Assessee Entitled to Compensation but Not Interest on Interest

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Case Name:

Gujarat Flourochemicals Ltd. Vs Commissioner of Income Tax (High Court of Gujarat)

Special Civil Application No.12855 of 1994

Key Takeaways

- The court affirmed that compensation in the form of interest is due for delayed refunds.

- However, the court ruled that no further interest on the compensatory interest is permissible.

- This decision aligns with the Supreme Court's interpretation in the cases of Sandvik Asia Limited and Gujarat Fluoro Chemicals.

Issue

Is the assessee entitled to interest on the compensatory interest awarded for delayed tax refunds?

Facts

- The petitioner filed a petition under Articles 226 and 227 of the Constitution of India seeking compensation for delayed tax refunds.

- The case was previously decided by a Division Bench, which awarded interest as compensation.

- The Revenue challenged this decision, leading to a reconsideration by the High Court based on Supreme Court judgments.

Arguments

- Petitioner:

Argued that they are entitled to compensation by way of interest for the delay in receiving refunds, as previously ordered by the court.

- Respondents:

Contended that no additional interest on the compensatory interest should be awarded, as per the Supreme Court's latter decision in Gujarat Fluoro Chemicals.

Key Legal Precedents

- Sandvik Asia Limited vs. Commissioner of Income Tax & Others:

The Supreme Court ruled that compensation in the form of interest is due for delayed refunds but did not approve interest on such interest.

- Commissioner of Income Tax, Gujarat vs. Gujarat Fluoro Chemicals:

The Larger Bench of the Supreme Court clarified that while compensation for delayed refunds is permissible, interest on such compensatory interest is not.

Judgement

The court ruled that the petitioner is entitled to compensation by way of interest at the rate of 9% per annum for the period from July 1, 1987, to November 13, 1990. However, the petitioner is not entitled to further compensation by way of interest on the compensatory interest.

FAQs

Q1: What was the main issue in this case?

A1: The main issue was whether the assessee is entitled to interest on the compensatory interest awarded for delayed tax refunds.

Q2: What did the court decide?

A2: The court decided that the assessee is entitled to compensation in the form of interest for delayed refunds but not to additional interest on that interest.

Q3: Which legal precedents were considered?

A3: The court considered the Supreme Court's decisions in Sandvik Asia Limited vs. Commissioner of Income Tax & Others and Commissioner of Income Tax, Gujarat vs. Gujarat Fluoro Chemicals.

Q4: What is the significance of this judgment?

A4: This judgment clarifies that while compensation for delayed refunds is permissible, additional interest on such compensatory interest is not allowed.

Q5: What was the rate of interest awarded as compensation?

A5: The rate of interest awarded as compensation was 9% per annum.

Q6: What period did the compensation cover?

A6: The compensation covered the period from July 1, 1987, to November 13, 1990.

1. As the present matter is directed by the Apex Court to be heard at the earliest, we have taken up the matter and heard the learned Counsel appearing for both the sides for final disposal.

2. We may briefly record that the petitioner has preferred the petition under Article 226 and Article 227 of the Constitution of India for various reliefs, inter alia, for appropriate direction to the respondents to award compensation by way of an interest on the amount of refund for the period from July 1, 1987 to November 13, 1990. This petition was earlier finally heard and decided by the Division Bench of this Court (Coram: J. M. Panchal and Smt. Abhilasha Kumari, J.J.) vide judgement dated 3.7.2007 and this Court, for the reasons recorded in the order, more particularly based on the decision of the Apex Court in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others, reported in (2006) 280 ITR 643 (SC), had issued the following directions:-

“10. It may be mentioned that the above quoted instruction has been issued on the basis of the judgment of the Supreme Court in Sandvik Asia Ltd. (supra). Thus, this Court is of the opinion that the petitioner would be entitled to compensation by way of interest for the delay in payment of amounts lawfully due which were withheld wrongly and contrary to law. The net result of the above discussion is that the petition will have to be accepted.

11. For the foregoing reasons, the petition succeeds. The three orders namely; (1) the order dated October 6, 1992 passed by the Commissioner of Income Tax, Baroda, declining to accept the claim of the petitioner for interest on refund on the ground that it is not admissible under Sections 243(1)(b), 244(1A) and 214(2) of the Act, produced at Annexure­N; (2) the order dated January 18, 1993 passed by the Chief Commissioner of Income Tax, Gujarat, Ahmedabad, refusing to pay interest on the excess amount of tax deducted at source on the ground that the excess amount of tax deducted at source was not as a result of any order passed by the authority under the Income Tax Act, which is produced at Annexure­P to the petition; and, (3) the order dated April 19, 1993 passed by the Government of India refusing to grant interest on refund on the ground that the provisions of Section 244(1A) of the Act would not apply to the facts of the case, which is produced at Annexure­R to the petition, are hereby set aside. The respondents are directed to grant compensation by way of interest at the rate of 9% per annum to the petitioner on the amount refunded for the period from July 1, 1987 to November 13, 1990 as well as make payment of running interest at the rate of 9% per annum on the amount of interest, which may be granted pursuant to the directions contained in this judgment. Rule is made absolute to the extent indicated hereinabove. There shall be no orders as to costs.”

3. The aforesaid shows that this Court, based on the above referred decision of the Apex Court in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra) directed the respondents to grant compensation by way of interest at the rate of 9% p.a., to the petitioner on the amount of refund for the period from July 1, 1987 to November 13, 1990 and further directed to pay interest at the rate of 9% on the amount of interest, meaning thereby simple interest at the rate of 9% p.a., and further interest at the rate of 9% on the amount of simple interest.

4. It appears that the aforesaid decision of the Apex Court was challenged by the Revenue before the Apex Court in the proceedings of SLP(C) No.11406 of 2008. Thereafter, as the leave was granted, it was numbered as Civil Appeal No.3507 of 2014. The Apex Court, in the said SLP/Civil Appeal, vide its decision dated February 26, 2014, considered the decision of the Apex Court in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra), which has been subsequently considered by the Larger Bench of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals, reported in (2014) 1 SCC, 126 and ultimately vide paragraphs 15, 16 and 17, following directions were issued:-

“15. In view of the above, we set aside the judgement and order passed by the High Court and remand the matter back to the High Court for re­consideration of the writ petition filed by the respondent herein before the High Court keeping in view the observations made by this Court in Commissioner of Income Tax, Gujarat vs. Gujarat Fluoro Chemicals, decided on 18.9.2013.

16. The Civil Appeal is disposed of accordingly.

17. All the contentions of both the parties are kept open. We request the High Court to dispose of the writ petition as expeditiously as possible. Ordered accordingly.”

5. The aforesaid shows that the Apex Court directed the matter to this Court for reconsideration, keeping in view the observations made by the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) and the Apex Court further has made the observations for early disposal of the matter. Under these circumstances, the present matter is listed before us.

6. We have heard Mr.Karia, learned Counsel for Mr.R.K. Patel, learned Counsel for the petitioner and Mr.Manish Bhatt, learned Sr. Counsel for the respondents.

7. It was submitted by the learned Counsel for the petitioner that the subsequent decision of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) does maintain the payment of compensation. However, the further compensation of the amount of interest, which is awarded by way of compensation has not been approved by he Apex Court in the latter decision of the Larger Bench in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) and, therefore, it was submitted that even if the Larger Bench decision is considered by this Court, the petitioner, in any case, would be entitled to the compensation by way of interest at the rate of 9% per annum, which was earlier ordered by this Court in its earlier decision dated 3.7.2007.

8. Whereas Mr.Bhatt, learned Sr. Counsel for the respondents, submitted that it is not only a matter of getting additional amount of compensation upon the interest, which is awarded by way of compensation not approved by the Apex Court in the latter decision in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) but the Apex Court has reiterated that the interest as provided by the provisions of the statute namely; Income Tax Act should be adhered to. He also submitted that in a case where no interest has been expressly provided by the statute, interest cannot be awarded by way of compensation.

9. Mr.Karia, learned Counsel for the petitioner, in further reply, contended that as per the subsequent decision of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra), whenever interest is not provided by the express provisions of the statute, no compensation can be awarded by ordering to pay interest at a particular rate.

10. In order to appreciate the contention, we may consider the above referred both the decisions of the Apex Court.

11.In the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra), it is true that the matter was pertaining to the payment of advance tax and the Apex Court also found that there was harassment and agony to the Assessee, but on the aspect of compensation to the Assessee, the Apex Court, in the said decision under the head as to whether on general principles the Assessee ought to have been compensated for the inordinate delay in receiving monies properly due to it, has observed from paragraphs 75 to 81 thus:- Whether on general principles the assessee ought to have been compensated for the inordinate delay in receiving monies properly due to it? Learned counsel for the appellant says that it cannot be denied that it has been deprived of the use of it's monies for periods ranging from 12 to 17 years. It also cannot be denied that such deprivation is solely due to the actions of the revenue which have been held by this Court to be contrary to the provisions of the Act, on general principles it ought to be compensated for such deprivation. In the impugned order, the Bombay High Court has held that no compensation is required to be paid since” ... there was a serious dispute between the parties, which was ultimately ordered to be paid pursuant to the order passed by this Court on 30.04.1997. Undisputedly, the amount pursuant thereto was paid on 27.03.1998. ...” The Court further held that since the amount was paid once the controversy was resolved there was no wrongful retention of monies. No authority can ever accept an obligation to make payment and simply refuse to pay. In each and every case an authority must at least claim to act in accordance with law and hence claim it has no obligation to pay for some reason or another. When the claims of the authority are found to be unsustainable or erroneous by the Courts it follows that the authority has acted wrongfully in the sense of not in accordance with law and compensation to the party deprived must follow. If the decision of the High Court is upheld it would mean that there can never be any wrongful retention by an authority until this Court holds that their stand is not in accordance with law. Therefore, that on this issue as well, the impugned judgment cannot be sustained and ought to be reversed.

In the present context, it is pertinent to refer to the Circular on Trade Notice issued by the Central Excise Department on the subject of refund of deposits made in terms of Section 35F of the Central Excise Act, 1944 and 129E of the Customs Act, 1962. The Circular is reproduced hereunder:­

"Refund/Return of deposits made under Section 35F of CEA, 1944 and Section 129E of Customs Act, 1962 – Clarifications The issue relating to refund of pre­deposit made during the pendency of appeal was discussed in the Board Meeting. It was decided that since the practice in the Department had all along been to consider such deposits as other than duty, such deposits should be returned in the event the appellant succeeds in appeal or the matter is remanded for fresh adjudication.

2. It would be pertinent to mention that the Revenue had recently filed a Special Leave Petition against Mumbai High Court's order in the matter of NELCO LTD, challenging the grant of interest on delayed refund of pre- deposit as to whether :

(i) the High Court is right in granting interest to the depositor since the law contained in Section 35F of the Act does in no way provide for any type of compensation in the event of an appellant finally succeeding in the appeal, and,

(ii) the refunds so claimed are covered under the provisions of Section 11B of the Act and are governed by the parameters applicable to the claim of refund of duty as the amount is deposited under Section 35F of the Central Excise Act, 1944. The Hon'ble Supreme Court vide its order dated 26­11­2001 dismissed the appeal. Even though the Apex Court did not spell out the reasons for dismissal, it can well be construed in the light of its earlier judgment in the case of Suvidhe Ltd. and Mahavir Aluminium that the law relating to refund of pre­deposit has become final.

3. In order to attain uniformity and to regulate such refunds it is clarified that refund applications under Section 11B(1) of the Central Excise Act, 1944 or under Section 27(1) of the Customs Act, 1962 need not be insisted upon. A simple letter from the person who has made such deposit, requesting the return of the amount, along with an attested Xerox copy of the order­in­appeal or CEGAT order consequent to which the deposit made becomes returnable and an attested Xerox copy of the Challan in Form TR6 evidencing the payment of the amount of such deposit, addressed to the concerned Assistant/Deputy Commissioner of Central Excise or Customs, as the case may be, will suffice for the purpose. All pending refund applications already made under the relevant provisions of the Indirect Tax Enactments for return of such deposits and which are pending with the authorities will also be treated as simple letters asking for return of the deposits, and will be processed as such. Similarly, bank guarantees executed in lieu of cash deposits shall also be returned.

4. The above instructions may be brought to the notice of the field formations with a request to comply with the directions and settle all the claims without any further delay. Any deviation and resultant liability to interest on delayed refunds shall be viewed strictly.

5. All the trade associations may be requested to bring the contents of this circular to the knowledge of their members and the trade in general.

6. Kindly acknowledge receipt. [Source : M.F.(D.R.) F.No. 275/37/2K- CX.8A, dated 2­1­2002]"

A close scrutiny of the contents of the Circular dated 2.1.2002 would disclose as to the modalities for return of pre­deposits. It again reiterated that in terms of the Supreme Court order such pre­deposit must be returned within 3 months from the date of the order passed by the Tribunal, Court or other fiscal authority unless there is a stay on the order of the fiscal authority, tribunal, court by a superior court. The Department has very clearly stated in the above circular that the delay beyond the period of 3 months in such cases will be viewed adversely and appropriate disciplinary action will be initiated against the concerned defaulting officers, a direction was also issued to all concerned to note that defaulter will entail a interest liability if such liability accrue by reason of any orders of the Tribunal/Court such orders will have to be complied with and it may be recoverable from the concerned officers. All the Commissioners were advised implementation of these instructions and ensure their implementation through a suitable monitoring mechanism. It is also specifically mentioned that the Commissioners under respective jurisdiction should be advised that similar matters pending in the High Courts must be withdrawn and compliance reported and that the Board has also decided to implement the orders passed by the Tribunal already passed for payment of interest and the interest payable shall be paid forthwith. The facts and the law referred to in paragraph (supra) would clearly go to show that the appellant was undisputably entitled to interest under Sections 214 and 244 of the Act as held by the various High Courts and also of this Court. In the instant case, the appellant's money had been unjustifiably withheld by the Department for 17 years without any rhyme or reason. The interest was paid only at the instance and the intervention of this Court in Civil Appeal No. 1887 of 1992 dated 30.04.1997. Interest on delayed payment of refund was not paid to the appellant on 27.03.1981 and 30.04.1986 due to the erroneous view that had been taken by the officials of the respondents. Interest on refund was granted to the appellant after a substantial lapse of time and hence it should be entitled to compensation for this period of delay. The High Court has failed to appreciate that while charging interest from the assesses, the Department first adjusts the amount paid towards interest so that the principle amount of tax payable remain outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence as per the stand that the Department takes they are liable to pay interest only upto the date of refund of tax while they take the benefit of assesses funds by delaying the payment of interest on refunds without incurring any further liability to pay interest. This stand taken by the respondents is discriminatory in nature and thereby causing great prejudice to the lakhs and lakhs of assesses. Very large number of assesses are adversely affected inasmuch as the Income Tax Department can now simply refuse to pay to the assesses amounts of interest lawfully and admittedly due to that as has happened in the instant case. It is a case of the appellant as set out above in the instant case for the assessment year 1978­79, it has been deprived of an amount of Rs.40 lakhs for no fault of its own and exclusively because of the admittedly unlawful actions of the Income Tax Department for periods ranging up to 17 years without any compensation whatsoever from the Department. Such actions and consequences, in our opinion, seriously affected the administration of justice and the rule of law. COMPENSATION: The word 'Compensation' has been defined in P. Ramanatha Aiyar's Advanced Law Lexicon 3rd Edition 2005 page 918 as follows: "An act which a Court orders to be done, or money which a Court orders to be paid, by a person whose acts or omissions have caused loss or injury to another in order that thereby the person damnified may receive equal value for his loss, or be made whole in respect of his injury; the consideration or price of a privilege purchased; some thing given or obtained as an equivalent; the rendering of an equivalent in value or amount; an equivalent given for property taken or for an injury done to another; the giving back an equivalent in either money which is but the measure of value, or in actual value otherwise conferred; a recompense in value; a recompense given for a thing received recompense for the whole injury suffered; remuneration or satisfaction for injury or damage of every description; remuneration for loss of time, necessary expenditures, and for permanent disability if such be the result; remuneration for the injury directly and proximately caused by a breach of contract or duty; remuneration or wages given to an employee or officer." There cannot be any doubt that the award of interest on the refunded amount is as per the statute provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the Court has to take all relevant factors into consideration while awarding the rate of interest on the compensation. (Emphasis supplied)

12. The aforesaid shows that in the above referred decision, the Apex Court did maintain that the interest on the amount of refund, if provided by the statute, such would govern the field, but the Court has to take all relevant factors into consideration while awarding rate of interest on compensation.

13.In the latter decision of the Larger Bench of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) at paragraphs 5, 6, and 7, it was observed and held as under:-

5. Since there was an inordinate delay on the part of the Revenue in refunding the amount due to the assessee this court had thought it fit that the assessee should be properly and adequately compensated and, therefore, in paragraph 51 of the judgement, the court while compensating the assessee had directed the Revenue to pay a compensation by way of interest for two periods, namely; for the assessment years 1977­78, 1978­79, 1981­82, 1982­83 in a sum of Rs.40,84,906 and interest at 9 per cent from March 31, 1986, to March 27, 1998, and in default, to pay the penal interest at 15 per cent, per annum for the aforesaid period.

6. In our considered view, the aforesaid judgment has been misquoted and misinterpreted by the assessees and also by the Revenue. They are of the view that in Sandvik case (supra) this Court had directed the Revenue to pay interest on the statutory interest in case of delay in the payment. In other words, the interpretation placed is that the Revenue is obliged to pay an interest on interest in the event of its failure to refund the interest payable within the statutory period.

7. As we have already noticed, in Sandvik case (supra) this Court was considering the issue whether an assessee who is made to wait 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. In the facts of that case, this Court had come to the conclusion that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and therefore, directed the Revenue to pay compensation for the same not an interest on interest.

14.The aforesaid shows that in the latter decision of the Larger Bench, it was held that the decision in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra) cannot be read to mean that Revenue is obliged to pay interest on interest in the event of its failure to refund the interest payable within the statutory period. The Apex Court further held that in the peculiar facts and circumstances of the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra) the Court had come to the conclusion that there was inordinate delay on the part of the Government to refund certain amount, which includes statutory interest and, therefore, directed the Revenue to pay compensation for the same, but not interest on interest.

15.In our view, as per the above referred observations of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra), obligation on the part of the Government to pay compensation for non- payment of the statutory interest by way of interest on interest was not approved. Further, in the above referred decision of the Larger Bench of the Apex Court at paragraph 7, it was observed that the interest provided under the statute, which may be claimed by the Assessee from the Revenue would be available and interest on such statutory interest would not be available.

16.From the conjoint reading of the decision of the Apex Court in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Others (supra) and the latter decision of the Larger Bench in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra) it appears that the liability to pay interest on interest by the Revenue is not approved and to that extent the contention of the Revenue can be maintained. But the further contention of the Revenue that no interest whatsoever would be payable if the refund of the amount of tax or refund of the amount deposited towards tax is to be made, no interest whatsoever would be available by way of compensatory measure.

17.In our view, the general principles for awarding compensation to the Assessee for the delay in receiving monies properly due to it is not disapproved by the Larger Bench of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra).

18.In view of the aforesaid observations and discussion, we find that the petitioner – Assessee would be entitled to compensation and the interest can be awarded by way of compensation, but would not be entitled to further compensation by way of interest on such interest, which is awarded as compensation.

19.Under these circumstances, we find that the Court can take a reasonable approach when the interest is to be awarded by way of compensatory measure, but with further caution that the interest on such interest cannot be ordered as per the above referred latter decision of the Apex Court in the case of Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals (supra).

20. We may record that we have not referred to the facts in details since they are elaborately considered in the earlier judgement dated 3.7.2007 of this Court and with the further admitted position that the refund was already made and the petition related to compensation by awarding interest on such refund of the amount deposited.

21. In view of the aforesaid observations and discussion, the respondents are directed to grant compensation by way of interest at the rate of 9% p.a., to the petitioner on the amount refunded for the period from July 1, 1987 to November 13, 1990.

22. Rule is made absolute to the aforesaid extent. Considering the facts and circumstances, no order as to costs.

(JAYANT PATEL, J.)

(S.H.VORA, J.)