(2014) 363 ITR 658 (SC)
TDS on specified payments; interest on delayed refund of excess tax
Yes. The State, having received and retained money without right, must refund it with interest. Interest under Section 244A is payable to the deductor from the date the tax was paid to the date of refund.
Where a resident deductor withholds and deposits tax on a payment to a non-resident, and that tax is later found not to have been payable, is the deductor entitled to interest on the refund?
The respondent had made payments to a non-resident and, acting on a determination by the Assessing Officer as to the rate at which tax should be withheld, deducted and deposited tax accordingly. In subsequent proceedings it was established that the sums were not chargeable to the extent assumed, and the tax deducted had therefore been deposited in excess of what was due. The deductor sought refund of the excess together with interest. The Revenue refunded the principal but declined interest, contending that the statutory provision for interest on refunds applies to an assessee who has paid tax on its own account and not to a deductor recovering tax it had withheld on another's behalf.
The claim to interest was rejected by the Revenue and the matter travelled through the appellate stages to the High Court, which decided in favour of the deductor. The Union appealed to the Supreme Court, where the question was whether the refund provisions extend to a deductor at all.
For the assessee
The money was collected by the State without authority of law, since the underlying sum was not chargeable to the extent assumed. A person who has been deprived of the use of money that the State had no right to retain is entitled to be compensated for that deprivation. The refund and interest provisions are general in their terms and are not confined to tax paid by an assessee on its own income.
For the Revenue
The interest provision is framed by reference to an assessee and to tax paid by way of advance tax, self-assessment tax or tax deducted on the assessee's own income. A deductor is not the assessee in respect of the deducted sum; it pays over money belonging to the payee. There is no express provision entitling a deductor to interest, and interest cannot be awarded in the absence of a statutory foundation.
The Court proceeded from the principle that the State may retain money only under authority of law. Where tax has been collected without such authority, the obligation to refund carries with it an obligation to compensate the person from whom it was taken for the period during which the State had the use of the money. The Court held that the refund provisions are not confined to an assessee paying tax on its own income: the expression must be read in the context of a scheme that contemplates refund to the person who paid, and a deductor who has deposited tax out of its own funds on a determination later found to be wrong is such a person. It rejected the argument that the absence of an express provision was fatal, observing that the obligation to pay interest on money wrongly retained is not a matter of concession but flows from the character of the receipt. The Court held that interest runs from the date on which the tax was paid to the State until the date on which the refund is granted, and that the resident deductor was entitled to it accordingly. It emphasised that this is compensation for deprivation of the use of money rather than a penalty on the Revenue.
Governs every claim for interest on refund of excess withholding, a recurring issue where tax is deducted on a conservative view of chargeability and the position is later resolved in the payer's favour. Under the IT Act 2025 the withholding provisions are consolidated in Section 393 and interest on delayed refund sits in Section 437. Read alongside GE India Technology, which establishes that withholding is required only where the sum is chargeable, this decision supplies the remedy when tax has nonetheless been deducted and deposited.