Deductor now entitled to interest on excess TDS in case of refund

The Apex court in the case of Union Of India vs. Tata Chemicals Ltd. recently held that excess TDS is to be refunded by the Income Tax Department to the deductor along with interest. The interest shall be calculated from the date of payment of tax which denotes the date of deposit of excess TDS with Govt.

Section 244A of the Income Tax Act:

Section 244A of the Income Tax Act provides that an assessee is entitled to get refund of interest for money paid in excess to the Government. The rule is applicable not only in case of assessees but similar benefit is also available to a deductor who has deducted excess TDS by mistake and has deposited the same.

The Apex Court is of the view that awarding interest is like a kind of compensation for the retention of the money collected by the Department. As such when the excess amount is refunded, it should be inclusive of the interest.

Why excess TDS is deducted?

One should learn why excessive TDS is deducted which is then refunded. There can be many reasons for the same such as:

1.       When permission is necessary before remittance – In certain cases tax has to be deducted and permission should be sought for before making payment or remitting the sum. In such cases TDS is deposited and then refund is claimed.

2.       Disputes regarding the amount of tax to be deducted – When the amount of tax which is deductible is an issue, the tax payer may opt for deduction and deposition of tax and claim refund.

3.       Disputes regarding the rates – Disputes about rate may be responsible for deduction of more TDS and claim for refund.

Refund of excess TDS:

When excess tax is deducted or collected, the deductor or collector can claim refund. When the person from whom the tax is deducted or collected does not agree with the TDS or TCS and where it is not possible to claim credit from the deductor by the said person, he may claim refund from the Income Tax Department.

The recent decision:

In the case of UOI vs. Tata Chemicals Ltd. the assessee applied under section 195(2) of the Income Tax Act for permission to remit technical service charges to a foreign company without TDS. The Assessing officer directed the assessee to deduct TDS @20% prior to making remittance. The assessee filed an appeal before the CIT (A) where he claimed that the remittance was not subject to TDS.

The CIT (A) upheld the claim and the TDS were refunded to the assessee. But the AO refused to grant interest under section 244A.

The CIT (A) upheld the decision of the Assessing Officer. On appeal by the department before the Apex Court the Hon’ble Court dismissed the appeal and held that the obligation to refund money received and retained wrongly carries with it the right to interest upon the amount and the same should be calculated from the date of deposit of the TDS.

The Apex Court stated that interest is a compensation for retention of the money collected by the department which was unauthorized. The revenue received it without any kind of right and retained the same for which was bound to make compensate the concerned party. The refund money should carry with it the interest. The rate of interest should be determined according to the statutory provisions of the Act.