Refund of tax paid under a quashed TDS demand attracts interest under Section 244A(1)(b).

The petitioner, engaged in infrastructure development and compliant with TDS obligations, was treated as an assessee-in-default under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, for allegedly failing to deduct TDS on a payment of ₹70 crore made to MSRDC. A demand of ₹12,60,65,949, including ₹5,89,25,714 as interest, was raised.

The petitioner challenged the action before the Gujarat High Court, which quashed the relevant notices and order on 23 February 2016; the Revenue’s challenge before the Supreme Court was subsequently dismissed.

Despite the quashing of the demand and the CIT(A)’s order dated 23 June 2016 directing implementation, the Revenue refunded ₹2,50,00,000 to the petitioner only on 3 February 2017 and without interest.

The petitioner’s claim for interest was rejected on the basis of Section 244A(1B), inserted with effect from 1 April 2017.

Whether the petitioner was entitled to interest under Section 244A(1)(b) on the refund of ₹2,50,00,000 paid pursuant to a demand that was subsequently quashed.

Whether the subsequently inserted Section 244A(1B), effective from 1 April 2017, could be relied upon to deny interest where the refund had already been granted on 3 February 2017.

Whether the Revenue was liable to pay costs and additional interest for failure to comply with the refund direction within the prescribed period.

The Court applied Section 244A(1)(b) of the Income Tax Act, which entitles an assessee to simple interest at the prescribed rate on refunds in “any other case,” calculated from the date or dates of payment of tax or penalty until the date of refund.

Section 244A(1A), concerning additional interest where a refund results from giving effect to specified appellate or revisional orders, was also part of the statutory framework.

Section 244A(1B), introduced with effect from 1 April 2017, could not displace the petitioner’s accrued entitlement under Section 244A(1)(b) in the circumstances of the case.

Relying on Union of India v. Tata Chemicals Ltd., (2014) 43 taxmann.com 240, the Court reiterated that money unlawfully retained by the Revenue must be refunded with interest, since interest compensates for the State’s use and retention of the taxpayer’s money.

The petitioner’s payment was made pursuant to a statutory demand that was ultimately quashed by the High Court, and the Revenue’s challenge to that decision failed before the Supreme Court.

Consequently, the amount retained by the Revenue became refundable. Since the refund arose from the petitioner’s successful challenge to the TDS demand and fell outside the specific categories covered by Section 244A(1)(a), it was governed by the residuary provision in Section 244A(1)(b).

The Court held that the Revenue could not rely on Section 244A(1B), which was introduced after the refund had already been granted, to defeat the petitioner’s entitlement under the existing statutory provision.

The principle in Tata Chemicals reinforced that interest follows the obligation to refund money received and retained without legal authority.

If the Revenue failed to comply within that period, the amount would carry further interest at 9% per annum.

The Court also imposed costs of ₹10,000, directing that the amount be deposited with the Gujarat High Court Legal Services Authority within two weeks.