Interest on refund allowed even if law is silent

We are sharing with you an important judgement of the Hon’ble High Court of Gujarat in the case of State of Gujarat Vs. Indian Petro Chemicals Ltd. [2015 (6) TMI 541 – Gujarat High Court] on following issues:

Issues:

Whether the entitlement of interest on refund subject to meeting with the test of constitutional provision?

What happen, when the legislature is silent about entitlement of interest on refund of the tax amount already paid by the citizen, whether the interest can be considered by way of a compensatory measure?

Facts & Background:

In the instant case, Indian Petro Chemicals Ltd. (“the Assessee”or “the Respondent”) was allowed refund of the tax amount by the Appellate Authority. However, as the interest was not awarded on such refund of the tax amount, the Assessee preferred second appeal before the Hon’ble Tribunal.

It was submission of the Department that entitlement of interest under Section 54 of the Gujarat Sales Tax Act (“Gujarat Sales Tax Act”) is only for such refund amount which has arisen in the Assessment Order under Section 41 thereof and not at the Appellate stage. Thus, the Assessee was not entitled to interest on such refund amount that has arisen at the Appellate stage.

The Hon’ble Tribunal relying upon its earlier decision in the case of Saurashtra Chemical Ltd. Vs. State of Gujarat in Second Appeal No.603 of 2007 decided on August 01, 2014 and on account of the principles of doctrine of merger and reasonable construction of the provisions of Section 41 of the Gujarat Sales Tax Act held that when the interest on refund of tax upon the Assessment is available, such interest should be made available on the refund of the tax which has accrued on account of the Order passed in appeals against the Assessment Order.

Being aggrieved, the Department preferred an appeal before the Hon’ble High Court of Gujarat.

Held:

The Hon’ble High Court of Gujarat held that once an Order is passed by the competent authority for Assessment and the appeal is preferred before the Appellate Authority against such Assessment Order, which is modified by the Appellate Authority, the principles of doctrine of merger would squarely apply.

Thus, the interpretation canvassed by the Department for Section 54(1)(aa) of the Gujarat Sales Tax Act, if accepted, would run counter to the basic principles of doctrine of merger which is well accepted doctrine incorporated in the system of administration of justice.

Further, the Hon’ble High Court relying upon the following judgment of the Apex court:

• Sandvik Asia Ltd. Vs. Commissioner of Income Tax and others reported in [(2006) 280 ITR 643 (SC)]
• Commissioner of Income Tax Vs. Gujarat Fluoro Chemicals reported in [(2014) 1 SCC 126]

And held that the principles of compensatory measure may apply where the legislature is silent about entitlement of interest on refund of the tax amount, which is already paid by the Assessee. Thus, by considering interest by way of a compensatory measure, the Hon’ble High Court rejected the argument of the Department that interest cannot be awarded by way of compensation unless the interest was expressly provided on any amount of refund.

(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Email: bimaljain@hotmail.com)

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