Refund

STUDY NOTE - 28

REFUND

This Study Note includes

• Provisions of the Income Tax Act relating to refund of taxes in the event of the tax
paid being in excess of the tax liability

WHEN RIGHT TO CLAIM REFUND ARISES [Sec. 237]

Where any person satisfies the Assessing Officer that the amount of tax paid by him or on his
behalf for any assessment year exceeds the amount with which he is properly chargeable un-
der this Act for that year, he is entitled to the refund of the excess amount paid.
Case Law :
i) The tax paid by the assessee must be accepted as it is, and in the event of the tax paid being
in excess of the tax liability duly computed on the basis of return furnished and the rates
applicable, the excess shall be refunded to the assessee, since its retention may offend
article 265 of the Constitution - CIT v. Shelly Products 261 ITR 367.

WHO CAN CLAIM REFUND ? [Sec. 238]

Usually refund can be claimed by a person who has made excess payment of tax. If income of
a person is included in the total income of another person u/s. 60 to 64, the refund can be
claimed by the latter and not by the former. Where a person cannot claim any refund because
of his death, incapacity, insolvency, liquidation or other cause, his legal representatives or the
trustee or guardian or receiver, as the case may be, will be entitled to claim and receive such
refund for the benefit of such person or his estate.
Where the value of fringe benefits provided or deemed to have been provided by one em-
ployer is included under any provisions of Chapter XII-H in the value of fringe benefits pro-
vided or deemed to have been provided by any other employer, the latter alone shall be en-
titled to a refund under this Chapter in respect of such fringe benefits.”.

HOW TO CLAIM REFUND [Sec. 239]

Refund claim should be made in Form No. 30 and verified in the prescribed manner.
In the following cases, where an otherwise valid refund claim u/s. 237 is filed by an assessee
after the expiry of the time limit, the Assessing Officer, may admit the refund claim if the
following conditions are satisfied-

366 Applied Direct taxation

1. The refund arising as a result of tax deducted at source in respect of the
assessment year under the provisions of section 192, 193, 194, 194A, 194B, 194C, 194D and
195 does not exceed Rs. 10,000;
2. the income returned is not a loss where the assessee claims the benefit of carry forward
of the loss;
3. the refund claim is not supplementary in nature; and
4. the amount of the assessee is not assessable in the hands of any other person under any
provisions of the Act.
Moreover, the A.O. is authorised to admit belated return claims upto Rs. 10,000 where the
following conditions are satisfied –
i) the refund arising as a result of excess advance tax payment in respect of assessment
year under the provisions of sec. 208, does not exceed Rs. 10,000;
ii) the returned income is not a loss, where the assessee claims the benefit of carry for-
ward of the loss;
iii) the refund claimed is not supplementary in nature, i.e. a claim for additional amount
of refund after the completion of the original assessment for the same assessment
year ; and
iv) the income of the assessee is not assessable in the hands of any other person under
section any provisions of the Act.

Case Law :

i) Board is competent to admit an application for refund even after expiry of period pre-
scribed under section 239, for avoiding genuine hardship in any case or class of cases.
Union of India v. Azadi Bachao Andolan 263 ITR 706.
REFUND ON APPEAL [Sec. 240]
iii) Assessee is entitled to interest if the interest is paid u/s 220(2) subsequently becomes re-
fundable: Interest u/s 244A is payable in respect of the amount of interest earlier paid by
the assessee u/s 220(2) but later determined as refundable. Modipon Ltd. V CIT 270 ITR
257.
Case Laws :
i) Revenue is liable to pay interest on the amount of interest which it should have paid to the
assessee but has unjustifiably failed to do - CIT v. Narendra Doshi 254 ITR 606/122 Taxman
717.
ii) Interest on delayment payment of interest: The Department is liable to pay interest on
interest under sections 214 and 244(1A) if payment of interest is delayed - MC, Nally Bharat
Engg. Co. Ltd. v. CIT Tax L.R. 638

iii) Calculation of interest Interest cannot be granted till date of dispatch of refund order but it
has to be granted till date when order regarding payment of interest has been signed -
Rajasthan State Electricity Board v. CIT 281 ITR 274

Applied Direct taxation 367

 Refund

iv) Where return is filled belatedly: Where delay in completion of assessment which led to
refund was on account of delay in filing returns by assessee, assessee was not entitled to
interest for period of said delay in terms of section 244A(2) - M. Ahammadkutty Haji v. Chief
CIT 155 Taxman 315

SET OFF OF REFUNDS AGAINST THE REMAINING PAYABLE [Sec. 245]

Where a refund is found to be due to any person, the tax authorities may, in lieu of payment of the
refunds, set off the amount of refund against the sum payable under the Income-tax Act.
Case Law :

i) Prior intimation to assessee whether mandatory: While making set off of refunds against
tax remaining payable, intimation is certainly not a jurisdictional requirement and ab-
sence thereof is merely an irregularity and, therefore, want of intimation would not vitiate
the adjustment - Brij Bhushan Lal & Sons v. Designated Authority 246 ITR 353
ii) Refund due to assessee cannot be adjusted against demand raised, against a third party
Archana Shukla v. Joint CIT 244 ITR 829.
Where refund arises as a result of any order passed in appeal or other proceedings under
the Act, no formal application from the assessee is required. The AO has to grant refund
suo moto.
Case Laws :
i) Clause (a) of proviso to section 240 added with effect from 1-4-1989 is merely clarificatory
and hence, must be held to be retrospective - CIT v. Chittoor Electric Supply Corpn. 212 ITR
404 /CIT v. Shelley Products 261 ITR 367
Correctness of assessment not to be questioned.[Sec. 242]
In a claim under this Chapter, it shall not be open to the assessee to question the correct ess
of any assessment or other matter decided which has become final and conclusive or ask
for a review of the same, and the assessee shall not be entitled to any relief on such claim
except refund of tax wrongly paid or paid in excess.

INTEREST ON DELAYED REFUNDS. [Sec. 243.]

[(1) If the [Assessing] Officer does not grant the refund,—
(a) in any case where the total income of the assessee does not consist solely of income
from interest on securities or dividends, within three months from the end of the
month in which the total income is determined under this Act, and
b) in any other case, within three months from the end of the month in which the claim
for refund is made under this Chapter,
the Central Government shall pay the assessee simple interest at [fifteen] per cent per
annum on the amount directed to be refunded from the date immediately following
the expiry of the period of three months aforesaid to the date of the order granting the
refund.

368 Applied Direct taxation

 Explanation.—If the delay in granting the refund within the period of three months
aforesaid is attributable to the assessee, whether wholly or in part, the period of the
delay attributable to him shall be excluded from the period for which interest is pay-
able.]
(2) Where any question arises as to the period to be excluded for the purposes of calculation
of interest under the provisions of this section, such question shall be determined by the
[Chief Commissioner or Commissioner] whose decision shall be final.
[(3) The provisions of this section shall not apply in respect of any assessment for the assess-
ment year commencing on the 1st day of April, 1989 or any subsequent assessment years.]

Interest on refund where no claim is needed.[Sec.244]

(1) 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 Central Government shall
pay to the assessee simple interest at [fifteen] per cent per annum on the amount of refund
due from the date immediately following the expiry of the period of [three] months afore-
said to the date on which the refund is granted.
[(1A) Where the whole or any part of the refund referred to in sub-section (1) is due to the
assessee, as a result of any amount having been paid by him after the 31st day of March,
1975, in pursuance of any order of assessment or penalty and such amount or any part
thereof having been found in appeal or other proceeding under this Act to be in excess of
the amount which such assessee is liable to pay as tax or penalty, as the case may be, under
this Act, the Central Government shall pay to such assessee simple interest at the rate
specified in sub-section (1) on the amount so found to be in excess from the date on which
such amount was paid to the date on which the refund is granted :
Provided that where the amount so found to be in excess was paid in instalments, such
interest shall be payable on the amount of each such instalment or any part of such instal-
ment, which was in excess, from the date on which such instalment was paid to the date
on which the refund is granted :
Provided further that no interest under this sub-section shall be payable for a period of
one month from the date of the passing of the order in appeal or other proceeding :
Provided also that where any interest is payable to an assessee under this sub-section, no
interest under sub-section (1) shall be payable to him in respect of the amount so found to
be in excess.]
(2) Where a refund is withheld under the provisions of section 241, the Central Government
shall pay interest at the aforesaid rate on the amount of refund ultimately determined to
be due as a result of the appeal or further proceeding for the period commencing after the
expiry of [three months from the end of the month in which the order referred to in section
241 is passed] to the date the refund is granted.
[(3) The provisions of this section shall not apply in respect of any assessment for the assess-
ment year commencing on the 1st day of April, 1989, or any subsequent assessment years.]

Applied Direct taxation 369

 Refund

INTEREST ON REFUND [Sec. 244A]

Interest on Refund of Income Tax: Where refund of any amount becomes due to the assessee
under the Income Tax Act, he shall be entitled to receive, in addition to the said amount, simple
interest on the refund calculated in the following manner:

(a) Where the refund is out of any tax deducted at source/ tax collected at source or
advance tax paid during the financial year, interest will be paid at the rate of ½%, per
month or part of a month from the period starting from 1st day of April of the assess-
ment year to the date on which refund is granted.

However, no interest shall be payable if the amount of refund is less than 10% of the
tax determined u/s 143(1).

(b) In other cases, interest shall be paid @ ½% per month for every month or part of
month for the period commencing from the date of payment of tax or penalty to the
date on which refund is granted.

Interest on Refund of Fringe Benefit Tax: Section 244A also provides for interest @ ½% for
every month or part of the month shall be payable where refund of any amount out of fringe
benefit tax paid by way of advance tax becomes due.

However, no interest shall be payable if the amount of refund is less than 10% of the tax deter-
mined u/s 115WE (1).

Similarly interest @ ½% for every month or part of month shall be payable in any other case for
the period or periods from the date or dates of payment of tax or penalty to the date on which
the refund is granted.

Judicial Decisions

i) Section 244(1) nowhere speaks of interest. Provisions of section 240 & 244 reveal liability
to pay interest on delayed payment of refund amount but do not provide for payment of
any interest on interest even though there is delay in payment of such interest to assessee.
Sandvik Asia Ltd. V CIT 280 ITR 643 (SC)

ii) As the assessee has not received the refund of the excess advance tax, he preferred a writ
petition before the Delhi High Court. When the writ petition was pending, the Depart-
ment granted refund of advance tax along with interest thereon. The petitioner claimed
interest on delayed payment of interest. The Delhi High Court held that the petitioner is
entitled to interest on delayed payment of interest & accordingly directed the revenue to
pay interest on interest. R.K. Jain & Sons v CIT193 CTR 659.

iii) Assessee is entitled to interest if the interest is paid u/s 220(2) subsequently becomes re-
fundable: Interest u/s 244A is payable in respect of the amount of interest earlier paid by

370 Applied Direct taxation

 the assessee u/s 220(2) but later determined as refundable. Modipon Ltd. V CIT 270 ITR
257.

Case Laws :

i) Revenue is liable to pay interest on the amount of interest which it should have paid to the
assessee but has unjustifiably failed to do - CIT v. Narendra Doshi 254 ITR 606/122 Taxman
717.
ii) Interest on delayment payment of interest: The Department is liable to pay interest on
interest under sections 214 and 244(1A) if payment of interest is delayed - MC, Nally Bharat
Engg. Co. Ltd. v. CIT Tax L.R. 638

iii) Calculation of interest Interest cannot be granted till date of dispatch of refund order but
it has to be granted till date when order regarding payment of interest has been signed -
Rajasthan State Electricity Board v. CIT 281 ITR 274

iv) Where return is filled belatedly: Where delay in completion of assessment which led to
refund was on account of delay in filing returns by assessee, assessee was not entitled to
interest for period of said delay in terms of section 244A(2) - M. Ahammadkutty Haji v. Chief
CIT 155 Taxman 315

SET OFF OF REFUNDS AGAINST THE REMAINING PAYABLE [Sec. 245]

Where a refund is found to be due to any person, the tax authorities may, in lieu of payment of the
refunds, set off the amount of refund against the sum payable under the Income-tax Act.
Case Law :

i) Prior intimation to assessee whether mandatory: While making set off of refunds against
tax remaining payable, intimation is certainly not a jurisdictional requirement and ab-
sence thereof is merely an irregularity and, therefore, want of intimation would not vitiate
the adjustment - Brij Bhushan Lal & Sons v. Designated Authority 246 ITR 353
ii) Refund due to assessee cannot be adjusted against demand raised, against a third party
Archana Shukla v. Joint CIT 244 ITR 829.

Applied Direct taxation 371