Tribunal Rightly Directed Tax Authority to Allow Interest Under Section 214

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Case Name:

Commissioner of Income Tax vs. Mehsana District Co-operative Milk Producers Union Ltd. (High Court of Gujarat)

Income Tax Reference No.81 of 1996

Date: 29th January 2008

Key Takeaways:

1. The Supreme Court's decision in Sandvik Asia Ltd. vs. CIT established that the government is liable to pay interest on the excess amount of tax refunded to the assessee under Section 214(1).

2. Once the interest becomes due under Section 214(1), it takes the same color as the excess amount of tax that is refundable on regular assessment.

3. The High Court affirmed that the ITAT was correct in law in directing the AO to allow the interest under Section 214.

Issue:

Whether the Income Tax Appellate Tribunal was legally justified in directing the Assessing Officer to allow interest under Section 214 of the Income Tax Act.

Facts:

- The assessment year in question was 1974-75.

- The CIT(A) had earlier directed the AO to calculate the interest in line with the Gujarat High Court's decision in Bardolia Textiles case.

- However, the AO refused to revise the interest because the department had not accepted the Gujarat High Court's decision and the matter was pending before the Supreme Court.

- The assessee challenged the AO's order, and the CIT(A) again directed the AO to allow the interest as per the Gujarat High Court's decision.

- The Revenue (CIT) then appealed this decision to the Income Tax Appellate Tribunal.

- The Tribunal dismissed the Revenue's appeal, following the Gujarat High Court's decision relied upon by the CIT(A).

Arguments:

- The Revenue argued that the Tribunal was not justified in directing the AO to allow the interest under Section 214.

- The assessee did not appear before the High Court, but the court still proceeded to decide the case based on the Supreme Court's decision in Sandvik Asia Ltd. vs. CIT.

Key Legal Precedents:

- Sandvik Asia Ltd. vs. CIT & Ors. (2006) 280 ITR 643 (SC):

The Supreme Court held that the government is liable to pay interest at the applicable rate on the interest amount which becomes due under Section 214(1) of the Income Tax Act.

- Bardolia Textiles (151 ITR 389):

The Gujarat High Court's decision relied upon by the CIT(A) and the Tribunal.

Judgment:

- The High Court upheld the Tribunal's decision, finding that it was legally justified in directing the AO to allow the interest under Section 214.

- The High Court applied the ratio from the Supreme Court's decision in Sandvik Asia Ltd. and concluded that once the interest becomes due under Section 214(1), it takes the same color as the excess amount of tax that is refundable on regular assessment.

FAQs:

Q1: What is the key legal principle established in this case?

A1: The key legal principle established in this case is that the government is liable to pay interest on the excess amount of tax refunded to the assessee under Section 214(1) of the Income Tax Act. This principle was laid down by the Supreme Court in the Sandvik Asia Ltd. case.

Q2: Why was the Tribunal's decision to direct the AO to allow the interest justified?

A2: The Tribunal's decision was justified because the Supreme Court's ruling in Sandvik Asia Ltd. clearly established the government's liability to pay interest on the excess tax amount under Section 214(1). Once the interest becomes due, it takes the same color as the excess tax amount that is refundable on regular assessment.

Q3: What was the significance of the Gujarat High Court's decision in Bardolia Textiles?

A3: The Gujarat High Court's decision in Bardolia Textiles was relied upon by the CIT(A) and the Tribunal in this case. This decision was relevant because it provided the legal basis for the assessee's claim to the interest under Section 214.

Q4: What was the main dispute between the parties in this case?

A4: The main dispute was whether the Tribunal was legally justified in directing the Assessing Officer to allow the interest under Section 214 of the Income Tax Act. The Revenue (CIT) argued that the Tribunal's decision was not justified, while the assessee maintained that the Tribunal's direction was correct.

Q5: What was the final outcome of the case?

A5: The High Court upheld the Tribunal's decision, finding that it was legally justified in directing the Assessing Officer to allow the interest under Section 214 of the Income Tax Act. The question referred to the High Court was answered in favor of the assessee and against the Revenue.

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1. The Income Tax Appellate Tribunal, Ahmedabad Bench-B, has referred the following question at the instance of Revenue under sec. 256(1) of the Income Tax Act, ('the Act').

“Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to allow interest under section 214 of the Act?”

2. The assessment year is 1974-75. The facts relevant for the present, have been stated by the Tribunal, as under:

“2. The CIT(A) vide his order dated 13.8.1987 in Appeal No. CIT(A) II/XIII-104/87-88 directed the Assessing Officer to calculate the interest keeping in view the decision of Hon'ble Gujarat High Court in the case of Bardolia Textiles (151 ITR 389). But the A.O. refused to revise the interest because the department has not accepted the decision of Hon'ble Gujarat High Court and the matter was before Hon'ble Supreme Court. The order of A.O. was again challenged and the CIT(A) vide order dated 7.9.90 passed in Appeal No. CIT(A)II/Cos.II(4)/132/167/87-88/88-89(IA) directed the A.O. To go through the claim of the assessee and to allow the interest as per decision of Hon'ble Gujarat High Court in the case of Bardolia Textiles (supra). The Revenue came in appeal before the Tribunal and the Tribunal following the decision of Hon'ble High Court of Gujarat relied by the CIT(A), dismissed the appeal.”

3. Heard Mrs. M.M. Bhatt learned Standing Counsel appearing for the applicant – Revenue. Though served, none appears for the respondent – assessee. Mrs. Bhatt has fairly invited attention to the decision of the Apex Court in the case of Sandvik Asia Ltd. vs. Commissioner of Income Tax & Ors., reported in (2006) 280 ITR 643 to submit that the issue stands concluded. In light of this position, it is not necessary to set out the facts and contentions in detail.

4. It has been held by the Apex Court in the aforesaid judgment that the Government is liable to pay interest, at the rate applicable to the excess amount refunded to the assessee, on the interest amount which becomes due under section 214(1). Section 214(1) itself recognizes in principle the liability to pay interest on the amount of tax paid in excess of the amount of assessed tax which is retained by the Government. Interest on the excess amount is payable at the rate specified therein from the first day of the year of assessment to the date of regular assessment. Once the interest becomes due, it takes the same colour as the excess amount of tax which is refundable on regular assessment.

5. Applying the aforesaid ratio to the facts of the case, it is apparent that the Tribunal was right in law in directing the Assessing Officer to allow interest under section 214 of the Act. The question referred for the opinion of this Court is, therefore, answered in affirmative, that is, in favour of the assessee and against the Revenue. The Reference stands disposed of accordingly with no order as to costs.

(D.A. MEHTA, J.)

(Z.K. SAIYED, J.)