Interest received on income tax refund can be set-off against the interest paid on delayed payment of income tax – ITAT Mumbai

DCIT v. Bank of America NT & SA (ITAT Mumbai) – Tribunal held that interest received on income tax refund can be set-off against the interest paid on delayed payment of income tax and only net amount is to be taxed.

The issue before the tribunal was that Whether interest income received by the taxpayer on income tax refund can be set-off against delayed payment on income tax? Whether the taxpayer can offer the net interest received as income?

Taxpayer Contended that the interest paid to and received from the same party i.e. the tax department. Hence both the transactions should be taken together and the interest paid should be adjusted against the interest received.

Honourable Tribunal Ruled as follows:-

• The taxpayer received refund from the government along with interest since excess tax had been paid. On the other hand, the taxpayer retained the Government money by delaying payment of tax and accordingly interest became payable to the Government.
•  Delhi Tribunal in the case of R M Agarwal v. ITO [1979] SOT 361 (Del) held that interest received on income tax refund and the interest paid on delayed payment of income tax are to be assessed under the head ‘income from other sources’ and since both have the same character only net amount could be taxed.
• Interest paid by the taxpayer on delayed payment of tax could not be treated as business expenditure as held by the Punjab & Haryana High Court in the case of CIT v. Oriental Carpet Manufacturers (India) (P) Ltd [1973] 90 ITR 373 (P&H).
•  Similarly, interest received from the tax department on delayed payment of refund could not be treated as business income.
• Interest received on income tax refund and the interest paid on delayed payment of income tax are to be assessed under the head ‘income from other sources’ and since both have the same character, if the interest received from the tax department exceeds the interest paid by the taxpayer, then only net amount could be taxed.

Accordingly, the Tribunal held that interest received on income tax refund can be set-off against the interest paid on delayed payment of income tax and only the net amount should be offered to tax.

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