1. RECOMMENDATION FOR PROVIDING FOR GRANT OF TIMELY REFUND WITH INTEREST AND ALSO PROVIDING FOR PAYMENT OF HIGHER INTEREST IN CASE OF DELAYED REFUND UNDER SECTION 244A

(A) Under section 244A of the Income-tax Act, the tax administration is liable to pay interest at the rate of one-half percent per month or part thereof (i.e. 6 percent per annum) on refund of any amount which becomes due to the assessee. The rate of interest paid to the assessee does not fully reflect the opportunity cost of money to the assessee. Further, the low rate of interest creates a perverse incentive for the tax administration to delay the processing of returns under section 143 (1) of the Income-tax Act. The Committee recommends that the tax administration should be held accountable for delay in processing of returns beyond a reasonable period. Accordingly, the Committee recommends that interest on refunds should be payable at the rate of –

(a) one percent per month, or part thereof, if the return is processed under section 143(1) of the Income-tax Act anytime after six months from the end of the month in which the return is filed or the refund is issued anytime after the end of the said six month period;

(b) one and one-half percent per month, or part thereof, if the return is processed under section 143(1) of the Income-tax Act anytime after twelve months from the end of the month in which the return is filed or the refund is issued anytime after the end of the said twelve month period;

This will also prompt the tax administration to put its house in order to expeditiously settle payment mismatches, if any. However, one member was of the view that a penal interest rate of 18% coming at cost of public exchequer is too high and not justified.

(B) Another major grievance of taxpayers is in relation to not granting of timely refunds in pursuance to orders passed in any appeal or other proceeding under this Act. Even where refund of tax is granted, in many a cases interest due to the assessee is not correctly worked out. As a result, not only does the taxpayer remain deprived of his legitimate refund consequentially due to him, but he also suffers on account of the provision u/s. 244A which grants only simple interest at the rate of 6% per annum. Infact, in such a case it is the revenue which is utilizing the taxpayer’s funds without due justification and therefore, the taxpayer ought to be compensated.

With a view to ensure timely actions in this regard by the Assessing Officer, it is recommended to provide through the insertion of Section 244A(1B) that the Assessing Officer shall, without the assessee being required to make any claim in that behalf, refund the amount due to the assessee in all such cases, with interest due thereon under the provisions of section 244A and that such refund shall be granted within three months from the end of the month in which such orders are passed. Further, to enforce accountability on the Assessing Officer, it is also recommended to provide that if such refund due to the assessee is not granted to him within three months from the end of the month in which such order is passed, the assessee shall be entitled to receive additional interest on the such delayed refund at one half per cent per annum, over and above the normal interest of one half per cent per annum due to him u/s. 244A(1).

(C) Under the present provisions of Section 244A, an assessee is entitled to interest on refund arising out of excess payment of advance tax, tax deducted or collected at source and tax or penalty paid in pursuance of a notice u/s. 156. However, there is no provision to grant interest on refund, where the same arises out of any self assessment tax or interest paid by an assessee under any provision of the Act. It is unfair and inequitable that an assessee should be deprived of interest on such refund of tax or interest, more particularly when the moneys representing such refund have been used by the Government until the same are refunded. Further, the grant of refund on self-assessment tax is also justified as the interest payable by the department is now only 6% p.a. which will not be an incentive for the tax payer to intentionally deposit more tax just to earn interest on the excess amount.

2. Based on the aforesaid, the following amendments are recommended to section 244A of the Income-tax Act:

Amendment of section 244A

(New Section to be substituted with effect from 1.4.2017)

244A. (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely:—

(a)where the refund is out of any tax paid under section 115WJ or collected at source under section 206C or paid by way of advance tax or treated as paid under section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted:

Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined under sub-section (1) of section 115WE or sub-section (1) of section 143 or on regular assessment;

(b)where the refund is out of any tax or interest paid on self assessment under section 140A or out of any tax or interest or penalty paid in pursuance of a notice of demand under section 156 or by way of any set off refund made under section 245 or on account of tax, interest or penalty paid under any other provision of this Act, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or interest or penalty to the date on which the refund is granted.

(1A) The interest on refund payable under sub-section (1) shall, notwithstanding anything to the contrary contained therein, be payable at the rate of –

(a) one percent per month, or part thereof, if‑

(i) the return is processed under section 143(1) of the Income-tax Act anytime after six months from the end of the month in which the return is filed; or

(ii) the refund is issued anytime after the end of the said six month period; and

(b) one and one-half percent per month, or part thereof, if‑

(i) the return is processed under section 143(1) of the Income-tax Act anytime after twelve months from the end of the month in which the return is filed; or

(ii) the refund is issued anytime after the end of the said twelve month period.’.

(1B) Where a refund is due to the assessee in pursuance of an order referred to in section 240 and the Assessing Officer does not grant the refund within a period of three months from the end of the month in which such order is passed, the assessee shall be entitled to receive in addition to the amount of refund and regular interest due thereon under the provisions of sub-section (1), additional interest at the rate of one half per cent per month on the amount of refund due from the date immediately following the expiry of the period of three months aforesaid to the date on which the refund is granted.

(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner whose decision thereon shall be final.

(3) Where, as a result of an order under sub-section (3) of section 115WE or section 115WF or section 115WG or sub‑ section (3) of section 143 or section 144 or section 147 or 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 on which interest was payable under sub-section (1) has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly.

(4) In a case referred to in (3) above, where the interest is reduced, the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the amount of the excess interest paid and requiring him to pay such amount and such notice of demand shall be deemed to be a notice under section 156 and the provisions of this Act shall apply accordingly.

(5) In a case referred to in (3) above, where the interest is increased, the Assessing Officer shall inform the assessee by a communication specifying the amount of the interest due to him and shall refund such amount to the assessee without the assessee being required to make a claim in this regard.

Source- ​Draft Report of Justice R.V. Easwar (Retd) Committee to Simplify the provisions of Income-tax Act, 1961

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