Assessee Liable for Interest on Excess Refund from 1.6.2003

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Case Name:

Commissioner of Income Tax-II, Ludhiana Vs. M/s Avery Cycles Inds. (High Court of Punjab and Harayana)

ITA No. 430 of 2006

Date: 7th January 2015

Key Takeaways

- Inclusion of Excise Duty:

The court upheld the CIT(A) and Tribunal's decision to exclude excise duty from stock valuation based on Section 145(A) (of Income Tax Act, 1961) and relevant guidelines.

- Interest on Advances:

The court remitted the issue of interest on interest-free advances to directors back to the Tribunal for reconsideration in light of the Supreme Court's judgment in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals).

- Section 234D (of Income Tax Act, 1961):

The court clarified that Section 234D (of Income Tax Act, 1961) applies from 1.6.2003, and the assessee is liable to pay interest on excess refunds from this date.

Issue

Is the assessee liable to pay interest on excess refunds under Section 234D (of Income Tax Act, 1961) from the date of its incorporation, i.e., 1.6.2003

Facts

- The assessee, a cycle parts manufacturer, filed a return declaring a business loss.

- The Assessing Officer included excise duty in the opening and closing stock valuation, which was contested by the assessee.

- The CIT(A) and Tribunal ruled in favor of the assessee, excluding excise duty based on Section 145(A) (of Income Tax Act, 1961) and relevant guidelines.

- The revenue challenged these decisions, raising issues about interest on borrowed money, excise duty inclusion, interest on advances, and applicability of Section 234D (of Income Tax Act, 1961).

Arguments

- Revenue:

Argued that excise duty should be included in stock valuation and that Section 234D (of Income Tax Act, 1961) applies to the assessee, making them liable for interest on excess refunds from the date of assessment.

- Assessee:

Contended that excise duty should not be included in stock valuation and that Section 234D (of Income Tax Act, 1961) should not apply retrospectively. They also argued that interest on advances should not be charged.

Key Legal Precedents

- CIT Vs. M/s Indo Nippon Chemical Industries Limited:

Affirmed that modvat credit is not taxable income.

- S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals):

Relevant for reconsidering interest on interest-free advances.

Judgement

The court ruled that:

- The assessee is liable to pay interest on excess refunds from 1.6.2003, the date Section 234D (of Income Tax Act, 1961) came into force.

- The inclusion of excise duty in stock valuation was correctly excluded by the CIT(A) and Tribunal.

- The issue of interest on interest-free advances was remitted back to the Tribunal for reconsideration.

FAQs

Q1: What is Section 234D (of Income Tax Act, 1961)?

A1: Section 234D (of Income Tax Act, 1961) mandates that if an assessee receives an excess refund, they are liable to pay interest on the excess amount from the date of the refund to the date of regular assessment.

Q2: Why was excise duty excluded from stock valuation?

A2: The CIT(A) and Tribunal excluded excise duty based on Section 145(A) (of Income Tax Act, 1961) and guidelines from the Institute of Chartered Accountants, which were upheld by the court.

Q3: What was the court's decision on interest-free advances?

A3: The court remitted the issue back to the Tribunal for reconsideration in light of the Supreme Court's judgment in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals).

Q4: From when is the assessee liable to pay interest on excess refunds?

A4: The assessee is liable to pay interest on excess refunds from 1.6.2003, the date Section 234D (of Income Tax Act, 1961) came into force.

By way of this order, we shall decide ITA Nos. 430 of 2006, 400 of 2007, 295 of 2009, 296 of 2009 titled as Commissioner of Income Tax-II, Ludhiana Vs. M/s Avery Cycles Inds. Ltd., ITA Nos. 297 of 2009, 298 of 2009 and 286 of 2009, Commissioner of Income Tax-II, Ludhiana Vs. M/s Avon Cycles Ltd. and ITA No. 593 of 2009, Commissioner of Income Tax-II, Ludhiana Vs. M/s Hero Cycles Ltd..

The revenue is before us challenging orders passed by the Income Tax Appellate Tribunal (here-in-after referred to as 'the Tribunal') in these appeals by raising four substantial questions of law, which are common to all appeals :-

1. Deletion of disallowance made on account of interest on money borrowed for purchase and installation of plant and machinery.

2. Deletion of addition on account of excise duty on closing stock as a result of application of section 145 (of Income Tax Act, 1961) A of the act.

3. Interest on interest free advances to directors and other parties.

4. Interest on 234D prior to insertion of section 234D (of Income Tax Act, 1961).

The first question arises in ITA No. 430 of 2006 and ITA No. 400 of 2007 but was answered against the revenue, at the time of admission of the appeal on 06.08.2008, by relying upon a judgment of the Supreme Court in Deputy Commissioner of Income Deputy Commissioner of Income Tax, Ahmedabad Tax, Ahmedabad Vs. Core Health Care Ltd. Core Health Care Ltd. (2008) 2 SCC 465. (2008) 2 SCC 465. (2008) 2 SCC 465. The first question, therefore, does not require any further consideration.

The second question arises in ITA Nos. 430 of 2006, 400 of 2007, 295 of 2009, 296 of 2009, 297 of 2009, 298 of 2009 and 286 of 2009. Facts necessary for adjudication of this question are being taken from ITA No. 430 of 2006. The assessee who manufactures cycle parts filed a return declaring a business loss of `1,03,32,832/- The return was processed under Section 143(1) (of Income Tax Act, 1961), 1961 (hereinafter referred to as 'the Act'). A statutory notice under Section 143(2) (of Income Tax Act, 1961) was served upon the assessee, followed by a detailed questionnaire dated 23.05.2001. After considering the material on record, the Assessing Officer relied upon Section 145(A) (of Income Tax Act, 1961) to include excise duty while computing opening and closing stock, for evaluating the assessee's income.

Aggrieved by this order, the assessee filed an appeal before

the Commissioner of Income Tax-II, Ludhiana. The CIT(Appeals)

(hereinafter referred to as 'the CIT(A)') relied upon CBDT circular No.

772 dated 23.12.1998 and guidelines issued by the Institute of

Chartered Accountants to delete the addition of `32,31,521/- made by

the Assessing Officer. The revenue preferred an appeal before the

Tribunal, which was dismissed by order dated 07.10.2005 by relying

upon a judgment of the Hon'ble Supreme Court in CIT Vs. M/s Indo M/s Indo Nippon Chemical Industries Limited, 261 ITR 275 , 261 ITR 275 261 ITR 275.Counsel for the revenue submits that the judgment in M/s

Indo Nippon Chemical Industries Limited (supra), relates to inclusion of ,modvat credit and, therefore, does not apply to the present case, which

pertains to inclusion of excise duty while calculating opening and closing stock.

Counsel for the assessee submits that it makes no difference whether the judgment in M/s Indo Nippon Chemical In M/s Indo Nippon Chemical Industries Limited's dustries Limited's case (supra) pertains to modvat credit as it is the method of accountancy and the principle set out in M/s Indo N M/s Indo Nippon Chemical ippon Chemical Industries Limited's case (supra)that are relevant.

A perusal of the facts reveals that the Assessing Officer

included excise duty while computing opening and closing stock. The

CIT(A), by relying upon a CBDT circular No.772, dated 23.12.1998 and

guidelines issued by the Chartered Accountants set aside the inclusion

of excise duty while computing opening and closing stock by holding as

follows :-

“I have considered this matter carefully and I find force in

the contentions of the Learned Counsels for the following

reasons:

(i) Section 145A (of Income Tax Act, 1961) refers to the valuation of purchase and

sale of goods and inventory. The section does not

speak of closing stock only and as contended by the

Learned A.Rs., the inventories would include the

opening stock, purchases, as well as the closing stock.

(ii) I am reminded of a CBDT circular No. 772 dated

23.12.98 which clarified the back ground for the

insertion of the new section 145A (of Income Tax Act, 1961). It was clarified that

a new section 145A (of Income Tax Act, 1961) had been inserted w.e.f. 1.4.1999

with a view to put an end to the point of litigation as to

whether the value of the closing stock of the inputs,

work in progress, and finished goods must necessarily

include the element for which modvat credit is

available. It was clarified that the new section 145A (of Income Tax Act, 1961)

was inserted in order to ensure that the value of

opening and closing stock reflect the correct value.

(iii) The Learned Counsel has also alluded to the guidelines

issued by the Instituted of Chartered Accountants,

which is the CA's Apex Body. After having considered

the rival submissions, I find force in the contentions of

the Learned Counsels that this new section mentions

the word inventory; the CBDT circular also speaks of

the correct value of the opening and closing stock, and

in matters of accountancy, the guidelines of the

Institute of the Chartered Accountants Apex Body,

have to be taken as the correct method. In view of the

above, I am inclined to agree with averments of the

Learned Counsel. Accordingly, I allow this ground of

appeal in favour of the appellant and direct the

Assessing Officer to delete this addition of

`32,31,521/- made on this account.”

The ITAT thereafter reconsidered the matter and held as

follows :-

“4. The next ground pertains to deleting the addition

of `32,31,521/- made as a result of application of section

145A of the Act. This issue has been deliberated upon by

the tribunal in the case of M/s Nahar Spinning Mills Limited

vide order dated 12.08.2005. Relevant discussion is

available in para 19 and 20 at page 38 of the said order. In

view of these facts, there is a force in the contention of the

Ld. counsel for the assessee. This issue has also been

decided by the Hon'ble Apex Court in the case of CIT Vs.

M/s Indo Nippon Chemical Industries Limited, 261 ITR 275

wherein it was held that modvat credit available to assessee

manufacturing goods with duty paid raw material is not on

income liable to be taxed. While coming to his conclusion,

the Hon'ble Apex Court affirmed the decision of the Hon'ble

High Court where it was held that merely because the

modvat credit was a reversible credit available to

manufacturer, open purchase of duty paid raw material

would not amount to income which was liable to be taxed

under the act.”

A perusal of Section 145(A) (of Income Tax Act, 1961) and the clarification

relating to the method of accounting, contained in the circular issued by the Institute of Chartered Accountant, does not enable us to hold that the opinion recorded by the Tribunal is in any manner perverse or

arbitrary. The fact that the judgment in M/s Indo M/s Indo Nippon Chemical Nippon Chemical Industries Limited's case (Supra) relates to modvat credit would make no difference as it is the method of accountancy and the principle affirmed in M/s Indo Nippon Chemical Industries Lim M/s Indo Nippon Chemical Industries Limited's case ited's case (Supra) (Supra) that is relevant. Consequently, the second question is answered against the revenue.

The third question, relates to interest on interest free

advances to directors and other parties. Counsel for the revenue

submits that similar matters have been remitted to the Tribunal in view

of a judgment of the Hon'ble Supreme Court in S.A. Builders Ltd. Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and another, (2007) 288 ITR 1. Counsel for the assessee fairly concedes that this question has already been answered against assessees and prays that the course adopted in ITA No. 225 of 2004 titled as Commissioner of Incom Commissioner of Income Tax Vs. M/s Southern Bottles Pvt. Ltd. may also be adopted in the present case.

In view of statements made by the counsel for the parties,

the third question which arises in ITA Nos. 297 and 286 of 2009 is

answered in favour of the revenue and against the assessee by setting-

aside the order passed by the Income Tax Appellate Tribunal and

restoring the matter to the Tribunal to adjudicate the matter afresh after taking into consideration the opinion recorded by the Hon'ble Supreme Court in M/s S.A. Builders Ltd's case (supra) M/s S.A. Builders Ltd's case (supra) .

The fourth question arises in ITA Nos. 286 and 593 of 2009.

Counsel for the revenue submits that as Section 234D (of Income Tax Act, 1961) of the

Act was in force on the date of assessment, the assessee was required

to pay interest on excess refund admittedly received by the assessee.

The assessing officer rightly levied interest but the CIT(A) and the

Income Tax Appellate Tribunal have both erred in deleting the interest.

Counsel for the assessee on the other hand, submits that Section 234D (of Income Tax Act, 1961)

of the Act does not apply to the appellant and even it is held that

Section 234D (of Income Tax Act, 1961) is applicable, the rate of interest has to be

calculated from the date of incorporation of Section 234D (of Income Tax Act, 1961) and not from

the date set out by the Assessing Officer.

Section 234D (of Income Tax Act, 1961) reads as follows:-

234D. (i) Subject to the other provisions of this Ac 234D. (i) t, where

any refund is granted to the assessee under sub-

section(1) of section 143 (of Income Tax Act, 1961), and -

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

(b) the amount refunded under sub-section(1) of

section 143 (of Income Tax Act, 1961)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 (of Income Tax Act, 1961) or

section 155 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or section 260 (of Income Tax Act, 1961) or

section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961)

or section 153A (of Income Tax Act, 1961), 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 Ist day of

June, 2003 if the proceedings in respect of such assessment

year is completed after the said date.”

A bare perusal of Section 234D (of Income Tax Act, 1961), leaves no

ambiguity that the assessee is liable to pay interest on excess refund.

The opinion recorded by the Tribunal that Section 234D (of Income Tax Act, 1961) does

not apply to the case of the assessee is incorrect. The assessee does

not deny receipt of excess refund and, therefore, is obliged under

Section 234D (of Income Tax Act, 1961) to pay interest. However, as Section 234D (of Income Tax Act, 1961)

came into force on 01.06.2003 and admittedly does not operate

retrospectively, the assessee would be required to pay interest from the

date of incorporation of Section 234D (of Income Tax Act, 1961) i.e. 1.6.2003.

Consequently, the question of law is answered in favour of

the revenue by holding that the assessee is liable to pay interest on

excess refund from 1.6.2003.

The questions of law having been answered, the appeals are

disposed of accordingly.

(RAJIVE BHALLA) RAJIVE BHALLA)

JUDGE

(B.S. WALIA)

JUDGE

January 07, 2015.