Holding

A refund becomes due only upon the making of the fresh assessment directed by the appellate order; therefore interest under Section 244(1) does not accrue from the date of the appellate order, and the proviso to Section 240 is merely clarificatory.

Summary

The Commissioner of Income‑Tax appealed against a High Court order that had directed the revenue to pay interest under Section 244(1) of the Income‑Tax Act to Chittor Electric Supply Corporation, which had received a refund after a fresh assessment was made in 1973. The original assessment of 1966 was set aside by an Appellate Assistant Commissioner who merely directed a fresh assessment on a different statutory basis; the fresh assessment determined a refund of Rs 84,562, which was promptly paid. The assessee claimed interest from the date of the appellate order (6 March 1969) to the date of refund, but the revenue argued that no amount became due until the fresh assessment was completed. The Supreme Court held that, under Section 240 and its proviso, a refund becomes due only when a fresh assessment is made, so interest under Section 244(1) cannot accrue from the date of the appellate order. The Court clarified that the proviso to Section 240 added by the Direct Tax Laws (Amendment) Act, 1987 is merely clarificatory. Consequently, the appeal was allowed, the High Court judgment set aside, and the Commissioner’s order restored.

Issues considered

Whether a refund becomes due to the assessee as a result of an appellate order that merely directs a fresh assessment.
Whether the proviso to Section 240, inserted by the Direct Tax Laws (Amendment) Act, 1987, is merely clarificatory or creates a substantive right to interest.
Whether interest under Section 244(1) of the Income‑Tax Act is payable from the date of the appellate order in such circumstances.

Legislation cited

Direct Tax Laws (Amendment) Act, 1987s. proviso to Section 240
Income Tax Act, 1961s. 220(2), s. 237, s. 240, s. 244(1), s. 264

Subjects

Income TaxRefundInterest under Section 244(1)Section 240 provisoFresh assessmentTax appealDirect Tax Laws Amendment Act 1987Refund interest liability

Judgment

'
}

COMMISSIONER OF INCOME-TAX A
j
v.
CHITTOR ELECTRIC SUPPLY CORPORATION AND ANR.

- JANUARY 13, 1995

[B.P. JEEVAN REDDY, N.P. SINGH AND SUHAS C. SEN, JJ.)
B

Income Tax Act, 1961-Section 244(1)-lnterest on refund-Where a
refund is due to assessee-Assessment made in 1966-Tax detennined
paid-Appea~Assessment set aside-Fresh Assessment directed on different C
basis-Excess amount refunded immediately-Claim of interest u/s
244(1)-Whether any amount became due as a result of Appellate Assistant
Commissioner's orde~eld, No-Proviso to Sec. 240 was merely
clarificatary.

The assessee-respondent, a limited company was taken over by the D
Government. The company received compensation therefor, which amount
was brought to tax. Original assessment was completed on January 31,
1966. On appeal, the appellate Assistant Commissioner set aside the
assessment and directed the Income-Tax Officer to complete the assess-
ment afresh u/s 12-B of the Income Tax Act, 1922 and not u/s 10(2) (vii) of
the Act. Assessee filed an appeal before the Tribunal but it was dismissed. E
Fresh assessment was completed in 1973. Excess amount was refunded to
the assessee in the same month. The assessee laid a claim for interest u/s
244(1) of the Income Tax Act, 1961 from the date of Appellant Assistant
Commissioner's order to the month in which the assessment was finalised
pursuant to the remand order and the refund made. The claim was F
rejected by the Income Tax Officer. Revision filed before the Commissioner
was also dismissed. It was held that the respondent having delayed fur-
nishing the particulars called for, was not justified in asking for interest.
The assessee filed a Writ Petition before the High Court which was allowed.
The revenue was directed to pay to the respondent intere!!t on the amount G
refunded. Hence this appeal.

The appellant challenged the correctness of the view taken by the
High Court while submitting that the proviso to Section 240 added by
Direct Tax Laws (Amendment) Act, 1987 w.e.f. April 1, 1989, was merely
clarificatory of the pre-existing position. H
231
232 SUPREME COURT REPORTS [1995) 1 S.C.R.

A For determining claim made u/s 244(1), the question raised fo1·
consideration was whether refund of any amount had become due to the
assessee as a result of the appellate order in this case.

Allowing the appeal, this Court

B HELD : Section 244(1) of the Income Tax Act, 1961, applied where
a refund is due to the assessee pursuant to an order referred to in Section
240. According to Section 237, a refund becomes due when the amount paid
by the assessee is in excess of 'the amount with which he is properly
chargeable under this Act for that year'. Unless a fresh assessment is
C _ made, it would not be possible to say what amount is properly chargeable
and until that is determined, question of refund may not arise. In this case,
Appellate Assistant Commissioner merely directed a fresh assessment on
a different basis. The Commissioner's order did not determined the tax
payable by the assessee. The amount due or the amount refundable to the
assessee was ascertained only on the making of a fresh assessment in
D August 1973. The Appellate Assistant Commissioner's order had the effect
of reviving the assessment proceedings which had yet to be completed and
which proceedings were in fact completed in August, 1973. When the
assessment proceedings are still pending, there cannot be any amount or
any refund becoming due to the assessee in respect of that assessment year,
E particularly in the light of Section 237. In this sense, Clause (a) of the
proviso to Section 240, added with effect from 1-4-1989, is merely
clarificatory. The said clause says that where an assessment is set aside
or cancelled and an order of fresh assessment is directed to be made, the
refund if any shall become due only on the making of such fresh assess-
ment. [236-C-D, 238-B-D]
F
Purshottam Dayal Varshney andAnr. v. Commissioner of Income Tax,
U.P. and Ors., (94) ITR 187 (All) and New Woodlands Hotel v. Commis-
sioner of Income Tax and Ors., (188) ITR 137 (Ker) (DB), overruled.

G New Woodlands v. Commissioner of Income Tax (Central), Madras,
(138) ITR 795 (Ker.), affirmed.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1413 of
1977.

H From the Judgement and Order dated 7.9.76 of the Andhra Pradesh
COMMR. OFl.T. v. CHIITOR ELECTRICCORPN.IJEEVAN REDDY,J.)233

High Court in W.P. No. 5167 of 1975. A
J. Ramamurthy, Manoj Arora and Ms. A. Subhashini for the Appel-
lants.

S.S. Javali, K. Ram Kumar and Ms. Anjani Aiyagari for the Respon-
dents. B

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. This appeal is preferred against the
decision of the Andhra Pradesh High Court allowing the writ petition filed
by the respondent-assessee and directing the Revenue to pay to the respon- C
dent interest on the amount of Rs. 84,562 from September 7, 1969 to
August 14, 1973 at the rate of 6 per cf)nt per annum under Section 244 (1)
of the Income-tax Act, as prayed for by the respondent. The respondent is
a limited company in liquidation and is represented by its Liquidators. On
November 24, 1960, the respondent-company was taken over by the D
Government. The respondent received compensation therefor which
amount was brought to tax by the Revenue. Original assessment was
completed on January 31, 1966. The appeal preferred by the respondent
was allowed by the Appellate Assistant Commissioner on 6th March, 1969.
He set aside the assessment and directed the Income Tax Officer to
complete the assessment afresh in the light of the directions given by him. E
In short, the Appellate Assistant Commissioner directed that the income
of the respondent-assessee must be determined under Section 12-B of the
Indian Income-tax Act, 1922 and not under Section 10(2)(vii) of the said
Act. The respondent filed an appeal before the Tribunal questioning the
correctness of the Appellate Assistant Commissioner's Order but it was F
dismissed on 20th September, 1971. The Income Tax Officer then took up
the assessment proceeding and called upon the respondent to furnish
certain particulars. The respondent furnished the particulars finally on 13th
April, 1973 and the Income Tax Officer completed the assessment on 14th
August, 1973. As a result of this assessment, a sum of Rs. 84,562 was found
refundable to the respondent. It was refunded in the same month. The G
respondent laid a claim for interest under Section 244(1) of the Income-tax
Act, 1961 for the period commencing on 6th March, 1969 (the date of the
Appellate Assistant Commissioner's order) to August, 1973 (the month in
which the assessment was finalised pursuant to the remand order and the
refund made). The claim was rejected by the Income Tax Officer, against H
·234 SUPREME COURT REPORTS [1995) 1 S.C.R.

A which order the respondent filed a revision before the Commissioner under
Section 264 which too was rejected. The Commissioner opined inter alia ""-'
that the respondent having delayed furnishing the particulars called for,
was not justified in asking for interest from the date of the Appellate
Assistant Commissioner's order. The assessee then approached the High
Court of Andhra Pradesh by way of a Writ Petition No. 5167 of 1975 which
B has been allowed as aforestated.

Mr. Murthy, learned senior advocate for the Revenue, assailed the -( 'I.--

correctness of the view taken by the High Court on the ground that it is in
the teeth of the express provision of Sections 240, 244(1), 237 and 243(1).
c He invited our attention to the proviso to Section 240 added by Direct Tax
Laws (Amendment) Act, 1987 with effect from April 1, 1989, submitting
that it was merely clarificatory of the pre-existing position. Counsel placed
strong relince upon the Full Bench decision of the Gujarat High Court in
Saurashtra Cement and Chemical Industries Ltd. v. Income-Tax Officer,
(194) J.T.R. 659 which inter alia held that the aforesaid proviso is merely
D clarificatory. He also disputed the correctness of the decision of the
Allahabad High Court in Purshottam Dayal Varshney and Another v. Com-
missioner of Income-Tax, U.P. and Others, (94) I.T.R. 187 which was relied
upon by the assessee before the High Court as well as before us. Learned
counsel also brought to our notice that the Orissa High Court has followed
E the Allahabad view in Grantha Mandir v. Commissioner of Income-Tax,
(172) I.T.R. '2557 which, he submitted, is equally unsustainable.

For a proper appreciation of the contention raised herein, 1t 1s
appropriate to notice a few provisions of the Act. Sections 237, 240 and
'{°. (
244(1) read as follows :
F
"Refunds.

237. If any person satisfies the (Assessing) Officer that the amount
of tax paid by him or on his behalf or treated as paid by him or
on his behalf for any assessment year exceeds the amount with
G
which he is properly chargeable under this Act for that year, he
shall be entitled to a refund of the excess.

Refund on appea1. etc.
\.
H 240. Where, as a result of any order passed in appeal or other
'~
~
COMMR. OFI.T. v. CHITTOR ELECTRIC CORPN. [JEEVAN REDDY,J.)235

-'! proceeding under this Act, refund of any amount becomes due to A
the assessee, the (Assessing) Officer shall, except as otherwise
.··> provided in this Act, refund the amount to the assessee without
his having to make any claim in that behalf :

(Provided that where, by the order aforesaid,-
B
(a) an assessment is set aside or cancelled and an order of fres:1
.... >-
assessment is directed to be made, the refund, if any, shall become
due only on the making of such fresh assessment;

(b) the assessment is annulled, the refund shall become due
only of the amount, if any of the tax paid in excess of the tax c
chargeable on the total income returned by the assessee.)

(The proviso was added by Direct Tax Laws (Amendment) Act,
1987 w.e.f. April 1, 1989).
.......
,. 4f.- /merest on refund where no claim is needed. D

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 E
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
aforesaid to the date on which the refund is granted."
.. "' (Prior to April 1, 1971 the period was six months. There has F
been a change in the rate of interest also.)

Section 240 says that where as a result of any appellate or other order
passed under the Act any amount becomes due to the assessee the Assess-
ing Officer shall have to refund if even without the assessee making a claim
therefor. Section °244(1), which carries forward the idea contained in G

... ,Section 240, says that where a refund is due to the assessee pursuant to 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 said order is passed, the Central Government shall pay to the
assessee interest on the amount of refund from the date immediately H
236 SUPREME COURT REPORTS [1995] 1 S.C.R.

A following the expiry of the period of three months till the date on which
refund is granted at the prescribed rate. Section 237, which is a general
provision relating to refunds, says that if any person satisfies the Assessing
Officer that the tax paid by him for any assessment year exceeds the
amount properly chargeable under the Act, he shall be entitled to a refund
of the excess. What is significant is that Section 240 speaks of an amount
B
becoming due as a result of any order passed in appeal or other proceeding
under the Act. Section 244(1) is also to the same effect. It says, where a
refund is due to the assessee pursuant to an order referred to in Section
240. The question to be answered is whether any amount became due to
the assessee in this case when the Appellate Assistant Commissioner
c passed his order. Obviously not. According to Section 237, a refund be-
comes due when the amount paid by the assessee is in excess of "the
amount with which he is properly chargeable under this Act for that year".
Unless a fresh assessment is made, it would not be possible to say what
amount is properly chargeable and until that is determined, question of
D refund may not arise. In this case, Appellate Assistant Commissioner
merely directed a fresh assessment on a different basis. In cases where the
assessment is set aside and a fresh assessment is directed to be made, the
tax determined on such assessment may be either more or less than the tax
determined in the original (set aside) assessment. Therefore, no one can
E say on the date of such appellate order that any amount has become due
to the assessee - or for that matter, to the Revenue. Take a case where the
tax determined as payable under the fresh assessment is found to be more
than the tax paid under the original assessment, is the Revenue entitled to
interest on such amount from the date of the appellate order? Certainly
not. According to Section 220(2), interest is payable by the assessee on the
F amount due only after the service of the notice of demand pursuant to such
fresh assessment. It is true that language of Section 220(2) and Section
244(1) is different, but a consideration of both the concepts helps in placing
a proper interpretation on Section 240 and Section 244(1). Be that as it
may, the question has yet to be answered, whether refund of any amount
G has become due to the assessee as a result of the appellate order in this
case? One answer, given by the Allahabad High Court in Purshottam Dayal
Varshney and Another v. Commissioner of Income-Tax, U.P. and Others,
(94) I.T.R. 187 and followed by some other High Courts is that once the
assessment is set aside, the entire tax paid becomes refundable (and that
H on a fresh assessment being made and a demand notice served, it again ---
COMMR. OF l.T. v. CHITTOR EL~<;:TRIC CORPN. [JEEVAN REDDY, J.]237

becomes due to the Revenue). We find this answer inconsistent with the A
language of Section 240, Section 237 and the scheme of the enactment. To
illustrate what we say, take a case where as a result of fresh assessment,
tax determined payable is more chan the tax determined under the original
assessment; this tax becomes due only when a notice of demand is served
on the assessee under Section 220 but meanwhile, the assessee has been
paid back the tax and the interest thereon; after the fresh assessment and
B
service of demand notice, he only pays back the amount (along with the
extra tax determined under the fresh assessment) but keeps the interest -
a situation both illogical and incongruous. The other probable answer may
be that in such an eventuality, tax paid over and above the tax payable as
per the return becomes refundable and not the whole amount of tax paid c
- a situation assumed in the Board Circular No. 551 dated 23.1.1990 issued
explaining the purpose of inserting the proviso to Section 240. We are
unable to appreciate the basis of this supposition as well which does not
take into account the general principle of refund embodied in Section 237,
viz., a person is entitled to refund of only that amount which is in excess D
of the amount with which he is properly chargeable under the Act for that
year. Another argument urged was that it is the appellate order that gives
rise to the right to refund and that the assessment order to be made
pursuant thereto is merely a matter of calculation, a ministerial act. This
argument is ex f acie unacceptable where a fresh assessment is directed to
be made. It is an assessment - not a mere calculation or a ministerial act. E
Now take this very case. An assessment was originally made on 31.1.1966
and certain tax was determined as payable by the respondent-assessee.
Evidently, the respondent paid it up. On appeal, the Appellate Assistant
Commissioner set aside the order of the Income Tax Officer altogether on
the ground that the very basis adopted by the Income Tax Officer is wrong F
and that the taxable income should be determined not under Section
10(2)(vii) but under Section 12-B of the 1922 Act. It is the respondent who
filed an appeal to the Tribunal against the orders of the Appellate Assistant
Commissioner and after the dismissal of that appeal*, the Income Tax
Officer completed the assessment on 14th August, 1973 and promptly
refunded the excess amount in the same month. In the circumstances of G
--'~~~~~~~~~~~~~~~~~~~~~~~~~~~

r Indeed, in such a case, a further question may arises - according to the interpretation
contended for by the assessee. If the date of the appellate order is the relevant date,
which appellate order it should be? In this case, assessee-respondent himself filed an
appeal before the Tribunal and because of the said appeal, it is obvious, the fresh
assessment could not be taken up soon after the AAC's order. H
238 SUPREME COURT REPORTS [1995) 1 S.C.R.

A this case, it cannot be said that any amount became due as a result of the
Appellate Assistant Commissioner's order. To repeat, the Appellate Assis-
tant Commissioner's order did not determine the tax payable by the
assessee. It merely directed the Income Tax Officer to make a fresh
assessment in accordance with its directions. The amount due or the
amount refundable to the assessee, as it may be called, was ascertained
B only on the making of a fresh assessment on 14.8.73. It may also be noticed
that the Appellate Assistant Commissioner's order had the effect of reviv-
ing the assessment proceedings which had yet to be completed and which
proceedings were in fact completed on 14.8.73. When the assessment
proceedings are still pending, it is idle to talk of any amount or any refund
c becoming due to the assessee in respect of that assessment year, particular-
ly in the light of Section 237. In this sense, clause (a) of the Proviso to
Section 240, added with effect from 1.4.89, is merely clarificatory. The said
clause says that where an assessment is set aside or cancelled and an order
of fresh assessment is directed to be made, the refund if any shall become
D due only on the making of such fresh assessment.

In Purshottam Dayal Varshney (94) I.T.R. 187, the Allahabad High
Court has taken the view that "if an assessment order is set aside, the notice
of demand becomes ineffective and the tax already paid under such a
notice of demand becomes refundable. If a fresh assessment is made, the
E tax determined as a result of the fresh assessment order again becomes due
and payable only after a fresh notice of demand is served upon the
assessee." With respect to the learned Judges, we are unable to agree with
the said reasoning, which does not notice or take into account the principle
of Section 237. As stated above, where an assessment is set aside and a
fresh.assessment is directed to be made, the assessment must be deemed
F
to be still pending, which has to be completed. In such a case, therefore,
question of amount becoming refundable does not arise. It arises only when
a fresh assessment is made and the amount properly chargeable under the
Act is ascertained.

G We find that Thommen, J. (as he then was of the Kerala High Court)
took the same view as we have in New Woodlands v. Commissioner of
Income-Tax (Central), Madras, (138) l.T.R. 796. the learned Judge dis-
sented from the view of the Allahabad High Court. But it appears that on
appeal, Thommen, J's. decsion was reversed by a Bench in New Woodlands
H Hotel v. Commissioner of Income-Tax and Others, (188) l.T.R. 137 follow-
COMMR. OF I.T. v. CHITIOR ELECTRIC CORPN. [JEEVAN REDDY, J.]239

ing the decision of Allahabad High Court and the decision of the Bombay A
./ ·>. High Court in Commissioner of Income-Tax, Bombay City-II v. S.C. Shah,
(137) I.T.R. 287. For the reasons given by us hereinabove, we cannot agree
with the decision of the Division Bench of Kerala High Court in New
Woodlands Hotel.

B
We must make it clear that what we have held herein is confined to
a case where an appellate or other authority under the Act sets aside or
cancels the assessment and directs a fresh assessment to be made, i.e., a
situation contemplated by the subpequently inserted proviso (clause (a)) to
Section 240. We do not propose to express any opinion as to what would
be the position where the situation is different. We may also mention that C
we have not referred to or taken into account sub-Section (1-A) of Section
244 - or, for that matter, to the second proviso thereto upon which an
argument can possibly be built up - for the reason that here the tax amount
was paid prior to October l, 1975 and .:tlso because the applicability of
that sub-Section turns upon the language employed therein, viz., "such D
amount or any part thereof having been found in appeal or other proceed-
ing under this Act to be in excess of the amount which the assessee is liable
to pay as tax....... ".

Lastly, Mr. Javali submitted that having regard to the fact that the E
amount concerned herein is very small and also because the company is
already under liquidation for a number · of years, this Court may not
interfere with the orders of the High Court even though it may declare the
law correctly. But this is a case where as a result of our order, the assessee
is not being asked to refund any amount which has already been received
by it; it would only be disabled from claiming any further amount from the F
Revenue. In such a case, we see no reason to adopt the course suggested
by learned counsel, assuming that such a course is permissible in law, upon
which aspect we express no opinion.

G
For the above reasons the appeal is allowed, the Judgment of the
High Court is set aside and the order of the Commissioner of Income-tax
is restored. No costs.

AG. Appeal allowed. H