Case Law Details
Gujarat State Police Housing Corporation Limited Vs DCIT (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has ruled that interest received by an assessee under Section 244A of the Income Tax Act, 1961, on an income tax refund is indeed taxable as “income from other sources.” The Tribunal dismissed a rectification application filed by Gujarat State Police Housing Corporation Limited, a wholly-owned Government of Gujarat entity, asserting that the taxability of such interest is not a “mistake apparent from the record” and therefore cannot be rectified under Section 154 of the Act.
Case Overview
The case involved Gujarat State Police Housing Corporation Limited (the assessee), which had filed a “Nil” income return for Assessment Year 2015-16. The case was selected for complete scrutiny, and during the assessment, the Assessing Officer (AO) discovered that the assessee had received interest of Rs. 27,67,422/- under Section 244A of the Act. This interest was paid on January 11, 2015, in respect of a refund for Assessment Year 2010-11. However, the assessee had not disclosed this interest in its profit and loss accounts nor offered it to tax.
The assessee explained that the refund was adjusted against outstanding demands for Assessment Years 2011-12 and 2012-13, and thus the interest amount was not “actually received.” The AO disagreed with this explanation and added the Rs. 27.67 lakh interest to the assessee’s income.
Following the assessment order dated November 24, 2017, the assessee filed a rectification application under Section 154 of the Act on April 11, 2019, requesting the removal of this addition. The AO rejected this rectification plea on April 30, 2019. The assessee’s appeal to the Additional/Joint Commissioner of Income Tax (Appeals-10), Mumbai (Addl. CIT(A)), was also dismissed, leading to the present second appeal before the ITAT.
Assessee’s Arguments
Before the ITAT, the assessee’s authorized representative, Shri S. N. Divetia, argued that the corporation operates on a “no-profit no-loss basis” as a Nodal Agency for the Government of Gujarat, undertaking construction and maintenance for police, jail, and home guard departments. He contended that the ultimate ownership of the constructed buildings remained with the Government of Gujarat, and the assessee’s consistent accounting practice involved transferring all income and costs to work-in-progress or work completed.
Crucially, the assessee argued that funds received from the Government for construction activities were temporarily kept with Gujarat State Finance Corporation Limited, and any interest generated on these funds was repaid and deposited into the Government account. Therefore, the assessee claimed that the interest accrued was not its income. To support this contention, the assessee relied on previous favorable decisions by the ITAT’s Co-ordinate Bench in ITA No. 2549/Ahd/2013 dated July 18, 2014, and the Hon’ble Gujarat High Court in Tax Appeal No. 63 of 2015 dated April 6, 2015. The assessee asserted that, in light of these precedents, the AO’s addition of interest under Section 244A was incorrect, and thus the rectification application should have been allowed.
Revenue’s Counter-Arguments
Shri Hargovind Singh, the Senior Departmental Representative (DR), countered that interest received under Section 244A is indeed income of the assessee and is taxable under the head “income from other sources.” He emphasized that this interest is paid on tax amounts (such as advance tax or TDS) previously paid by or on behalf of the assessee. Therefore, the AO was correct in treating it as the assessee’s income.
Furthermore, the DR argued that the taxability of interest under Section 244A is a debatable issue and cannot be considered a “mistake apparent from the record.” Consequently, he contended that the AO had rightly rejected the rectification application under Section 154, as such applications are meant for obvious errors, not for re-adjudicating debatable points of law.
ITAT’s Deliberation and Distinction of Precedents
The ITAT carefully considered both sides. It acknowledged that the assessee had indeed received the Rs. 27,67,422/- interest under Section 244A. The Tribunal affirmed that interest received on an income tax refund is generally taxable under the head “income from other sources,” and the assessee was obligated to disclose it in its return for AY 2015-16, as the refund and interest were received in that year.
The ITAT rejected the assessee’s plea that the interest should not be taxed merely because the refund was adjusted against outstanding demands. The Tribunal clarified that interest under Section 244A is compensation for excess tax paid by or collected on behalf of the assessee. Therefore, the assessee could not claim that this interest income did not belong to it.
Crucially, the ITAT drew a clear distinction between the nature of the interest in the present case and the interest in the judicial precedents cited by the assessee. The Tribunal noted that the decisions in ITA No. 2549/Ahd/2013 (ITAT Ahmedabad) and Tax Appeal No. 63 of 2015 (Gujarat High Court) pertained to “interest income earned on fixed deposit made on temporary basis out of the grant received from the Government.” In those cases, the funds belonged to the Government, and the interest earned thereon was held to belong to the Government, not the assessee.
The ITAT explicitly stated, “The same principle cannot be applied to the interest received by the assessee u/s.244A of the Act.” It reasoned that interest under Section 244A is on excess tax paid by the assessee, and the ownership of this interest squarely rested with the assessee, not the Government of Gujarat. The fact that the interest was adjusted against the assessee’s own outstanding tax liabilities for earlier years further supported this conclusion.
Rectification Application Not Applicable
Beyond the taxability of the interest, the ITAT also addressed the procedural aspect of the rectification application. The Tribunal concurred with the Revenue that the question of whether interest under Section 244A is taxable requires “application of mind” and is a debatable issue. Therefore, it cannot be considered a “mistake apparent from the record” that could be rectified under Section 154 of the Act. The ITAT upheld the AO’s decision to reject the rectification application and the Addl. CIT(A)’s confirmation, stating that if the assessee wished to challenge the taxability, it should have done so by filing a regular appeal against the assessment order, not through a rectification plea.
Conclusion
In conclusion, the ITAT dismissed the assessee’s appeal, upholding the Addl. CIT(A)’s order. The ruling clarifies that interest received under Section 244A on income tax refunds is taxable in the hands of the recipient, irrespective of whether the refund is physically received or adjusted against outstanding demands. It also reinforces the limited scope of rectification applications under Section 154, which are not meant for re-adjudicating debatable points of law.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the assessee against the order passed by the Additional/Joint Commissioner of Income Tax (Appeals-10) Mumbai, dated 20.01.2025 (in short “the Addl. CIT(A)”) for the Assessment Year 2015-16, in the proceedings u/s.154 of the Income Tax Act, 1961 (in short “the Act”).
2. The brief facts of the case are that the assessee had filed return of income for AY 2015-16, declaring “Nil” income. The case was selected for complete scrutiny and a notice u/s. 143(2) of the Act was issued on 25.07.2016. The assessee is 100 % Government of Gujarat entity with the main object to undertake construction/maintenance/repairs of residential/non-residential buildings for Police/Jail/ Home Guard Department, as per the directive of the Government of Gujarat. In the course of assessment, the AO found that the assessee was paid interest of Rs.27,67,422/- u/s. 244A of the Act in respect of refund for AY 2010-11 paid on 11.01.2015. However, this interest was not disclosed in the profit & loss accounts of the assessee-company and was not offered to tax. It was explained by the assessee that the refund was adjusted against outstanding demand for AYs 2011-12 and 2012-13 and interest amount was not actually received by the assessee. However, the AO did not agree with the explanation of the assessee and addition of Rs.27,67,422/- was made in respect of interest received u/s.244A of the Act. Thereafter, the assessee had filed a rectification application u/s.154 of the Act on 11.04.2019 with a request to rectify the mistake in the Assessment Order u/s.143(3) of the Act dated 24.11.2017 in respect of addition of Rs.27,67,422/- on account of interest u/s.244A of the Act. The AO vide order u/s.154 of the Act dated 30.04.2019 had rejected the application of the assessee.
3. Aggrieved with the Order u/s.154 of the Act, dated 30.04.2019 passed by the AO, the assessee had filed appeal before the First Appellate Authority which was decided vide the impugned order and the appeal of the assessee was dismissed.
4. Now the assessee is in second appeal before us. The following grounds have been taken in this appeal:
1.1 The order passed u/s.250 on 20.01.2025 for A.Y.2015-16 by Addl./JT.CIT(A), Mumbai (for short CIT(A) upholding addition towards interest income of Rs.27,67,420/- on the refund of TDS is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanations furnished and the evidence produced by the appellant. The impugned order being a non-speaking order, it is liable to be quashed and set aside.
2.1 The Ld CIT(A) has grievously erred in law and or on facts in upholding that the interest income of Rs.27,67,420/- on the investment of funds not belonging to the Appellant Corporation was chargeable to tax in the hands of the appellant though the refund of tax did not belong to the appellant.
2.2 That in the facts and circumstances of the case as well as in law, the Id. CIT(A) ought not to have held that the refund of income tax belongs to the appellant and as such corresponding income had accrued to him.
2.3 The Ld CIT(A) has grievously erred in law and or on facts in upholding that since no appeal was filed against the assessment order, no application for rectification of concluded issue could be made.
5. Shri S N Divetia, Ld. AR appearing for the assessee explained that the assessee is a wholly owned Government Company and acting as Nodal Agency for carrying out various types of construction, maintenance and repair work for Home Department, Government of Gujarat. He explained that the assessee has been working on no-profit no-loss basis, as the ultimate ownership of the buildings constructed remains with the Government of Gujarat. It was regular and consistent accounting practice of the assessee to transfer the entire income and cost to either work-in-progress or work completed. The Ld. AR explained that the fund received for construction activities from the Government was kept with Gujarat State Finance Corporation Limited and the interest generated thereon was re-paid and deposited in Government account. Thus, the interest accrued to the assessee was not the income of the assessee and this fact was decided in favour of the assessee by the Co-ordinate Bench of this Tribunal in ITA No. 2549/Ahd/2013 dated 18.07.2014 and also by Hon’ble Gujarat High Court in Tax Appeal No.63 of 2015 dated 06.04.2015. In view of this fact, the addition made by the AO in respect of interest u/s.244A of the Act was not correct and, therefore, the order u/s.154 of the Act rejecting the rectification application was also not correct.
6. Per Contra Shri Hargovind Singh, Ld. Sr. DR submitted that the interest received u/s.244A of the Act was income of the assessee and was required to be disclosed in the Income-tax return, as income earned from “other sources”. He submitted that this interest was paid on the tax paid by the assessee/TDS made on behalf of the assessee and, therefore, the AO was correct in treating the same as income of the assessee. He further submitted that the taxability of interest u/s.244A of the Act cannot be considered as mistake apparent from the record as it was a debatable issue. Therefore, the AO had rightly rejected the rectification application of the assessee.
7. We have carefully considered the rival submissions. There is no dispute to the fact that the assessee had received interest of Rs.27,67,422/-u/s.244A of the Act during the year. Further, the interest received on income tax refund is liable to tax under the head “income from other sources” and accordingly the assessee was required to disclose this interest in the income tax return for AY 2015-16, as the refund along with the interest was received in this year only. Merely because the refund was adjusted with the outstanding demands of the assessee for AYs 2011-12 and 2012-13, this cannot be a ground for non-disclosure of interest income received during the year u/s.244A of the Act. The interest on refund paid u/s.244A of the Act was in respect of excess tax paid by the assessee or excess tax collected on behalf of the assessee. Therefore, the assessee cannot take a plea that this interest income does not belong to it. The interest received u/s.244 of the Act cannot be equated with the interest on surplus fund received from the Government and deposited with Gujarat State Finance Corporation Ltd. The decision of the Tribunal and the High Court, relied upon by the assessee, was in respect of interest income earned on fixed deposit made on temporary basis out of the grant received from the Government. In that case, the fund belonged to the Government which was temporarily deposited with the Corporation and interest earned thereon was held as belonging to the Government of Gujarat and not to the assessee. The same principle cannot be applied to the interest received by the assessee u/s.244A of the Act. This interest was received on the excess tax deposited/collected on behalf of the assessee. Further, the interest received by the assessee was adjusted with the outstanding tax liability of the assessee itself for the AY 2011-12 and 2012-13. The ownership of the interest received u/s.244A of the Act on the excess tax paid, was squarely with the assessee and not with the Govt. of Gujarat. The assessee has not contended that it was not liable to pay any tax on the interest earned by it or that its income was not taxable at all.
8. Be that as it may, the fact remains that ownership of the interest u/s.244A of the Act was with the assessee and not with the Government of Gujarat. Further, as rightly pointed by the Revenue, whether the interest u/s.244A of the Act was liable to tax in the hands of the assessee or not, required application of mind and this cannot be considered as mistake apparent from the record. Therefore, the AO had correctly rejected the rectification application of the assessee and we do not find anything wrong with the rejection of the appeal by the Ld. Addl. CIT(A) on this issue. As rightly held by Ld. Addl. CIT(A), if the assessee wanted to challenge this matter, it should have been done by filing a regular appeal against the assessment order and not in the proceedings u/s.154 of the Act. Accordingly, the order of the Ld. Addl. CIT(A) is upheld and the appeal of the assessee is dismissed.
9. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the Open Court on 09th July, 2025 at Ahmedabad.
Author Bio
