Revenue Liable to Compensate Assessee for Interest Loss Resulting from Unjustified Retention of Seized Mature Assets

On 21.01.1997, the Income Tax Department conducted a search under Section 132 of the Income Tax Act, 1961, seizing Kisan Vikas Patras (KVPs) and Indira Vikas Patras (IVPs) with a face value of Rs. 24,66,500.

Following an assessment and demand of Rs. 2.24 crores, the petitioners approached the Settlement Commission on 10.08.2000.

While the matter was pending, the KVPs/IVPs matured, but the Assessing Officer (AO) ignored multiple requests to renew or convert them into interest-bearing FDRs.

On 08.12.2003, the Settlement Commission ordered the release of the instruments upon payment of the settlement amount.

Although the petitioners deposited the tax dues on 23.12.2003, the department withheld the instruments until 10.01.2005, citing recovery of audit fees.

The petitioners sought compensation for the loss of interest during the period of seizure.

1. Whether the Revenue is liable to pay interest for the loss of opportunity cost caused by the delayed release of matured KVPs and IVPs.

2. Whether the petitioners are entitled to interest on interest where the department retains seized assets without authority of law.

The court primarily applied Section 132 of the Income Tax Act regarding search and seizure, and Section 254(1) concerning the powers of the Settlement Commission.

It relied on the principle of restitution for "opportunity cost" lost due to the indecisive or stubborn approach of Revenue officials.

The court cited Sandvik Asia Ltd. v. CIT [2006] 280 ITR 643, which established that the Revenue must compensate an assessee when amounts (or assets) are wrongfully withheld without authority of law.

It distinguished CIT v. Gujarat Floral Chemicals (2013) 358 ITR 291, noting that while statutory interest under Section 244A does not generally allow "interest on interest," such limitations do not apply to compensatory interest awarded for the unjustifiable retention of assets.

The Court observed that while the instruments could not be released before the settlement dues were paid (as per the Commission’s order dated 08.12.2003), the AO’s failure to renew them or convert them to FDRs caused a distinct financial loss to the petitioners.

Once the petitioners complied with the settlement order on 23.12.2003, the Revenue had no legal justification to retain the assets.

The Court found the Revenue's justification—retention of KVPs for a "meagre amount of audit fee"—as an act of harassment, especially since the department already held other assets like jewellery.

The Court determined that since this was not a claim for statutory interest but compensation for the wrongful withholding of property, the petitioners were entitled to be made whole for the period between the date of payment (23.12.2003) and the date of actual release (10.01.2005).

The Court awarded 4% per annum simple interest on that accrued interest amount from 10.01.2005 until the date of actual payment and directed the Revenue to calculate these amounts (using National Savings Certificate rates if KVP/IVP rates are unavailable) and effect payment within three months.