Direct Tax Alert - Interest under section 234D of the IT Act is not applicable to re-assessment order

BACKGROUND

Section 234D of the Income-tax Act, 1961 (IT Act) levies interest on excess refund granted to the taxpayer. As per this section, if the refund granted under section 143(1) of the IT Act either exceeds the refund determined or no refund is determined under the regular assessment, the taxpayer shall be liable to pay interest at 0.5% of the excess refund granted. The Finance Act, 2012 inserted Explanation 1 to section 234D of the IT Act to provide that where the assessment is made for first time under section 147 or section 153A of the IT Act then such assessment shall be construed as regular assessment for the purpose of computing interest. While the assessment done under section 147 of IT Act is deemed to be regular assessment for the purpose of section 234D of the IT Act, a question arises whether Explanation 1 to section 234D of the IT Act enlarges the scope to cover reassessment as well or not. In this regard, recently, the Madras High Court¹ had an occasion to examine whether section 234D of the IT Act is applicable to assessment made under section 143(3) read with section 147 by way of reopening of order passed under section 143(3) of the IT Act or not.

We, at BDO in India, have summarised the ruling of the Madras High Court and provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

The Taxpayer, an insurance company, filed loss tax return for fiscal year (FY) 2000-01. The taxpayer’s return was processed under section 143(1) of the IT Act and refund was granted. Subsequently, an order was passed under section 143(3) of the IT Act in March 2004 raising demand on the taxpayer. The Tax Officer levied interest under section 234D in respect of the excess refund granted to the taxpayer. While the taxpayer was litigating the order passed under section 143(3) of the IT Act, the Tax Officer reopened the assessment under section 147 of the IT Act and the final order was passed under section 143(3) read with section 147 of the IT Act in December 2008 increasing the tax liability. Accordingly, the tax officer computed interest under section 234D of the IT Act on the enhanced demand. The taxpayer filed an appeal before the first Appellate Authority held that as section 234D of IT Act was introduced with effect from 1 June 2003 and the year under consideration is FY 2000-01, thus the same is not applicable. The Tax Tribunal affirmed the view of first Appellate Authority’s order and thereafter the revenue authorities filed an appeal with the Madras High Court (HC) challenging the order of Tax Tribunal.

HC RULING

The question raised before the Madras High Court was whether the interest under section 234D of the IT Act is attracted where the order is passed post 1 June 2003 but pertains to fiscal year prior to 1 June 2003. While observing that post the Explanation introduced by the Finance Act, 2012, if the order is passed post 1 June 2003 section 234D of the IT Act is attracted; the Madras High Court reframed question raised – whether the interest under section 234D of the IT Act is attracted to reopening of assessment or not. On the reframed question, Madras High Court held that the reopening of assessment cannot be termed as regular assessment as defined in section 2(40) of the IT Act and thereby not covered under section 234D of the IT Act. For coming to this conclusion, it made following observations:

• Section 2(40) of the IT Act defines regular assessment as assessment made under section 143(3) or section 144 of the IT Act. Therefore, re-assessment proceeding under section 147 of the IT Act is not covered by the definition of regular assessment.
• Though Explanation 1 to section 234D of the IT Act brings proceedings under section 147 or section 153A of the IT Act within the ambit of regular assessment, even for these sections only those proceedings which are concluded for the first time will be considered as ‘regular assessment’.
• Re-assessment proceedings conducted after the conclusion of assessment under section 143(3) of the IT Act will not be covered under the ambit of regular assessment and cannot be treated as ‘first or initial assessment’.
• Reference was made to Supreme Court² decisions as well as various High Courts³ and Tax Tribunal⁴.
• Further, rectification order passed for an assessment completed prior to the date from which section 234D of the IT Act became effective, cannot be considered as an order passed under regular assessment.

BDO COMMENTS

With many assessments being reopened and considering that generally the reassessment order enhances the demand / reduces the refund, which was determined under the original assessment, this decision will have a far reaching impact. This decision will assist the taxpayers to contend that for the purpose of levy of interest under section 234D of the IT Act, if any, the demand / refund as determined by the original assessment should only be considered. Having said this, the order passed for the first time under section 147 of the IT Act is not covered by this HC decision and thereby no relaxation shall be available. Furthermore, it is imperative to note that the HC has observed that even rectification order cannot partake the character of regular assessment. It shall be interesting to see whether the tax department litigates the matter before the Hon’ble Supreme Court in order to get a conclusion on the issue.

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