) or 144 or 147 had already been completed.


    Assessment u/s 143(3) is a ‘detailed assessment’ and is also known as ‘scrutiny assessment’ whereas the assessment u/s 144 is made as per the best judgment of the Assessing Officer.


    Set-off of interest payable under section 244A against interest income under section 244A


    Section 234D effectively makes an assessee liable to pay interest on excess refund granted to him although assessee has no control over receipt of such refund. Readers are aware that an assessee is liable to pay interest u/s 234A for belated filing of return and interest u/s 234B and u/s 234C for short payment and deferment of advance tax respectively.  Interest u/s 234D payable by the assessee is in addition to those interest.


    When an assessee is granted refund of income tax amount he is entitled to receive interest thereon as per the provisions of section 244A of the Act. Such interest granted u/s. 244A is subject to income tax under the head ‘Income from other sources’.


    However, it should be noted that the interest levied under section 234D on the excess amount of refund being recovered from the assessee is not allowed as a deduction in computing his total income.


    For example, an assessee is granted a refund of income tax of Rs. 1,00,000 along with interest of Rs. 2,000 for an assessment year as per Intimation issued u/s 143(1). Later on, in the regular assessment the entire amount of refund of Rs. 1,00,000/- is found not to be payable to the assessee. Hence the assessee has to repay the entire amount of Rs. 1,02,000/- (including interest received u/s 244A) along with additional interest amount of Rs. say, Rs. 4,000 u/s 234D. Hence, the assessee will be repaying Rs. 1,06,000/- to the government.


    In this case, one should remember that the assessee has paid tax on interest income of Rs. 2,000 which he had received with the refund amount in the assessment year in which he has received the refund. But when he has repaid the interest amount in a subsequent year, he will not get any deduction for Rs. 2,000 interest amount. Further, no deduction is allowed for Rs. 4,000 paid u/s 234D.


    It should be remembered that interest paid u/s. 234D is not deductible in computing the total income whereas income earned by the assessee on excess refund is taxable.


    It may also be noted that there is no provision in the Act for rectification to cover a situation when interest granted u/s 244A on intimation is already taxed in one year and in the latter year, it is reduced or withdrawn on assessment u/s 143(3).


    Unless there is a specific provision in the law to amend the earlier order to recompute the total income by the Assessing Officer or allow the set-off, the interest income received u/s 244A cannot be set-off with the interest payable u/s 234D.


    In this connection, the observation of Hon’ble Madras High Court in the case of Tamilnadu Industrial Investment Corporation Ltd. vs. Deputy Commissioner of Income-tax (2004) 270 ITR 566 (Mad.) is reproduced below:


    “...... the Legislature should step in and make a suitable provision in the Income-tax Act providing for reduction of the amount of income in the year of receipt so that there may not be any difficulty in the administration of tax law and the assessee is also not required to pay more tax than that is due by him. We find that the Legislature has made a provision in section 41(2) of the Act in the case of transfer of capital assets to recapture the depreciation granted on the transfer of assets and on the same analogy, we are of the view that it would be better to introduce a provision empowering the officer to suitably amend the order of assessment in case the assesses is required to pay back the refund amount within a specific period from the date of repayment of excess interest refunded by the assessee which will obviate the difficulty faced by the assessee and which will bring in fairness in the administration of tax law.” 


    Other important Judicial case laws on section 234D


    Adjustment with outstanding demand: Interest u/s. 234D cannot be charged when refund due to assessee has been adjusted to the outstanding demand. [The Bank of Tokyo Mitsubishi UFJ Ltd., New Delhi vs. DCIT (International Taxation) ITA No. 4584/DEL/2016 (ITAT Delhi)]


    Date of assessment order must be after 01.06.2003: Interest u/s 234D is leviable even where the refund is granted before 01.06.2003 but the assessment order u/s 143(3) is passed after that date. [Sandvik Asia Limited vs. ACIT (ITA No. 1439/PN/2004) (ITAT Pune)]


    Meaning of ‘proceedings’: Where the assessment order u/s 143(3) was passed before 01.06.2003 and there was no levy of interest on the assessee but any Rectification order u/s 154 is passed after the said date, interest u/s 234D cannot be levied. The term ‘proceedings’ occurring in Explanation 2 should be read with the provisions as contained in section 234D(1) which contemplates only regular assessment. Thus the term proceedings used in explanation 2 shall be limited to the proceedings of a regular assessment only. [CIT vs. Reliance Energy Limited (2013) 358 ITR 371 (SC) followed in Sundaram Finance Ltd. vs. DCIT (Tax Case Appeal No.154 of 2011) (Madras High Court) decided on 13.12.2018]


    Meaning of ‘First assessment u/s 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. vs. ACIT (ITA No. 4749/Mum/2016) ITAT Mumbai decided on 06.04.2018]


    Charging interest u/s 154: Not charging interest u/s 234D while passing a regular assessment order is a mistake apparent on record and therefore interest u/s 234D can be charged invoking the provisions of section 154. [Bharat Petroleum Corporation Ltd. vs ACIT (ITA No.1678/Mum/2013) (ITAT Mumbai)]


    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 u/s 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 (Bang.-Trib)]


    Refund must be granted u/s 143(1): Interest under section 234D is chargeable only where the refund has been granted to the assessee while processing the return of income under section 143(1) and thereafter, such refund is found to be excessive under the regular assessment. Where the refund was not granted under section 143(1), even the refund was not granted even by way of assessment order passed under section 143(3) read with section 147, but the same was granted pursuant to the order passed by the Commissioner (Appeals), provisions of section 234D are not attracted. [DIT (International Taxation) vs. Delta Air Lines Inc. (2013) 358 ITR 367 (Bom.)(HC) Also refer CIT vs. M/s. Ramco Industries Ltd. (Tax Case (Appeal) No.1343 of 2009) (Madras HC) decided on 07.12.2009]


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


    Meaning of ‘refund’, not to include interest u/s 244A: For the purpose of charging interest u/s 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 u/s 244A paid on the refund of taxes are excluded from charging interest u/s 234D. [DDIT vs. Clough Engineering Ltd. (ITA NO. 5605/DEL/2010) (ITAT Delhi)]


    Read Also:

    Adjustment of Refund with Outstanding Demand-Section 245 of Income Tax

    Section 244A: All about Interest on Income-tax Refund

    Refund of TDS to Deductor to Claim by Form 26B from TRACES

    Section 139 Provisions for filing Return of Income





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