Commissioner of Income Tax vs Hindustan Engineering Co.

These references have been made u/s 256(1) of the Income Tax Act, 1961 (hereinafter to be called "the Act"), at the instance of the Commissioner of Income Tax, Jodhpur, for deciding the following question of law, namely :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in directing the Income Tax Officer to grant interest u/s 214 in respect of amount of tax refunded to the assessee?"

The relevant assessment years are 1980-81 and 1981-82. The assessee, a registered firm, carried on the business of building construction for Military Engineering Services (in short, "MES"). The deductions were effected by the Military Engineering Services for tax from the amounts payable to the assessee. Consequent upon the assessments, the assessee became entitled to refunds. The Income Tax Officer granted refunds, but did not allow interest u/s 214 of the Act. Appeals were preferred before the Appellate Assistant Commissioner, Jodhpur, and were dismissed. Thereafter, appeals were filed by the assessee before the Income Tax Appellate Tribunal and they were allowed by its common order dated November 13, 1986. At the instance of the Commissioner of Income Tax, Jodhpur, these references have been made.

It has been contended by learned standing counsel for the Revenue that the provisions of Section 214 of the Act are attracted for the advance tax only and not for the tax deducted at source, there is no provision in the Act permitting payment of interest on the amount refundable from the amount of tax deducted, at source and there is no place for equity in matters of tax. He relied upon Addl CIT v. Bareilly Corporation Bank Ltd. [1978] 115 ITR 449 and Lord Krishna Bank Ltd. Vs. Income Tax Officer and Others,

In reply, it has been contended by learned counsel for the assessee that the Income Tax deducted at source is to be treated as advance tax for the purpose of payment of interest u/s 214 of the Act and its Sub-section (2) clearly provides that on any portion of such amount which is refunded under Chapter XVII of the Act interest shall be payable. He relied upon CIT v. Jaipur Vdyog Ltd. [1987] 167 ITR 306.

Section 4(2) of the Act speaks of Income Tax deducted at source and Income Tax paid in advance. Section B of Chapter XVII of the Act deals with the provisions relating to deduction of tax at source and section C contains the provisions relating to advance payment of tax. Advance tax is paid on the estimated income for the current year on the basis of the previous year before the same is earned. Tax is deducted at source on the income already earned at the rate applicable on the amount which has actually fallen due and is paid. The amount of tax and the rate may vary when the total income is computed. Such is not the case with advance tax. A distinction has been clearly made between these payments in Section 214. The common characteristic is that they are paid/collected prior to the assessment. There is no enabling provision in the Act for payment of interest on the tax deducted at source. There is no equity in tax matters.

Sub-section (2) of Section 214 of the Act is not applicable to refunds from amounts deducted at source. It speaks of any portion of such amount which is refunded under this Chapter. The word "such" refers to Sub-section (1) of Section 214 dealing with advance payment of tax and not with tax deducted at source. The same view has also been taken in Lord Krishna Bank Ltd. Vs. Income Tax Officer and Others, and Addl. CIT v. Bareilly Corporation Bank Ltd. [1978] 115 ITR 449. The facts and circumstances of CIT v. Jaipur Vdyog Ltd [1987] 167 ITR 306 are quite different and distinguishable. It has been held in it that the payment of the amount of tax beyond time in pursuance of the order of the Supreme Court was deemed as a payment of advance tax and accordingly it allowed interest u/s 214 of the Act. No question of payment of interest on the amount refundable from the tax deducted at source was involved in this reported case.

By the Direct Tax Laws (Amendment) Act, 1989, a provision has been inserted in Section 244A of the Act for the payment of interest on refund out of tax collected at source u/s 206C.

In the result, the question referred to us is answered in the negative, in favour of the Revenue and against the assessee.