Taxpayer Cannot Be Denied Compensation for Unauthorized Retention of Funds: Gujarat High Court Orders Interest on Delayed Refund

Even in the Absence of a Statutory Provision, Government Must Pay Interest for Withholding Taxpayer's Money - Gujarat High Court directed the Income Tax Department to pay interest of ₹22,04,104/- to M/S Sahil Total Infratech Pvt. Ltd. for the unauthorized retention of a tax refund amounting to ₹2,20,41,042/-. Despite the petitioner’s eligibility under the Direct Tax Vivad Se Vishwas Act, 2020, the refund was delayed by nearly two years, prompting the company to approach the High Court seeking interest on the delayed payment.

A Division Bench of Justice Bhargav D. Karia and Justice D.N. Ray, while ruling in favor of the petitioner in Special Civil Application No. 20804 of 2023, observed:

"When the government retains and enjoys a taxpayer’s money without justification, it is bound to compensate for the delay, just as any individual would be under similar circumstances."

The judgment reinforces the principle that refund due and payable to an assessee is a debt owed by the government, and the absence of a statutory provision does not absolve the authorities from their obligation to pay interest for the undue retention of funds.

The Refund Delayed for Two Years: How the Taxpayer Was Denied Timely Payment
The petitioner, M/S Sahil Total Infratech Pvt. Ltd., had applied under the Direct Tax Vivad Se Vishwas Act, 2020 and was sanctioned a refund of ₹2,20,41,042/- by an order dated May 12, 2022. However, despite repeated representations, the refund was not processed due to alleged validation issues with the petitioner’s bank account.

The petitioner raised multiple grievances on the Income Tax Portal from July 2022 to January 2023, repeatedly informing the authorities that their new bank account was validated in October 2022. Despite this, the refund was not credited until January 29, 2024—nearly two years after the order sanctioning it.

Upon receiving no relief from the tax authorities, the petitioner approached the Gujarat High Court in November 2023, leading to a court notice being issued on December 19, 2023. Following the notice, the Income Tax Department finally credited the refund on January 29, 2024, but refused to pay interest for the delay, arguing that Section 244A of the Income Tax Act, 1961, does not provide for interest in such cases.

"Government Cannot Retain Taxpayer's Money Without Compensation": High Court Cites Supreme Court Precedent
Rejecting the Income Tax Department’s argument, the High Court relied on the Supreme Court’s decision in Union of India v. Tata Chemicals Ltd. (2014) 43 taxmann.com 240, which held that: "When the government retains a taxpayer’s money without right, it must compensate for the delay. The obligation to refund money received and retained without right carries with it the right to interest."

The Court further emphasized: "Providing interest on delayed refunds is a well-recognized principle of fiscal legislation. The absence of an express statutory provision does not mean the government can withhold money indefinitely without liability."

The Court noted that refunds due under tax statutes are not mere administrative transactions but legal obligations, and the failure of the authorities to process refunds on time amounts to unauthorized retention of taxpayer funds.

"Refunds Are Not a Matter of Administrative Discretion—They Are a Taxpayer’s Right": High Court Rejects Department’s Justification
The Income Tax Department defended the delay, arguing that the petitioner had not validated its new bank account in time, which resulted in the refund being stuck in procedural limbo.

Rejecting this claim, the Court pointed out that: "The petitioner had validated its bank account on the tax portal as early as October 2022. The failure to process the refund thereafter is solely attributable to the inaction of the tax department, not the petitioner."

The Court further noted that even after the validation issue was resolved, the refund was delayed by more than a year, demonstrating a lack of administrative accountability on the part of the Income Tax Department.

"Interest at 6% Per Annum Must Be Paid for the Delay": Court Orders Compensation for the Undue Retention of Funds
Acknowledging the financial burden placed on taxpayers due to delays in refund payments, the High Court ordered the Income Tax Department to pay interest at 6% per annum for the period from June 1, 2022, to January 31, 2024.

The Court observed: "Refund due and payable to the assessee is a debt owed by the government. The government cannot shrug off its obligation to reimburse the taxpayer with interest for the period of undue retention of funds."

Directing the authorities to process the interest payment within three months, the Court ruled: "The respondents are liable to pay ₹22,04,104/- as interest for the delay in refunding the taxpayer’s money. This amount must be paid within three months from the receipt of this order."

This Gujarat High Court ruling is a landmark decision affirming taxpayers' rights against arbitrary delays in tax refunds. The judgment reiterates that:

•    Refunds due to taxpayers are legally enforceable debts, not favors granted at the discretion of the tax department.
•    Even if a statute does not explicitly provide for interest, the government must compensate for undue retention of funds, as per principles of equity and fairness.
•    Taxpayers should not be penalized for administrative lapses on the part of the authorities.
By awarding interest for the delayed refund, the High Court has reinforced the principle that taxpayers must be treated fairly and that tax authorities cannot retain funds indefinitely without liability.
 

Date of Decision: 24 February 2025